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DEC 1 -> 1983

Treas.
HJ
10
.A1P34

v. 2m

U.S. Dept. of the Treasury
-* ' PRESS RELEASES

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

January 3, 1983

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $5,803 million of 13-week bills and for $5,801 million of
26-week bills, both to be issued on
January 6, 1983, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing
April 7, 1983
Discount Investment
Rate
Price
Rate 1/

High
98.018a/7.841%
Low
97.996
7.928%
Average
98.004
7.896%
a/ Excepting 1 tender of $405,000.

26-week bills
maturing
July 7, 1983
Discount Investment
Rate 1/
Rate
Price
95.996
95.976
95.983

8.11%
8.20%
8.17%

7.920%
7.960%
7.946% 2/

8.36%
8.41%
8.39%

Tenders at the low price for the 13-week bills were allotted 34%.
Tenders at the low price for the 26-week bills were allotted 47%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

TENDERS RECEIVED AND ACC:EPTED
(In Thousands)
Received
Accepted
:
Received
:
$
51,345
$
52,095
$
76,940
4,365,960
: 11,802,925
10,940,960
23,965 '•
23,965
13,935
34,400
34,400
30,190
40,500
40,500
25,045
35,295
35,295
29,230
473,690
1,035,525
723,780
38,465
46,035
41,550
16,310
24,310
24,215
41,225
43,915
•
37,645
27,110
:
16,295
32,110
373,510
:
1,323,305
838,110
281,075
:
301,375
281,075

Accepted
$
47,130
4,298,135
13,935
30,190
25,045
29,230
191,120
31,800
19,215
36,645
16,295
760,685
301,375

$13,428,295

$5,802,850

: $14,446,430

$5,800,800

$11,341,925
913,960
$12,255,885

$3,816,480
913,960
$4,730,440

: $12,200,265
:
703,765
: $12,904,030

$3,654,635
703,765
$4,358,400

1,012,110

912,110

1,000,000

900,000

160,300

542,400

$13,428,295

$5,802,850

$14,446,430

$5,800,800

y Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
on money market certificates is 8.076%.
R-1090

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.

January 4, 1983

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 13, 1983.
This offering will provide $625
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $10,983 million, including $1,224 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2,251 million currently held byFederal Reserve Banks for their own account. The two series
offered are as follows:
91-day bilis (to maturity date) for approximately $5,800
million, representing an additional amount of bills dated
October 14, 1982, '
and to mature April 14, 1983
(CUSIP
No. 912794 CR 3) , currently outstanding in the amount of $ 5,626
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
July 15, 1982,
and to mature July 14, 1983
(CUSIP
No. 912794 DA 9 ) , currently outstanding in the amount of $6,034
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 January 13, 1983.
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 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 $10,000
and in any higher $5,000 multiple, on the records either of the
o-inoi
Federal
Reserve Banks and Branches, or of the Department of the
Treasury.

- 2 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,
January 10, 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.
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 competi-~
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
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
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 .

- 3 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
on January 13, 1983,
in cash or other immediately-available funds
or in Treasury bills maturing January 13, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch , or from the Bureau of the Public
Debt.

epartment of the Treasury • Washington, D.c. • Telephone 566-204
FOR IMMEDIATE RELEASE
January 7, 1983.
\

CONTACT: Robert Don Levine
, (202) 566-2041

Chrysler Loan Guarantee Board Approves UAW Contracts
The Chrysler Loan Guarantee Board announced today it has
unanimously approved by notational vote the labor contracts
with the Chrysler Corporation ratified last month by the
American and Canadian United Auto Workers unions.
Secretary, of the Treasury Donald T. Regan is chairman of
the Board. The other voting members are Chairman of the Federal
Reserve Board Paul A. Volcker and Charles A. Bowsher, Comptroller
General of the United States.
R-1092

TREASURY NEWS
2041
epartment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
January 10, 1983
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $5,801 million of 13-week bills and for $5,801 million of
26-week bills, both to be issued on January 13, 1983, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing
April 14, 1983
Discount Investment
Price
Rate
Rate 1/

High
98.066
7.651%
Low
98.054
7.698%
Average
98.061
7.671%
a/ Excepting 1 tender of $100,000:

26-week bills
maturing
July 14, 1983
Discount Investment
Rate 1/
Price
Rate

7.91%
7.96%
7.93%

96.082a/7.750%
96.063
7.787%
96.070
7.774% 2/

8.18%
8.22%
8.20%

Tenders at the low price for the 13-week bills were allotted 19%.
Tenders at the low price for the 26-week bills were allotted 69%.

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Received
Accepted
:
$
58,340
$
58,340
: $
80,740
13,126,210
4,271,730
:
12,070,060
16,330
16,330
67,400
67,870
34,870
50,150
59,450
42,540
38,415
49,770
48,830
36,385
1,081,795
99,795
954,560
53,415
43,415
56,005
15,010
10,430
16,495
50,155
46,315
46,315
30,315
18,815
30,315
1,246,860
799,465
1,160,185
298,520
359,130
298,520

Accepted
$
40,740
4,549,955
17,400
25,150
33,415
33,785
193,460
40,005
13,475
41,755
13,815
439,240
359,130

$16,063,525

$5,800,895

: $15,045,170

$5,801,325

$13,638,495
994,795
$14,633,290

$3,375,865
994,795
$4,370,660

: $12,375,175
:
825,395
: $13,200,570

$3,131,330
825,395
$3,956,725

1,126,435

1,125,000

303,800

719,600

$16,063,525

$5,800,895

: $15,045,170

$5,801,325

U Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
on money market certificates is 7.968%.

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
EMBARGOED FOR RELEASE UPON DELIVERY
Expected at 1:30 p.m.
Wednesday, January 12, 1983

Remarks
by
Donald T. Regan
Secretary of the Treasury
before the
Washington Post
Annual Business Luncheon
Washington, D.C.

There are probably 100 good speech themes I could elaborate on
this afternoon. But there is only one that anybody in this town cares
about these days: the budget. I am sure you all followed the news of
the last week — the forecasts, the deficits, the Congressional
leaders flowing in and out of the White House and all of the economic
scenario's that came with them.
It reminds me of the story about the surgeon, the engineer and the
economist who found themselves together at the gates of Heaven. They
were arguing about whose profession in life was the oldest.
"It's mine" said the surgeon, "because the Bible said that God
created man and then woman from one of Adam's ribs and that is clearly
a surgical operation."
But the engineer said before God created man, he created the world
out of chaos and that was an engineering job.
At that point the economist looked calmly at both of them and
said, "Yes, but who do you think created the chaos?"
Although you have already heard some pretty specific budget
stories, I cannot give too many details. But I can and will talk
about the central issues and the hard choices that must be made.
It is clear that we are in for several months of intense debate
and discussion on the budget and spending. And the side of the
discussion you support will be laraely determined by your preconceived
frame of reference. For many, that frame of reference has become
seriously distorted in two important ways.
The first problem has to do with the whole idea of spending and
spending increases.
R-1094

- 2 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,
February 28, 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.
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
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 .

- 3 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
on March 3, 1983,
in cash or other immediately-available funds
or in Treasury bills maturing March 3, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch , or from the Bureau of the Public
Debt.

4
As defense spending was going down as a portion of the budget,
what was happening to outlays for social programs? There has not onl
been a steady increase; but in the past several years that increasing
trend has become an exploding upward spiral. Spending for human
resources — such categories as education, training, health, income
security and the like -- increased from S25 billion in 1960 to $72
billion in 1970 and to over $300 billion in 1980. Now, these same
figures as a percentage of the total budget, went from 28 percent to
37 percent to 52 percent in 1980. And in 1981 that category of
spending went up further to over 345 billion or almost 53 percent of
total spending.
Spending, for human resources was over $372 billion in the fiscal
year just ended. And based on last year's estimates, will grow to
$386 billion in the current fiscal year and to over $400 billion next
year. And yet we still hear that the Administration is cutting back
on social programs!
Now with the explosive increase in total government spending, the
portion of the budget that must by syphoned off each year to service
that debt has also gone up. From 1955 through 1975, the percentage o
the budget needed to service the debt was about 7%. The percentage
went up to 9% in 1980.
In FY 81, it increased further to 10.5
percent and this year it was a staggering $85 billion or 11.6 percent
of the budget.
If you really stop to consider the dimensions of all this, it kin<
of boggles the mind. But we don't stop to consider it very often.
Sadly, these trends and big numbers are nothing new. And, as a
nation, we are getting a little numb to it all.
But whether we are talking about a billion dollars or a nickel —
it is money that has been hard earned by the American people and that
must come one way or another out of the pockets of the American
people.
Now in addition to calling spending increases something other tha:
what they are, we have concocted a second way to confuse the spending
issue.
Some years ago the word 'uncontrollable' crept into the debate
about spending and the budget. It is a term typically applied to the
social spending side of the budget: items such as Social Security,
Medicare, Medicaid, student loans and the like. Once such a program
is signed into law, so goes the argument, the outlay of funds flows
"automatically." The concept of an uncontrollable expenditure is
applied also — a l t h o u g h usually to a lesser extent — to defense
spending. The idea here, of course, is that the process of procuring
a weapons system involves a long, multi-year process of research and
development, testing, redesign, and production. And, of course, once

5
into ptoduction, the economies of scale often reauire that a large
number of the systems be built so that the price per unit can be"
reduced. Persuasive arguments are usually made that once we are part
way through a weapons system procurement it is often unwise to then
stop in mid-stream.
What we have then — both in the case of domestic transfer
payments and defense spending, is a series of very powerful
institutional and procedural factors which make it very difficult to
halt or slow a Federal spending program once it has been put into
place.
But what is our response to this situation? Do we simply throw u
our hands and say "the budget is uncontrollable."? Have we put into
motion a spending machine whose momentum is so great that the creator
of that machine are now powerless to reign it in? I reject that
notion.
We are a free people with a freely elected legislative body and a
elected president. If we as a nation do not have control over our ow
budget, what do we have control of? Many are on the verge of
abdicating the overall levels of expenditures to forces which they
themselves set. in motion. If we do this, where are we headed?
What I am suggesting is that that we as a national community have
the power — if we choose to use it — to control spending.
We in the Reagan Administration have said repeatedly that we are
going to honor the basic commitment of the Federal Government to thos
truly in need. And, contrary to much of the scare talk that was hear
before the election last fall, social security beneficiaries are goin
to receive their checks, and they will not be reduced from their
current levels. At the same time, however, it is obvious to anyone
who does not have their head completely in the sand that the Social
Security system as it is now constituted cannnot continue indefinetlv
The system is currently paying out about $30,000 dollars more each
minute than it is taking in. Nothing can go on indefintely like that
There is no company which can stay in business nor any individual
which can make ends meet, on that basis. And, wishful thinking not
withstanding, there is no government program — in the world — which
can function indefinitely on that basis.
Now in talking about spending there is always the inflation facte
to contend with. It looks as though inflation for this calendar yeai
will be somewhere in the 4-5% percent range. So when we start talkir
about the Administration's proposed Fiscal year 1984 budget let's be<
in mind some simple rules of thumb. If the budget level for a
particular agency, program or category is less than that for the lasl
fiscal year, that is a budget cut. If it grows by a factor of 4% or
less that is a slight increase in'nominal terms and — depending on

6
the figure — about the same or a slight decrease in real terms. Anj
figure that is more than 5% greater than last year's figure is an
increase both in real and nominal terms. It is not a slash. It is
not being tightfisted to the point of insensitivity. It is not a
reduction. It is an increase. Period.
Other nations are learning that they cannot spend their way to
prosperity. Debts must all be repaid — eventually. Living on credi
where each year debt servicing constitutes a greater slice of nations
earnings is not a national lifestyle that can go on forever. Uncle
Sam has been very adament in making sure that point is driven home to
other nations. And it is well that we do so. But we had better lear
the lesson ourselves. We cannot afford to keep saying, "Do as I say
and not as I do."
/
Future deficits are going to be large and they are worrisome. But
they have not grown larger only — I might say, not even primarily —
because of the tax cuts. In spite of the cut and in spite of the
recession, "government receipts", taxes by another name, have actuall
gone up — from $599 billion in 1981 to $618 billion in 1982. This
year's revenues will be about $600 billion, a reduction. But while
government revenue was going up, spending was going up more by almost
$70 billion. The underlying cause of these deficits is really
two-fold. First, the recession has reduced personal and business
income and therefore reduced tax receipts. And that is why the
President rightly pointed out last week in his press conference that
getting an economic recovery is an essential ingredient in reducing
the deficits. But the other cause stems, of course, from decades of
overspending — which are also, by the way contributing causes to the
slow economic growth.
We need to view all of this in terms of the gross national
product.
This Administration came into office committed to reducing
spending as a percentage of GNP. Unfortunately, that percentage has
gone up, not down.
But that is still an over-riding goal. Spending must be brought
down to 21 to 22 percent of GNP by 1986. If we are serious about thj
— and we are — no program should be automatically immune from cuts,
Now while we are bringing outlays down, we have to start bringing
revenues up to meet the outlays.
Obviously, more revenue can best be raised from a growing base.
To enable that base to expand several favorable conditions must be
present.

7
First, interest rates, which have dropped substantially, are still
too high. There are many economists who will tell you that there is
no technical correlation between deficits and interest rates. And as
an academic point, there may be some truth here. But as a man who
worked on Wall Street for thirty five years, I can tell you that there
is a powerful perception in the marketplace that massive deficits will
bring on rising interest rates. And that perception has a way of
becoming a self fulfilling prophesy. That is why spending must move
down and revenues up, respectively, into that range of 21-22 percent
of GNP.
#

In my judgement, interest rates in the long run will move down
further and stay down only if we get deficits below 2% of GNP.
Secondly, to ensure that we can look forward — in the near term to an expanding economic base, monetary policy should be accommodative
to recovery. Then, as the economy strengthens, money growth should be
phased back slowly.
Finally, if we want to strengthen an expanding economic base,
increased attention must be paid to streamlining and simplifying the
federal tax structure. We have a tax code in this country that has
more than a thousand pages. It is only the well-to-do who can afford
the lawyers and accountants needed to really pore over the whole
matrix. I recognize that any really serious attempt to reform that
code will bring out the special interest groups like flowers brinq
bees. All will be trying to maintain 'their' special circumstances or
'their' loophole.
But it is high time that interest groups thought more in plural
terms and less in singular. Remember that the U.S., in lower case, is
"us" and that is who should be considered. An excessive preoccupation
with "I" or "our group" or "my interest" is simply not compatible with
fiscal responsibility, nor with simplfying the tax system.
To reach all these goals we will need a lot of honest and serious
dialogue on the real issues; not bamboozling rhetoric.
The Question which faces the United States and many other nations
in the world is: What overall levels of public sector spending and
public sector revenues will maximize the prospects of vigorous
economic recovery? This Administration is determined to identify
those levels and work cooperatively with Congress to stay within them.
Thank you.

apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M. January 11, 1983
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $12,000 million, to be issued January 20, 1983.
This offering will provide $850 million of new cash for the
Treasury, as the regular 13-week and 26-week bill maturities were
issued in the amount of $11,156 million. The $5,008 million of
additional issue 50-day cash management bills issued December 1,
1982, and maturing January 20, 1983, will be redeemed at maturity.
The $11,156 million of regular maturities includes $1,318
million currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities and $1,713 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 $6,000
million, representing an additional amount of bills dated April 22,
1982, and to mature April 21, 1983 (CUSIP No. 912794 CB 8 ) , currently outstanding in the amount of $10,894 million, the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,000 million, to be dated
January 20, 1983, and to mature July 21, 1983 (CUSIP No. 912794
DJ 0 . )
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing January 20, 1983. 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 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 $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.
R-1095

- 2Tenders 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., Eastern Standard time, Monday,
January 17, 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.
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
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 .

- 3 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
on January 20, 1983,
in cash or other immediately-available funds
or in Treasury bills maturing January 20, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch , or from the Bureau of the Public
Debt.

rREASURY NEWS
partment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.

January 12, 1983

TREASURY TO AUCTION $7,250 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $7,250 million of
2-year notes to refund $4,647 million of 2-year notes maturing
January 31, 1983, and to raise $2,603 million new cash. The $4,647
million of maturing 2-year notes are those held by the public,
including $677 million currently held by Federal Reserve Banks as
agents for foreign and international monetary authorities.
The $7,250 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks as agents for foreign and
international monetary authorities (including the $677 million of
maturing securities) will be added to that amount.
In addition to the public holdings, Government accounts and Federal Reserve Banks, for their own accounts, hold $544 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.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment
R-1096

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED JANUARY 31, 1983
January 12, 1983
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date
Call Date
Interest rate
Investment yield
Premium or discount
Interest payment dates
Minimum denomination available
Terms of Sale:
Method of sale
Competitive tenders

Noncompetitive tenders
Accrued interest payable
by investor
Payment by non-institutional
investors
Deposit guarantee by
designated institutions
Key Dates:
Deadline for receipt of tenders
Settlement date (final payment
due from institutions)
a) cash or Federal funds
b) readily collectible check

$7,250 million
2-year notes
Series Q-1985
(CUSIP No. 912827 PB 2)
January 31, 1985
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
July 31 and January 31
$5,000
Yield Auction
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the
average price up to $1,000,000
None
Full payment to be submitted
with tender
Acceptable
Wednesday, January 19, 1983,
by 1:30 p.m., EST

Monday, January 31, 1983
Thursday, January 27, 1983

partment of the Treasury • Washington, D.C. • Telephone 566-204
FOR IMMEDIATE RELEASE CONTACT: Charles Powers
January 13, 1983

202/566-2041

CHARLES RINKEVICH SELECTED AS THE DIRECTOR,
FEDERAL LAW ENFORCEMENT TRAINING CENTER,
GLYNCO, GEORGIA
Secretary of the Treasury Donald T. Regan announced today
that Charles F. Rinkevich of Marietta, Georgia, has been selected
as the Director of the Federal Law Enforcement Training Center
(FLETC), Glynco, Georgia.
FLETC, a bureau of the Department of the Treasury, is an
interagency service organization for Federal law enforcement
personnel from 49 participating organizations. Recently, FLETC
also was designated* by President Reagan to be the focal point for
the creation of a National Center for State and Local Law Enforcement Training.,
John M. Walker, Jr., Assistant Secretary (Enforcement and
Operations), whose office has oversight responsibility for FLETC,
commented that "Mr. Rinkevich is a superb choice to head this
Nation's premier law enforcement training facility because of his
extensive experience and knowledge of enforcement activities at
all levels of government."
Mr. Rinkevich is a Regional Director for the U.S. Department
of Justice's Audit 'Staff in Atlanta, Georgia. He is currently \
serving and will continue t,o_serve as the Coordinator for the South
Florida Task Force which was established by the President to counteract
serious crime problems stemming from massive illegal immigration
and drug smuggling into the United States through South Florida.
Previously, he was assigned as Director of the Atlanta Federal
Task Force which coordinated Federal assistance to the City of
Atlanta during its crisis involving murdered and missing
children. Mr. Rinkevich has also held important positions with
the U.S. Law Enforcement Assistance Administration and the
Pennsylvania Governor's Justice Commission. He served as a
police officer in Michigan, a police training officer in
Savannah, Georgia and law enforcement consultant with both the
University of Georgia and the International Association of Chiefs
of Police.
Mr. Rinkevich received an A.A. from Grand Rapids Junior
College, Grand Rapids, Michigan, and a B.S. in Police Administration/Public Administration from Michigan State University, and he
is nearing the completion of a masters degree in Public
Administration from Georgia State University, Atlanta, Georgia.
He is a recipient of the Department of Justice's Meritorious
R-1097
Award. His wife Sara and he have two children, Charles Jr., 11,
and Monica, 9.

rREASURYNEWS

apartment of the Treasury • Washington, D.C. • Telephone 566-20
FOR RELEASE AT 12:00 NOON January 14, 1983
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $7,500 million of 364-day Treasury bills
to be dated January 27, 1983, and to mature January 26, 1984 (CUSIP
No. 912794 EC 4 ) . This issue will provide about $2,200 million new
cash for the Treasury, as the maturing 52-week bill was originally
issued in the amount of $5,294 million. The $4,006 million of additional issue 73-day cash management bills issued November 15, 1982,
and maturing January 27, 1983, will be redeemed at maturity.
The bills will be issued for cash and in exchange for Treasury bills maturing January 27, 1983. In addition to the maturing
52-week and cash management bills, there are $11,162 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 $1,542 million, and
Federal Reserve Banks for their own account hold $2,481 million of
the maturing bills. These amounts represent the combined holdings
of such accounts for the three regular 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 $325 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
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, Thursday, January 20, 1983.
Form PD 4632-1 should be used to submit tenders for bills to be
maintained on the book-entry records of the Department of the
Treasury.
R-1098

- 2 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. Dealers, who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New
York their positions in and borrowings on such securities, when
submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches . A deposit of
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders .
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids . Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for $500,000 or less without
stated price from any one bidder will be accepted in full at the
weighted average price (in three decimals) of accepted competitive
bids .

- 3 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 27, 1983, in cash or other immediately-available funds
or in Treasury bills maturing January 27, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

TREASURY NEWS
January
17, 1983
apartment of the Treasury • Washington, D.C. •
Telephone
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 6,000 million of 13-week bills and for $6,000 million of
26-week bills, both to be issued on January 20, 1983, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

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

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

High
98.091a/ 7.552%
7.81%
96.132b/ 7.651%
8.07%
L° w
98.066
7.651%
7.91%
96.084
7.746%
8.17%
Average
98.074
7.619%
7.88%
96.093
7.728%2/ 8.15%
a/ Excepting 4 tenders totaling $1,945,000.
b/ Excepting 2 tenders totaling $2,000,000.
Tenders at the low price for the 13-week bills were allotted 33%.
Tenders at the low price for the 26-week bills were allotted 66%.

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
$
43,005
$
43,005
$
94,495
8,982,095
4,440,295
10,866,315
25,900
25,900
59,300
74,975
59,975
59,925
37,130
37,130
25,470
49,455
47,220
35,220
1,003,045
456,045
649,360
49,530
41,530
47,190
15,105
14,435
14,590
42,910
42,210
38,660
29,225
29,225
18,650
764,700
482,310
793,995
281,205
281,205
312,840

$
42,795
4,942,850
59,300
54,925
25,470
35,220
221,860
34,190
9,590
38,660
18,650
203,995
312,840

$11,398,280

$6,000,485

> $13,016,010

$6,000,345

$ 9,558,300
914,250
$10,472,550

$4,360,505
914,250
$5,274,755

$10,539,940
688,870
$11,228,810

$3,724,275
688,870
$4,413,145

913,030

713,030

800,000

600,000

12,700

987,200

$6,000,485

$13,016,010

$6,000,345

$11,398,280

Accepted

y Equivalent coupon-issue yield
2/ The four-week average for calculating the maxjLmum interest rate payable
on money market certificates is 7.874%.

R--1099

2041

FOR IMMEDIATE RELEASE JANUARY 17, 1983
The Treasury announced today that the 2-1/2 year
Treasury yield curve rate for the five business days ending
January 17, 1983, averaged 9.30 % rounded to the nearest
five basis points. Ceiling rates based on this rate will be
in effect from Tuesday, January 18, 1983 through Monday,
January 31, 1983.
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 fron the DIDC on a recorded telephone message.
The phone number is (202)566-3734.

Approved

''
Francis X. Cavanaugh, Director
Office of Government Finance
& Market Analysis

rREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M. January 18, 1983
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$12,000 million, to be issued January 27, 1983. This offering will
provide $850 million of new cash for the Treasury, as the regular
13-week and 26-week bill maturities were issued in the amount of
$11,162 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,000
million, representing an additional amount of bills dated
October 28, 1982, and to mature April 28, 1983 (CUSIP No. 912794
CS 1 ) , currently outstanding in the amount of $8,630 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,000 million, to be dated
January 27, 1983, and to mature July 28, 1983 (CUSIP No. 912794 DK 7).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing January 27, 1983. In addition to the
maturing 13-week and 26-week bills, there are $5,294 million of
maturing 52-week bills and $4,006 million of maturing cash management bills. The disposition of these latter amounts was announced
last week. Federal Reserve Banks, as agents for foreign and international monetary authorities, currently hold $1,574 million, and
Federal Reserve Banks for their own account hold $2,481 million of
the maturing bills. These amounts represent the combined holdings
of such accounts for the three regular 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 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 $1,249 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 will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.

R-2000

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20 2 26, up to 1:30 p.m., Eastern Standard time, Monday,
January 24, 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.
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
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 .

- 3 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
on January 27, 1983, in cash or other immediately-available funds
or in Treasury bills maturing January 27, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch , or from the Bureau of the Public
Debt.

fREASURYNEWS

apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE

" ^

January 19, 1983

RESULTS OF AUCTION OF[2-^EAR NOTES
The Department of the TreasippQ^lias accepted $ 7,251 million of
$14,341 million of tenders received from the public for the 2-year
notes, Series Q-1985, auctioned today. The notes will be issued
January 31, 1983, and mature January 31, 1985.
The interest rate on the notes will be 9-1/4%. The
range of accepted competitive bids, and the corresponding prices at
the 9-1/4% interest rate are as follows:
Bids Prices
Lowest yield
9..18%1/
100..125
Highest yield
9..28%
99..946
Average yield
9..25%
100..000
Tenders at the high yield were allotted 42%.
TENDERS RECEIVED AND ACCEP'TED (In Thousands)
Location
Received
Boston
79,780
$
New York
11 ,623,495
Philadelphia
48,835
Cleveland
179,315
Richmond
175,395
Atlanta
119,860
Chicago
1 ,103,580
St. Louis
167,975
Minneapolis
77,430
Kansas City
136,270
Dallas
30,960
San Francisco
593,325
Treasury
4,920
Totals
$14 ,341,140

Accepted
$
58,740
5,727,575
48,255
155,355
143,330
111,830
405,620
109,805
77,430
132,290
26,720
248,725
4,920
$7,250,595

The $7,251
million of accepted tenders includes $1,338 million
of noncompetitive tenders and $5,913
million of competitive tenders
from the public.
In addition to the $7,251 million of tenders accepted in the
auction process, $420 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $544 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 3 tenders totaling $4,010,000.

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rREASURY NEWS

partment of the Treasury • Washington, D.C. • Telephone 566-204
FOR IMMEDIATE RELEASE January 20, 1983
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $ 7,501 million of 52-week bills to be issued January 27, 1983,
and to mature January 26, 1984,
were accepted today. The details are
as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Investment Rate
High
Low
Average -

Price

Discount Rate

91.931
91.893
91.904

7.980%
8 .018%
8 .007%

(Equivalent Coupon-issue Yield)
8,.62%
8,.66%
8,.65%

Tenders at the low pricet were allotted 40%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received

Accepted

51,140
14,315,750
27,730
43,050
78,010
66,190
1,186,880
67,535
38,195
60,510
18,250
1,000,475
69,970

$
24,640
6,529,150
20,730
19,550
68,005
34,190
439,380
38,035
21,570
52,010
13,250
170,985
69,970

$17,023,685

$7,501,465

$15,330,945
512,740
$15,843,685

$5,808,725
512,740
$6,321,465

900,000

280,000

$17,023,685

$7,501,465

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

Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

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rREASURYNEWS
lartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE

January 24, 1983

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 6,004 million of 13-week bills and for $6,014 million of
26-week bills, both to be issued on January 27, 1983,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing April 28, 1983
Discount Investment
Price
Rate
Rate 1/

HiS11
97.972a/
8.023%
Low
97.960
8.070%
Average
97.964
8.055%
a/ Excepting 1 tender of $995,000.

26-week bills
maturing July 28. 1983
Discount Investment
Rate 1/
Rate
Price

8.30%
8.35%
8.34%

95.890
95.881
95.883

8.130% 8.60%
8.62%
8.147%
3.61%
8.144Z2/

Tenders at the low price for the 13-week bills were allotted 96%.
Tenders at the low price for the 26-week bills were allotted 91%'.

Location
Bos'ton
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
$
34,885
$
47,945
$
47,945
13,522,600
4,589,535
=
11,331,175
28,190
26,140
28,190
82,640
52,160
88,660
100,625
53,470
36,670
122,630
47,015
51,985
989,155
149,000
991,000
42,685
39,585
41,835
18,075
13,635
19,635
45,800
40,575
46,115
:
16,310
24,670
29,670
1,085,220
650,705
1,270,385
:
292,410
278,875
278,875

Accepted
$
24,885
5,403,255
17,640
19,840
30,625
29,685
54,635
34,435
11,020
40,575
11,310
43,325
292,410

$14,278,940

$6,003,785

: $16,373,950

$6,013,640

$12,431,825
975,080
$13,406,905

$4,306,670
975,080
$5,281,750

: $14,228,275
:
722,775
:
$14,951,050

$4,017,965
722,775
$4,740,740

831,035

681,035

41,000

$14,278,940

$6,003,785

750,000

600,000

672,900

: $16,373,950

$6,013,640

V Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
"~
on money market certificates is 7.898%.

rREASURYNEWS _
partment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M. January 25, 1983
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 12,000 million , to be issued February 3, 1983.
This offering will provide $825
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $ ll,187million , including $1,131 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $i,529 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 $6,000
million, representing an additional amount of bills dated
November 4, 1982,
and to mature May 5, 1983
(CUSIP
No. 912794 CT 9) , currently outstanding in the amount of $5,628
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $6,000 million, to be dated
February 3, 1983,
and to mature August 4, 1983
(CUSIP
No. 912794 DL 5) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing February 3, 1983.
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 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 $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.

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- 2 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,
January 31, 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.
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
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 .

- 3 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
on February 3, 1983,
in cash or other immediately-available funds
or in Treasury bills maturing February 3, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch , or from the Bureau of the Public
Debt.

FREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
January 25, 1983

Contact:

Robert E. Nipp
(202) 566-2133

TREASURY ANNOUNCES PRICE INCREASES FOR OLYMPIC COINS
The Treasury Department today announced that the cost of
Olympic coins will be increased effective tomorrow, January 26.
The increase reflects the upward movement in the price of
precious metals, and the end of the pre-issue discount rate
mandated by the Olympic Commemorative Coin Act. There will be
an additional fee to help defray postage and handling costs.
Orders mailed on or after January 26 will be accepted at the new
rates only.
Public Law 97-220 signed by President Reagan on July 22,
1982, authorizes the Mint to strike three coins with designs
emblematic of the summer Olympic games which are to be held in
Los Angeles, California July 28 to August 12, 1984:
* A silver dollar coin bearing the 1983 date and composed of 90 percent silver. Production of the proof
coin will begin early next month at the San Francisco
Assay Office.
* A second 90 percent silver dollar coin of different
design and bearing the 1984 date. It will be available early next year.
* A $10 gold coin bearing the 1984 date and composed of
90 percent fine gold (21.6 karat). This represents
the first gold coin to be produced by the United
States Mint in over 50 years and will be available in
early 1984.
The silver coins will contain .77 troy ounces of silver and
have a diameter of 1.50 inches; the gold coins will contain .484
troy ounces of fine gold and have a diameter of 1.06 inches.
Public Law 97-220 provides that a surcharge of no less than
$10 for each silver coin and $50 for each gold coin be used to
promote the Olympic movement. These surcharges are incorporated
into the costs of the co:n s^ts. Specifically, the law stipulates that 50 percent of the surcharges be promptly paid to the
United States Olympic Committee to be used to train United
States Olympic athletes, to support local or community amateur
athletic programs and to erect facilities for the training of
such athletes. The remaining 50 percent of the surcharges shall
be paid to the Los Angeles Olympic Organizing Committee to be
used to stage and promote the 1984 games in Los Angeles.
(more)

- 2 The new prices on the three sets are effective through Tuesday,
April 5, 1983. Prices after April 5 have not been established.
In the event that further significant increases in bullion
prices should occur, the Mint reserves the right to discontinue
the acceptance of orders before April 5. Once an order is
acceptedby theMint, however, it will not be cancelled due to
changes in bullion prices. Interested buyers are invited to
send a letter order and payment to:
The United States Mint
P. 0. Box 6766
San Francisco, CA
94101
Those interested in bulk rate discounts should write Olympic
Coin Program, 475 Park Avenue, South, New York, New York 10016.
The three options, their prices, and postage and handling
charges effective January 26 are:
Single Coin Set
1983 Silver One Dollar Proof Coin

$29.00 plus postage &
handling

Two Coin Set
1983 Silver One Dollar Proof Coin
1984 Silver One Dollar Proof Coin

$58.00 plus postage &
handling

Three Coin Set
1983 Silver One Dollar Proof Coin
1984 Silver One Dollar Proof Coin
1984 Gold Ten Dollar Proof Coin

$410.00 plus postage
& handling

A charge of $2.00 for the first set plus $1 for each
additional set is being made to help defray postage and handling
costs. Add this amount to the total cost of the coins.
The Treasury Department also reported that more than
800,000 Olympic coins have been sold through Friday, January 21
with gross sales in excess of $60 million. Of this amount, $14
million in surcharges have been collected for the two Olympic
commi ttees.

(0)

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 10 A.M.
Wednesday, January 26, 1983
TESTIMONY OF THE HONORABLE DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE
JOINT ECONOMIC COMMITTEE
Mr. Chairman and Members of the Committee:
It is a pleasure to meet with you today to discuss the
current state of the economy and the outlook for the future- Two
years ago the incoming Reagan Administration inherited a very
difficult economic situation. Real growth had declined steadily
in the late 1970*s and was negative by 1980. Inflation had
soared to double digit levels. The ensuing two years have seen
serious economic recession as a result of the inflation/tax
spiral. On the bright side, inflation is down from 12.4 percent
for 1980 to 3.9 for 1982.
However, the worst is over in the sense that signs such as
housing, inventories, and real income show the economy is poised
for recovery. Interest rates are down from peak levels of 21-1/2
percent on the prime to 11 percent currently and the stock market
last year made new peaks. Alongside these favorable
developments, there is the distressing fact of high levels of
unemployment.
The task now is to encourage the renewal of economic growth
to reduce unemployment and provide productive job opportunities
in the private sector. But in so doing we must not repeat the
errors of the past and return to an inflationary economy. That's
been our past experience and it only leads to an even more severe
adjustment at some time in the future. The correct course of
action is to persevere with our policies that are designed to
promote long-run economic growth while keeping inflation securely
under control.
The current domestic situation is complicated by the
existence of large federal budget deficits and the threat of even
larger ones in the future. These budget deficits will have to be
reduced since their persistence would inevitably lead to very
adverse consequences for the U.S. economy and its financial
markets.
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-2-

Many of the economic difficulties we face at home are also
faced by countries abroad. The entire international economy is
experiencing a severe slowdown, complicated by the special
debt-servicing problems of a number of countries. My prepared
statement today deals primarily with the U.S. domestic economy,
but it is obvious that the domestic and international situations
are closely linked. The clear need in both cases is to encourage
expansion rather than undergo further contraction.
The Background of Current Difficulties
There would be no point to a lengthy review of past
developments. It is important to recognize, however, that
current difficulties are the culmination of a long period of
deteriorating economic performance in this country. The U.S.
economy was in deep trouble long before the current recession
began. It follows that our policies must aim at lasting long-run
solutions. There are no quick cures.
The origin of most of our current difficulties was the
failure to control inflation after the mid-1960's. Once
underway, the inflationary process was fueled by excessive rates
of monetary expansion and developed a momentum of its own. There
have been intense periods of inflation before in this country,
but only temporarily at, or near, wartime peaks. The Great
Inflation of the 1960's and 1970's is without parallel in
previous U.S. experience. As shown in Chart I, each cyclical
peak and trough in the rate of inflation following the mid-1960's
was at successively higher levels. The basic rate of inflation
was finally ratchetted to double digit levels. Only now and at
great cost has the upward trend of inflation been interrupted.
Rising rates of inflation after the mid-1960's did not lead
to more rapid economic growth for any sustained period of time.
Quite the contrary. Inflation and its inevitable consequence of
higher interest rates finally choked off real growth altogether.
As shown in Chart II, real growth averaged about 4 percent
annually in the decades of the 1950's and 1960's, and slowed to a
little over 3 percent in the 1970's. Indeed, by the late 1970's,
real growth was nonexistent. And, since 1979 there have been two
recessions and real growth has turned negative. Over most of
this period of time while growth was declining, the rate of
inflation moved upward more or less steadily.
Rising rates of inflation after the mid-1960's led to a
roughly parallel rise in key interest rates. As shown in Chart
III, the 3-month Treasury bill rate followed the rate of
inflation very closely over most of the period. Thus, inflation
appears to have been a major factor in the increase in the bill
rate since the early 1960's.

-3-

Proposals to force down interest rates through monetary
expansion fail to recognize that over long periods of time the
absolute level of nominal interest rates is determined by an
underlying real rate of interest plus a premium equal to the
expected.rate of inflation. Sustained periods of monetary
expansion drive up the rate of inflation and pull up interest
rates. The chart also shows very clearly the extent to which
interest rates have risen above the inflation rate in the last
few years of unusually violent swings in money growth. The
resulting increase in real interest rates is due to what might be
termed a wider risk or volatility premium — in addition to the
inevitable inflation premium.
The combination of inflation and rising interest rates was
extremely harmful for the economy. The continuation of inflation
over long periods of time encouraged the assumption of heavy debt
burdens by individual and corporate borrowers in the belief that
a new era of permanent inflation had commenced. Those debt
burdens have become extremely heavy as the period of inflation
has drawn to an end. Inflation also exerted a depressing effect
on corporate profitability both because of inadequate financial
provision for the replacement of real capital and because of the
unremitting pressure of wage demands to keep pace with increases
in the cost of living and rising tax rates.
The combined effect of rising interest rates and downward
pressure on profit margins is shown in Chart IV. The share of
profits in national income has fallen more or less steadily since
the mid-1960's while the interest share has risen. Both of these
trends have accelerated in recent years. Some of the recent rise
in net interest may simply reflect the deregulation of financial
markets — a healthy development. But, the long period of
inflation offered unhealthy incentives for borrowing and reduced
the share of profits in national income.
By late 1980, the U.S. economic and financial situation had
reached a very difficult stage. Critics would do well to recall
the state of affairs which this Administration inherited, as I
stated earlier.
Approach of the Reagan Administration
The Administration's primary economic goal upon coming to
office was to reverse the situation. In our view that required a
fundamental restructuring of the economy, including:
bringing inflation under control;
shifting the composition of activity away from
government spending and toward the private sector into
more productive endeavors;

-4-

providing an environment which would reward innovation,
work effort, saving and investment, and in which
free-market forces could operate effectively.
Within a month of coming into office, President Reagan put
before Congress a four-point program designed to reverse the
steadily deteriorating performance of the past decade and a half.
That program consisted of:
spending restraint;
tax reductions;
far-reaching regulatory improvements;
gradual, steady reduction in the rate of monetary growth
to a pace consistent with noninflationary expansion of
the economy.
While we did not get our full package through Congress in
the exact form we had asked for, our success in achieving quick
approval of the major elements of the program was unprecedented.
This support doubtless reflected widespread recognition that
restoring vitality to the economy would require broadscale
revamping of fiscal and monetary policies.
Over the past two years we have seen evidence that the
program is working. We have made very significant gains on the
inflation front and we are now witnessing a reduction in interest
rates, both of which are prerequisites for a resumption of solid
economic growth.
In the twelve months ending in December consumer prices
rose only 3.9 percent — far below the back-to-back
double-digit increases of 13.3 percent and 12.4 percent
in 1979 and 1980 and the smallest rise since price
controls artificially depressed the statistic in 1972.
The broadest measure of inflation, the GNP deflator, has
come down by more than half since 1980 to an increase of
only 4.6 percent during 1982. These statistics mark an
achievement of primary importance in restoring economic
vitality. The inflationary spiral has been reversed,
thereby conquering the major economic problem of the
past decade and a half.
The reduction in inflationary pressures has also been
visible in wages. But because prices had risen less,
there was good news on wages for the employed people of
this country. The average hourly earnings index
increased only 5.9 percent in the twelve months ending

-5in December, the smallest rise since 1967. Nonetheless,
after four years in which workers had seen the steady
erosion of the purchasing power of their earnings, 1982
was the first time since 1977 in which a real wage gain
was posted. (Chart V shows the recent record on
earnings and price growth.)
It took somewhat longer than hoped for interest rates to
come down. Rates remained sticky through the spring of
last year (Chart VI), stalling the widely anticipated
recovery. However, as markets became aware that the
progress on inflation was not transitory, interest rates
began to drop. The prime fell from 21-1/2 percent in
September 1981 to 11 percent currently — a dramatic
reduction. The three-month Treasury bill rate has also
fallen by about 500 basis points from the end of June to
about 8 percent currently and is down by more than half
from its peak. Yields on Aaa corporate bonds are now
about 11-3/4 percent, a drop of a little over 300 basis
points since last June.
The decline in interest rates was certainly at least in
part responsible for triggering the phenomenal stock
market rally that took place this fall. Stock prices
are now running more than 35 percent above their August
lows, contributing signficantly to household wealth.
We have strong evidence that the fundamental elements of
recovery are now largely in place. Inflation has been brought
under control. Interest rates are coming down. Real wage growth
is being restored. In addition, there have been other
improvements — notably in productivity growth and saving
behavior — which mark a shift away from the problems that
contributed to sluggish economic performance in recent years.
During the latest recession the falloff in productivity
has been less than normal, apparently reflecting
vigorous efforts by business to reduce costs.
Productivity in the total business sector turned
positive in the second quarter of last year and scored a
strong 4.2 percent annual rate of advance in the third
quarter. Gains in productivity are usually greatest in
the early stages of recovery so we can look forward to
further progress as real growth resumes. Since high
productivity reduces costs per unitof output, this will
help ensure that inflationary pressures are not
reignited when the recovery gets underway.
The personal saving rate has also registered improvement
since the first portions of the Administration's tax
rate reductions and savings incentives were put into

-6effect in October 1981. In the five quarters since
then, the personal saving rate has averaged 6.7 percent,
up from the 5.9 percent rate that prevailed from 1977
through 1980.
Within this framework of very significant achievements,
there remains the fact that the economy has been in recession and
unemployment is high.
The unemployment rate of 10.8 percent in December is, of
course, a matter of great concern. It is important to
remember, however, that in December the share of the
working-age population with jobs was 56.5 percent —
1-1/2 percentage point above the 1975 low and close to
the peaks reached in the 1960's. (See Chart VII.)
The Current State of the Economy
The economy now stands poised for recovery. In fact, the
recovery may well already be underway at this moment. It is
always some time after the fact before the actual month of
turnaround can be pinpointed.
The recovery has been much longer in coming than we had
expected, or, for that matter, than expected by nearly all
forecasters. Last year at this time we were projecting that
improvement in the economy would begin to emerge in the spring
and that growth during the four quarters of 1982 would be 3.0
percent. This was almost exactly the consensus of private
forecasters, as contained in Blue Chip Economic Indicators of
January 1982, which projected real growth of 3.1 percent during
the year. Last summer the economy appeared to be in the process
of turning around, and we, along with the private forecasting
community, projected recovery in the second half of the year.
The delayed coming of the recovery has been a major
disappointment.
The recovery was delayed primarily because of the
persistence of high interest rates and because of developments in
the international sphere. Interest rates remained intractably
high into the summer. Rates in general tend to be slow to change
on the way down. Additionally this year, inflationary
expectations failed to incorporate fully the rapidly proceeding
process of disinflation. On the international front, the
economies of our leading trading partners continued to weaken.
Industrial production of OECD European countries dropped at an 8
percent annual rate between the first and third quarters of last
year, and production in Japan was unchanged. Weakness among all
the industrialized nations was self-reinforcing. Furthermore,
the financial difficulties of some of the newly industrializing

-7nations had adverse impacts on economic activity here. To cite
but one example, our exports to Mexico were down in October and
November by about 60 percent from a year earlier, or nearly $11
billion measured at an annual rate. Overall, the slide in total
real net exports accounted for nearly one-half of the total
decline in real GNP between the third quarter of 1981 and the
final quarter of last year. These forces, combined with a
general hesitancy on the part of the consumer, led to another
round of inventory cutting in the second half of 1932 and delayed
the expected turnaround of the economy.
Signals of an Economic Upturn
There are clear signals that the economy is turning around
now and that the recession will soon be behind us. To summarize
these signals:
The index of leading indicators has risen for seven out
of the last eight months.
Housing is in the midst of a rapid recovery. New home
starts jumped by 45 percent in the fourth quarter from a
year earlier; and permits increased by 60 percent over
the same span. As shown in Chart VIII, new home sales
have risen 55 percent since the spring quarter of last
year, and inventories of unsold homes have hit the
lowest levels recorded in more than a decade.
Business trimmed inventories sharply in the final
quarter of last year — a 6 percent annual rate for the
nonfarm sector. Historically, a cleanout of inventories
typically has been followed by a shift back to higher
rates of production.
Retail sales have begun to firm. Sales of the major
nonautomotive discretionary components of consumer
purchasing — namely household durables and clothing —
rose at an impressive 11-1/2 percent annual rate in real
terms in the final three months of last year.
Automobile sales appear to be in the early stages of
recovery, following a four-year period of decline. Auto
production is slated to rise by 20 percent (not
annualized) in the first quarter of this year from the
prior quarter, and that increase could be even larger
should sales continue to outpace currently announced
production schedules.
Total industrial production stabilized in December and
appears poised to turn upward.

-8Weekly initial claims for state unemployment insurance
have been trending downward since mid-October. And even
though employment continued to decline in December,
decreases in recent months have slowed notably.
Finally, declines in interest rates and the resurgence
of stock prices since last summer are indicative of a
vastly improved financial climate.
The Typical Recovery
We would all hope for a vigorous recovery, not unlike those
which occurred in the past. The typical postwar recovery path is
shown in Chart IX. Excluded from it are the two atypical
recoveries — the first of which included the Korean War buildup
and the second which got underway late in 1980 but was
short-lived. The five recoveries contained in the average line
in the chart were remarkably similar. Gains over the first eight
quarters from the real GNP trough were within an extremely narrow
range of 10.2 percent to 12.0 percent — in the 5 to 6 percent
annual rate range.
The contributions of GNP components to real growth during
the typical recovery are shown in Chart X. Notably, that chart
clearly indicates that stimulus from higher Federal spending is
not a prerequisite for strong recovery. In fact, real Federal
purchases declined on average during previous recoveries, and
especially so during their early stages. Furthermore,
improvement in our real balance of net exports also is not
necessary for strong recovery, as it too has typically weakened
during the early stages of recovery. Real capital spending
typically contributed but little to the early- stages of recovery,
though picking up steam in the second year.
As the chart indicates, much of the initial thrust for
expansion comes from:
A resurgence in homebuilding activity, such as currently
is underway.
A swing in inventory investment from decumulation in the
later stages of recession to accumulation. Decumulation
proceeded rapidly in the fourth quarter of last year,
apparently setting the stage for a swing upward in
inventory investment over coming quarters.
A major contribution from consumer spending, with
purchases of consumer durables registering particularly
large increases. Consumers recently have vastly
improved their financial positions, and with the age of

-9existing stocks of consumer durables, most importantly
of autos, having increased substantially over the past
several years, coming quarters should witness a rebound
in consumer spending.
The Outlook for the Economy
A vigorous recovery of the type outlined would be most
welcome. It would certainly help ease the Nation's budgetary
problems. If, for example, real GNP growth was only 0.5 percent
higher than our current forecast in 1983 and 1984, the deficit
would decline to $90 billion in 1988 instead of the $117 billion
estimated in the budget. If real GNP growth reached the high
rates obtained during the early 1960's (1.3% higher growth in
each of the next six years) we could balance the budget by 1988.
However, we recognize that the serious problems still confronting
us may well hold growth during the next year or two below the
typical recovery pattern.
Our overall trade balance is likely to register further
marked deterioration in the coming year, reflecting the
recent high value of the dollar and the serious problems
of our trading partners.
Real interest rates may persist at high levels though
far below those prevailing a year ago.
The economy is in the process of undergoing marked
structural change. Some of our industries may not
quickly regain the vitality they experienced in the
1950's and 1960's. The shift of resources to emerging
industries will take timeThe transition to a noninflationary environment is not
an easy one. In particular, as inflation is winding
down, businesses face uncertain returns on investment
programs, as they will not know what prices they may be
able to charge in the future. Only one thing is certain
— they will not be able to count on ever accelerating
inflation to bail out faulty investment decisions.
Most fundamentally, we are not yet fully out of the
inflationary woods, and we cannot afford to direct
monetary and fiscal policy toward excessively rapid
economic expansion. Rather, we must set our sights on
achieving a steady, stable, long-lived expansion, one in
which inflation can be further reduced and the
conditions for lapid growth of productivity and living
standards can be fostered.

-10For these reasons, the Administration will be forecasting
fairly modest real growth at a 3 percent rate during the four
quarters of 1983, rather than the typical recovery growth rate of
about twice that much. Certainly we would welcome a strong
recovery. Growth is expected to pick up modestly to the 4
percent range in 1984 and the years beyond.
If we are successful in making this difficult transition and
move onto a sustainable, noninflationary growth path, then we can
look forward to years of improved economic performance such as we
enjoyed during the 1950 's and in the early 1960's. Such a growth
path can only be achieved by consistent application of the proper
mix of policies. It will certainly require that we take
immediate and strenuous efforts to reduce the budget deficits
that loom ahead.
Policies for the Recovery
In setting policy for the remainder of the 1980's, we must
recognize what we must not do. We no longer have the freedom of
action to revert back to the overly stimulative monetary and
fiscal policies pursued at times in the past, for these would
surely lead to a resurgence of inflationary pressures and a new
round of rising interest rates. Further, we must not reverse the
fundamental tax restructuring put in place in 1981, for this was
designed to provide the noninflationary incentives without which
the private sector would continue to wither.
Sound policy for the remainder of the 1980's must build on
the framework enunciated by the President two years ago. That
program was designed to foster an economic climate in which the
private sector could flourish. The problems facing us are even
more severe than we envisaged two years ago, but we still believe
the general course laid out then was the proper one.
Monetary Policy
Achievement of a gradual slowing of growth in the money
supply to a steady and noninflationary pace has been, and
continues to be, one of the major goals of the Administration's
economic program. The Federal Reserve's efforts to achieve that
goal have been complicated by a number of factors such as by
far-reaching institutional changes in the banking and thrift
industries. Nevertheless, the Fed has generally succeeded in its
efforts albeit in a somewhat erratic fashion: in the four years
ending in 1980, growth in the money supply (Ml) from fourth
quarter to fourth quarter averaged nearly 8 percent annually. In
1981, Ml growth slowed sharply to a 5 percent rate, and from the
fourth quarter of 1981 to the third quarter of 1982 Ml grew at
only a 5.3 percent annual rate.

-11-

The Federal Reserve's efforts to slow money growth have,
however, been accompanied by some volatile short-run swings.
Growth in the narrowest monetary aggregate, Ml, was actually
negative on a 13-week basis by mid-summer of last year, and then
soared to the double-digit range by the end of the year. This
recent acceleration has caused some observers to conclude that
the fight against inflation and inflationary money growth has
been abandoned. That is not true. Both the Administration and
the Federal Reserve remain committed to the long-run goal of
providing money growth at a noninflationary pace consistent with
a steady and sustainable expansion of economic activity.
Monetary policy faced a difficult and uncertain situation
during much of last year. Rapid institutional change in the form
of new money market instruments blurred the boundaries between
the various aggregates and made the achievement of any target
rates of growth unusually difficult. There is also some
indication that the recession may have led to an increased demand
for liquidity and precautionary balances. In 1982, growth in
monetary velocity — the rate at which money is used — turned
negative for the first time in nearly three decades as shown in
Chart XI. Under the unusual economic and institutional
circumstances of 1982, some temporary offset in the form of
above-target rates of monetary growth was probably desirable.
As we look to the year ahead, it is clear that monetary
policy goals will be important. Interest rates are still higher
than they should be, and money growth must be returned eventually
to the steady noninflationary pace envisioned by our overall
economic program. One of the reasons interest rates remain
high is that markets continue to be uncertain about the direction
of Federal Reserve policy in the short run. The erratic movement
of the money supply has been a factor underlying that
uncertainty, and we hope that an even greater effort to avoid the
wide swings in money growth seen in 1981 and 1982 will be
undertaken by the Federal Reserve. Some of those fluctuations,
of course, were the result of the institutional changes which
have occurred and which have blurred the meaning of the
traditional money supply measures. Nevertheless, as flows to and
from the new money market deposit accounts and Super NOW accounts
settle down and economic recovery moves ahead, the stage will be
set for the Fed to follow a policy aimed once again at steady,
predictable and noninflationary money growth.
Fiscal Policy
The objectives of our fiscal policy upon coming to office
two years ago were two-fold. First, we believed and still
believe it was imperative to correct the disincentives to
economic performance that had been built into the tax structure

-12over the years. These disincentives arose in large measure, not
by design, but through the interaction of a high rate of
inflation with a progressive tax system and historical cost
accounting of depreciable assets. Second, it was equally
imperative to reverse the seemingly inexorable growth of Federal
spending, thereby freeing resources for use in the private
sector.
The tax reforms that were put in place were designed
primarily to restore an adequate rate of return of investment in
plant and equipment and to put a halt to the steady upcreep of
marginal tax rates on labor and savings income. The investment
incentives were necessary to bring long-depressed U.S. investment
rates and productivity growth rates up to acceptable standards.
These measures will greatly improve our competitive standing in
the world as economic recovery proceeds. For individuals, the
tax cuts were needed to protect incentives and purchasing power.
For the average taxpayer, they will only result in an actual
dollar tax cut in 1983, after allowance for the effects of
bracket creep and higher social security taxes. And that 1983
cut will be needed to offset scheduled increases in social
security taxes in the future.
Even with the tax reforms fully in place in 1984, the
marginal tax rate on American labor will be in the 40 percent
range, including social security as well as Federal and State and
local income taxes. For example, Mr. Chairman, a $25,000 a year
worker with three dependents in the State of Iowa who does not
itemize will be in the 22 percent Federal income tax bracket and
the 8 percent state income tax bracket, and will face a combined
marginal income tax rate of 30 percent. In addition, the worker
and his employer will face a combined payroll tax of more than 13
percent, for a total tax on additional wages of over 43 percent.
In recent years, it has cost a firm close to $1.70 to reward a
worker with an additional $1.00 of compensation, a difference
which can only be paid out of productivity gains.
It is of utmost importance that we do not revert to old
policies by repealing the indexation to become effective in 1985
and relying on inflation to provide hidden, unlegislated
increases in tax rates. What is needed now is not a reversal of
previous reforms in the tax structure, but additional reforms to
provide for even further reductions in disincentives. We will be
taking a careful look at the structure of the entire tax system
over the coming year.
We were relatively successful in working with the Congress
to achieve our goals of tax reform, but we were less successful
in the area of outlay control. While some of our proposals for
outlay reduction were enacted in the Omnibus Budget
Reconciliation Act of 1981 and in the First Concurrent Budget

-13-

Resolution of 1982, a major portion of the savings we hoped to
achieve did not receive favorable action. This, along with much
weaker economic activity than expected, has left us facing the
prospect of large deficits even as the economy recovers.
Deficits can feed on deficits, as each year's deficit raises the
debt servicing costs for the forthcoming year.
This Administration has determined that deficits of the
magnitudes bandied about in the press lately will not come to
pass. Deficits of such size would drain the available savings
pool, force up interest rates, and dampen spending on new
business plant and equipment. This Administration came to office
with a program of boosting the rate of capital investment in
order to place the economy on a faster growth track, and we will
not allow ourselves to be diverted from that goal. We will take
whatever measures are necessary to narrow the deficit to
acceptable levels. Preferably, the deficit can be narrowed from
the outlay side. Total federal spending represents the amount of
resources absorbed by the government at the expense of the
private sector. This spending is financed by both taxes and
borrowing, which in either case amounts to a drain on private
savings. Only through spending reduction will the credit market
find itself in a more favorable position. However, if we are not
successful in reducing outlays sufficiently, and deficits still
loom in the outyears even as the economy recovers, we are
prepared to request additional revenue raising measures to be
effective in those years. If the Congress chooses not to reduce
spending, as we wish, then it is preferable to have the full cost
of federal spending programs explicitly identified for the
taxpayers who bear the burden of financing government. In the
event taxes are needed, this Administration will do its best to
structure the tax code in a way that minimizes disincentives for
productive effort.
Policies for a Changing Economic Structure
Not only must we maintain steady monetary and fiscal
policies directed at reinvigorating the private sector of the
economy, but we must carry through with policies of reducing the
regulatory burden on private industry. Noteworthy successes have
been achieved in this area, particularly in the deregulation of
the financial system. For the first time in the postwar period,
small investors can count on being able to obtain market rates of
return on their savings from banks and thrift institutions.
Further, we recognize that our economy and those of the
other industrialized nations are undergoing a period of rapid
restructuring. This is an era of rapid technological change, and
comparative advantage in the production of many goods and
services is shifting from the already developed to the newly

-14developing nations. These forces must be encouraged and
fostered. Those nations which expend all their energies shoring
up declining industries and resisting change"will find themselves
with industrial bases that are obsolete and with declining
relative standards of living. Their more foresighted and
innovative neighbors will be moving forward and capturing newly
opening markets.
Government can ease this painful process, but the private
sector must take primary responsibility for making this
transition. In order to help smooth the process, the President
has announced a program that relies heavily on the market
mechanisms to deal with structural unemployment that stems from
problems in both labor and product markets. Unlike cyclical
unemployment, which will respond to the stimulus of economic
recovery, structural unemployment requires more specific measures
that address the unique problems of young people and the
long-term unemployed. Thus, the President's program will
emphasize training, retraining and relocation, and job-search
assistance for workers facing the lack or loss of jobs even after
an economic recovery. Other proposals will be designed to reduce
the barriers to youth employment. Business management will face
particularly difficult times, for they must develop their
investment and new product strategies during times of both rapid
transition to a noninflationary climate and rapid structural
change. Individuals must exercise initiative in making the
investment in human capital which will allow them to work
effectively in this changing environment.
Finally, in setting the proper course of policy for the
1980's, we must work closely with the other industrialized
nations of the world, so that we all can move forward together
onto sustainable, noninflationary expansion paths. We must also
work diligently and cooperatively to assist financially troubled
newly industrializing nations to overcome their problems. The
International Monetary Fund (IMF) plays an integral role in
current efforts to promote the sound world economy and stable
international financial system required for economic recovery in
the United States and abroad. International negotiations are
nearing completion on measures to assure that the IMF has
adequate resources to help countries experiencing difficulties
implement sound policies of economic adjustment. The
participation of the United States in an increase in IMF
resources is an essential complement to domestic measures to
achieve sustainable economic growth and represents a valuable
investment in defense of the economic interests of the American
farmer, laborer, businessman, and consumer. Legislation
providing for the U.S. share of the increase in IMF resources
will be submitted in the near future and I urge prompt approval
by the Congress.

-15Most important, all nations must eschew courses of
protectionism in futile efforts to shift the burden of economic
difficulties to others. Only through cooperation and common
policies directed by common goals can we move forward together.

Chart I

CONSUMER PRICES YEAR-TO-YEAR PERCENT CHANGES

'80

'82
Junuarv 21. 1983 A27

Chart

ANNUAL RATES OF GROWTH OF REAL GNP AND INFLATION
Percent

8.2
Real Growth

Inflation *

6.5

2.6

2.5

TZZZZZZT
-0.1

1950's

1960's

1970's

1979-82

1950's

1960's

1970's

1979-82

Chart III

INTEREST RATES AND INFLATION

Percent

15-

3-Month Treasury Bill Rate

* Growth from year earlier in G N P deflator.
Plotted quarterly.

•

Jimurv 19. 1983 A28

Chart IV

Percent

PROFIT AND INTEREST SHARES
OF NATIONAL INCOME

Profits*
/

s^^*
Net Interest

.#—

\ \

\ \ \ \

\ \ \

1950 '52 '54 '56 '58 '60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82
* Pretax corporate profits after allowance for depreciation and inventory profit.
January 18, 1983-A207

Chart V

YEARLY GROWTH IN INFLATION AND WAGES
(Percent Change from December to December)
Percent

13.3
12.4

Consumer Price Index

Average Hourly Earnings Index

3.9

1970

January 21, 1983-A209

Chart VI

INTEREST RATES
Weekly Averages

Percent

18
Prime Rate

^.^.-•-.N Aaa Corporate Bonds
V'-.

..*
"«..-.^-

123-Month
Treasury Bills*

^.•.»«j.^'——"—*.^.

i i i i Ii i i Ii i i Ii i i i Ii i i I i

Oct.

I I I I I i ll I I ll i i i h

i i I i i i Ii i u L

i i Ii i ii

Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan.
1981
1982
1983

•Bank discount basis
January 24, 1983-A203

Chart VII

Employment Rate
(Quarterly Data)

Percent

-60

-58

1960

1965

1970

1975

1980

Unemployment Rate
(Quarterly Data)

Percent

Percent
10.7

10-

-10

-8

-6

-4

| I I I | I M ) I I I |ll I | I I l | H I | M I | I l l | l l l|l l l | l l l | l I I | l l l | l M | l l l
i • • • i • • ' i • • • i • • • i

1960

• •• i • • • i

1965

• i •

1970 1975 1980

Chart VIII

NEW HOME SALES AND INVENTORIES
OF UNSOLD HOUSES
Thousands
of Units

New Home Sales
(seasonally adjusted,
annual rate)

700

600
_ •

3 Month Moving Average

500

400

Monthly— ••

/
Credit Controls

300

11 I I i i 1 1 I 11 ll 1 1 1 1 I i i 1

11 i 1 1 1 i i i I I I I i i <

Unsold New Homes
(seasonally adjusted)

400

300

200

- N I I II I I I I I I I I I I I I I I I I I I I I M I I I I
J

S
1979

J
1980

J
1981

1982
January 21, 1983-A212

Chart IX

THE PATH OF POSTWAR ECONOMIC RECOVERIES
Real GNP trough = 100

115

S
110
Average of 5
Postwar Recoveries
ies*

_•»•

-dh *^ 1975-76 Recovery

105

Current Cycle

100

-3

-2

-1

-K3

Quarters from real GNP trough
* Postwar recoveries excluding the Korean War period
and the short-lived 1980-81 recovery.

January 21, 1983-A210

Chart X

CONTRIBUTIONS TO A TYPICAL RECOVERY
BY REAL GNP COMPONENT
Percentage
Points
11.0

— C o n s u m e r Spending

6.4

4.4
—

Inventory Investment

—

Business Capital Spending

-L— Residential Construction

AVN'x\\\^

,»,....*..V.'..WI.X>

— State and Local Purchases

'.":"-".".ll:>i."|

Net Exports
Federal Purchases

-2
First
Four
Quarters

Second
Four
Quarters

TOTAL,
First
Eight
Quarters

* Average of postwar recoveries, excluding the Korean War period
and the short-lived 1980-81 recovery.

January 21, 1983-A213

Chart XI

MONETARY VELOCITY

M 1 Velocity
(yearly percent change)

- 1

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

January 12, 1983 A35

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
January 26, 1983
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
TREASURY FEBRUARY QUARTERLY FINANCING
The Treasury will raise about $8,700 million of new cash and
refund $5,769 million of securities maturing February 15, 1983, by
issuing $6,500 million of 3-year notes, $4,500 million of 10-year
notes, and $3,500 million of 29-3/4-year bonds. The $5,769
million of maturing securities are those held by the public,
including $22 million held, as of today, by Federal Reserve Banks
as agents for foreign and international monetary authorities.
The three issues totaling $14,500 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 $22 million of maturing securities) will be added
to that amount.
In addition to the public holdings, Government accounts and
Federal Reserve Banks, for their own accounts, hold $2,189 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 each of the new securities are given in the
attached "highlights" of the offering and in the official offering circulars.
oOo
Attachment

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rREASURY NEWS
lartment of the Treasury • Washington, D.C. • Telephone
FOR IMMEDIATE RELEASE
January 31, 1983
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,001 million of 13-week bills and for $6,003 million of
26-week bills, both to be issued on February 3, 1983, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

26-week bills
maturing August 4, 1983
Discount Investment
Price
Rate 1/
Rate

13-week bills
maturing
May 5, 1983
Discount Investment
Price
Rate
Rate 1/

95.869
95.834
95.842

High
97.957a/
8.082% 8.37%
Low
97.941
8.145%
8.43%
Average
97.947
8.122%
8.41%
a/ Excepting 1 tender of $2,000,000.

8.171%
8.240%
8.225%2/

8.64%
8.72%
8.70%

Tenders at the low price for the 13-week bills were allotted 80%.
Tenders at the low price for the 26-week bills were allotted 23%.

TENDERS RECEIVED AND ACCJEPTED
(In Thousands)
Received
Accepted
:
Received
:
$
72,575
$
61,570
$
60,570
11,026,075
10,643,540
4,812,540
=
42,200
36,535
:
36,535
150,590
48,130
68,130
78,750
42,325
47,325
35,175
60,760
60,860
951,860
399,490
919,190
44,655
39,805
40,905
10,050
10,385
10,385
:
48,060
40,635
41,135
:
19,685
32,090
32,090
819,385
151,290
796,290
:
281,290
266,580
266,580

Accepted
$
37,575
4,946,555
17,200
62,090
42,980
34,985
214,650
38,885
10,050
48,060
19,685
249,385
281,290

$13,024,535

$6,001,135

: $13,580,350

$6,003,390

$11,144,980
1,034,995
$12,179,975

$4,271,580
1,034,995
$5,306,575

: $11,418,950
:
737,900
: $12,156,850

$3,991,990
737,900
$4,729,890

783,060

633,060

61,500
$13,024,535

725,000

575,000

61,500

698,500

$6,001,135

: $13,580,350

$6,003,390

V Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
on money market certificates is 7.967%.
R-2008

2041

FOR IMMEDIATE RELEASE JANUARY 31, 1983
The Treasury announced today that the 2-1/2 year
Treasury yield curve rate for the five business days ending
January 31, 1983, averaged
five basis points.

y, /U

% rounded to the nearest

Ceiling rates based on this rate will be

in effect from Tuesday, February 1, 1983 through Monday,
February 14, 1983.
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.

. ..'

Approved

^ •'
Francis X. Cavanaugh, Director
Office of Government Finance
& Market Analysis

rREASURY NEWS
partment
of the Treasury • Washington,
D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Contact: Charles Powers
January 31, 1983

(202)566-2041

TREASURY ANNOUNCES PUBLIC MEETING TO DISCUSS
US-SWEDEN TAX TREATY ISSUES, ON FEBRUARY 17, 1983
The Treasury Department today announced that it will
hold a public meeting on February 17, 1983, to solicit the
views of interested persons regarding issues being
considered during negotiations of a new income tax treaty
between the United States and Sweden.
The public meeting will be held at the Treasury
Department, at 2:00 p.m., in room 4426. Persons interested
in attending are requested to give notice in writing by
February 10, 1983, of their intention to attend. Notices
should be addressed to Steven R. Lainoff, Associate
International Tax Counsel, Department of the Treasury,
Washington, D.C. 20220.
Today's announcement of the February public meeting
follows the conclusion of the second round of negotiations
between representatives of the United States and Sweden to
develop a new income tax treaty for the avoidance of double
taxation and the prevention of tax evasion. The existing
treaty between the United States and Sweden was signed in
1939.
The Treasury seeks the views of interested persons in
regard to the full range of income tax treaty issues, as
well as other matters that may have relevance to an income
tax treaty between the United States and Sweden. The
February 17 public meeting will provide an opportunity for
an exchange of views, and will permit discussion of the
United States position in regard to the issues presented.
o 0 o

R-2009

rREASURYNEWS
partment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
Tuesday, February 1, 1983
TESTIMONY OF THE HONORABLE DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE APPROPRIATIONS COMMITTEE
Mr. Chairman and Members of the Committee:
It is a pleasure to meet with you today and to discuss
the Administration's 1984 budget proposals. The development
of a sound fiscal policy was one of the central objectives of
the Reagan Administration when it came into office two years
ago. For too long a time Americans had watched the share of
GNP accounted for by Federal spending and taxes move upward.
As the government siphoned off resources from the private
sector and the money supply expanded, economic activity
stagnated and inflation soared.
In February 1980 the Administration put before Congress
a four point plan to revitalize the economy. Our program
included spending restraint, tax reductions, regulatory reform,
and support of the Federal Reserve's efforts to attain gradual,
steady reduction in the rate of monetary growth.
The transition to a noninflationary environment has been
somewhat more difficult than anticipated. We have seen two
years of serious economic recession as a result of the inflation/tax spiral.
However, the worst is now over. There has been clear
progress on inflation, and consumer price growth has dropped
dramatically from 12.4 percent in 1980 to 3.9 percent in
1982. Interest rates are down from peak levels of 21-1/2
percent on the prime in December 1980 to 11 percent currently,
and the stock market last year made new highs. Indicators such
as housing, inventories, and real income show the economy is
poised for recovery. Alongside these favorable developments,
there remains distressingly high unemployment.
R-2010

- 2 -

The task now is to encourage the renewal of economic
growth to reduce unemployment and provide productive job
opportunities in the private sector. In so doing we must
not repeat the errors of the past and return to an inflationary economy.
The current domestic situation is complicated by the
existence of large Federal budget deficits and the threat of
even larger ones in years to come. These budget deficits will
have to be reduced, since their persistence would inevitably
lead to very adverse consequences for the U.S. economy and
its financial markets.
Many of the economic difficulties we face at home are
also faced by countries abroad. The entire international
economy is experiencing a severe slowdown, complicated by
the special debt-servicing problems of a number of countries.
My prepared statement today deals primarily with the U.S.
domestic economy, but it is obvious that the domestic and
international situations are closely linked. The clear
need in both cases is to encourage expansion rather than
undergo further contraction.
It is important to recognize that current difficulties
are the culmination of a long period of deteriorating economic
performance in this country. The U.S. economy was in deep
trouble long before the current recession began. It follows
that our policies must aim at lasting long-run solutions.
There are no quick cures.
Inflation has led to a roughly parallel rise in key
interest rates. As shown in Chart I on interest rates
and inflation, the 3-month Treasury bill rate followed the
rate of inflation very closely over most of the period from
the early 1960's to present. Thus, inflation appears to
have been a major factor in the increase in the bill rate
during that time.
Rising rates of inflation after the mid-1960's did not
lead to more rapid economic growth for any sustained period
of time. Quite the contrary. Inflation and its inevitable
consequence of higher interest rates finally choked off real
Approach of the Reagan Administration
growth altogether.
The Administration's primary economic goal upon coming
to office was a fundamental restructuring of the economy,
including:

- 3 -

•

bringing inflation under control;

• shifting the composition of activity away from
government spending toward more productive
endeavors in the private sector;
° providing an environment which would reward
innovation, work effort, saving and investment,
and in which free-market forces could operate
effectively.
Over the past two years we have seen evidence that the.
Administration's program is working. The fundamental elements
of recovery are now largely in place. Inflation has been
brought under control. Interest rates are coming down, as
shown in Chart II. Real wage growth is being restored. In
addition, there have been other improvements — notably in
productivity growth and saving behavior — which mark a shift
away from the problems that contributed to sluggish economic
performance in recent years.
Within this framework of very significant achievements,
there remains the fact that the economy has been in recession
and unemployment is high. The unemployment rate of 10.8
percent in December is, of course, a matter of great concern.
The President has indicated in his State of the Union Message
that he will be submitting special legislation to help deal
with the problem.
The Current State of the Economy
The economy now stands poised for recovery. In fact, the
recovery may well already be underway at this moment. It has
been much longer in coming than we, or for that matter nearly
all forecasters, had expected.
The delay occurred primarily because of the persistence
of high interest rates and because of developments in the
international sphere. On the international front, the economies
of our leading trading partners continued to weaken. Weakness
among all the industrialized nations was self-reinforcing.
Furthermore, the financial difficulties of some of the newly
industrializing nations had adverse impacts on economic activity
here. These forces, combined with a general hesitancy on the
part of the consumer, led to another round of inventory cutting
in the second half of 1982 and delayed the expected turnaround
of the economy.

- 4-

Signals of an Economic Upturn
There are now clear signals that the economy is turning
around and that the recession will soon be behind us. To
summarize these signals:
° The index of leading indicators has risen for
eight out of the last nine months.
° Housing is in the midst of a rapid recovery.
° Business trimmed inventories sharply in the
final quarter of last year. Historically, a
cleanout of inventories typically has been
followed by a shift back to higher rates of
production.
0
Retail sales have begun to firm.
° Total industrial production stabilized in
December and appears poised to turn upward.
The Typical Recovery
We would all hope for a vigorous recovery, not unlike
those which occurred in the past. The typical postwar recovery
path is shown in Chart III. Excluded from it are two atypical
recoveries — the first of which included the Korean War buildup
and the second which got underway late in 1980 but was shortlived. The five recoveries contained in the average line in
the chart were remarkably similar. Gains over the first eight
quarters from the real GNP trough were within an extremely
narrow range of 5 to 6 percent at an annual rate.
The contributions of GNP components to real growth during
the typical recovery are shown in Chart IV. As it indicates,
much of the initial thrust for expansion comes from:
• a resurgence in homebuilding activity, such as
currently is underway;
0
a swing in inventory investment from decumulation
in the later stages of recession to accumulation;
and
0
a major contribution from consumer spending, with
purchases of consumer durables registering particularly large increases.
By contrast, Federal spending normally declines as a share
of GNP during recovery, and is not necessary for promoting
expansion.

- 5 -

The Outlook for the Economy
A vigorous recovery of the type outlined would be most
welcome. It would certainly help ease the Nation's budgetary
problems. However, we recognize that the serious problems
still confronting us may well hold growth during the next
year or two below the typical recovery pattern.
° Our overall trade balance is likely to register
further marked deterioration in the coming year.
° Real interest rates may persist at high levels,
though remaining below those prevailing a year
ago.
• The economy is in the process of undergoing marked
structural change. Some of our industries may not
quickly regain the vitality they experienced in
the 1950's and 1960's. The shift of resources to
emerging industries will take time.
° Most fundamentally, we are not yet fully out of
the inflationary woods, and we cannot afford to
direct monetary and fiscal policy toward excessively
rapid economic expansion.
For these reasons, the Administration is forecasting
fairly modest real growth at a 3.1 percent rate during the four
quarters of 1983, rather than the typical recovery growth rate
of about twice that much, though certainly we would welcome
a stronger recovery. Growth is expected to pick up modestly
to the 4 percent range in 1984 and the years beyond.
Policies for the Recovery
In setting policy for the remainder of the 1980's, we
must recognize what we must not do. We no longer have the
freedom of action to revert back to the overly stimulative
monetary and fiscal policies pursued at times in the past,
for these would surely lead to a resurgence of inflationary
pressures and a new round of rising interest rates. Further,
we must not reverse the fundamental tax restructuring put
in place in 1981, for this was designed to provide the
noninflationary incentives without which the private sector
would continue to wither.

- 6 Policies for a Changing Economic Structure
For years private sector initiative and dynamic market
forces have been stifled by unnecessary Federal regulation.
It is important that we carry through with policies of reducing the regulatory burden on private industry. Noteworthy
successes have been achieved in this area, particularly in the
deregulation of the financial system. For the first time in
the postwar period, small investors can count on being able
to obtain market rates of return on their savings from banks
and thrift institutions.
Further, we recognize that our economy and those of the
other industrialized nations are undergoing a period of
restructuring. This is an era of rapid technological change,
and comparative advantage in the production of many goods
and services is shifting from the already developed to the
newly developing nations. Those nations which expend all
their energies shoring up declining industries and resisting
change will find themselves with industrial bases that are
obsolete and with declining relative standards of living.
Their more foresighted and innovative neighbors will be
moving forward and capturing newly opening markets.
Government can ease the painful process of structural
change within the economy. The President has announced a
program that relies heavily on the market mechanism to deal
with structural unemployment that stems from problems in both
labor and product markets. This program will emphasize
training, retraining and relocation, and job-search assistance for workers facing the lack or loss of jobs even after
an economic recovery. Other proposals will be designed to
reduce the barriers to youth employment.
Finally, in setting the proper course of policy for the
1980's, we must work closely with the other industrialized
and newly industrializing nations of the world. Negotiations
are nearing completion on measures to assure that the International Monetary Fund has adequate resources to help countries
experiencing difficulties implement sound policies of economic
adjustment. The negotiations are focusing in on an increase
in IMF quotas to a new level in the range of $93-100 billion,
representing an increase of 40-50 percent, and an expansion of
the existing General Arrangement to Borrow (GAB) to a level of
about $19 billion (from $7 billion). The participation of the
United States in an increase in IMF resources is an essential
complement to domestic measures to achieve sustainable economic
growth and represents a valuable investment in defense of the
economic interests of the American farmer, laborer, businessman,
and consumer. The U.S. share of the increase in quotas and
the GAB will be about $8 billion but will have no effect on
with
net
increase
budget
any transfers
inoutlays
its international
or
to the budget
IMF, monetary
the
deficit
U.S.reserve
receives
since assets.
simultaneous
an offsetting

- 7-

Legislation providing for the U.S. share of the increase in
IMF resources will be submitted in the near future and I urge
prompt approval by the Congress.
Monetary Policy
In addition to policies aimed at facilitating structural
changes within the economy, we must maintain steady monetary
and fiscal policies directed at reinvigorating economic activity.
Steady, predictable money supply growth at a noninflationary
pace has been, and continues to be, one of the major goals of
the Administration's economic program. The Federal Reserve's
efforts to achieve that goal have been complicated by a number
of factors, such as far-reaching institutional changes in the
banking and thrift industries. Nevertheless, the Fed has
generally been successful, albeit in a somewhat erratic fashion.
Monetary policy faced a difficult and uncertain situation
during much of the last year. Rapid institutional change in
the form of new money market instruments blurred the boundaries
between the various aggregates and made the achievement of any
target rates of growth unusually difficult. There is also
some indication that the recession may have led to an increased
demand for liquidity and precautionary balances. In 1982,
growth in monetary velocity — the rate at which money is used
— turned negative for the first time in nearly three decades.
Under the unusual economic and institutional circumstances of
1982, some temporary offset in the form of above-target rates
of monetary growth was probably desirable.
The Federal Reserve's efforts to slow money growth have
been accompanied by some volatile short-run swings. Growth
in Ml was actually negative on a 13-week basis by mid-summer
of last year, and then soared to the double-digit range by
the end of the year. This recent acceleration has caused some
observers to conclude that the fight against inflationary
money growth has been abandoned. That is not true. Both the
Administration and the Federal Reserve remain committed to
the long-run goal of providing money growth at a noninflationary pace consistent with a steady and sustainable expansion
of economic activity.
Fiscal Policy
The objectives of our fiscal policy upon coming to office
two years ago were two-fold. First, we believed and still
believe it was imperative to correct the disincentives to
economic performance that had been built into the tax structure
over the years. These disincentives arose in large measure,
not by design, but through the interaction of a high rate of
inflation with a progressive tax system and historical cost
accounting of depreciable assets. Second, it was equally

- 8 -

imperative to reverse the seemingly inexorable growth of
Federal spending, thereby freeing resources for use in the
private sector. In moving to achieve these goals, we faced
one major constraint, namely that our defense establishment
had been allowed to deteriorate badly, so that our national
survival mandated a stepped-up rate of defense spending.
The tax reforms that were put in place were designed
primarily to restore an adequate rate of return for investment
in plant and equipment and to put a halt to the steady ratchetting upward of marginal tax rates on labor and savings income.
The investment incentives were necessary to bring long-depressed
rates of business capital investment and productivity growth
back up to acceptable standards. For individuals, the tax
cuts were needed to protect incentives and purchasing power,
and to keep American labor competitive in world markets. For
the average taxpayer, they will only result in an actual dollar
tax cut in 1983, after allowance for the effects of bracket
creep and higher social security taxes. And that 1983 cut and
tax indexing will be needed to offset bracket creep and increases
in social security taxes scheduled to take effect in the future.
These measures will greatly improve the competitive standing
of American capital and labor in the world as economic recovery
proceeds.
We were relatively successful in working with the Congress
to achieve our goals of tax reform, but we were less successful
in the area of outlay control. A major portion of the savings
we had proposed in our original budget did not receive favorable
action. This, along with much weaker economic activity than
expected, has left us facing the prospect of large deficits
even as the economy recovers.
The proposals in the FY-1984 Budget are directed at the
crucial task of restoring noninflationary economic growth.
This requires the preservation of the investment and work
incentives provided by the tax reforms of 1981 and a reduction
in the high deficits and interest rates which lie ahead unless
corrective action is taken to bring government outlays under
control.
The tax reforms already enacted will enable us to make good
progress in rebuilding and modernizing America's plant and equipment as the recovery progresses. Incentives are in place to
encourage saving and investment and to lower the cost of new
machinery and structures. Taxes on American labor are coming
down. These reforms will lead to a more productive, more
competitive United States. The capital formation program will
be financed by higher levels of personal saving, more generous
capital consumption allowances, and higher retained earnings
as
profits
recover
from surpluses,
the currentform
slump.
These elements,
plus
state
and local
budget
the Nation's
savings pool.

- 9 -

Spending reduction will contribute to the recovery, and
the recovery will contribute to deficit reduction. The deficit
will fall as the economy advances, particularly if the recovery
is a vigorous one. A strong recovery with 1-1/3 percent more
real growth per year than in our forecast would bring the
budget to near balance by 1988, provided we also curb the
growth of Federal outlays.
However, if we fail to bring spending under control and
if recovery is slow, we will face a deficit problem which is
larger and longer-lasting than we can afford. In such case,
the deficit could run in the range of 6 to 7 percent of GNP
each year through 1988. Our tax reforms were designed to
raise the private savings share, but still we would face the
possibility of draining off a large part of the pool of
savings, leaving less available for new capital formation.
Interest rates could remain high, and the recovery could stall.
This Administration is determined that deficits of such
magnitudes will not come to pass. We came to office with a
program of boosting the rate of capital investment in order to
place the economy on a faster growth track, and we will not
allow ourselves to be diverted from that goal. We will take
whatever measures are necessary to narrow the deficit to
acceptable levels.
0
Preferably, all of the necessary narrowing of the
deficit would come from the outlay side. Total
Federal spending represents the amount of resources
absorbed by the government at the expense of the
private sector. This spending can be financed by
both taxes and borrowing, which in either case
amounts to a drain on private resources. Only through
spending reduction will the credit market find itself
in a more favorable position.
° In the event that the combination of economic growth
and outlay reductions is not sufficient to narrow
the deficit to acceptable levels in the outyears,
we are prepared to request additional revenue raising
measures in those years. If the Congress chooses not
to reduce spending, as we wish, then it is preferable
to have the full cost of federal spending programs
explicitly identified for the taxpayers who bear the
burden of financing government. If additional revenues
are needed, this Administration will do its best to
structure the tax code in a way that minimizes
disincentives for productive effort.

- 10 -

Our Budget Proposals
Spending reduction is crucial. Unfortunately, it has been
difficult to achieve because of the built-in momentum of Federal
spending programs. Consequently, we are proposing strong
medicine. None of us will find it agreeable., but it is critical
to the restoration of vitality to our economy. In prescribing
the medicine, there must be assurance all will be willing to take
the proper dosage, just as all of us will share in the benefits
of a revitalized recovery. We, like a great many other nations
in the world, have tried to live beyond our means. Now we must
bring our spending into line with our productive capacity and
strengthen the private sector which produces our national wealth.
The deficit reduction program that we propose contains four
basic elements.
0
The first is a freeze on 1984 outlays to the extent
possible. Total outlays shall be frozen in real
terms in 1984. The 6-month freeze on COLAs, as
recommended by the Social Security Commission, is to
be extended to other indexed programs. There will be
a 1-year freeze on pay and retirement of Federal
workers, both civilian and military. Many workers
in the private sector have accepted freezes in their
pay. Federal workers can also make a sacrifice,
which hopefully will serve as an example for sectors
of the economy which have not yet recognized the
need for moderation in wage demands. As a final item
of freeze, outlays for a broad range of nonentitlement
programs will be held at 1983 levels.
° The second element of our budgetary program contains
measures to control the so-called "uncontrollables."
Laws have been so written that Federal payments are
automatic to all those declared eligible. We plan a
careful review of all such programs, taking special
care to protect those truly in need.
0
The third element is a cutback of $5 5 billion in
defense outlays from original plans.
0
Fourth is a set of proposals involving the revenue
side of the budget, described below.
We are projecting receipts for the current year (fiscal
year 1983) of $597.5 billion. For fiscal year 1984 we expect
receipts to be $659.7 billion. The 1983 figure represents a
decline of $20.3 billion from the fiscal year 1982 total of
$617.8 billion. This decline, and indeed the absence of an
increase in receipts in the range of $50-70 billion, is
explained primarily by the recession. As I have already

- 11 -

explained, our economic projections throughout the remainder
of the recovery period are cautious. If real GNP grows at a
faster rate than we have projected, then receipts for the
current fiscal year, as well as for subsequent years, will be
somewhat higher than we are now projecting.
In 1984, as the recovery is well underway, receipts are
expected to rise to $659.7 billion, an increase over 1983 of
$62.2 billion, representing an annual growth of 10.4 percent.
This will occur as profit margins recover and other income
shares continue to grow.
For the other years in our forecast period (1985-1988)
we project an average annual growth rate of receipts about
10 percent without contingency taxes (and 11 percent per year
including contingency taxes), with receipts reaching the
$1 trillion mark for the first time in fiscal year 1988. All
of these projections assume the legislative proposals included
in the President's Fiscal Year 1984 Budget. Receipts under
existing legislation will also grow, but at a somewhat lower
9-1/2 percent annual average rate.
It is noteworthy that individual income tax receipts will
continue to rise over the 1985-1988 period, but only as real
income rises. Beginning in 1985, we will no longer collect
hidden taxes in the form of bracket creep caused by inflation.
Without the indexation provision of ERTA, individuals would
pay $6 billion more in taxes during fiscal year 1985 alone,
and about $100 billion more during the entire forecast period 1985 through 1988.
There has been a gradual upward trend in unified budget
receipts as a percent of GNP, shown in the top line of Chart V.
As shown in the bottom line of the chart, a major shift in the
composition of receipts has been the rising share of social
insurance and other payroll taxes to fund social security and
other retirement benefits.
There is no proposed omnibus tax bill in the President's
budget message. However, there are several separate tax items.
Proposed tax legislation in the President's budget can be
conveniently grouped under three broad headings: Proposals
that improve the income security of Americans, proposals that
will improve our ability to produce future output, and, as an
insurance policy, a contingency or standby tax, which is
intended as a clear signal that we will not permit spending
to increase in the outyears unless we pay for it up front.

- 12 -

In the first category, our principal recommendation is
for adoption of the bipartisan social security proposals.
These proposals, which will increase receipts to the social
security funds by $9.8 billion in fiscal year 1984, $11.6
billion in 1985, and $10.6 billion in 1986, are necessary to
insure the solvency and security of these trust funds.
The second category, proposals to improve the utilization
of our human resources, includes the tuition tax credit, the
exclusion of earnings on savings for higher education, the jobs
tax credit for hiring the long-term unemployed, and the enterprise zone tax incentives. These will all improve our production
capacity, either through increased investments in education or,
more directly, by getting our currently underutilized force of
experienced workers back to work. As a group, these proposals
will reduce taxes $0.5 billion in 1984, $1.2 billion in 1985,
and $1.7 billion in 1986.
Finally, the President has proposed a contingency tax plan
designed to raise revenues of about 1 percent of GNP in the
event that, after Congress has adopted the spending reduction
proposals, there is insufficient economic growth to reduce the
deficit below 2-1/2 percent of GNP. The contingency tax plan
would not go into effect on October 1, 1985, unless the economy
is growing on July 1, 1985. The contingency tax plan is an
insurance program. It is important to have a plan in place
so that the country and the world know that we will not
tolerate a string of deficits that would exceed 2-1/2 percent
of GNP. Chart VT shows the effect on the deficit that the
contingency tax would have if it were implemented. It also
shows how the budget picture would be altered by the stronger
expansion that some private forecasters expect. The deficit
path under high growth reflects the assumption that real GNP
increases 1-1/3 percentage points faster than in the official
forecast path, starting with FY-1983. Such growth would be in
line with the performance from the end of 1960 to late 1966.
The contingency tax plan would contain two elements, each
raising about half of the revenues that may be required. One
element would be a temporary surcharge of 5 percent on individuals
and corporations. The other element would be a temporary
excise tax on domestically produced and imported oil designed
to raise revenues of about $5 per barrel. The contingency tax
alternative shown in the budget raises $146 billion over the
36-month period beginning October 1, 1985. The specific contingency tax plan we will be sending to Congress for adoption
this year will be designed to raise revenues of about $130-150
billion over a temporary period of up to 36 months.

- 13 -

If these budget saving proposals are enacted, we will
reduce the projected deficits by a total of $580 billion over
the next five years, or by $2,400 for every man, woman, and
child in the United States. The deficit as a share of GNP
will be down to about 2-1/2 percent in 1988 from the 6-1/2
percent we expect this year. Total outlays will grow by only
7 percent per year in nominal terms over the next five years,
compared with a bloated 13 percent between 1977 and 1981.
In addition, as part of our overall program, over the next
year we will be taking a careful look at the entire structure
of our tax system. We will be searching for ways to simplify
the tax code and make it fairer while at the same time promoting
economic growth by enhancing incentives for work effort, saving,
and investment. This is the true road for putting people back
to work and bringing the budget into balance.
We are confident that the deficit reduction program contained in this realistic budget is the right program for the
economy at this critical juncture. The most important signals
we can send the economy are spending restraint, deficit restraint,
and a commitment to non-inflationary economic growth throughout
the decade. This is the program we have devised. Together with
the Congress, we can make it work.

Chart I

INTEREST RATES AND INFLATION

Percent.

3-Month Treasury Bill Rate

* Growth from year earlier in G N P deflator.
Plotted quarterly.

81
Unu.ly ID IUHI A.'b

Chart II

INTEREST RATES
Weekly Averages

Percent

18
Prime Rate

16
\. %*>\

«.....-•*». Aaa Corporate Bonds

14
12

3-Month
Treasury Bills'

*• •»•«». ^••",

• • ^ . ^

^•-

8
i i i | i i i I i i i I i i i i I i i i 1i i i I i i i i 1 i i i I i i i I i i i i I i i i I i i i I i i i i I i i i I i i i i

Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July
1981 1982 1983

i i i

Aug. Sept. Oct. Nov. Dec. Jan.

•Bank discount basis
J.muaiy 31. 1983 A203

Chart III

THE PATH OF POSTWAR ECONOMIC RECOVERIES
Real GNP trough =100

115

110
Postwar Recoveries *

^.^

_##

1975-76 Recovery

105
........
•
•.

Current Cycle

100

1
-5

\^4
1

-4

-3

-2

-1
0
+1
+2
Quarters from real GNP trough

* Postwar recoveries excluding the Korean War period
and the short-lived 1980-81 recovery.

January 25, 1983 A 2 1 0

Chart IV

CONTRIBUTIONS TO A TYPICAL RECOVERY*
BY REAL GNP COMPONENT
Percentage
Points

— C o n s u m e r Spending

Inventory Investment

— Business Capital Spending

— Residential Construction

— State and Local Purchases
Net Exports
Federal Purchases

First
Four
Quarters

Second
Four
Quarters

TOTAL,
First
Eight
Quarters

* Average of postwar recoveries, excluding the Korean War period
and the short-lived 1980-81 recovery.

January 21, 1983-A213

Chart V

UNIFIED BUDGET RECEIPTS AS A PERCENT OF GNP
Fiscal Years 1954-1988

Percent
25

Total Receipts
— 20

V \ ,«•—-^. ^ A
^ y

^^M\^^^^!M

— 15

All Other
fltliAr D
A n a i n l e •/^
All
Receipts

^M*
^ ^

VjT

— 10

••

-•••••••
,•••••
•••

^ - Social
Q#\/«ial Insurance
I n e n r a n r o Taxes
Tavoe

— 5

•••••••"

••••'

II II III IIII II III I I II I III I I I II I II I0

1954 56 58 60 62 64 66 68 70 72
* Receipts include contingency taxes.

74 76 78 80 82 84 86

January 28, 1983 A215

Chart VI

THE DEFICIT AS A SHARE OF GNP
Percent

Administration Growth Path

No Contingency Tax

Contingency |

*% %

High Growth Path, %
No Contingency Tax*
*

'«%
%%

***
'*,.
'%,
'%,

%h
V
Trigger for
Contingency Tax

—Trigger base
year

Decision date
1982

*•

Fiscal Year
•Higher growth than the official path by 1-1/3 percentage point starting fiscal year 1983.
January 28, 1983-A214

TREASURY NEWS
epartment of the Treasury • Washington, o.c. • Telephone
FOR RELEASE AT 4:00 P.M.

-,, 1ftft^
February 1, 1983
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 12,000 million , to be issued February 10, 1983
This offering will provide $850
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $11,162 million, including $1,058 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2,058 million currently held by
Federal Reserve Banks for their own account. The two series
offered91-day
are as
follows:
bills
(to maturity date) for approximately $6,000
million , representing an additional amount of bills dated
November 12, 1982,
and to mature
May 12, 1983
(CUSIP
No. 912794 CU 6) , currently outstanding in the amount of $5,632
million , the additional and original bills to be freely
interchangeable.
182-day bills (to maturity date) for approximately $6,000
million, representing an additional amount of bills dated
August 12, 1982,
and to mature
August 11, 1983
(CUSIP
No. 912794 DB 7) , currently outstanding in the amount of $6,262
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 February 10., 1983.
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 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 $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.

R-2011

2041

- 2 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,
February 7, 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.
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 £ate 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 .

- 3 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
rr.ust be made or completed at the Federal Reserve Bank or Branch
on February 10, 1983, in cash or other immediately-av ail able funds
or in Treasury bills maturing February 10, 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.
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
oasis (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 and tender forms may be obtained from any
Federal Reserve Bank or Branch, or from the Bureau of the Puolic
Debt.

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
STATEMENT BY DONALD T. REGAN
SECRETARY OF THE TREASURY
AT A BUDGET BRIEFING
MONDAY, JANUARY 31, 1983
WASHINGTON, D.C.

Today we present the Fiscal 1984 budget and it carries
a stern message: we must harness federal spending and
reduce deficits.
This budget reflects a lot of hard work and difficult
decisions. I believe it provides a realistic assessment of
the economy and the role of government in our lives. We
have been cautious in our outlook and careful in our
approach.
Our forecasts are modest. They reflect a prudent
examination of the economic forces at work in the country
today. And they are in line with most private forecasts.
The result is a sound budget and a sensible roadmap for
economic progress.
The Fiscal 1984 budget of $848.5 billion is based on
four principles for deficit reduction. First, a
comprehensive Federal spending freeze which will allow 1984
outlays to grow at the predicted rate of inflation. Second,
a restructuring of programs in health care, federal
retirement and welfare. Third, a reduction in defense
spending of $55 billion over the next 5 years. And fourth,
a standby deficit reduction program of tax increases to
become effective in FY 1986 if the economy is not in
recession, the proposed freezes have been enacted, and the
deficit is greater than 2.5 percent of GNP.
All of these efforts are designed to reduce deficits
from nearly 7 percent of GNP today to 2.4 percent by 1988,
putting the budget on a path consistent with sustained
economic recovery.
In the course of our deliberations over the past
several weeks, it became clear that the recession had taken
a high toll in revenues to the government. It became
equally clear that decisive action had to be taken to reduce
the share of GNP taken by the government, especially as the
economy enters a period of growth.

-2-

I believe we have fashioned a reasonable approach to
the deficit problem that should be credible to the financial
markets, the Congress and the American people. We are
renewing our commitment to limiting the tax burden, to
reducing the growth of Federal spending, to eliminating
excessive regulations, and to a moderate and steady monetary
policy. At the same time, we have significant new
initiatives to fight the most pressing problem in America
today: unemployment.
With that brief background, Marty will discuss the
economic forecasts, Dave will outline the budget itself, and
I will summarize the tax provisions. After those three
presentations, we will take questions.

THE DEFICIT AS A SHARE OF GNP
The attached chart shows the downward path of federal
deficits under the proposed budget. The heavy black line shows
the rate of diminishing deficits under the Administration's
projected rate of economic growth. With the contingency tax, and
assuming all of the budget proposals are enacted by Congress, the
deficit would fall steadily to just under 2-1/2 percent of GNP by
1988.
Assuming economic growth 1-1/3 percentage points faster than
the official forecast, as shown by the heavy broken line,
deficits would be under 2-1/2 percent of GNP by 1986 and there
would be no need for the contingency tax.

THE DEFICIT AS A SHARE OF GNP
Percent

Administration Growth Path

No Contingency Tax

Contingency |

"x X

High Growth Path, % #
No Contingency Tax*
•#

""">r,

**%
\
\%

Trigger for
Contingency Tax

Decision date —
1982

—Trigger base
year
86

Fiscal Year
* Higher growth than the official path by 1-1/3 percentage point starting fiscal year 1983.
January 28, 1983-A214

THE TYPICAL RECOVERY
The attached chart shows that in the typical postwar
recovery, total gains in GNP over the first eight quarters have
come primarily from private sector spending. Very little comes
from government spending. Although the present recovery may not
be typical in magnitude, the relative size of the components will
be the same.
As the chart indicates, most of the initial thrust of
recovery comes from consumer spending, inventory investment,
business capital spending, and homebuilding.

CONTRIBUTIONS TO A TYPICAL RECOVERY*
BY REAL GNP COMPONENT
Percentage
Points I
11.0

— C o n s u m e r Spending

—

Inventory Investment

—

Business Capital Spending

State and Local Purchases
Net Exports
Federal Purchases

First
Four
Quarters

Second
Four
Quarters

TOTAL,
First
Eight
Quarters

* Average of postwar recoveries, excluding the Korean War period
and the short-lived 1980-81 recovery.

January 21, 1983-A213

TAX REVENUES AS A PERCENT OF GNP
The attached chart shows that total tax revenues to the
Government, as represented by the solid line, have increased
slightly as a percent of GNP over the past 30 years. Revenues
continue to increase in spite of the 25 percent tax cut enacted
in 1981.
The heavy broken line (all other receipts) shows the level
of tax revenues if social insurance taxes are excluded. As the
dotted line shows, rising payroll taxes to support social
security and other retirement obligations are the primary reason
for the upward drift in the total tax burden over the past three
decades.

UNIFIED BUDGET RECEIPTS AS A PERCENT OF GNP
Percent
25

Fiscal Years 1954-1988

Percent
25

Total Receipts
20

V* V .**

V -...w'\v»<

All Other Receipts /

\ . « / " "

10
• •• • • • •
....•••
•••••••

• ••••

••

^ - ^ Cs>/«iol l n e n r o n / > A

Tov«
Social Insurance Taxes

I I II II I IIIIIIII III I I
1954 56

58 60

62 64

66 68

74 76

I I I I I I I I I I0

78 80 82

84 86

* Receipts include contingency taxes.
January 28, 1983-A215

TREASURY NEWS
lepartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
Wednesday, February 2, 1983
TESTIMONY OF THE HONORABLE DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE BUDGET COMMITTEE
Mr. Chairman and Members of the Committee:
It is a pleasure to meet with you today and to discuss
the Administration's 1984 budget proposals. The development
of a sound fiscal policy was one of the central objectives of
the Reagan Administration when it came into office two years
ago. For too long a time Americans had watched the share of
GNP accounted for by Federal spending and taxes move upward.
As the government siphoned off resources from the private
sector and the money supply expanded, economic activity
stagnated and inflation soared.
In February 1980 the Administration put before Congress
a four point plan to revitalize the economy. Our program
included spending restraint, tax reductions, regulatory reform,
and support of the Federal Reserve's efforts to attain gradual,
steady reduction in the rate of monetary growth.
The transition to a noninflationary environment has been
somewhat more difficult than anticipated. We have seen two
years of serious economic recession as a result of the inflation/tax spiral.
However, the worst is now over. There has been clear
progress on inflation, and consumer price growth has dropped
dramatically from 12.4 percent in 1980 to 3.9 percent in
1982. Interest rates are down from peak levels of 21-1/2
percent on the prime in December 1980 to 11 percent currently,
and the stock market last year made new highs. Indicators such
as housing, inventories, and real income show the economy is
poised for recovery. Alongside these favorable developments,
there remains distressingly high unemployment.

- 2 -

The task now is to encourage the renewal of economic
growth to reduce unemployment and provide productive job
opportunities in the private sector. In so doing we must
not repeat the errors of the past and return to an inflationary economy.
The current domestic situation is complicated by the
existence of large Federal budget deficits and the threat of
even larger ones in years to come. These budget deficits will
have to be reduced, since their persistence would inevitably
lead to very adverse consequences for the U.S. economy and
its financial markets.
Many of the economic difficulties we face at home are
also faced by countries abroad. The entire international
economy is experiencing a severe slowdown, complicated by
the special debt-servicing problems of a number of countries.
My prepared statement today deals primarily with the U.S.
domestic economy, but it is obvious that the domestic and
international situations are closely linked. The clear
need in both cases is to encourage expansion rather than
undergo further contraction.
It is important to recognize that current difficulties
are the culmination of a long period of deteriorating economic
performance in this country. The U.S. economy was in deep
trouble long before the current recession began. It follows
that our policies must aim at lasting long-run solutions.
There are no quick cures.
Inflation has led to a roughly parallel rise in key
interest rates. As shown in Chart I on interest rates
and inflation, the 3-month Treasury bill rate followed the
rate of inflation very closely over most of the period from
the early 1960's to present. Thus, inflation appears to
have been a major factor in the increase in the bill rate
during that time.
Rising rates of inflation after the mid-1960's did not
lead to more rapid economic growth for any sustained period
of time. Quite the contrary. Inflation and its inevitable
consequence of higher interest rates finally choked off real
growth altogether.
Approach of the Reagan Administration
The Administration's primary economic goal upon coming
to office was a fundamental restructuring of the economy,
including:

- 3 -

bringing inflation under control;

shifting the composition of activity away from
government spending toward more productive
endeavors in the private sector;
providing an environment which would reward
innovation, work effort, saving and investment,
and in which free-market forces could operate
effectively.
Over the past two years we have seen evidence that the
Administration's program is working. The fundamental elements
of recovery are now largely in place. Inflation has been
brought under control. Interest rates are coming down, as
shown in Chart II. Real wage growth is being restored. In
addition, there have been other improvements — notably in
productivity growth and saving behavior — which mark a shift
away from the problems that contributed to sluggish economic
performance in recent years.
Within this framework of very significant achievements,
there remains the fact that the economy has been in recession
and unemployment is high. The unemployment rate of 10.8
percent in December is, of course, a matter of great concern.
The President has indicated in his State of the Union Message
that he will be submitting special legislation to help deal
with the problem.
The Current State of the Economy
The economy now stands poised for recovery. In fact, the
recovery may well already be underway at this moment. It has
been much longer in coming than we, or for that matter nearly
all forecasters, had expected.
The delay occurred primarily because of the persistence
of high interest rates and because of developments in the
international sphere. On the international front, the economies
of our leading trading partners continued to weaken. Weakness
among all the industrialized nations was self-reinforcing.
Furthermore, the financial difficulties of some of the newly
industrializing nations had adverse impacts on economic activity
here. These forces, combined with a general hesitancy on the
part of the consumer, led to another round of inventory cutting
in the second half of 1982 and delayed the expected turnaround
of the economy.

- 4 -

Signals of an Economic Upturn
There are now clear signals that the economy is turning
around and that the recession will soon be behind us. To
summarize these signals:
° The index of leading indicators has risen for
eight out of the last nine months.
Housing is in the midst of a rapid recovery.
° Business trimmed inventories sharply in the
final quarter of last year. Historically, a
cleanout of inventories typically has been
followed by a shift back to higher rates of
production.
° Retail sales have begun to firm.
° Total industrial production stabilized in
December and appears poised to turn upward.
The Typical Recovery
We would all hope for a vigorous recovery, not unlike
those which occurred in the past. The typical postwar recovery
path is shown in Chart III. Excluded from it are two atypical
recoveries — the first of which included the Korean War buildup
and the second which got underway late in 1980 but was shortlived. The five recoveries contained in the average line in
the chart were remarkably similar. Gains over the first eight
quarters from the real GNP trough were within an extremely
narrow range of 5 to 6 percent at an annual rate.
The contributions of GNP components to real growth during
the typical recovery are shown in Chart IV. As it indicates,
much of the initial thrust for expansion comes from:
° a resurgence in homebuilding activity, such as
currently is underway;
° a swing in inventory investment from decumulation
in the later stages of recession to accumulation;
and
° a major contribution from consumer spending, with
purchases of consumer durables registering particularly large increases.
By contrast, Federal spending normally declines as a share
of GNP during recovery, and is not necessary for promoting
expansion.

- 5 -

The Outlook for the Economy
A vigorous recovery of the type outlined would be most
welcome. It would certainly help ease the Nation's budgetary
problems. However, we recognize that the serious problems
still confronting us may well hold growth during the next
year or two below the typical recovery pattern.
Our overall trade balance is likely to register
further marked deterioration in the coming year.
° Real interest rates may persist at high levels,
though remaining below those prevailing a year
ago.
The economy is in the process of undergoing marked
structural change. Some of our industries may not
quickly regain the vitality they experienced in
the 1950's and 1960's. The shift of resources to
emerging industries will take time.
° Most fundamentally, we are not yet fully out of
the inflationary woods, and we cannot afford to
direct monetary and fiscal policy toward excessively
rapid economic expansion.
For these reasons, the Administration is forecasting
fairly modest real growth at a 3.1 percent rate during the four
quarters of 1983, rather than the typical recovery growth rate
of about twice that much, though certainly we would welcome
a stronger recovery. Growth is expected to pick up modestly
to the 4 percent range in 1984 and the years beyond.
Policies for the Recovery
In setting policy for the remainder of the 1980's, we
must recognize what we must not do. We no longer have the
freedom of action to revert back to the overly stimulative
monetary and fiscal policies pursued at times in the past,
for these would surely lead to a resurgence of inflationary
pressures and a new round of rising interest rates. Further,
we must not reverse the fundamental tax restructuring put
in place in 1981, for this was designed to provide the
noninflationary incentives without which the private sector
would continue to wither.

- 6 Policies for a Changing Economic Structure
For years private sector initiative and dynamic market
forces have been stifled by unnecessary Federal regulation.
It is important that we carry through with policies of reducing the regulatory burden on private industry. Noteworthy
successes have been achieved in this area, particularly in the
deregulation of the financial system. For the first time in
the postwar period, small investors can count on being able
to obtain market rates of return on their savings from banks
and thrift institutions.
Further, we recognize that our economy and those of the
other industrialized nations are undergoing a period of
restructuring. This is an era of rapid technological change,
and comparative advantage in the production of many goods
and services is shifting from the already developed to the
newly developing nations. Those nations which expend all
their energies shoring up declining industries and resisting
change will find themselves with industrial bases that are
obsolete and with declining relative standards of living.
Their more foresighted and innovative neighbors will be
moving forward and capturing newly opening markets.
Government can ease the painful process of structural
change within the economy. The President has announced a
program that relies heavily on the market mechanism to deal
with structural unemployment that stems from problems in both
labor and product markets. This program will emphasize
training, retraining and relocation, and job-search assistance for workers facing the lack or loss of jobs even after
an economic recovery. Other proposals will be designed to
reduce the barriers to youth employment.
Finally, in setting the proper course of policy for the
1980's, we must work closely with the other industrialized
and newly industrializing nations of the world. Negotiations
are nearing completion on measures to assure that the International Monetary Fund has adequate resources to help countrie;
experiencing difficulties implement sound policies of economic
adjustment. The negotiations are focusing in on an increase
in IMF quotas to a new level in the range of $93-100 billion,
representing an increase of 40-50 percent, and an expansion of
the existing General Arrangement to Borrow (GAB) to a level of
about $19 billion (from $7 billion). The participation of the
United States in an increase in IMF resources is an essential
complement to domestic measures to achieve sustainable economi
growth and represents a valuable investment in defense of the
economic interests of the American farmer, laborer, businessma
and consumer. The U.S. share of the increase in quotas and
the GAB will be about $8 billion but will have no effect on
net budget outlays or the budget deficit since simultaneous
with
increase
any transfers
in its international
to the IMF,monetary
the U.S.reserve
receives
assets.
an offsetting

- 7 -

- 8 -

imperative to reverse the seemingly inexorable growth of
Federal spending, thereby freeing resources for use in the
private sector. In moving to achieve these goals, we faced
one major constraint, namely that our defense establishment
had been allowed to deteriorate badly, so that our national
survival mandated a stepped-up rate of defense spending.
The tax reforms that were put in place were designed
primarily to restore an adequate rate of return for investment
in plant and equipment and to put a halt to the steady ratchetting upward of marginal tax rates on labor and savings income.
The investment incentives were necessary to bring long-depress<
rates of business capital investment and productivity growth
back up to acceptable standards. For individuals, the tax
cuts were needed to protect incentives and purchasing power,
and to keep American labor competitive in world markets. For
the average taxpayer, they will only result in an actual dollai
tax cut in 1983, after allowance for the effects of bracket
creep and higher social security taxes. And that 1983 cut and
tax indexing will be needed to offset bracket creep and increas
in social security taxes scheduled to take effect in the future
These measures will greatly improve the competitive standing
of American capital and labor in the world as economic recovery
proceeds.
We were relatively successful in working with the Congress
to achieve our goals of tax reform, but we were less successfu]
in the area of outlay control. A major portion of the savings
we had proposed in our original budget did not receive favorab]
action. This, along with much weaker economic activity than
expected, has left us facing the prospect of large deficits
even as the economy recovers.
The proposals in the FY-1984 Budget are directed at the
crucial task of restoring noninflationary economic growth.
This requires the preservation of the investment and work
incentives provided by the tax reforms of 1981 and a reduction
in the high deficits and interest rates which lie ahead unless
corrective action is taken to bring government outlays under
control.
The tax reforms already enacted will enable us to make go<
progress in rebuilding and modernizing America's plant and equ:
ment as the recovery progresses. Incentives are in place to
encourage saving and investment and to lower the cost of new
machinery and structures. Taxes on American labor are coming
down. These reforms will lead to a more productive, more
competitive United States. The capital formation program will
be financed by higher levels of personal saving, more generous
capital consumption allowances, and higher retained earnings
as profits recover from the current slump. These elements, pi
state and local budget surpluses, form the Nation's savings po

- 9 -

Spending reduction will contribute to the recovery, and
the recovery will contribute to deficit reduction. The deficit
will fall as the economy advances, particularly if the recovery
is a vigorous one. A strong recovery with 1-1/3 percent more
real growth per year than in our forecast would bring the
budget to near balance by 1988, provided we also curb the
growth of Federal outlays.
However, if we fail to bring spending under control and
if recovery is slow, we will face a deficit problem which is
larger and longer-lasting than we can afford. In such case,
the deficit could run in the range of 6 to 7 percent of GNP
each year through 1988. Our tax reforms were designed to
raise the private savings share, but still we would face the
possibility of draining off a large part of the pool of
savings, leaving less available for new capital formation.
Interest rates could remain high, and the recovery could stall.
This Administration is determined that deficits of such
magnitudes will not come to pass. We came to office with a
program of boosting the rate of capital investment in order to
place the economy on a faster growth track, and we will not
allow ourselves to be diverted from that goal. We will take
whatever measures are necessary to narrow the deficit to
acceptable levels.
° Preferably, all of the necessary narrowing of the
deficit would come from the outlay side. Total
Federal spending represents the amount of resources
absorbed by the government at the expense of the
private sector. This spending can be financed by
both taxes and borrowing, which in either case
amounts to a drain on private resources. Only through
spending reduction will the credit market find itself
in a more favorable position.
° In the event that the combination of economic growth
and outlay reductions is not sufficient to narrow
the deficit to acceptable levels in the outyears,
we are prepared to request additional revenue raising
measures in those years. If the Congress chooses not
to reduce spending, as we wish, then it is preferable
to have the full cost of federal spending programs
explicitly identified for the taxpayers who bear the
burden of financing government. If additional revenues
are needed, this Administration will do its best to
structure the tax code in a way that minimizes
disincentives for productive effort.

- 10 -

Our Budget Proposals
Spending reduction is crucial. Unfortunately, it has be<
difficult to achieve because of the built-in momentum of Fede]
spending programs. Consequently, we are proposing strong
medicine. None of us will find it agreeable, but it is criti(
to the restoration of vitality to our economy. In prescribing
the medicine, there must be assurance all will be willing to 1
the proper dosage, just as all of us will share in the benefil
of a revitalized recovery. We, like a great many other natior
in the world, have tried to live beyond our means. Now we mus
bring our spending into line with our productive capacity and
strengthen the private sector which produces our national wea]
The deficit reduction program that we propose contains fc
basic elements.
° The first is a freeze on 1984 outlays to the extent
possible. Total outlays shall be frozen in real
terms in 1984. The 6-month freeze on COLAs, as
recommended by the Social Security Commission, is tc
be extended to other indexed programs. There will t
a 1-year freeze on pay and retirement of Federal
workers, both civilian and military. Many workers
in the private sector have accepted freezes in theii
pay. Federal workers can also make a sacrifice,
which hopefully will serve as an example for sectors
of the economy which have not yet recognized the
need for moderation in wage demands. As a final it*
of freeze, outlays for a broad range of nonentitleme
programs will be held at 1983 levels.
0
The second element of our budgetary program contains
measures to control the so-called "uncontrollables."
Laws have been so written that Federal payments are
automatic to all those declared eligible. We plan i
careful review of all such programs, taking special
care to protect those truly in need.
° The third element is a cutback of $5 5 billion in
defense outlays from original plans.
° Fourth is a set of proposals involving the revenue
side of the budget, described below.
We are projecting receipts for the current year (fiscal
year 1983) of $597.5 billion. For fiscal year 1984 we expect
receipts to be $659.7 billion. The 1983 figure represents a
decline of $20.3 billion from the fiscal year 1982 total of
$617.8 billion. This decline, and indeed the absence of an
increase in receipts in the range of $50-70 billion, is
explained primarily by the recession. As I have already

- 11 -

explained, our economic projections throughout the remainder
of the recovery period are cautious. If real GNP grows at a
faster rate than we have projected, then receipts for the
current fiscal year, as well as for subsequent years, will be
somewhat higher than we are now projecting.
In 1984, as the recovery is well underway, receipts are
expected to rise to $659.7 billion, an increase over 1983 of
$62.2 billion, representing an annual growth of 10.4 percent.
This will occur as profit margins recover and other income
shares continue to grow.
For the other years in our forecast period (1985-1988)
we project an average annual growth rate of receipts about
10 percent without contingency taxes (and 11 percent per year
including contingency taxes), with receipts reaching the
$1 trillion mark for the first time in fiscal year 1988. All
of these projections assume the legislative proposals included
in the President's Fiscal Year 1984 Budget. Receipts under
existing legislation will also grow, but at a somewhat lower
9-1/2 percent annual average rate.
It is noteworthy that individual income tax receipts will
continue to rise over the 1985-1988 period, but only as real
income rises. Beginning in 1985, we will no longer collect
hidden taxes in the form of bracket creep caused by inflation.
Without the indexation provision of ERTA, individuals would
pay $6 billion more in taxes during fiscal year 1985 alone,
and about $100 billion more during the entire forecast period -1985 through 1988.
There has been a gradual upward trend in unified budget
receipts as a percent of GNP, shown in the top line of Chart V.
As shown in the bottom line of the chart, a major shift in the
composition of receipts has been the rising share of social
insurance and other payroll taxes to fund social security and
other retirement benefits.
There is no proposed omnibus tax bill in the President's
budget message. However, there are several separate tax items.
Proposed tax legislation in the President's budget can be
conveniently grouped under three broad headings: Proposals
that improve the income security of Americans, proposals that
will improve our ability to produce future output, and, as an
insurance policy, a contingency or standby tax, which is
intended as a clear signal that we will not permit spending
to increase in the outyears unless we pay for it up front.

- 12 -

In the first category, our principal recommendation is
for adoption of the bipartisan social security proposals.
These proposals, which will increase receipts to the social
security funds by $9.8 billion in fiscal year 1984, $11.6
billion in 1985, and $10.6 billion in 1986, are necessary to
insure the solvency and security of these trust funds.
The second category, proposals to improve the utilizatior
of our human resources, includes the tuition tax credit, the
exclusion of earnings on savings for higher education, the jot
tax credit for hiring the long-term unemployed, and the enterprise zone tax incentives. These will all improve our product
capacity, either through increased investments in education oi
more directly, by getting our currently underutilized force of
experienced workers back to work. As a group, these proposals
will reduce taxes $0.5 billion in 1984, $1.2 billion in 1985,
and $1.7 billion in 1986.
Finally, the President has proposed a contingency tax pla
designed to raise revenues of about 1 percent of GNP in the
event that, after Congress has adopted the spending reduction
proposals, there is insufficient economic growth to reduce the
deficit below 2-1/2 percent of GNP. The contingency tax plan
would not go into effect on October 1, 1985, unless the econorr
is growing on July 1, 1985. The contingency tax plan is an
insurance program. It is important to have a plan in place
so that the country and the world know that we will not
tolerate a string of deficits that would exceed 2-1/2 percent
of GNP. Chart VT shows the effect on the deficit that the
contingency tax would have if it were implemented. It also
shows how the budget picture would be altered by the stronger
expansion that some private forecasters expect. The deficit
path under high growth reflects the assumption that real GNP
increases 1-1/3 percentage points faster than in the official
forecast path, starting with FY-1983. Such growth would be in
line with the performance from the end of 1960 to late 1966.
The contingency tax plan would contain two elements, each
raising about half of the revenues that may be required. One
element would be a temporary surcharge of 5 percent on individ
and corporations. The other element would be a temporary
excise tax on domestically produced and imported oil designed
to raise revenues of about $5 per barrel. The contingency ta>
alternative shown in the budget raises $146 billion over the
36-month period beginning October 1, 1985. The specific contingency tax plan we will be sending to Congress for adoption
this year will be designed to raise revenues of about $130-15C
billion over a temporary period of up to 36 months.

- 13 If these budget saving proposals are enacted, we will
reduce the projected deficits by a total of $580 billion over
the next five years, or by $2,400 for every man, woman, and
child in the United States. The deficit as a share of GNP
will be down to about 2-1/2 percent in 1988 from the 6-1/2
percent we expect this year. Total outlays will grow by only
7 percent per year in nominal terms over the next five years,
compared with a bloated 13 percent between 1977 and 1981.
In addition, as part of our overall program, over the next
year we will be taking a careful look at the entire structure
of our tax system. We will be searching for ways to simplify
the tax code and make it fairer while at the same time promoting
economic growth by enhancing incentives for work effort, saving,
and investment. This is the true road for putting people back
to work and bringing the budget into balance.
We are confident that the deficit reduction program contained in this realistic budget is the right program for the
economy at this critical juncture. The most important signals
we can send the economy are spending restraint, deficit restraint,
and a commitment to non-inflationary economic growth throughout
the decade. This is the program we have devised. Together with
the Congress, we can make it work.

Chart I

INTEREST RATES AND INFLATION

Percent
15-

3-Month Treasury Bill Rate

t A

• •

•

,..+
••••.••
Inflation Rate*

* Growth from year earlier in G N P deflator.
Plotted quarterly.

81
Jtnuary 19, 1083 A2B

Chart II

INTEREST RATES
Weekly Averages

Percent

18
Prime Rate

16
...-.-^v

*-~~\

Aaa

Corporate Bonds

/"x_

-14
^

\.l.->-

12-

3-Month
Treasury Bills'

10-

8
I

I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 1 I I I I I . . .1 I I I I
I I I
I I I I I I I I I I I
Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan.
1981
1982
1983

•Bank discount basis
January 31, 1983-A203

THE PATH OF POSTWAR ECONOMIC RECOVERIES
Real G N P trough = 100

•

—

/•

Average of 5
Postwar Recoveries *

^
^

•
^*

1975-76 Recovery

— V
W

Current Cycle

^^^^
.

^-^>A

.^^^^^^V^^^lw*

-4

-3

-2

-1

1
0 + 1

1
+2

1
+3

1
+4

1
+5

1
+6

1 1
+7

Quarters from real G N P trough
* Postwar recoveries excluding the Korean War period
and the short-lived 1980-81 recovery.

January 25, 1983-A210

Chart IV

CONTRIBUTIONS TO A TYPICAL RECOVERY*
BY REAL GNP COMPONENT
Percentage
Points I

— C o n s u m e r Spending

—

Inventory Investment

—

Business Capital Spending

—

Residential Construction

— State and Local Purchases
Net Exports
Federal Purchases

First
Four
Quarters

Second
Four
Quarters

TOTAL,
First
Eight
Quarters

* Average of postwar recoveries, excluding the Korean War period
and the short-lived 1980-81 recovery.

January 21, 1983-/3

UNIFIED BUDGET RECEIPTS AS A PERCENT OF GNP
Percent
25

Fiscal Years 1954-1988

Percent
25

Total Receipts
20 —

15 —

15
All Other Receipts '

\*y-

10
• • • • • <

>•• . . • • •
••••

...•••'V Social Insurance Taxes

-•••••••••'

1954 56

74 76

* Receipts include contingency taxes.
January 28, 1983 A215

Chart VI

THE DEFICIT AS A SHARE OF GNP
Percent

Administration Growth Path

No Contingency Tax

J
%

Contingency |

* %%

High Growth Path, %
No Contingency Tax*
%

^%,

r//

%
***%

%
\

Trigger for
Contingency Tax

Decision date —
0

1982

—Trigger base
year
86

•

Fiscal Year
* Higher growth than the official path by 1-1/3 percentage point starting fiscal year 1983.
January 28, 1983-A214

TREASURY NEWS

2041

Department of the Treasury • Washington, D.C. • Telephone
FOR IMMEDIATE RELEASE
February 1, 1983
RESULTS OF AUCTION OF 3-YEAR NOTES
The Department of the Treasury has accepted $6,501
million
of $12,292 million of tenders received from the public for the 3-year
notes, Series L-1986, auctioned today. The notes will be issued
February 15, 1983, and mature February 15, 1986.
The interest rate on the notes will be 9-7/8%.
The range of
accepted competitive bids, and the corresponding prices at the 9-7/8%
interest rate are as follows:
Bids
Prices
99.936
9.90%
Lowest yield
99.632
10.02%
Highest yield
99.733
9.98%
Average yield
Tenders at the high yield were allotted

6%.

TENDERS RECEIVED AND ACCEPTED (In Thousands)
Received
Accepted
$
54,240
69,520
Boston
$
5,209,755
New York
9,,661,295
23,610
19,670
Philadelphia
146,920
127,190
Cleveland
127,580
94,120
Richmond
83,795
80,930
Atlanta
1
,156,145
298,140
Chicago
200,805
137,515
St. Louis
84,060
84,060
Minneapolis
122,175
120,205
Kansas City
63,650
47,950
Dallas
549,875
224,015
San Francisco
2,770
2,770
Treasury
$6,500,560
$12 ,292,200
Totals
The $6,501 million of accepted tenders includes $1,535
million of noncompetitive tenders and $4,966 million of competitive
tenders from the public.
In addition to the $6,501 million of tenders accepted in the
auction process, $420 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $1,100 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

R-2013.

.$2
.i= iD
3

federal financing bank

"
£
a> o
*- CVi

WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

February 2, 1983

FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of October 1982.
FFB holdinqs of obligations issued, sold, or guaranteed by other Federal agencies on October 31, 1982
totaled $125.1 billion, an increase of $0.7 billion
over the September 30 level. FFB increased holdings of
agency debt issues by $0.2 billion and holdings of agency
guaranteed debt by $0.6 billion. Holdings of agency
assets purchased decreased by $0.1 billion. A total of
259 disbursements were made during the month.
Attached to this release are tables presenting
FFB loan activity and new FFB commitments to lend
durinq October and a table summarizing FFB holdings as
of October 31, 1982.
# 0 #

R-2Q14

C\J

°"vo

Rage 2 of 7

FEDERAL FINANCING BANK
OCTOBER 1982 ACTIVITY.
BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(seniannual)

5,000,000.00
15,000,000.00
5,000,000.00
150,000,000.00

1/7/83
1/6/83
1/6/83
1/6/83

8.097%
7.823%
7.897%
8.254%

11/3/82
1/10/83
1/11/83
1/12/83
11/15/82
11/15/82
12/14/82
11/29/82
11/18/82
12/30/82
1/24/83
12/30/82
1/27/83

7.680%
8.099%
7.802%
7.771%
7.885%
7.885%
7.885%
7.901%
7.810%
7.985%
8.436%
8.436%
8.275%

4/30/11
3/16/90
2/10/12
6/22/92
12/31/84
9/1/09
9/1/09
2/16/12
12/22/10
4/30/89
4/25/94
6/15/12
6/22/92
9/1/09
2/16/12
6/15/12
12/5/93
3/20/90
9/10/87
10/1/93
5/5/92
6/22/92
6/22/92
12/22/10
2/16/12
6/15/12
9/1/09
3/16/90
9/1/92
2/16/12
6/15/12
4/25/90
4/30/11
4/25/94
9/1/09
5/25/89
2/15/88
9/1/92
4/25/90
6/15/91
2/16/12

11.826%
11.740%
11.828%
11.818%
11.867%
11.834%
11.806%
11.820%
11.813%
11.528%
11.627%
11.674%
11.624%
11.084%
11.128%
10.778%
10.614%
10.378%
10.133%
10.558%
10.444%
10.451%
10.669%
10.808%
10.982%
10.850%
10.806%
10.422%
10.618%
10.820%
10.925%
10.537%
10.915%
10.781%
10.898%
10.563%
10.372%
10.725%
10.536%
10.596%
11.286%

ON-BUDGET AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Note
Note
Note
Note

#264
#265
1266
#267

10/8
10/15
10/22
10/31

NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
Note
Note
Note
Note
Note
°Note
°Note
Note
Note
Note
Note
Note
Note

#116
#117
#118
#119
#120
#121
#122
#123
#124
#125
#126
#127
#128

10/4
10/12
10/13
10/14
10/15
10/15
10/15
10/18
10/19
10/25
10/26
10/26
10/29

2,500,000.00
1,569,340.00
240,000.00
12,000,000.00
2,000,000.00
11,600,000.00
15,000,000.00
14,450,000.00
5,000,000.00
1,500,000.00
731,200.00
3,000,000.00
324,000.00

GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE - FOREIGN MILITARY SALES
Greece 14
Jordan 8
Sudan 4
Turkey 9
Uruguay 2
Israel 8
Israel 8
Israel 13
Turkey 11
Dominican Republic 5
Honduras 8
Greece 15
Turkey 9
Israel 8
Israel 13
Egypt 3
El Salvador 4
Indonesia 7
Philippines 7
Tunisia 10
Tunisia 11
Turkey 9
Turkey 9
Turkey 11
Israel 13
Egypt 3
Israel 8
Jordan 7
Somalia 1
Israel 13
Egypt 3
Honduras 5
Greece 14
Honduras 8
Israel 8
Panama 4
Peru 7
Somalia 1
Spain 4
Spain 5

10/1
10/1
10/1
10/1
10/1
10/5
10/6
10/6
10/6
10/7
10/7
10/7
10/7
10/12
10/12
10/13
10/13
10/13
10/13
10/13
10/14
10/14
10/15
10/15
10/18
10/19
10/19
10/19
10/19
10/20
10/22
10/22
10/22
10/22
10/22
10/22
10/22
10/22
10/22
10/22

•IS

3,485,769.00
2,511,321.00
19,982,203.73
403,316.06
169,800.00
1,500,000.00
1,908,025.62
7,828,051.39
1,244,493.00
79,749.52
626,764.00
4,546,799.00
6,486,945.05
70,000,000.00
808,239.28
1,970,684.54
109,321.00
214,802.76
343,597.38
714,313.75
23,968,728.25
419,895.23
6,486,960.11
1,003,022.09
11,424,700.00
704,544.32
25,784,000.00
415,370.00
1,776,675.60
6,050,640.70
1,987,388.22
225,000.00
263,750.00
293,151.64
1,000,000.00
193,813.20
83,911.93
654,631.64
841,774.12
2,364,331.75
7,549,264.88

INTEREST
RATE
(other than
semi-annual)

FEDERAL FINANCING BANK

Page 3 of 7

OCTOBER 1982 ACTIVITY
BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual

INTEREST
RATE
(other than
seni-annual)

DEPARTMENT OF DEFENSE - FOREIGN MILITARY SALES (Cont'd)
Lebanon 4
Ecuador 4
Lebanon 4
Thailand 7
Egypt 3
Jordan 7
Liberia 9
Philippines 7
Spain 5
Turkey 13
DEPARTMENT OF ENERGY

10/26
10/28
10/28
10/28
10/29
10/29
10/29
10/29
10/29
10/29

81 ,739.00
317 ,017.31
4,211 ,953.00
105 ,066.50
10,949 ,689.54
1,203 ,231.00
860 ,907.15
267 ,297.03
613 ,661.00
1,215 ,659.00
$

7/25/89
7/25/87
7/25/89
8/25/86
6/15/12
3/16/90
7/21/94
9/10/87
6/15/91
3/24/12

10.994%
10.502%
10.766%
10.345%
11.048%
10.617%
10.862%
10.400%
10.679%
11.043%

Geothenral Loan Guarantees
Nothern California
Municipal Power Corp. #2

10/1

4,281,088.88

10/1/83

10.385%

4,000,000.00
23,500,000.00
5,000,000.00
6 ,000,000.00

7/1/02
7/1/02
1/3/83
7/1/02

12.581%
11.817%
8.635%
11.594%

5/]/84
2/15/83
7/1/03
1/1/83
9/1/83
6/1/83
8/1/83
10/15/02
2/1/85
8/31/03
6/1/83
8/1/83
11/30/82

10.885%
8.645%
11.091%
7.802%
8.715%
8.465%
8.625%
10.724%
9.863%
10.865%
9.085%
9.225%
8.275%

10.254% qtr.

Synthetic Fuels Guarantees - Non-Nuclear Act
Great Plains
Gasification Assoc. #32

#33
#34
#35

10/4
10/12
10/18
10/25

DEPARTMENT OF HOUSING ,K URBAN DEVELOPMENT
Community Development Block Grant Guarantees
Hammond, IN •
Ashland, KY
Syracuse Ind.. Dev. Auth., NY
lawrence, MA
Owensboro, KY
Tenpe, AZ
Washington County, PA
Pittsburgh, PA
Long Beach, CA
Rochester, NY
Kenosha, WI
Vlashington County, PA
Louisville, KY

10/4
10/8
10/8
10/13
10/13
10/13
10/13
10/15
10/18
10/22
10/28
10/28
10/29

339,168.00
158,200.00
56,000.00
80,000.00
201,187.53
119,000.00
158,251.39
253,500.00
100,000.00 •
160,000.00
63,515.00
42,264.00
300,000.00

11.181% ann.
11.399% ann.
8.880%
8.561%
8.811%
11.012%
10.106%
11.160%
9.150%
9.371%

ann.
ann.
ann.
ann.
ann.
ann.
ann.
ann.

Public Housing Notes
Sale #26

10/8

34,758,641.96

11/1/91— 11.745%
11/1/18

12.090% ann.

10/1/92
10/1/92

11.804%
10.562%

12.152% ann.
10.841% ann.

10/1/84
10/1/84
10/1/84
12/31/16
12/31/11
10/1/84
10/1/84
12/31/13
12/31/12
10/2/85
10/2/85
10/3/84
12/31/11

11.355%
11.355%
11.355%
11.882%
11.843%
11.355%
11.355%
11.701%
11.688%
11.505%
11.505%
11.255%
11.877%

11.198% qtr.
11.198% qtr.
11.198% otr.
11.711% qtr.
11.673% qtr.
11.198% qtr
11.198% qtr.
11.535% qtr.
11.522% qtr.
11.344% qtr.
11.344% qtr.
11.101% qtr.
11.706% qtr.

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
Space Communications Company

10/1
10/20

9,100,000.00
7 ,500,000.00

RURAL ELECTRIFICATION ADMINISTRATION

*N. Michigan Electric #101
Arkansas Electric #142
Arkansas Electric #221
Western Illinois Power #225
•United Power #2
•Arkansas Electric #97
•Arkansas Electric #142
•Hoosier Energy #107
•Alabama Electric #26
*Big Rivers Electric #58
*Big Rivers Electric #91
•Dairyland Power #54
"United extension
Power #2
•maturity
°early extension

10/1
10/1
10/1
10/1
10/1
10/1
10/1
10/2
10/2
10/2
10/2
10/3
10/5

2,331,000.00
1,722,000.00
11,508,000.00
10,706,000.00
9,000,000.00
42,000.00
3,980,000.00
25,000,000.00
11,000,000.00
1,369,000.00
355,000.00
2,000,000.00
12,000,000.00

FEDERAL FINANCING BANK

Page 4 of 7

OCTOBER 1982 ACTIVITY
BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
•United Power #6
•New Hampshire Electric #192
•New Hampshire Electric #192
•New Hampshire Electric #192
•New Hampshire Electric #192
•Western Illinois Power #162
•East Ascension Tele. #39
Wolverine Electric #233
•New Hampshire Electric #192
Sunflower Electric #174
•Cajun Electric #163
New Hampshire Electric #234
Wabash Valley Power #104
Wabash Valley Power #206
•Hoosier Enerqy #107
•N. Michigan Electric #101
•N. Michigan Electric #101
•Wolverine Electric #100
Wolverine Electric #233
Western Farmers Electric #64
Western Farmers Electric #133
Western Farmers Electric #196
Western Farmers Electric #220
Allegheny Electric #175
Deseret G&T #211
Tennessee Telephone #80
East Kentucky Power #73
East Kentucky Power #140
East Kentucky Power #188
•Central Electric Power #131
New Hampshire Electric #192
Corn Belt Power #138
Cajun Electric #147
Plains Electric G&T #215
•Brazos Electric #108
•Brazos Electric #144
•Cooperative Power #130
•Cooperative Power #5
. °Cooperative Power #130
•Oglethorpe Power #74
•East Kentucky Power #140
•Seminole Electric #141
•Associated Electric #132
Plains Electric G&T #158
•New Hampshire Electric #192
•New Hampshire Electric #192
•New Hampshire Electric #192
Florence Telephone #40
•Western Illinois Power #99
•Soyland Power #105
Brazos Electric #108
Brazos Electric #230
Basin Electric #137
Seminole Electric #141
•S. Mississippi Electric #3
•Big Rivers Electric #58
•Big Rivers Electric #65
•Big Rivers Electric #91
•Big Rivers Electric #91
•Big Rivers Electric #136
•Big Rivers Electric #143
•Corn Belt Power #166
•United
•Sugar
•Colorado
Big Rivers
Land
Power
Ute
Telephone
Electric
Electric
#139
#86
#136
#69
#8

10/5
10/5
10/5
10/5
10/5
10/6
10/6
10/7
10/7
10/7
10/7
10/7
10/8
10/8
10/9
10/10
10/10
10/10
10/12
10/12
10/12
10/12
10/12
10/12
10/12
10/13
10/14
10/14
10/14
10/14
10/15
10/15
10/15
10/15
10/15
10/15
10/15
10/15
10/15
10/15
10/15
10/16
10/17
10/17
10/18
10/18
10/18
10/18
10/19
10/19
10/20
10/20
10/20
10/20
10/20
10/20
10/20
10/20
10/20
10/20
10/20
10/21
10/21

1,700,000.00
100,000.00
3,000,000.00
2,460,000.00
51,000.00
4,245,000.00
622,000.00
18,236,000.00
3,242,000.00
2,000,000.00
14,398,000.00
26,598,000.00
8,809,000.00
1,511,000.00
30,000,000.00
1,968,000.00
786,000.00
1,559,000.00
3,864,000.00
536,000.00
4,000,000.00
73,000.00
5,000,000.00
3,745,000.00
13,725,000.00
1,223,000.00
2,000,000.00
1,200,000.00
4,479,000.00
60,000.00
1,008,000.00
800,000.00
38,200,000.00
1,417,000.00
2,626,000.00
951,000.00
12,000,000.00
4,000,000.00
8,000,000.00
12,520,000.00
670,000.00
3,352,000.00
15,500,000.00
5,950,000.00
428,000.00
1,755,000.00
973,000.00
344,000.00
55,061,000.00
61,085,000.00
480,000.00
2,333,000.00
20,000,000.00
10,241,000.00
3,500,000.00
4,407,000.00
28,000.00
1,790,000.00
898,000.00
193,000.00
136,000.00
150,000.00
1,000,000.00
1,550,000.00
2,708,000.00
630,000.00
97,000.00

12/31/11
12/31/15
12/31/15
12/31/15
12/31/15
12/31/14
12/31/12
10/7/84
12/31/16
10/7/84
12/31/14
10/7/84
10/8/84
10/8/84
10/9/84
10/10/85
10/10/84
10/10/85
10/12/84
12/31/16
12/31/16
12/31/16
12/31/16
10/31/84
10/20/84
10/13/84
12/31/16
12/31/16
12/31/16
10/14/84
12/31/16
12/31/16
12/31/16
12/31/16
10/15/84
10/15/84
12/31/13
12/31/13
12/31/13
12/31/12
12/31/14
10/16/84
12/31/14
12/31/14
12/31/16
12/31/16
12/31/16
12/31/16
12/31/12
12/31/12
10/20/84
10/20/84
10/20/84
12/31/16
12/31/09
10/20/85
10/20/84
10/20/85
10/20/84
10/20/84
10/20/84
10/21/84
12/31/14
10/21/84
12/31/11

11.877%
11.912%
11.912%
11.912%
11.912%
11.882%
11.864%
11.335%
11.770%
11.335%
11.754%
11.335%
10.585%
10.585%
10.275%
10.665%
10.275%
10.665%
10.275%
11.256%
11.256%
11.256%
11.256%
10.315%
10.285%
9.815%
10.798%
10.798%
10.798%
9.805%
10.948%
10.948%
10.948%
10.948%
9.965%
9.965%
10.905%
10.905%
10.905%
10.892%
10.915%
10.125%
11.080%
11.080%
11.099%
11.099%
11.099%
11.099%
10.919%
10.919%
9.945%
9.945%
9.945%
10.935%
10.822%
10.305%
9.945%
10.305%
9.945%
9.945%
9.945%
9.845%
10.952%
10.982%
9.845%

11.706% qtr.
11.740% qtr.
11.740% qtr.
11.740% qtr.
11.740% qtr.
11.711% qtr.
11.693% qtr.
11.179% qtr.
11.602% qtr.
11.179% qtr.
11.586% qtr.
11.179% qtr.
10.449% qtr.
10.449% qtr.
10.146% qtr.
10.526% qtr.
10.146% qtr.
10.526% qtr.
10.146% qtr.
11.102% qtr.
11.102% qtr.
11.102% qtr.
11.102% qtr.
10.185% qtr.
10.156% qtr.
9.697% qtr.
10.565% qtr.
10.565% qtr.
10.565% qtr.
9.688% qtr.
10.802% otr.
10.802% qtr.
10.802% qtr.
10.802% qtr.
9.844% qtr.
9.844% qtr.
10.760% qtr.
10.760% qtr.
10.760% qtr.
10.748% qtr.
10.770% atr.
10.000% qtr.
10.931% qtr.
10.931% qtr.
10.949% qtr.
10.949% qtr.
10.949% qtr.
10.949% qtr.
10.774% qtr.
10.774% qtr.
9.824% qtr.
9.824% qtr.
9.824% qtr.
10.789% qtr.
10.679% qtr.
10.176% qtr.
9.824% qtr.
10.176% qtr.
9.824% qtr.
9.824% qtr.
9.824% qtr.
9.727% qtr.
10.806%
10.835%
9.727% qtr.

FEDERAL FINANCING RANK

Page 5 of 7

OCTOBER 1982 ACTIVITY
BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semi-

annual)

INTEREST
RATE
(other than

semi-annual)

RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
Big Rivers Electric #143
Big Rivers Electric #179
•Corn Belt Power #166
•United Power #67
•United Power #129
•Colorado Ute Electric #78
•Deseret G&T #170
•Seminole Electric #141
•Basin Electric #137
Kamo Electric #209
Wabash Valley Power #206
Wolverine Electric #233
Basin Electric #137
•Southern Illinois Power #38
•Brookville Telephone #53
•United Power #6
•United Power #67
East River Electric #117
. °East Kentucky Power #73
•East Kentucky Power #73
•East Kentucky Power #73
•East Kentucky Power #73
•M&A Electric #111
•M&A Electric #111
•M&A Electric #111
•M&A Electric #111
•M&A Electric ,#111
•M&A Electric #111
•M&A Electric #111
•M&A Electric #111
^Ponderosa Telephone #35
North Carolina Telephone #185
Colorado Ute Electric #168
Colorado Ute Electric #203
Basin Electric #137
Sunflower Electric #174
Cajun Electric #197
M&A Electric #111
•Sunflower Electric #174
•Sunflower Electric #174
•Sunflower Electric #174
•Sunflower Electric #174
•Big Rivers Electric #58
•Big Rivers Electric #91
•East Kentucky Power #73
•Seminole Electric #141
•Allegheny Electric #93
•S. Mississippi Electric #171
•Arkansas Electric #142
•Gulf Telephone #50
•Southern Illinois Power #38
•Basin Electric #87
•Basin Electric #88
•Southern Illinois Power #38
•San Miguel Electric #110
•Arkansas Electric #142

10/21
10/21
10/21
10/22
10/22
10/22
10/24
10/24
10/25
10/25
10/25
10/25
10/25
10/25
10/25
10/27
10/27
10/28
10/28
10/28
10/28
10/28
10/28
10/28
10/28
10/28
10/28
10/28
10/28
10/28
10/29
10/29
10/29
10/29
10/29
10/29
10/29
10/29
10/29
10/29
10/29
10/29
10/30
10/30
10/30
10/30
10/31
10/31
10/31
10/31
10/31
10/31
10/31
10/31
10/31
10/31

$
618,000.00
17,600,000.00
150,000.00
1,500,000.00
4,500,000.00
900,000.00
58,716,000.00
2,122,000.00
15,000,000.00
1,079,000.00
140,000.00
498,000.00
23,710,000.00
650,000.00
1,412,000.00
5,700,000.00
6,350,000.00
3,000,000.00
8,302,000.00
6,586,000.00
7,061,000.00
7,909,000.00
1,125,000.00
501,000.00
325,000.00
830,000.00
200,00p.00
250,000.00
200,000.00
487,000.00
395,000.00
7,000,000.00
12,000,000.00
2,019,000.00
20,000,000.00
30,000,000.00
26,000,000.00
1,490,000.00
25,000,000.00
10,000,000.00
35,000,000.00
15,000,000.00
945,000.00
305,000.00
19,184,000.00
879,000.00
2,445,000.00
24,210,000.00
2,837,000.00
168,285.00
2,920,000.00
332,000.00
777,000.00
500,000.00
3,000,000.00
2,837,000.00

10/21/84
9.845%
10/21/84
9.845%
12/31/14 10.982%
12/31/14 10.987%
12/31/14 10.987%
10/22/85 10.395%
12/31/14 11.109%
12/31/14 11.109%
12/31/14 11.109%
12/31/16 11.122%
10/25/84
9.995%
10/25/84
9.995%
10/25/84
9.995%
12/31/13 11.101%
12/31/12 11.091%
12/31/13 11.216%
12/31/13 11.216%
10/28/86 10.795%
12/31/13 11.243%
12/31/13 11.243%
12/31/13 11.243%
12/31/13 11.243%
12/31/12 11.227%
12/31/13 11.243%
12/31/13 11.243%
12/31/13 11.243%
12/31/13 11.243%
12/31/13 11.243%
12/31/14 11.257%
12/31/15 11.271%
10/29/84 10.015%
10/29/84 10.015%
10/29/84 10.015%
10/29/84 10.015%
10/29/84 10.015%
12/31/16 11.169%
12/31/16 11.169%
12/31/16 11.169%
12/31/14 11.144%
12/31/15 11.157%
12/31/15 11.157%
12/31/15 11.157%
10/30/85 10.475%
10/30/85 10.475%
12/31/12 11.007%
12/31/14 11.038%
10/31/84
9.975%
12/31/14 11.038%
10/31/84
9.975%
11/1/84
9.975%
12/31/11 10.685%
12/31/14 11.038%
12/31/12 11.007%
12/31/14 11.038%
12/31/14 11.038%
12/31/14 11.038%

SMALL BUSINESS ADMINISTRATION
Small Business Investment Company Debentures
Northland Capital Corp.
Northland Capital Corp.
Round Table Cap. Corp.
Wood River Cap. Corp.
Bando-McGlocklin Inv. Co.
Brittany Cap. Corp.
Capital Marketing Corp.

•maturity extension
•early extension

10/20
10/20
10/20
10/20
10/20
10/20
10/20

200,000.00
200,000.00
600,000.00
4,000,000.00
1,500,000.00
300,000.00
2,000,000.00

10/1/85
10/1/87
10/1/89
10/1/89
10/1/92
10/1/92
10/1/92

10.345%
10.535%
10.665%
10.665%
10.705%
10.705%
10.705%

9.727%
9.727%
10.835%
10.840%
10.840%
10.263%
10.959%
10.959%
10.959%
10.972%
9.873%
9.873%
9.873%
10.951%
10.941%
11.063%
11.063%
10.653%
11.089%
11.089%
11.089%
11.089%
11.074%
11.089%
11.089%
11.089%
11.089%
11.089%
11.103%
11.117%
9.893%
9.893%
9.893%
9.893%
9.893%
11.017%
11.017%
11.017%
10.993%
11.006%
11.006%
11.006%
10.341%
10.341%
10.060%
10.890%
9.854%
10.890%
9.854%
9.854%
10.546%
10.890%
10.860%
10.890%
10.890%
10.890%

qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
atr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
atr.
atr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
atr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
atr.
qtr.
qtr.
qtr.

FEDERAL FINANCING BANK

Page 6 of 7

OCTOBER 1982 ACTIVITY

BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

10/1/92
10/1/92
10/1/92
10/1/92

10.705%
10.705%
10.705%
10.705%

10/1/97
10/1/97
10/1/97
10/1/97
10/1/97
10/1/97
10/1/97
10/1/97
10/1/02
10/1/02
10/1/02
10/1/02
10/1/02
10/1/02
10/1/02
10/1/02
10/1/02
10/1/02
10/1/02
10/1/02
10/1/07
10/1/07
10/1/07
10/1/07
10/1/07
10/1/07
10/1/07
10/1/07
10/1/07
10/1/07

11.829%
11.829%
11.829%
11.829%
11.829%
11.829%
11.829%
11.829%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.821%
11.821%
11.821%
11.821%
11.821%
11.821%
11.821%
11.821%
11.821%
11.821%

INTEREST
RATE
(other than
semi-annual)

Small Business Investment Company Debentures (Cont'd)
European Dev. Cap. Corp. 10/20 $ 1,000,000.00
SBI Cap. Corp.
10/20
500,000.00
Tidewater Industrial Cap. Corp. 10/20
300,000.00
Unicorn Ventures, Ltd.
10/20
500,000.00
State & Local Development Company Debentures
Jackson Local Dev. Corp. 10/6
St. Louis Local Dev. Co.
10/6
CCD Business Dev. Corp.
10/6
Toledo Econ. Planning Council
10/6
Lynn Cap. Inv. Corp.
10/6
City-Wide an. Bus. Dev. Corp.
10/6
VERD-ARK-CA Dev. Corp.
10/6
St. Louis Local Dev. Corp.
10/6
Com. Dev. Corp. of Ft. Wayne
10/6
St. Louis County Local Dev. Co. 10/6
Lynn Cap. Inv. Corp.
10/6
Plymouth Industrial Dev. Corp.
10/6
Eastern Maine Dev. District
10/6
Ocean State Bus. Dev. Auth.
10/6
Ocean State Bus. Dev. Auth.
10/6
Androscoggin Valley Reg. PI. Com.10/6
Greater Bakersfield L.D.C
10/6
Long Island Dev. Corp.
10/6
Pawtuckett Local Com. & I.D.C.
10/6
Los Angeles L.D.C, Inc.
10/6
Ocean State Bus. Dev. Auth.
10/6
Washington, D.C. Loc. Dev. Co.
10/6
Wisconsin Bus. Dev. Fin. Corp.
10/6
Los Angeles L.D.C. Inc.
10/6
Tucson Local Dev. Corp.
10/6
Wisconsin Bus. Dev. Fin. Corp.
10/6
Bay Area Employment Dev. Co.
10/6
Washington, D.C. Loc. Dev. Co. 10/6
La Habra Local Dev. Co., Inc.
10/6
Los Angeles L.D.C, Inc.
10/6

38,000.00
42,000*.00
46,000.00
83,000.00
93,000.00
95,000.00
101,000.00
105,000.00
63,000.00
91,000.00
126,000.00
160,000.00
163,000.00
172,000.00
223,000.00
256,000.00
263,000.00
315,000.00
315,000.00
500,000.00
34,000.00
47,000.00
36,000.00
122,000.00
173,000.00
184,000.00
230,000.00
261,000.00
500,000.00
500,000.00

TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
1/31/83

327,569,918.02

Note A-83-1 10/29

8.308%

DEPARTMENT OF TRANSPORTATION
National Railroad Passenger Corporation
•Amtrak #21
•Amtrak #29

10/1
10/1

200,000,000.00
600,000,000.00

1/3/83
1/3/83

7.980%
7.980%

Section 511
Missouri-Kansas-Texas R.R.

10/21

15,000,000.00

4/30/90

10.709%

• maturity extension

FEDERAL FINANCING BANK
October 1982 Commitments

BORROWER
Ashland, KY
Albany Ind. Dev. Aqencv

AMOUNT

GUARANTOR

$ 400,000.00
3,000,000.00

HUD
HUD

COMMITMENT
EXPIRES
2/15/83
7/1/83

MATURITY
2/15/88
7/1/03

Pane 7 of 7

FEDERAL FINANCING BANK HOLDINGS
(in ni.11 ions)
Program

September 30, 1982

October 31, 1982

Net Change
10/1/82-10/31/82

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

12,285.0
13,953.9
130.1

12,460.0
13,953.9
145.0

175.0

-015.0

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

-0-

1,221.0
194.9

1,221.0
191.5

53,736.0
131.0
145.7
21.5
3,123.7
58.1

53,661.0
131.0
145.7
21.5
3,123.7
57.3

-75.0

11,630.7
5,000.0
40.9
378.5
119.0
33.5
1,659.0
420.5
36.0
29.5
774.3
16,600.0
721.0
53.7
1,233.6
855.4
190.0
177.0

194.9

-3.4

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

-0-0-0-0-.8

Government-Guaranteed Loans
DOD-Poreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loans
DOE-Non-Nuclear Act (Great Plains)
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes
General Services Administration
DOI-Guam Power Authority
DOI-Virqin Islands
NASA-Space Communications Co.
Rural Flectrification Admin.
SBA-Small Business Investment Cos.
SBA-StateAocal Development Cos.
TVA-Seven States Energy Corp.
DOT-Amtrak
DOT-Section 511
DOT-WMATA
TOTALS^
•fiqures nay not total due to rounding

11,435.8
5,000.0
36.6
340.0
117.0
33.5
1,624.3
420.5
36.0
29.5
757.8
16,281.5
712.0
48.4
1,258.0
855.4
193.0
177.0
$ 124,357.3

125,064.2

-04.3
38.5

2.0
-034.8

-0-0-016.5
318.4

9.0
5.3
-24.3

-0-3.2

-0S

707.0

TREASURY NEWS
tepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Thursday, February 3f 1983

CONTACT:

Michael Brown
(202)376-0560

THE PRESIDENT REAGAN MEDAL
Treasury Secretary Donald T. Regan presented President
Reagan with his official Presidential medals, struck by the
United States Mint, in an Oval Office ceremony this afternoon.
Joining in the presentation were Donna Pope, Director of the U.S.
Mint, and Miss Elizabeth Jones, Chief Sculptor- Engraver of the
United States. The medals are part of the Mint's historic
tradition of striking a commemorative medal for each President.
The three-inch bronze Presidential medal and the miniature
one and 5/16th inch bronze medal will be added to the Mint's
National Medals Program and will be available for purchase by the
public. Director Pope emphasized, "this is a self-supporting and
profitable program with no tax dollars expended."
Miss Elizabeth Jones designed and modeled the medal. The
obverse features an impressionistic-style portrait of President
Reagan developed from photographs furnished by the White House.
The incription, RONALD REAGAN, appears along the top border and
PRESIDENT OF THE UNITED STATES along the lower border. The
artist's name, E.A.B. Jones, appears on the base of the portrait.
The reverse design was suggested by First Lady Nancy Reagan
as representative of the President's attachment to mountains. It
features Half Dome, a mountain in Yosemite National Park. The
quotation in the upper field is, "LET US RENEW OUR FAITH AND OUR
HOPE. WE HAVE EVERY RIGHT TO DREAM HISTORIC DREAMS." It was
taken from the President's Inaugural Address. "INAUGURATED
JANUARY 20, 1981" follows the quotation. The artist's initials,
E.J., appear along the right lower border and YOSEMITE NATIONAL
PARK along the left lower border.
The two medals will be available at all Mint sales outlets
and by mail order. The 3-inch medal retails for $10.00 over-thecounter and $10.75 by mail order. The minature medal retails for
75 cents over-the-counter and $1.00 by mail order. All mail
orders for the President Reagan medals should be sent to:
Bureau of the Mint
55 Mint Street
San Francisco, CA 94175
(more)
R-2015

- 2 -

OVER-THE-COUNTER SALES AT:
Philadelphia Mint
Independence Mall,
5th and Arch Street
Philadelphia, PA
Denver Mint
320 Colfax Avenue
Denver, CO
San Francisco Old Mint
88 Fifth Street
(Fifth & Mission)
San Francisco, CA
Department of the Treasury
15th Street & Pennsylvania Ave., N.W.
Washington, D.C.

TREASURY NEWS®

Department of the Treasury • Washington, D.C. • Telephone 566-2
FOR IMMEDIATE RELEASE February 2, 1983
RESULTS OF AUCTION OF 10-YEAR NOTES
The Department of the Treasury has accepted $4,501 million of
$10,343 million of tenders received from the public for the 10-year
notes, Series A-1993, auctioned today. The notes will be issued
February 15, 1983, and mature February 15, 1993.
The interest rate on the notes will be 10-7/8%. The range of
accepted competitive bids, and the corresponding prices at the 10-7/8%
interest rate are as follows:
Bids
Prices
Lowest yield 10.92% 99.730
Highest yield
10.96%
99.491
Average yield
10.94%
99.611
Tenders at the high yield were allotted 42%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Received
Accepted
11,323
$
24,603
Boston
$
New York
8,608,896
3 ,950,406
16,700
6,700
Philadelphia
Cleveland
51,693
43,693
42,970
15,650
Richmond
31,978
22,978
Atlanta
904,752
222,512
Chicago
67,829
61,539
St. Louis
17,299
12,219
Minneapolis
25,901
24,801
Kansas City
7,423
6,263
Dallas
541,948
122,248
San Francisco
1,029
1,029
Treasury
$4 ,501,361
$10,343,021
Totals
The $4,501 million of accepted tenders includes $1,012
million of noncompetitive tenders and $3,489 million of competitive
tenders from the public.
In addition to the $4,501 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. An additional $650 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.
R-2016

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone
f l

""I

FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
Thursday, February 3, 1983
TESTIMONY OF THE HONORABLE DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE
SENATE FINANCE COMMITTED
Mr. Chairman and Members of the Committee:
I

It is a pleasure to meet with you today and to discuss
the Administration's 1984 budget proposals. The development
of a sound fiscal policy was one of the central objectives of
the Reagan Administration when it came into office two years
ago. For too long a time Americans had watched the share of
GNP accounted for by Federal spending and taxes move upward.
As the government siphoned off resources from the private
sector and the money supply expanded, economic activity
stagnated an'd inflation soared.
In February 1980 the Administration put before Congress
a four point plan to revitalize the economy. Our program
included spending restraint, tax reductions, regulatory reform,
and support of the Federal Reserve's efforts to attain gradual,
steady reduction in the rate of monetary grovth.
The transition to a noninflationary environment has been
somewhat more difficult than anticipated. W\ have seen two
years of serious economic recession as a result of the inflation/tax spiral.
However, the worst is now over. There has been clear
progress on inflation, and consumer price growth has dropped
dramatically from 12.4 percent in 1980 to 3.9 percent in
1982. Interest rates are down from peak leveis of 21-1/2
percent on the prime in December 1980 to 11 percent currently,
and the stock msrVet last year made new highs. Indicators such
as housing, inventories, and real income show the economy is
poised for recovery. Alongside these favorable developments,
there remains distressingly high unemployment.

f- ion

2041

- 3 -

•

bringing inflation under control;-

° shifting the composition of activity away from
government spending toward more productive
endeavors in the private sector;
° providing an environment vhich would reward
innovation, work effort, -saving and investment,
and in which free-market forces could operate
effectively.
Over the past two years we have seen evidence that the
Administration's program is working. The fundamental elements
of recovery are now largely in place. Inflation has been
brought under control. Interest rates are coming down, as
shown in Chart II. Real wage growth is being restored. In
addition, there have been other improvements — notably in
productivity growth and saving behavior — which mark a shift
away from the problems that contributed to sluggish economic
performance in recent years.
Within this framework of very significant achievements,
there remains the fact that the economy has been in recession
and unemployment is high. The unemployment rate of 10.8
percent in December is, of course, a matter of great concern.
The President has indicated in his State of the Union Message
that he will be submitting special legislation to help deal
with the problem.
The Current State of the Economy
The economy now stands poised for recovery. In fact, the
recovery may well already be underway at this moment. It has
been much longer in coming than we, or for that matter nearly
all forecasters, had expected.
The delay occurred primarily because of the persistence
of high interest rates and because of developments in the
international sphere. On the iriterr.ational front, the economies
of our leading trading partners continued to weaken. Weakness
amona all the industrialized nations was self-reinforcing.
Furthermore, the financial difficulties of some of the newly
industrializing nations had adverse impacts on economic activity
here. These forces, combined with a general hesitancy on the
part of the consumer, led to another round of inventory cutting
in the second half of 1982 and delayed the expected turnaround
of the economy.

- 5 -

The Outlook for the Economy
A vigorous recovery of the type outlined would be most
welcome. It would certainly help ease the Nation's budgetary
problems. However, we recognize that the serious problems
still confronting us may wel.. hold growth during the next
year or two below the typica.. recovery pattern.
° Our overall trade balance is likely to register
further marked deterioration in the coming year.
° Real interest rates may persist at high levels,
though remaining below those prevailing a year
ago.
° The economy is in the process of undergoing marked
structural change. Some of our industries may not
quickly regain the vitality they experienced in
the 1950's and 1960's. The shift of resources to
emerging industries will take time.
° Most fundamentally, we are not yet fully out of
the inflationary woods, and we cannot afford to
direct monetary and fiscal policy toward excessively
rapid economic expansion.
For these reasons, the Administration is forecasting
fairly modest real growth at a 3.1 percent rate during the four
quarters of 1983, rather than the typical recovery growth rate
of about twice that much, though certainly we would welcome
a stronger recovery. Growth is expected to pick up modestly
to the 4 percent range in 1984 and the years beyond.
Policies for the Recovery
In setting policy for the remainder of the 1980' s, we
must recognize what we must not do. We no longer have the
freedom of action to revert back to the overly stimulative
monetary and fiscal policies pursued at times in the past,
for these would surely lead to a resurgence of inflationary
pressures and a new round of rising interest rates. Further,
we must not reverse the fundamental tax restructuring put
i;* place in 1981, for this was designed to provide the
noninflationary incentives without which the private sector
would continue to wither.

- 7 -

Legislation providing for the U.S. share of the increase in
IMF resources will be submitted in the near future and I urge
prompt approval by the Congress.
Monetary Policy
In addition to policies aimed at facilitating structural
changes withinthe economy, we must maintain steady monetary
and fiscal policies directed at reinvigorating economic activity.
Steady, predictable mcney supply growth at a noninflationary
pace has been, and continues to be, one of the major goals of
the Administration's economic program. The Federal Reserve's
efforts to achieve that goal have been complicated by a number
of factors, such as fac-reaching institutional changes in the
banking and thrift industries. Nevertheless, the Fed has
generally been successful, albeit in a somewhat erratic fashion.
Monetary policy faced a difficult and uncertain situation
during much of the last year. Rapid institutional change in
the form of new money market instruments blurred the boundaries
between the various aggregates and made the achievement of any
target rates of growth unusually difficult. There is also
some indication that the recession may have led to an increased
demand for liquidity and precautionary balances. In 1982,
growth in monetary velocity — the rate at which money is used
— turned negative for the first time in nearly three decades.
Under the unusual economic and institutional circumstances of
1982, some temporary offset in the form of above-target rates
of monetary growth was probably desirable.
The Federal Reserve's efforts to slow money growth have
been accompanied by some volatile short-run swings. Growth
in Ml was actually negative on a 13-week basis by mid-summer
of last year, and then soared to the double-digit range by
the end of the year. This recent acceleration has caused some
observers to conclude that the fight against inflationary
money growth has been -ibandoned. That is not true. Both the
Administration and the Federal Reserve remain committed to
the long-run goal of providing money growth at a noninflationary pace consistent with a steady and sustainable expansion
of economic activity.
Fiscal Policy
The objectives of our fiscal policy upon coming to office
two years ago were two-fold. First, we believed and still
believe it was imperative to correct the disincentives to
economic performance that had been built into the tax structure
over the years. These disincentives arose in large measure,
not by design, but through the interaction of a high rate of
inflation with a progressive tax system and historical cost
accounting of depreciable assets. Second, it was equally

- 9 -

hardly ask hcn<jst taxpayers to pick up this additional
burden. Repealing withholding at this time would also
send a message that the government does not take
seriously the najor effort initiated last year to insure
better compliance with the tax laws in general.
Last year ve were relatively successful in working with
the Congress to achieve our goals of tax reform, but we were
less successful in the area of outlay control. A major portion
of the savings we had proposed in our original budget did not
receive favorable action. This, along with much weaker economic
activity than expected, has left us facing the prospect of large
deficits even as the economy recovers.
The proposals in the FY-1984 Budget are directed at the
crucial task oil restoring noninflationary economic growth.
This requires the preservation of the investment and work
incentives provided by the tax reforms of 1981 and a reduction
in the high deficits and interest rates which lie ahead unless
corrective action is taken to bring government outlays under
control.
The tax reforms already enacted will enable us to make good
progress in rebuilding and modernizing America's plant and equipment as the recovery progresses. Incentives are in place to
encourage saving and investment and to lower the cost of new
machinery and structures. Taxes on American labor are coming
down. These reforms will lead to a more productive, more
competitive United States. The capital formation program will
be financed by higher levels of personal saving, more generous
capital consumption allowances, and higher retained earnings
as profits recover from the current slump. These elements, plus
state and local budget surpluses, form the Nation's savings pool.
Spending reduction will contribute to the recovery, and
the recovery will contribute to deficit reduction. The deficit
will fall as the economy advances, particularly if the recovery
is a vigorous one. A strong recovery with 1-1/3 percent more
real growth per year than in our forecast would bring the
budget to near balance by 1988, provided we also curb the
growth of Federal outlays.
However, if we fail to bring spending under control
and if recovery is slow, we will face a deficit problem which
is larger and longer-lasting than we can afford. In such
case, the deficit could run in the range of 6 to 7 percent of
GNP each year tnrough 1988. Our tax reforms were designed
to raise the private savings share, but still we would face

- 11--

Our Budget Proposals
Spending reduction is crucial. Unfortunately, it has
been difficult to achieve because of the built-in momentum of
Federal spending programs. Consequently, we are proposing
strong medicine. We, like a great many other nations in the
world, have tried ta live beyond our means. Now we must
bring cur spending into line with our productive capacity and
strengthen the private sector which produces our national
wealth.
The deficit reduction program that we propose contains
four basic elements.
o The first is a freeze on 1984 outlays to the extent
possible. Total outlays shall be frozen in real
terms in 1984.- The 6-month freeze on COLAs, as
recommended by the Social Security Commission, is to
be extended to other indexed programs. There will be
a 1-year freeze on pay and retirement of Federal
workers, both civilian and military. Many workers in
the private sector have accepted freezes in their
pay. Federal workers can also make a sacrifice,
which may serve as an example for sectors of the
economy that have not yet recognized the need for
moderation in wage demands. As a final item of
freeze, outlays for a broad range of nonentitlement
progams will be held at 1983 levels.
o The second element of our budgetary program contains
measures to control the so-called "uncontrollable."
Laws have been so written that Federal payments are
automatic to all those declared eligible. We plan a
careful review of all such programs, taking special
care to protect those truly in need.
o The third element is a cutback of $55 billion in
defense outlays from original plans.
o Fourth is a set of proposals involving the revenue
side of the budget, described below.
We are projecting receipts for the current year (fiscal
year 1983) of $597.5 billion. For fiscal year 1984 we expect
receipts to be $659.7 billion. The 1983 figure represents a
decline of $20.3 billion from the fiscal year 1982 total of
$617.8 billion. This decline, and indeed the absence of an
increase in receipts in the range of $50-$70 billion, is
explained in large part by the recession. As I have already
explained, our economic projections throughout the remainder
of the -recovery period are cautious. If real GNP grows at a
faster rate than we have projected, then receipts for the
current fiscal year, as well as for subsequent years, will be
somewha higher than we are now projecting.

- 13 -

a cap on the amount of employer-paid health insurance
premiums that may be excluded from employees' taxable
incomes, and a limited exclusion from tax for earnings on
savings set aside for higher education expenses.
Last, the President has included in his budget message a
contingency tax plan designed as a stand-by insurance program
to insure additional tax revenue if deficits are projected to
exceed two and one-half percent of GNP in 1986.
In addition to these eight specific tax proposals, the
President has directed Treasury to undertake a careful study
of the current income tax structure. We will be searching
for ways to simplify the tax system, to make it fairer, and
to remove tax obstacles to economic growth and expanding
employment.
Let me now discuss some of the details of each of these
proposals.
Social Security. As the President made clear in his
State of the Union Address, the Administration strongly
supports the bipartisan plan recommended by the National
Commission on Social Security Reform. Although this
Committee will be taking up all aspects of the proposal, I
will concentrate today on just the tax aspects of the
bipartisan plan. Three major Social Security tax changes are
proposed.
First, there will be a slight acceleration of the
scheduled increase in the payroll tax rate in 1984 and then
again in 1988 and 1989. For 1984, an income tax credit will
be provided to refund the increase for employees. Second,
beginning in 1984 the self-employment tax rate will be made
conparable to the combined employer-employee tax rate, with
?ne-half of the new self-employment rate being deductible as
a business cost in calculating taxable income. Third, single
taxpayers with more than $20,000 and married couples with
more than $25,000 of adjusted gross income from non-social
security sources will be required to include 5Q...percent of
their Social Security benefits in adjusted gross income
subject to the Federal income tax. Any technical problem in
designing the income tax changes will be worked out within
the spirit of the bipartisan compromise.
Further, beginning in 1984, mandatory coverage will be
extended to all new Federal employees and employees of
nonprofit organizations. Also, State and local governments
currently paticipating in the system will no longer be
allowed to withdraw.
Together with the recommended changes in benefits, these
tax changes will provide the necessary revenues to assure
adequate funding for the Social Security system for many

• - 15 -

For a three-year period beginning in 1983, the Secretary
of Housing and Urban Development may designate up to 75 small
areas as enterprise zones. No more than 25 zones will be
designated each year. For zones designated in 1983, the tax
incentives will become effective January 1, 1984. The
enterprise zone tax incentives are estimated to reduce
receipts by $0.1 billion in 1984, $0.4 billion in 1985, $0.8
billion in 1986.
The Administration also is reintroducing a proposal to
allow taxpayers a credit against their income taxes equal to
50 percent of tuition costs for each child in a private
elementary or secondary school. The provisions of this
proposal are identical to those contained in the Senate
Finance Committee bill of last year except that the income
range over which the credit will phase out is $40,000 $60,000 of adjusted gross income rather than $40,000 $50,000 of adjusted gross income. The maxium credit per
child would be $100 in 1983, $200 in 1984 and $300 in 1985
and thereafter. The Administration supports the strong
anti-discrimination provisions passed by the Senate Finance
Committee last year.
This proposal would be effective for tuition expenses
paid on or after August 1, 1983.
The proposal is estimated
to reduce receipts by $0.2 billion in 1984, $0.5 billion in
1985, and $0.8 billion in 1986.
New Tax Initiatives. There are also three major new tax
initiatives in this year's Budget. First, to help the
long-term unemployed find meaningful jobs in the private
sector, the Administration proposes a new tax credit for
employers who hire individuals after they have exhausted
their regular and extended unemployment insurance benefits.
The tax credit is part of a plan to modify the present
program for Federal Supplemental Compensation (FSC), turning
that program into an effective hiring incentive. Rather than
simply offering additional payments to those already out of
work for a long period, this proposal will allow job seekers
to convert FSC benefits to job vouchers they may offer to
prospective employers as a hiring incentive. When the
employee is hired, these vouchers entitle the employer to a
credit against taxes, including their unemployment insurance
taxes. After six months, the option to receive FSC benefits
will end, but the tax incentives for hiring the long-term
unemployed will continue until April 1984. The value of the
tax credit will be equal to the benefits available under the
FSC program. The proposed tax credit is estimated to reduce
receipts by a negligible amount in 1983, $0.2 billion in
1984, $0.2 billion in 1985, and $0.1 billion in 1986.
The Administration also proposes to limit the amount of
employer-paid health insurance premiums that may be excluded

- 17 -

purpose will be assessed a penalty, except in the case of the
child's death or when the savings are needed to pay for
certain unusual medical expenses incurred by the child.
In order to encourage families to begin saving early for
a child's higher education, deposits may be placed in these
special savings accounts on behalf of any dependent children
under the age of 18. In no case may an account be kept open
for a child over the age of 25.
The following example illustrates how the exclusion from
tax for earnings deposited in these accounts will help
families set aside funds to enroll their children in colleges
or universities of their choice. For a family with about
$30,000 of income and making maximum contributions to
accounts earning 10 percent per annum for two children, the
tax reduction will be about $50 in the first year, $350 in
the sixth year, and about $800 in the tenth year. Over the
full 10 years, an additional $4,800 would be available to
meet the qualified education expenses of the family's
children.
If, in a future year, the taxpayer's adjusted gross
income rises above $40,000, he will be eligible only for
reduced deposit amounts, but the exclusion of income on
previous deposits still will be allowed in full.
This exclusion for earnings on savings set aside for
higher education is proposed to be effective January 1, 1984.
It is estimated to reduce receipts by a negligible amount in
1984, $0.1 billion in 1985 and $0.2 billion in 1986.
Contingency Tax. Finally, the President has proposed a
contingency tax plan designed to raise revenues of about 1
percent of GNP in the event that, after Congress has adopted
the Administration's spending reduction proposals and
structural reforms, there is insufficient economic growth to
reduce the deficit below 2-1/2 percent of GNP. The
contingency tax plan would go into effect on October 1, 1985,
provided that the economy is- growing on July 1, 1985 and the
forecasted deficit for fiscal year 1986 exceeds 2-1/2 percent
of GNP. The contingency tax plan is an insurance program.
It is important to have a plan in place so that everyone •-ill
know that we will not tolerate a string of deficits that
would exceed 2-1/2 percent of GNP. Chart VI shows the effect
on the deficit that the contingency tax would have if it were
implemented. It also shows how- the budget picture would be
altered by a much stronger expansion. The high growth
deficit path shown reflects the assumption that real GNP
increases 1-1/3 percentage points faster than in the official
forecast path, starting with FY-1983. Such growth would be
in line with economic performance from the end of 1960 to
late 1966.

- 19 -

Conclusion
If all of the Administration's budget saving proposals
are enacted, we will reduce the projected deficits by a total
of $580 billion over the next 5 years, or by $2,400 for every
man, woman, and child in the United States. The deficit as a
share of GNP will be down to about 2-1/2 percent in 1988 from
the 6-1/2 percent we expect this year. Total outlays will
grow by only 1.9 percent per year in real terms over the next
5 years, compared with a bloated 3.9 percent real growth
between 1977 and 1981.
We are confident that, the deficit reduction program
contained in this realistic budget is the right program for
the economy at this critical juncture. The most important
signals we can send the economy are spending restraint,
deficit restraint, and a commitment to noninflationary
economic growth throughout the decade. This is the program
we are recommending. Together with the Congress, we can make
it work.

Chart I

INTEREST RATES AND INFLATION

Percent
15-

3-Month Treasury BUI Rate

• Growth from year earllor In Q N P deflator.
Plollud <|iuifl<Mly

Jwwwy 19. IMIAN

unart in

THE PATH OF POSTWAR ECONOMIC RECOVERIES
Real GNP trough = 100

115

110
Average of 5
Postwar Recoveries *

•Jr

4>^+
•*

1975 76 Recovery

105
/
Current Cycle

100

1 1 1 1 1
-5

-A

-2

-1

I
0

I
+2

I
+3

I
+4

I
+5

I I

-!£

Quarters from real GNP trough
* Postwar recoveries excluding the Korean War period
and tho short MVIMI IflRf)fllrecovery.

lanuarv ?S. i<W3 A 2 1 0

Chart V

UNIFIED BUDGET RECEIPTS AS A PERCENT OF GNP *
Percent
25

Fiscal Years 1954-1988
Percent
25

Total Receipts
20

"•^%*^V V
All Other Receipts /

W~"

V Social Insurance Taxes
nl I I II I I I I I I I III I II I I I I I I | ||
1954 56

58 60 62 64 66 68 70 72

74 76 78 80 82

M | |
84 86

88 0

* Receipts include contingency taxes.
January 28. 1983 A215

TREASURY NEWS'"

department of the Treasury • Washington, D.C. • Telephone 566-20
FOR IMMEDIATE RELEASE
February 3, 1983
RESULTS OF AUCTION OF 29-3/4-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF FEBRUARY FINANCING
The Department of the Treasury has accepted $ 3,502 million of $ 6,197
million of tenders received from the public for the 10-3/8% 29-3/4-year Bonds of
2007-2012, auctioned today. The bonds will be issued February 15, 1983, and
mature November 15, 2012.
The range of accepted competitive bids was as follows:
Bids Prices
Lowest yield
Highest yield
Average yield

10.98%
11.05%
11.01%

94.650
94.071
94.401

Tenders at the high yield were allotted 56%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
6,155
$
6,155
New York
5,445,442
3,129,622
Philadelphia
3,060
3,060
Cleveland
4,228
3,348
Richmond
11,162
11,162
Atlanta
21,039
17,049
Chicago
292,579
150,079
St. Louis
55,364
51,144
7
Minneapolis
»239
7,019
Kansas City
9,037
8,037
Dallas
!»119
1.H9
San Francisco
340,329
114,289
Treasury
131
180
Totals
$6,196,933 a/
$3,502,263
a/ Excepting $730 million above the original issue discount yield limit of 11.21%.
The $ 3,502 million of accepted tenders includes $ 655
million of noncompetitive tenders and $ 2,847 million of competitive tenders from the public.
In addition to the $ 3,502 million of tenders accepted in the auction
process, $439 million of tenders were accepted at the average price from Government accounts and Federal Reserve Banks for their own account in exchange
for maturing securities.
SUMMARY RESULTS OF FEBRUARY FINANCING
Through the sale of the three issues offered in the February financing,
the Treasury raised approximately $9.2 billion of new money and refunded
$8.0 billion of securities maturing February 15, 1983. The following table
summarizes the results:
New Issues
9-7/8% 10-7/8% 10-3/8%
Net
Notes
Notes
Bonds
Maturing
New
2/15/86 2/15/93 11/15/07Securities Money
2012
Total
Held
Raised
Public
,
$6.5
$4.5
$3.5
$14.5
$5.8
$8.7
Government
Accounts and Federal Reserve Banks...
1.1
0.6
0.4
2.2
2.2
Foreign Accounts
0.4
(*)
0.4
0.4
TOTAL
$8.0
$5.2
$3.9
$17.1
$8.0
$9.2
* $50 million or less.
Details may not add to total due to rounding.
R-2018

TREASURY NEWS
Deportment of the Treasury • Washington, D.C. • Telephone 566-2041
POP IMMEDIATE RELEASE
Friday, February 4, 1983

CONTACT:

Charley Powers
(202) 566-2041

Treasury Announces First Bank Loan Settlement
With Iran
Chemical Bank of New York has reached a settlement with Bank
Markazi, Iran's Central Bank, and has today received payment on
its non-syndicated loan claims aaainst Iran. The payment was
made from the escrow account (known as "Dollar Account No. 2")
established at the Bank of England with the deposit of $1,418
billion in January 1981, followino the release of the U.S.
nationals held hostage in Iran. From the amount that was paid
out of Dollar Account No. 2, Chemical paid an agreed-upon amount
to Markazi in settlement of Iran's claims for interest on blocked
Iranian deposits held by Chemical.
This is the first settlement reached by a U.S. bank havina
outstanding loan claims against Dollar Account No. 2. Other U.S.
banks are scheduled to meet in London over the next several
months to negotiate their respective claims with Bank Markazi.
Additional bank settlements are expected to follow.
John M. Walker, Jr., Assistant Secretary of the Treasury for
Enforcement and Operations said, "This is a significant milestone
in the implementation of the Algier Accords and in the Iran
claims settlement process. After two years of negotiations, U.S.
banks are now receiving amounts owed to them by Iran. As banks
settle these claims, the claims will be withdrawn from the
Iran-United States Claim Tribunal and the burden on the Tribunal,
which must still deal with numerous non-bank claims, will be
eased considerably."
# # #

F-2019

REASURY MEWS
nr+mori* A l t h A T*o«iciira m Ufnchlnatan. B.C. • T e l G D h O n e 5 6 6 2 0 4 1
FOR USE UPON REQUEST
CONTACT: Marlin Fitzwater
Monday, February 7, 1983
202/566-5252
STATEMENT BY R.T. MCNAMAR
DEPUTY SECRETARY OF THE TREASURY t
Monday, February 7, 1983

Neither the State Department, Treasury, the Federal Reserve,
the National Security Council, nor the White House Office of
Policy Development has had any "preliminary" discussions about
suggestions to create a new international agency in the IMF as
reported in the Wall Street Journal today. The plan reportedly
would have Western governments buy up international bank loans
and replace them with long-term negotiable government notes.
There is no "high-level Administration task force" considering
replacing existing international bank debt with government loans.
The Administration's focus is on securing an accelerated new
quota agreement and modifications of the General Arrangements to
Borrow for the IMF to ensure it has adequate resources to handle
the challenges it faces. While the Reagan Administration
continually monitors the international financial, trade, and
energy situation, there has been no senior level proposal alone*
the lines contained in the Wall Street Journal article.

TREASURY NEWS W.
Department of the Treasury • Washington, D.C. • Telephone 566-204!
For Immediate Release
Contact: Charles Powers
Monday, February 7,
(202) 566-5252
TAX1983
STATUS OF NEW FARM PROGRAM
The Treasury Department announced today that it will support
legislation to avoid any adverse tax consequences to farmers who
participate in the Payment in Kind (PIK) program. This
legislation will treat farmers who receive commodities for
diverting acreage from agricultural use under the PIK program as
if they had grown the commodities themselves. Under current law,
the farmer would realize gross income in the amount of the fair
market value of the commodities received under the PIK program at
the time they are made available to the farmer. The farmer would
take a tax basis in the commodities equal to the amount included
in income.
Under the legislation, which the Administration supports,
the commodities received by the farmer will be excluded from
gross income and will have a zero basis for income tax purposes.
Thus, the farmer will realize income only at the time he sells
the commodities.
Further, for purposes of the special farm
estate tax valuation rules, the farmer will be treated as if he
had actually produced the commodities on the acreage diverted
from agricultural use under the PIK program.
Agriculture Department officials said the legislation is
needed for an effective PIK program. The deadline for farmers to
sign up for the program is March 11. Congress will be asked to
act quickly on the legislation so that farmers are aware of the
tax status prior to the sign-up deadline.

-) - O c

rREASURY NEWS
partment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
CONTACT: Leon Levine
Monday, February 7, 1983
202/634-2179
TREASURY TO HOLD PAPERWORK REDUCTION CONFERENCE
A conference on reducing the paperwork burden imposed on the
public by the Treasury Department and its bureaus was today
announced by Cora P. Beebe, Assistant Secretary of the Treasury
for Administration.
The conference will be held on Thursday, March 17, 1983, at
10:00 a.m. in the Cash Room of the U.S. Treasury Department
located at 15th St., and Pennsylvania Ave., N.W., Washington,
D.C.
Assistant Secretary Beebe, who has been designated by the
Secretary of the Treasury to carry out departmental
responsibiities under the Paperwork Reduction Act of 1980, said
that "a major purpose of the conference is to solicit paperwork
burden reduction ideas and suggestions from business, trade,
professional and consumer groups."
Beebe urged representatives of these groups to "take the
opportunity to broaden the Treasury-private sector dialogue begun
so successfully at the first departmental paperwork burden
conference held on Dec. 2, 1982. The positive response from the
private sector to the first meeting," she added, "encouraged the
Treasury to convene a second conference and to hold a series of
public hearings on paperwork burden around the country later in
the year."
Beebe said that the Internal Revenue Service, Bureau of
Alcohol, Tobacco and Firearms, Customs Service and other Treasury
Bureaus will also report on their current and planned efforts to
reduce paperwork.
Requests to speak and written proposals should be submitted
by March 9, 1983, to U.S. Treasury Department, Office of
Management and Organization, 15th St. and Pennsylvania Ave.,
N.W., Washington, D.C. 20220, Attention: Paperwork Reduction
Conference. Persons who wish to speak should submit outlines of
their remarks. Additional information may be obtained by writing
to the above address or by calling (202)634-2179.

R-2021

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
REMARKS BY
DEPUTY SECRETARY MCNAMAR
BEFORE THE
NATIONAL SAVINGS AND LOAN LEAGUE
MONDAY, FEBRUARY 7, 1983
Your institution's play a significant role in the progress
of our economy and the nation. Since your inception, you have
worked tirelessly to provide a framework for individual savings
and investment.
As the economic recovery continues your role becomes
increasingly more important. Greater consumer spending will lead
us out of recession. And yours is the institution where people
go to save and where capital is available for people to buy a
house or a car — and sales at both are up. I'm sure you welcome
this news just as much as we do.
Thomas Jefferson once said "Responsibility is a tremendous
engine in a free government." Well this is as true now as it was
in 1791 when Jefferson delivered that message to Congress.
This Administration understands and accepts responsibility.
It also understands that with responsibility comes the
expectation of change and progress.
This is what I want to talk with you about today. The
change and progress we has made in implementing a program to
permanently strengthen our economy.
The Economy
The development of a sound fiscal and monetary policy was
the central objective of the Reagan Administration when it came
to office two years ago. For too long a time, Americans had
watched the share of GNP accounted for by Federal spending and
taxes move upward. As the government siphoned off resources from
the private sector and the money supply expanded, economic
activity stagnated and inflation soared.
In February 1980 the Administration put before congress a
four point plan to revitalize the economy. Our program mandated
that:
First, irresponsible and inflationary spending habits were
to be stopped.
Second, excessive taxing which had suffocated incentive and'
productivity was to be cut.
R-2022

-2Third, the irregular monetary habits of the past were to be
replaced by consistent noninflationary practices.
And fourth, the regulatory morass which chained the
productive capacities of the private sector was to be cut and
disposed of.
The plan called for progress — progress born through
change.
During 1981 and 1982 we implemented major portions of this
plan.
The task now is to encourage the renewal of economic growth
to reduce unemployment and provide productive job opportunities
in the private sector. In so doing we must not repeat the errors
of the past and return to an inflationary economy.
The current domestic situation is complicated by the
existence of unacceptably large Federal budget deficits and the
threat of even larger ones in years to come. These budget
deficits will have to be reduced, since their persistence would
inevitably lead to very adverse consequences for the U.S. economy
and its financial markets. And if fear of failure to reduce the
deficits will result in a rekindling of inflationary expectations
and higher interest rates.
Many of the economic difficulties we face at home are also
faced by countries abroad. The entire international economy is
experiencing a severe slowdown, complicated by the special
debt-servicing problems of a number of countries. My discussion
today deals primarily with the U.S. domestic economy, but it is
obvious that the domestic and international situations are
closely linked.
It is important to recognize that current difficulties are
the culmination of a long period of deteriorating economic
performance in this country. It follows that our policies must
aim at lasting long-run solutions. There are no quick cures.
The President noted in his State of the Union Address to
Congress, "The problems we inherited were far worse than most
inside and out of Government had expected; the recession was
deeper than most inside and out of Government had predicted.
Curing those problems has taken more time, and a higher toll than
any of us wanted."
Approach of Administration
The Administration's primary goals of economic recovery have
not changed. The fundamental restructuring of the economy still
includes:
o

bringing inflation under control;

-3o

shifting the composition of activity away from
government spending toward more productive endeavors in
the private sector;

o providing an environment which would reward innovation,
work effort, saving and investment, and in which
free-market forces could operate effectively.
Current State of the Economy
The economy now stands poised for recovery. In fact, the
recovery may well already be underway at this moment. It has
been much longer in coming than we, or for that matter nearly all
forecasters, had expected.
The delay in recovery occurred primarily because of the
persistence of high interest rates and developments in the
international sphere. On the international front, the economies
of our leading trading partners continued to weaken. This had an
adverse impact on economic activity here. These forces, combined
with a general hesitancy on the part of the consumer, led to
another round of inventory cutting in the second half of 1982 and
delayed the expected turnaround of the economy.
There are now clear signals that the economy is turning
around and that the recession will soon be behind us.
Encouraging signs include:
o The index of leading indicators has risen for eight out
of the last nine months.
o Housing is in the midst of a rapid recovery.
o Business trimmed inventories sharply in the final
quarter of last year. Historically, a cleanout of
inventories typically has been followed by a shift back
to higher rates of production.
o Durable goods spending
o Retail sales have begun to climb.
o Total industrial production stabilized in December and
appears poised to turn upward.
o The index of average hourly earnings of production
workers in the private nonfarm economy rose at a 5.1
percent annual rate in January from 6 months earlier and
was up 5.4 percent from 12 months earlier.
o The unemployment rate fell to 10.4 percent (representing
11.4 million workers) in January from 10.8 percent (12
million) in December.

-4Policies for the Recovery
In setting policy for the remainder of the 1980's, we must
recognize what we must not do. We no longer have the freedom of
action to revert back to the overly stimulative monetary and
fiscal policies pursued at times in the past, for these would
surely lead to a resurgence of inflationary pressures and a new
round of rising interest rates. Further, we must not reverse the
fundamental tax restructuring put in place in 1981, for this was
designed to provide the noninflationary incentives without which
the private sector would continue to wither.
Fiscal Year 1984 Budget
The President's Fiscal Year 1984 Budget contains these
objectives. It carries a stern message that spending and
deficits must be reduced.
The President, as he outlined in his address to Congress,
proposed his budget based on four principles. I quote:
"It must be bipartisan. Conquering the deficits and putting
the Government's house in order will require the best
efforts of all of us.
"It must be fair. Just as all will share in the benefits
that will come from recovery, all should share fairly in the
burden of transition.
"It must be prudent. The strength of our national defense
must be restored so that we can pursue prosperity in peace
and freedom while maintaining our commitment to the truly
needy.
"Finally, it must be realistic. We cannot rely on hope
alone."
The fiscal 1984 budget of $848.5 billion is based on four
avenues for deficit reduction. First, a comprehensive Federal
spending freeze which will allow 1984 outlays to grow at the
predicted rate of inflation. Second, a restructuring of programs
in health care, federal retirement and welfare. Third, a
reduction in defense spending of $55 billion over the next 5
years. Fourth, a standby deficit reduction program of tax
increases to become effective in FY 1986 if — the economy is not
in recession, the proposed freezes have been enacted, and the
deficit is greater than 2.5 percent of GNP.
We are projecting receipts for the current year (fiscal year
1983) of $597.5 billion. For fiscal year 1984 we expect receipts
to be $659.7 billion. The 1983 figure represents a decline of
$20.3 billion from the fiscal year 1982 total of $617.8 billion.
This decline, and indeed the absence of an increase in receipts
in the range of $50-$70 billion, is explained in large part by

-5the recession.
As I have already explained, our economic projections
throughout the remainder of the recovery period are cautious. If
real GNP grows at a faster rate than we have projected, then
receipts for the current fiscal year as well as for subsequent
years will be somewhat higher than we are now projecting.
In 1984, when the recovery will be underway, receipts are
expected to rise to $659.7 billion, an increase over 1983 of
$62.2 billion, representing an annual growth of 10.4 percent.
This will occur as profit margins recover and other income shares
continue to grow.
For the other years in our forecast period (1985-1988) we
project an average annual growth in receipts of about 10 percent,
without contingency taxes (and 11 percent per year including
contingency taxes).
All of these projections assume the legislative proposals
included in the President's Fiscal Year 1984 Budget are enacted.
Receipts under existing legislation will also grow, but at a
somewhat lower 9-1/2 percent annual average rate.
It is noteworthy that individual income tax receipts will
continue to rise over the 1985-1988 period, but only as real
income rises. Beginning in 1985, we will no longer collect
hidden taxes in the form of bracket creep caused by inflation.
Without the indexation provision of ERTA, individuals would pay
$6 billion more in taxes during fiscal year 1985 alone, and about
$100 billion more through 1988.
All of these efforts are designed to reduce deficits from
nearly 7 percent of GNP today to 2.4 percent by 1988, putting the
budget on a path consistent with sustained economic recovery.
Deficits
Spending reductions are really the key to the President's
program.
Spending cuts will contribute to the recovery, and the
recovery will contribute to deficit reduction. The deficit will
fall as the economy advances, particularly if the recovery is a
vigorous one. A strong recovery with 1-1/3 percent more real
growth per year than in our forecast would bring the budget to
near balance by 1988, provided we also curb the growth of Federal
outlays.
However, if we fail to bring spending under control and if
recovery is slow, we will face a deficit problem which is larger
and longer-lasting than we can afford. In such case, the deficit
could run in the range of 6 to 7 percent of GNP each year through
1988. Our tax cuts in 1981 were designed to raise the private

-6savings pool. But still we would face the possibility of
draining off a large part of the pool of savings, if deficits
remain high over the next several years. Interest rates would
remain high, and the recovery could stall.
Preferably, all of the necessary narrowing of the deficit
would come from the outlay side. Total Federal spending
represents the amount of resources absorbed by the government at
the expense of the private sector. This spending can be financed
by both taxes and borrowing, which in either case amounts to a
drain on private resources. Only through spending reduction will
the credit market find itself in a more favorable position.
This Administration is determined that deficits of such
magnitudes will not come to pass. We came to office with a
program of boosting the rate of capital investment in order to
place the economy on a faster growth track, and we will not allow
ourselves to be diverted from that goal. We will take whatever
measures are necessary to narrow the deficit to more acceptable
levels, which is at least 2 1/2 percent by 1988.
The President proposes a contingency tax plan to raise
revenues of about 1 percent of GNP in the event that after
Congress has adopted his spending reduction proposals, there is
insufficient economic growth to reduce the deficit below this
2-1/2 percent levels the economy is out of recession, and the
proposed freezes on spending have been enacted.
The contingency tax plan would contain two elements, each
raising about half of the revenues that may be required.
One would be a temporary surcharge of 5 percent on
individuals and corporations. The other element would be a
temporary excise tax on domestically produced and imported oil
designed to raise revenues of about $5 per barrel. This plan
would raise about $146 billion over the 36-month period beginning
October 1, 1985.
It is essential to remember that the contingency tax plan is
only an insurance plan — an insurance plan similar to what we
all have. For instance, while we don't expect our house to burn
down we still buy insurance in the event that it does.
Indexing
Let me touch on two other important considerations related
to the budget: repeal of the third year of the tax cuts and
indexing.
The 1983 tax cut and tax indexing will be needed to offset
bracket creep and of 10 percent on July 1 the increases in social
security taxes scheduled to take effect in the future. These
measures will greatly improve the competitive standing of
American capital and labor in the world as economic recovery

-7proceeds.
Those who would repeal indexing and the 10 percent tax cut
due on July 1, 1983, inflict a painful injustice on the working
men and women of this country. In 1985, repeal of both of these
would mean a 24.3 percent tax increase for those earning less
than $10,000 and only a 3.1 percent tax increase for those
earning more than $200,000. Seventy-four percent of the benefits
of the third year tax cut and indexing go to taxpayers with
incomes below $50,000. As a total, repeal would result in a
massive $273.2 bilion tax increase between fiscal 1983 and 1988.
Under the full three-year income tax cut plus indexing, the
taxpayer would experience by 1984 a decrease in average marginal
tax rate to just a shade below those of 1979. The second and
third years of the tax cut offset the bracket creep of 1980-1984.
Without indexing, however, even the third year of the tax cut
fails to provide permanent tax relief. Inflation and bracket
creep would repeal the third year of the tax cut by 1985 and the
entire tax cut (measured against 1980 tax rates) by 1987. All
improvement in incentives would be lost.
As the President has said, it makes no sense to raise taxes
just as we are coming out of recession. Nor does it make any
sense to so unfairly place the tax burden on the backs of low and
middle income families. We need more economic growth in this
country that will put people back to work and increase our tax
base. Repeal is a bad idea at the wrong time and place.
We are confident that our economic program is the right one
for the economy at this critical juncture. The most important
signals we can send the economy are spending restraint, deficit
restraint, and a commitment to non-inflationary economic growth
throughout the decade. This is the program we have devised.
Together with the Congress, we can make it work.
I now want to say a few words about the United States role
in the world economy.
The major strains in the international financial system
which emerged in 1982 had their roots in the rising inflationary
pressures in the late 1960's, the twin oil shocks of the 1970's
and policy responses that avoided adjustment to new economic
realities. Many governments sought to maintain real incomes and
employment in uncompetitive industries by subsidies rather than
pursue policies to counter inflationary pressures and reallocate
resources to reflect new competitive conditions. The results of
these policies were higher inflation, slower real economic
growth, and large balance of payments deficits an external
financing requirements.
The bulk of the external financing was provided through
private markets, largely commercial banks, and was heavily
concentrated on the developing countries. During 1982, however,

-8financial markets began to recognize that the inflationary
environment of the 1970's was changing and that inflationary
expectations were undergoing a dramatic shift. Therefore, levels
of debt which had previously been considered manageable are now
viewed as high in real terms and large in the face of weak export
prices and slow world economic growth.
The nature of these difficulties has been known for some
time. However, with our own country just beginning to come out
of a recession, there is a very natural tendency to feel that the
debts of other countries are their debts and not ours.
Because of the pivotal role international trade plays in the
U.S. economy this attitude is unrealistic. For instance, this
year, if we were to pull back sharply in the absence of any
interest or action on the part of the major industrial countries,
new lending could begin to dry up. Trade would consequently have
to be reduced to match the new lower level of external financing.
For the United States, growth would be about 1 percentage point
less than we're expecting, and our trade deficit would grow very
rapidly due to the loss of $12 billion or so in exports to the
developing world. Lost jobs in vital export sectors would
compound our recovery efforts.
Assisting nations, including the United States, to make
essential financial adjustment is part of the role of the
International Monetary Fund. The IMF was founded to promote a
sound financial framework for the world economy and is at the
center of international efforts to deal with current economic
problems.
The IMF is a revolving fund to which each member is
obligated to provide its currency to the IMF to finance drawings
by other countries facing balance of payments needs; each country
in turn has a right to draw upon the IMF in case of balance of
payments need.
The re-emergence of large balance of payments financing
needs and growing debt problems has led to a sharp resurgence in
requests for IMF financing.
Based on a U.S. initiative, agreement has been reached in
principle by the major industrialized nations to establish a
contingency borrowing arrangement which could be used to deal
with threats to the stability of the system. The existing
General Arrangement to Borrow (GAB) in the IMF is being increased
to about (the equivalent of) $19 billion. In addition we are
also negotiating an increase in IMF quotas in the range of 40-50%
which would bring the total quotas up to about the (equivalent
of) $93 to $100 billion. The U.S. share of the increase, for
both the GAB and quotas, would be $7.5 - $8.0 billion.
The initiatives will be further debated and decided on at
the February 10th and 11th Interim Committee meeting in

-9Washington, D.C. At this meeting, the United States will take a
lead role in developing solutions for the IMF to deal with the
short-term and long-term international financial problems.
The soundness and prosperity of each of the national
economies is inextricably linked. It is not possible to get
growth at home unless we have a sound world economy. In
achieving this goal we will need your help and the assistance of
all financial institutions in the country.

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
'
February 7, 1983
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,003 million of 13-week bills and for $6,003 million of
26-week bills, both to be issued on February 10, 1983, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing
May 12, 1983
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing August 11, 1983
Discount Investment
Price
Rate
Rate 1/

97.928 8.197%
8.49%
97.908
8.276%
8.57%
97.914
8.252%
8.55%

95.793 8.322% 8.81%
95.776
8.355%
8.84%
95.781
8.345%2/
8.83%

Tenders at the low price for the 13-week bills were allotted 67%.
Tenders at the low price for the 26-week bills were allotted 90%.

TENDERS RE CEIVED AND ACC;EPTED
(In Thousands)
Received
Received
Accepted
:
65,230
$
46,605 $
46,605
'> $
10,359,255
4,633,805
s 13,348,730
31,830
31,830
:
20,510
48,665
77,445
52,445
62,800
51,800
92,955
53,425
53,805
53,805
908,585
1,029,240
529,480
42,240
45,325
54,825
40,235
40,245
28,925
:
39,460
49,810
49,610
:
19,585
25,995
25,995
:
798,580
203,570
637,570
249,650
:
262,165
249,650

Accepted
$
28,780
5,029,285
19,510
23,665
42,455
33,125
258,585
35,240
10,735
39,430
14,585
205,580
262,165

$12,719,075 $ 6,002,845

s $15,740,365

$6,003,140

$10,515,060 $3 ,798,830
976,090
976,090
$11,491,150 $4 ,774,920

: $13,409,520
:
728,145
: $14,137,665

$3,672,295
728,145
$4,400,440

1,030,025

1,000,000

197,900

602,700

: $15,740,365

$6,003,140

$12,719,075 $6 ,002,845

U Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
on money market certificates is 8.110%.
R-2023

TREASURY NEWS
Department of the Treasury • Washington, D.C. •Telephone 566-2041
EMBARGOED FOR RELEASE
AFTER 3:30 P.M.
Tuesday, February 8, 1983

CONTACT:
^LAS....

Marlin Fitzwater
(202) 566-5252

REMARKS BY
DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE CREDIT UNION NATIONAL ASSOCIATION
FEBRUARY 8, 1983

It's a special pleasure to be with you here this morning for
several reasons. To begin with, I had the-opportunity last
January to speak with many of you at the National Association of
Federal Credit Unions annual meeting. At that time, the
Administration had a lot of far-reaching plans for deregulating
the financial services industry. That was just twelve months
ago, and as you all know, since that time major progress has been
made in getting the regulatory burden permanently off your backs.
Another reason I've looked forward to this event is that
it's not a budget hearing. That is not to say I don't like going
up on Capitol Hill to discuss the goals of the Administration. I
actually enjoy it very much. I also enjoy going to the dentist
and banging into walls I I've spent about 15 hours answering
Congressional questions so my forebearance is running almost as
thin as my jokes.
For instance, at a recent hearing the room was packed with
lobbyists, congressional aides, spectators and the media. There
were also quite a few Congressmen. The noise level was high, so
before my testimony began, I asked the Congressmen if they could
hear me. Immediately a Congressman in the back stood up and
shouted "no". With that a Member in the front jumped to his
feet, turned to his colleague and said, "Please take my place,
I've already heard his opening remarks."
It really is a pleasure to be here today among members of a
financial industry that has achieved so much during the last 75
years. Your success is nothing to be taken lightly. After
spending thirty-five years on Wall Street, I know what it takes
to survive in this industry.
In an environment where survival of the most resourceful
dictates, your progress has been outstanding.
Since the first credit union was founded in New Hampshire in
1909, your industry has grown to more than 21,000 credit unions
nationwide. From the first deposit of ten cents, your industry
now has over $75 billion in total assets. You service more than
R-2024

43 million people, meaning that today nearly one person in five
is a member of a U.S. credit union.
Yet of even greater significance is that your industry is
based on a simple idea: the idea that people working together
and pooling their savings can create a resource that is otherwise
not available to them.
Yours is a story of progress. And this is the theme I want
to touch on today regarding the financial industry and the
economy.
When President Reagan came to Washington with a plan to
limit the size and authority of the government, the pundits had
already arrived. With pencils and wit sharpened, they told the
President that his plan was for dreamers.
They likened the task of harnessing the federal beast to
Ahab's slaying of the great white whale. And they predicted for
the President a similar fate.
However, this Administration came to Washington with a
mandate from the people, not the pundits. We put together a
total economic program, with deregulation as a major component.
And it was based on tenets unheard of in the last 50 years.
First, irresponsible and inflationary spending habits were
to be stopped.
Second, excessive taxing which had suffocated incentive and
productivity was to be cut.
Third, the irregular monetary habits of the past were to be
replaced by consistent non-inflationary practices.
And fourth, the regulatory morass which chained the
productive capacities of the private sector was to be cut and
disposed of.
The plan called for progress — progress born through
change. And nowhere was change and progress more necessary than
in the financial industry.
As this audience knows, one of the basic laws governing the
financial industry, the Glass Steagall Act, was rolled out of
Congress at the same time Henry Ford revolutionized the auto
industry with the Model A. Both were great accomplishments. But
today we wouldn't expect a Model A to compete at Indy. Likewise
we shouldn't expect the laws of the 20's to regulate the
financial industry.
The auto industry has come a long way since the Model A.
It's a rich history of progress and growth. Well, the banking
industry has also come a long way, but we're only halfway to

-3where we should be.
We realize this now. But before we decide where and how
fast we should go to make up for lost time, we need to understand
how we got here.
After the money-runs and bank failures of the 1930*s, the
revelation of unrestrained and speculative banking practices led
to the need for major reform.
In Congress the banking industry was labeled as more
"dangerous than a standing army." And in the streets, bankers
were commonly referred to "as a seething den of vipers."
Franklin Delano Roosevelt typified the popular sentiment of
the period by saying, "Control is necessary. For every man has a
right to his own property; which means a right to be assured, to
the fullest extent attainable, of the safety of his savings."
The climate demanded change. And the national mood called
for financial control and security which was embodied in the
Glass-Steagall Act, the Banking Act of 1935, the Securities Acts
of 1933 and 1934, and amendments to the Federal Reserve Act.
These laws were far-reaching in their restructuring of the
banking system. They created a new homogeneity among banks and
the nation. Where banks were once considered the villians of
society, they soon became the foundation for industrial and
business recovery.
Banking was now safer and sounder with less financial risk.
Regulation had created rock-solid confidence in the industry. As
a result, people in the 60s, and 70s became more concerned with
convenience, services, and interest rates than the financial
health of the institution.
During this period our business and industrial sector
underwent explosive growth and change. And in an inflationary
economy, investors looked for new ways to make their money work
and their assets grow. Consequently, aided by computers,
telecommunications and minimal regulation, new non-bank saving
alternatives worked their way into the system. Money market
mutual funds quickly become a top-shelf investment choice. And
while banks and credit unions stood by helplessly restrained,
their non-bank competitors gathered in billions of dollars from
individual savers.
My point is that while financial markets were radically
changing, the regulatory regimen imposed on some segments of the
financial industry allowed them to change hardly at all. The
first legislation to free such institutions was the Depository
Institutions Deregulation and Monetary Control Act of 1980.
Then came passage of the Garn-St Germain Depository

-4Institution Act of 1982, supported heartily by this
Administration, which chipped away some more of the regulatory
wall blocking the ability of depository institutions, especially
thrift institutions, to compete in the financial services
industry.
This bill expands the service powers of thrift institutions,
gives the Federal insurance agencies greater flexibility in
dealing with emergency mergers and acquisitions, and provides a
capital assistance program to support troubled thrift
institutions.
It gives credit unions authority to invest in state and
local government obligations, and makes numerous other changes
providing greater operating flexibility for federal credit
unions.
But before the Garn-St Germain Act got its commission to
fly, the Depository Institutions Deregulation Committee (DIDC)
was in the air battling the forces of regulation.
Since I have been Chairman of the Committee the DIDC has:
adopted a schedule to phase out interest rate ceilings
on deposits in federally insured commercial banks,
savings and loan associations and mutual savings banks;
— lifted the cap on the 2-1/2 year small savers
certificates;
— developed a new IRA and Keogh account with no federally
set interest rate ceiling, and;
— authorized two short-term deposit instruments.
The DIDC's most recent action has been implementing the
landmark New Money Market Deposit Accounts and more recently the
Super NOW Accounts. More than $213 billion flowed into the first
of these accounts in the first few weeks of its existence, the
greatest change in savings habits the country has ever seen. And
the Super NOWs have attracted an additional $17 billion. Thrift
institutions and savings can now battle with the best and the
biggest.
Because the credit union movement is based on the philosophy
of service, you've set an example for the entire thrift industry.
You've been aggressive in offering the new investment
instruments. And consequently, you have been very competitive
in the market.
Under the leadership of Chairman Callahan, you've carried
some water for the entire deregulatory movement. And we at the
Treasury notice and appreciate that contribution. Significant
gains have been made in deregulating interest rates. Yet this is

-5only the beginning in restoring health to the industry.
So far we've only replaced some parts of the financial
machine. But this industry is like a locomotive — and all the
parts must work together smoothly and efficiently for it to run
at full power. We still need an overall framework for the
management and administration of the new powers in Garn-St
Germain, and those yet to come.
Right now, the law is being reshaped in an uncertain
case-by-case basis. And like using gum to stop the leak in a
pipe, something's bound to burst. Not only do the financial
industries differ as to what is legal and rightfully theirs, but
the regulatory agencies can't agree on what is permissible
competition.
As you know, last year the Administration sent a proposal to
the 97th Congress which would have allowed bank holding companies
through subsidiaries to offer a broad range of services. The
legislation sought to enhance the competitive ability of
traditional depository institutions. Although it was not voted
on in the 97th Congress, with industry support — it's designed
to help them — we plan to reintroduce the legislation this year.
At the same time, we all recognize the importance of keeping
soundness in the financial services industry. So the goal of
that legislation is to define a system in which financial
institutions can take banking risks and other financial or
commercial risks, but through bank holding companies.
Thus, a
broader range of services can be offered while insuring the
soundness of the system.
Getting this kind of legislation passed into law will not be
easy. We'll need your help and the support of the entire
financial industry.
Deregulation has one other dimension that I want to mention
in closing.
Cutting unnecessary regulation is like pulling up old roots.
Even though the root looks dead, it is sometimes very difficult
to extract. And typically when it's finally pulled out, you
discover it's five times longer than you thought it would be.
Well, this has been the problem with pruning the financial
regulatory system. There are just a lot more regulations than we
originally expected. We've pulled out a lot of roots, but
they're only surface roots. So, in order to bring health to the
6ystem, we've got to go deeper and continue extracting and
pruning.
Over the past half century, the Federal government has
developed an overly complex apparatus for regulating our

-6financial institutions. For example, the commercial banking
industry alone is subject to three separate Federal regulatory
agencies. We also have three separate agencies providing deposit
insurance for depository institutions. The result has been
duplication, overlapping of duties, and fragmented authority.
After years of regulatory inefficiency, we need to seriously
examine proposals for streamlining the apparatus. That's exactly
what we're doing in the Vice President's Task Group on Regulation
of Financial Services; he chairs the group, and I am the
Vice-Chairman.
The Task Group has several major goals. First, we want to
insure that Federal regulation of different kinds of financial
institutions is consistent and equitable: no category of
institutions should enjoy any kind of preferential treatment just
because it happens to be subject to one regulatory agency rather
than another. Second, we want to insure coherent and effective
Federal responses to certain policy problems which now tend to
get entangled in the conflicting or overlapping jurisdictions of
the various agencies. I am thinking, for example, of the
regulation of bank holding companies, and the handling of failing
institutions. Finally, we want to see what we can do to reduce
the burdens on financial institutions of redundant or unnecessary
reporting requirements and other regulations which are associated
with the existing organizational structure.
On January 11 this task force — and Chairman Callahan is a
member — held its first meeting. The results were encouraging.
We set ourselves a timetable of nine months to examine all
aspects of the problem and to produce specific legislative
proposals.
Doing all of that in nine months in quite a challenge. But
it's a task long overdue, and we've got strong support in the
agencies and from the heads of all the depository institution
regulators.
Deregulation and reform is no longer a dream of the future.
It is a reality of the present. The response to unlimited
interest rate accounts and thrift institution money market
accounts is proof that the public wants more from its financial
institutions.
The Administration's commitment to deregulation embraces
this public demand. And as we develop legislation to meet the
expanded needs of the country, we will be guided by one major
principle: the best interests of the consumer.
Perhaps that phrase, "the best interests of the consumer,"
is a good place to mention withholding of taxes on dividends and
interest. I realize that the Credit Union National Association
is urging repeal of this important tax compliance measure. I
also realize that at least one Administration official has

-7suggested that we might change our position on this issue.
he's wrong.

Well

The Administration remains committed to the withholding of
dividend and interest income. And I am frankly appalled that
some financial institutions have used questionable scare tactics
to suggest that this is a new tax, or that retired people will
lose their savings, or that banks will lose their shirts in
performing this function.
My response is: You won't lose your shirts unless you lose
your heads.
One notice reached new heights of demagoguery by saying that
old people would lose — and I quote — "money that might
otherwise go to pay for food, housing and medical bills."
Someone should be ashamed. There are no new taxes involved and
over 85 percent of retired people are exempt.
Another bank ad suggests that to get an exemption you have
to reveal your financial condition. Nonsense. You need only
declare whether or not your taxes are above or below a certain
level. Both you, the bank and the IRS already know far more thar
that about your customers.
Another ad suggests that bankers don't want to be tax
collectors. Nonsense. They already withhold taxes on employee
wages. And so does every other company in America.
Even
distillers and tobacco companies collect taxes and still make a
profit.
Another ad says the exemption form is too hard to fill out.
Nonsense. It requires a name, address, social security number
and a check mark in the exemption box. It's no more difficult
than filling out a deposit slip.
Indeed, we let the banks design their own exemption form so
they can make it as easy as they want.
And finally, if we do lose withholding we would have to mak(
up the $26 billion in tax revenues we would collect through 1988
with some new tax that really would affect consumers or business
In any case, financial institutions and the government
a lot of important issues to deal with in the next few
issues that will improve your profits and your ability
compete. It's time we focused on these issues and got
the important business of deregulation.
Thank you.

have
months —
to
on with

TREASURY NEWS
lepartment of the Treasury • Washington, D.C. • Telephone 566-2041
Remarks by
The Honorable Roy G. Hale
Treasurer of the United States (Acting)
First Striking of the Olympic Coin
at the San Francisco Mint
February 10, 1983
Good morning everyone. And thank you, Donna, for that
kind introduction. It is my pleasure to be here to represent
Angela M. Buchanan, the Treasurer of the United States, and
say a few words on behalf of the Olympic Coin Program.
We are particularly pleased to have such a large turnout
for this exciting moment. Today, as you know, we are
gathered here to strike the first of three precious metal
coins to benefit the United States Olympic movement and
amateur sports in this country. Striking this 1983 silver
coin represents a significant step in an honorable effort
that betfan some 20 months ago when Congressman Frank
Annunzio, Chairman of the House Subcommittee on Consumer
Affairs and Coinage, sponsored this country's first Olympic
Coin bill. The overall.goal of this legislation is to
provide financial support for competitive amateur sports.
The legislation is thoughtfully written and designed so
that — by establishing a surcharge on each coin sold —
funds will be provided for the Olympic Program at no cost to
the United States Government or to the American taxpayer.
Fifty percent of the surcharges are earmarked for the United
States Olympic Committee to train United States athletes, to
support local or community amateur athletic programs and to
erect facilities for the training of such athletes. The
remaining 50 percent surcharge will go to the Los Angeles
Olympic Organizing Committee to stage and promote the 1984
games in Los Angeles, California, July 28 to August 12, 1984.
There has been a rapid chain of events since President
Reagan signed into luv last July this Nation's first Olympic
Commemorative Coin Act:
* October 15 — three months after the new law was on
the books, the Treasury announced the kickoff of
the new program. This included the selection of 6
preliminary designs for the obverse and reverse
R-202S
sides of the coins, and the beginning of coin
sales.

- 2 -

Forty-five days
announced gross
million and the
million for the

later — on November 30 — Treasury
sales of 630,000 coins for $48
first surcharge check of $10
Olympic committees.

* By December 23, gross sales totaled over $58
million with an additional $3.3 million for
surcharges.
* As of January 31, gross sales had climbed to
829,000 coins totalling $62 million. As a result,
we have transferred a total of $14.3 million in
surcharges to the two Olympic Committees.
Looking ahead to February 28, proposals are due in our
office from firms interested in marketing Olympic coins
internationally. By April 1 of this year, the marketing
program for Olympic coins should be in full swing in this
country and around the world.
We are pleased so far with the public's response to our
initial offering of Olympic coins. Now, with the striking of
the first coin and the beginning of a major marketing
program, we are really getting this program moving. Today is
truly a momentous occasion for the Olympic movement in this
country.
Thank you for coming and in closing I would just like to
quote from our nationwide public advertisement this week:
"C'mon America, Invest in Your Team."
Thank you.
o 0 o

TREASURY NEWS
tepartment of the Treasury • Washington, D.C. • Telephone 566-2041
February 8, 1983
FACT SHEET
United States Joins African Development Bank
President Reagan today signed the necessary documentation
accepting United States membership in the African Development
Bank.
In 1972, non-regional countries joined Bank members in
establishing the African Development Fund to provide concessional
financing to the poorest African countries. In 1979, the
Governors of the Bank extended the offer of membership to the
United States and other non-regional countries.
In 1981, Congress authorized both U.S. membership in the
African Development Bank and a U.S. subscription of $359.7
million of Bank capital. Also in 1981, the first installment
($17.99 million of paid-in capital and $53.96 million of callable
capital) was enacted by the Congress. Four additional
installments with identical amounts for paid-in and callable
capital subscriptions will be sought in the FY 1984-1987 period.
United States membership in the African Development Bank
reflects this country's growing economic and security interests
in this important region, and our desire to cooperate in a
constructive multilateral effort to help the countries of Africa
overcome their very serious development problems.
Background on the African Development Bank
The African Development Bank, with headquarters in Abidjan
in the Ivory Coast, was established in 1963, by 30 African
countries to make loans on near-market terms to promote economic
and social development in member countries individually and
through regional cooperation. Under the terms of the original
Articles of Agreement, membership was restricted to independent
African countries. There are currently 50 African member
countries. In 1972, Bank members joined with non-regional
countries to establish the African Development Fund to provide
financing on concessional terms to the poorest African countries.
The United States became a member of the Fund in 1976.
The Bank finances its loan operations primarily from the
paid-in capital subscriptions of member countries and funds
raised through borrowings or guarantees in international capital
markets. Lending operations totaled $1,663 million as of
year-end 1981, with lending concentrated in public utilities (32
percent), industry and development banks (25 percent), transport
(24 percent:) and agriculture (17 percent).

Although Bank resources have increased significantly, the
absence of industrial countries severely limited the Bank's
access to world capital markets. In May 1979, the Governors of
the African Development Bank agreed, subject to the necessary
ratification by member governments, to invite non-African
countries to join the Bank. Twenty-one non-regional countries
subsequently agreed to subscribe a total of $2.1 billion to the
Bank, 25 percent in paid-in capital and 75 percent in callable
capital. The United States share of the non-regional
subscription is 17.04 percent, i.e., $89.93 million in paid-in
capital and $269.80 million in callable capital.

TREASURY NEWS

epartment of the Treasury • Washington, D.C. • Telephone 566-204
FOR RELEASE AT 4:00 P.M. February 8, 1983
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $12,400 million, to be issued February 17, 1983.
This offering will provide $1,225 million of new cash for the
Treasury, as t,he maturing bills are outstanding in the amount
of $11,169 million, including $1,144 million currently heid by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,918 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 $6,200
million , representing an additional amount of bills dated
May 20, 1982,
and to mature May 19, 1983
(CUSIP
No. 912794 CC 6 ) , currently outstanding in the amount of $11,212
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $6,200 million, to be dated
February 17, 1983,
and to mature August 18, 1983
(CUSIP
No. 912794 DM 3 ) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing February 17, 1983.
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 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 $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.

R-2026

- 2 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,
February 14, 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.
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
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 .

- 3 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
on February 17, 1983, in cash or other immediately-available funds
or in Treasury bills maturing February 17, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
TR-ASL
IH:February 9, 1983
TREASURY TO AUCTION $7,500 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $7,500 million
of 2-year notes to refund $4,939 million of 2-year notes maturing
February 28, 1983, and to raise $2,561 million new cash. The
$4,939 million of maturing 2-year notes are those held by the
public, including $768 million currently held by Federal Reserve
Banks as agents for foreign and international monetary authorities.
The $7,500 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks as agents for foreign
and international monetary authorities (including the $768 million
of maturing securities) will be added to that amount.
In addition to the public holdings, Government accounts and
Federal Reserve Banks, for their own accounts, hold $499 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.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment

R-2027

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED FEBRUARY 28, 1983
February 9, 1983
Amount Offered:
:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date
Call date
Interest rate
Investment yield
Premium or discount
Interest payment dates

Minimum denomination available
Terms of Sale:
Method of sale
Competitive tenders

Noncompetitive tenders........
Accrued interest payable
by investor
Payment by non-institutional
investors
Deposit guarantee by
designated institutions
*
Key Dates:
Deadline for receipt of tenders
Settlement date (final payment
due from institutions)
a) cash or Federal funds
b) readily collectible check

$7,500 million
2-year notes
Series R-1985
(CUSIP No. 912827 PE 6)
February 28 , 1985
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
August 31, 1983; February 29,
1984; August 31, 1984; and
February 28, 1985
$5,000
Yield Auction
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,000
. .None
Full payment to be
submitted with tender
Acceptable
Wednesday, February 16, 1983,
by 1;30 p.m., EST

Monday, February 28, 1983
Thursday, February 24, 1983

TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 12:00 NOON February 11, 1983
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $ 7,750 million of 364-day
Treasury bills to be dated February 24, 1983, and to mature
February 23, 1984 (CUSIP No. 912794 ED 2 ) . This issue will
provide about $2,475 million new cash for the Treasury, as the
maturing 52-week bill was originally issued in the amount of
$ 5,271 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing February 24, 1983.
In addition to the
maturing 52-week bills, there are $11,153 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 $1,648 million, and Federal
Reserve Banks for their own account hold $3,026 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 $320
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
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, Thursday,
February 17, 1983.
Form PD 4632-1 should be used to submit
tenders for bills to be maintained on the book-entry records of
the Department of the Treasury.
R-2028

- 2 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
arc 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.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches . A deposit of
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders .
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids . Competitive bidders will be advised of the acceptance or rejection of
their tenders . The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for $500,000 or less without
stated price from any one bidder will be accepted in full at the
weighted average price (in three decimals) of accepted competitive
bids .

- 3 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 February 24, 1983, in cash or other immediately-available funds
or in Treasury bills maturing February 24, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

FOR IMMEDIATE RELEASE FEBRUARY 14, 1983
The Treasury announced today that the 2-1/2 year
Treasury yield curve rate for the five business days ending
February 14, 1983, averaged 9,90 % rounded to the nearest
five basis points. Ceiling rates based on this rate will be
in effect from Tuesday, February 15, 1983 through Monday,
February 28, 1983.
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 OJI a recorded telephone message.
The phone number is (202)566-3734.

Appr ov ed ^
Francis X. Cavanaugh, Director
Office of Government Finance
& Market Analysis

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041

STATEMENT OF THE HONORABLE DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS
Washington, D.C.
February 14, 1983
IMF Resources, World Financial Stability, and
U.S. Interests
Mr. Chairman and members of the Committee:
It is a pleasure to appear before you today to explain and
support the Administration's proposals for legislation to increase
the resources of the International Monetary Fund.
After extensive consultations and negotiations among IMF
members, agreement was completed last Friday on complementary
measures to increase IMF resources:

an increase in quotas, the

IMF's basic source of financing; and an expansion of the IMF's
General Arrangements to Borrow (GAB), for lending to the IMF on
a contingency basis, if needed to deal with threats to the
international monetary system.

These must now be confirmed by

member governments, involving Congressional authorization and
appropriation in our case, in order to become effective.

background to our legislative proposals, which we will submit
formally within a very few days, I would like to outline the
problems facing the international financial system, the importance
to the United States of an orderly resolution of those problems,
and the key role the IMF must play in solving them.
R-2029

- 2 The International Financial Problem
Since about the middle of last year, the international monetary system has been confronted with serious financial problems.
The debt and liquidity problems of Argentina, Brazil, Mexico,
and a growing list of other borrowers became front-page news —
and correctly so, since management of these problems is critical
to our economic interests. Bluntly stated, the problem is that
the debts of many key countries became too large for them to
continue to manage under present policies and world economic circumstances; lenders began to retrench sharply; and the borrowers
have been finding it difficult if not impossible to scrape together
the money to meet upcoming debt payments and to pay for essential
imports. As a result, the international financial and economic
system is experiencing strains that are without precedent in the
postwar era and which threaten to derail world economic recovery.
There is a natural tendency under such circumstance for
financial contraction and protectionism — reactions that were
the very seeds of the depression of the 1930s. It was in
response to those tendencies that the International Monetary
Fund was created in 1944, largely at the initiative of the U.S.
government, to offer a backstop and underlying support mechanism
to prevent a recurrence of that slide into depression. If the
IMF is to be able to continue in that role, it must have adequate
resources to deal with the current situation.
The current problem did not arise overnight, but rather stems
from the economic environment and policies pursued over the last two
decades. Inflationary pressures began mounting during the 1960's,
and were aggravated by the commodity boom of the early 1970's and

- 3 the two oil shocks that followed. For most industrialized countries, the oil shocks led to a surge of imported inflation,
worsening the already growing inflationary pressures; to large
transfers of real income and wealth to oil exporting countries;
and to deterioration of current account balances. For the oilimporting less developed countries — the LDCs — this same
process was further compounded by their loss of export earnings
when the commodity boom ended.
For both industrial and developing countries, the appropriate
policy response to all these events would have been a combination
of fiscal and monetary restraint to resist inflationary pressure,
and willingness to let structural adjustments take place to adapt
their economies to the higher relative price of energy. The higher
energy price made many industries less competitive, and adjustment
required that resources be shifted away from them. Similarly, the
transfer of real income and wealth to OPEC implied a reduction in
real income at home.
Instead, most governments tried to maintain real incomes
through stimulative economic policies, and to protect jobs in
uncompetitive industries through controls and subsidies. Inflationary policies did bring a short-run boost to real growth at
times, but in the longer run they led to higher inflation, declining investment and productivity, and worsening prospects for
real growth and employment.
Similarly, while these policies delayed economic adjustment
somewhat, they could not put it off forever. In the meanwhile,
the size of the adjustment needed was getting larger. Important
regions remained dependent on industries whose competitive position
was declining; inflation rates and budget deficits soared; and —

- 4 most pertinent to today's financial problems —• many oil importing
countries experienced persistent, large current account deficits
and unprecedented external borrowing requirements.
In the inflationary environment of the 1970's, it was fairly
easy for most nations to borrow abroad, even in such large amounts.
Commercial banks were "recycling" surplus OPEC funds; interest
rates were low in relation to current and expected inflation; and
both borrowers and lenders expected that continued inflation would
lead to ever-increasing export revenues and reduce the real
burden of foreign debts. As a result, many countries' foreign
debts continued to grow too rapidly for too many years.
Most of the increased foreign debt reflected borrowing from
commercial banks in industrial countries. By mid-1982, the total
foreign debt of non-OPEC developing countries was something over
$500 billion — more than five times the level of 1973. Of that
total, roughly $270 billion was owed to commercial banks in the
industrial countries, and more than half of that was owed by
only three Latin American countries — Argentina, Brazil, and
Mexico. New net lending to non-OPEC LDCs by banks in the industrial
countries grew at a rising pace — about $37 billion in 1979,
$43 billion in 1980, and $47 billion in 1981 — with most of
the increase continuing to go to Latin America. (See Charts A
and B.)
That there has been inadequate adjustment and excessive
borrowing has become painfully clear in the current economic
environment — one of stagnating world trade, disinflation,
declining commodity prices, and interest rates which are still
high by historical standards. Over the past two years, there
has been a strong shift to anti-inflationary policies in most

- 5 industrial countries, and this shift has had a major impact on
market attitudes. Market participants are beginning to recognize
that our governments intend to keep inflation under control in
the future and are adjusting their behavior accordingly.
In most important respects, the impact of this change has
been positive. Falling inflation expectations have led to major
declines in interest rates. There has been a significant drop
in the cost of imported oil. On the financial side, there is a
shift toward greater scrutiny of foreign lending which may be
positive for the longer run, even though there are short-term
strains. Lenders are re-evaluating loan portfolios established
under quite different expectations about future inflation.
Levels of debt that were once expected to decline in real terms
because of continued inflation — and therefore to remain easy
for borrowers to manage — are now seen to be high in real terms
and not so manageable in a disinflationary world. As a result,
banks have become more cautious in their lending — not just
to LDCs but to domestic corporations as well.
There is certainly nothing wrong with greater exercise of
prudence and caution on the part of commercial banks — far from
it. Since banks have to live with the consequences of their
decisions, sound lending judgment is crucial. In addition,
greater scrutiny by lenders puts pressure on borrowers to improve
their capacity to repay, and creates an additional incentive for
borrowing countries to undertake needed adjustment measures.
But a serious short-run problem has arisen as a result of
the size of the debt of several key countries, the turn in the
world economic environment, inadequacy of adjustment policies,
and the speed with which countries' access to external financing

- 6 has been cut back. Last year, net new bank lending to oil importing
LDCs dropped by roughly half, to something in the range of $20 to
$25 billion for the year as a whole (Chart B), and came to a virtual
standstill for a time at mid-year. This forced LDCs to try to cut
back their trade and current account deficits sharply to match the
reduced amount of available external financing.
The question is one of the speed and degree of adjustment.
While the developing countries must adjust their economies to
reduce the pace of external borrowing and maintain their capacity
to service debt, there JLS a limit, in both economic and political
terms, to the speed with which major adjustments can be made.
Effective and orderly adjustment takes time, and attempts to
push it too rapidly can be destabilizing.
The only fast way for these countries to reduce significantly
their deficits in the face of an abrupt cutback in financing is to
cut imports drastically, either by sharply depressing their economies
to reduce demand or by restricting imports directly. Both of these
are damaging to the borrowing countries, politically and socially
disruptive, and painful to industrial economies like the United
States -- because almost all of the reduction in LDC imports must
come at the direct expense of exports from industrial countries.
They are exactly the sort of reaction that the IMF was created to
avoid. But as the situation has developed in recent months, there
has been a danger that lenders might move so far in the direction
of caution that they compound the severe adjustment and liquidity
problems already faced by major borrowers, and even push other
countries which are now in reasonably decent shape into serious
financing problems as well.

- 7 Importance to the United States of an Orderly Resolution
It is right for American citizens to ask why they and their
government need be concerned about the international debt problem.
Why should we worry if some foreign borrowers get cut off from
bank loans? And why should we worry if banks lose money? Nobody
forced them to lend, and they should live with the consequences
of their own decisions like any other business.
If all the U.S. government had in mind was throwing money
at the borrowers and their lenders, it would be difficult to
justify using U.S. funds on any efforts to resolve the debt crisis,
especially at a time of domestic spending adjustment.
But of course, there _is more to the problem, and to the
solution. First, a further abrupt and large-scale contraction of
LDC imports would do major damage to the U.S. economy. Second,
if the situation were handled badly, the difficulties facing LDC
borrowers might come to appear so hopeless that they would be
tempted to take desperate steps to try to escape. The present
situation is manageable. But a downward spiral of world trade
and billions of dollars in"simultaneous loan losses would pose a
fundamental threat to the international economic system, and to
the American economy as well.
In order to appreciate fully the potential impact on the U.S.
economy of rapid cutbacks in LDC imports, it is useful to look at
how important international trade has become to us. Trade was the
fastest growing part of the world economy in the last decade —
but the volume of U.S. exports grew even faster in the last part
*

of the 1970's, more than twice as fast as the volume of total world
exports. By 1980, nearly 20 percent of total U.S. production of
goods was being exported, up from 9 percent in 1970, although the

- 8 proportion has fallen slightly since then. (Charts C and D.)
Among the most important export sectors for this country are
agriculture, services, high technology, crude materials and fuels.
American agriculture is heavily export-oriented: one in three
acres of U.S. agricultural land, and 40 percent of agricultural
production, go to exports. This is one sector in which we run a
consistent trade surplus, a surplus that grew from $1.6 billion
in 1970 to over $24 billion in 1980. (Chart E.)
Services trade -- for example, shipping, tourism, earnings on
foreign direct investment and lending —• is another big U.S. growth
area. The U.S. surplus on services trade grew from S3 billion in
1970 to $34 billion in 1980, and has widened further since. (Chart F.)
When both goods and services are combined, it is estimated that onethird of U.S. corporate profits derive from international activities.
High technology manufactured goods are a leading edge of the
American economy, and not surprisingly exports of these goods have
grown in importance. They rose from $7.6 billion in 1970 to $40
billion in 1980. And even in a sector we do not always think of
as dynamic — crude materials and non-petroleum fuels like coal —
exports rose six-fold, from $2.4 billion to $14.6 biliion over the
same period.
Vigorous expansion of our export sectors has become critical
to employment in the United States. (Chart G.) The absolute importance of exports is large enough — they accounted directly for 5
million jobs in 1982, including one out of every eight jobs in
manufacturing industry. But export-related jobs have been getting
even more important at the margin. A survey in the late 1970s
indicated that four out of every five new jobs in U.S. manufacturing
was coming from foreign trade; on average, it is estimated that
every $1 billion increase in our exports results in 24,000 new jobs.

- 9 Later I will detail how Mexican debt problems have caused a $10
billion annual-rate drop in our exports to Mexico between the end
of 1981 and the end of 1982. By the rule of thumb I just gave,
that means the loss of a quarter of a million American jobs.
These figures serve to illustrate the overall importance of
exports to the U.S. economy. The story can be taken one step
further, to relate it more closely to the present financial situation. Our trading relations with the LDCs have expanded even
more rapidly than our overall trade. Our exports to the LDCs,
which accounted for about 25 percent of total U.S. exports in
1970, rose to about 29 percent by 1980. (Chart H.) In manufactured
goods, which make up two-thirds of our exports, the share going to
LDCs rose even more strongly — from 29 percent to 39 percent.
In fact, since the mid-1970's trade with LDCs has accounted for
more than half of the overall growth of American exports.
What these figures mean is that the export sector of our
economy — a leader in creating new jobs — is tremendously
vulnerable to any sharp cutbacks in imports by the LDCs. Yet
that is exactly the response to which debt and liquidity problems
have been driving them. This is a matter of concern not just to
4

the banking system, but to American workers, farmers, manufacturers and investors as well.
Even on the banking side, there are indirect impacts of
concern to all Americans. A squeeze on earnings and capital
positions from losses on foreign loans not only would impair
banks' ability to finance world trade, but also could ultimately
mushroom into a significant reduction in their ability to lend
to domestic customers and an increase in the cost of that lending.

Beyond our obvious interest in maintaining world trade and
trade finance, there is another less-recognized U.S. financial
interest. The U.S. government faces a potential exposure through
Federal lending programs administered by Eximbank and the Commodity
Credit Corporation. This exposure — built in support of U.S. export
expansion — amounted to $35 billion at the end of 1982, including
$24 billion of direct credits (mostly from Eximbank) and $11 billion
of guarantees and insurance. Argentina, Brazil and Mexico are high
on the list of borrowers. Should loans extended or guaranteed under
these programs" sour, the U.S. Treasury —• meaning the U.S. taxpayer
-- would be left with the loss. We have a direct interest in
avoiding this addition to Federal financing requirements.
All industrial economies, including the American economy,
will inevitably bear some of the costs of the balance of payments
adjustments LDCs must make and are already making. This adjustment would be much deeper, for both the borrowing countries and
for lending countries like the United States, if banks were to
pull back entirely from new lending this year. In 1983, for
example, a flat standstill would require borrowers to make yet
another $20 to $25 billion cut in their trade and current account
deficits, which would be considerably harder to manage if it
came right on the heels of similar cuts they have already made.
If these countries were somehow to make adjustments of that size
for a second consecutive year, the United States and other industrial countries would then have to suffer large export losses
once again. At the early stages of U.S. and world economic
recovery we are likely to be in this year, a drop in export
production of this size could abort the gradual rebuilding of
consumer and investor confidence we need for a sustained recovery.

- 11 In fact, many borrowers have already taken very difficult
adjustment measures to get this far. If they were forced to
contemplate a second year of further massive cutbacks in available
financing, they could be driven to consider other measures to
reduce the burden of their debts. Here potentially lies a still
greater threat to the financial system.
When interest payments are more than 90 days late, not only
are bank profits reduced by the lost interest income, but they
may also have to begin setting aside precautionary reserves to
cover potential loan losses. If the situation persisted long
enough, the capital of some banks might be reduced.
Banks are required to maintain an adequate ratio between
their underlying capital and their assets — which consist mainly
of loans. For some, shrinkage of their capital base would force
them to cut back on their assets — meaning their outstanding
loans — or at least on the growth of their assets — meaning
their new lending. Banks would thus be forced to make fewer
loans to all borrowers, domestic and foreign, and they would
also be unable to make as many many investments in securities
such as municipal bonds. Reduced access to bank financing would
not only force a cutback in the expenditures which private
corporations and local governments can make — it would also put
upward pressure on interest rates.
The usual perception of international lending is that it
involves only a few large banks in the big cities, concentrated
in half a dozen states. The facts are quite different. We have
reliable information from bank regulatory agencies and Treasury
reports identifying nearly 400 banks in 35 states and Puerto
Rico that have foreign lending exposures of over $10 million —

and in all likelihood there are hundreds more banks with exposures
below that threshhold but still big enough to make a significant
dent in their capital and their ability to make new loans here at
home. Banks in most states are involved, and the more abruptly
new lending to troubled borrowing countries is cut back, the more
likely it is that the fallout from their problems will feed back
back on the U.S. financial system and weaken our economy. Many
U.S. corporations also have claims on foreign countries, related
to their exports and foreign investments.
Resolving the International Financial Problem
Debt and liquidity problems did not come into being overnight,
and a lasting solution will also take some time to put into place.
We have been working on a broad-based strategy involving all the
key players -- LDC governments, governments in the industrialized
countries, commercial banks, and the International Monetary Fund.
This strategy has five main parts:
First, and in the long run most important, must be effective
adjustment in borrowing countries. In other words, they must take
steps to get their economies back on a stable course, and to make
sure that imports do not grow faster than their ability to pay for
them. Each of these countries is in a different situation, and
each faces its own unique constraints. But in general, orderly
and effective adjustment will not come overnight. The adjustment
will have to come more slowly, and must involve expansion of
productive investment and exports. In many cases it will entail
multi-year efforts, usually involving measures to address some
combination of the following problems: rigid exchange rates;
subsidies and protectionism; distorted prices; inefficient otate

- 13 enterprises; uncontrolled government expenditures and large
fiscal deficits; excessive and inflationary money growth; and
interest rate controls which discourage private savings and
distort investment patterns. The need for such corrective policies is recognized, and being acted on, by major borrowers —
with the support and assistance of the IMF.
The second element in our overall strategy is the continued
availability of official balance of payments financing, on a scale
sufficient to help see troubled borrowers through the adjustment
period. The key institution for this purpose is the International
Monetary Fund. The IMF not only provides temporary balance of
payments financing, but also ensures that use of its funds is tied
tightly to implementation of needed policy measures by borrowers.
It is this aspect -- IMF conditionality — that makes the role of
the IMF in resolving the current debt situation and the adequacy
of its resources so important.
IMF resources are derived mainly from members' quota subscriptions, supplemented at times by borrowing from official sources.
Assessing the adequacy of these resources over any extended period
is extremely difficult and subject to wide margins of error. The
potential needs for temporary balance of payments financing depend
on a number of variables, including members' current and prospective
balance of payments positions, the availability of other sources
of financing, the strength of the conditionality associated with
the use of IMF resources, and members' willingness and ability to
implement the conditions of IMF programs. At the same time, the
amount of IMF resources that is effectively available to meet its
members' needs at any point in time depends not only on the size
of quotas and borrowing arrangements, but also on the currency

- 14 composition of those resources in relation to .balance of payments
patterns, and on the amount of members' liquid claims on the IMF
which might be drawn.

In view of all these variables, assessments

of the IMF's "liquidity" —
for drawings —

its ability to meet members' requests

can change very quickly.

Still, as difficult as it is to judge the adequacy of IMF
resources in precise terms, most factors point in the same direction
at present.

The resources now effectively available to the IMF have

fallen to very low levels, both in absolute terms and in relation
to actual and potential use of the IMF.
At the beginning of this year, the IMF had about SDR 28 billion
available for lending.

However, SDR 19 billion of that total had

already been committed under existing IMF programs or was expected
to be committed shortly to programs already negotiated, leaving only
about SDR 9 billion available for new commitments.

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
probable that the IMF's ability to commit resources to future
adjustment programs will be exhausted by late 1983 or early 1984.
It is therefore clear that the Fund's liquidity position will
be under extreme strain in the near future.

Since actual drawings

under its program commitments are phased over time and tied to the
borrower's performance of policy conditions, the Fund has sufficient
resources to meet its immediate short-run cash needs.

But there

is no provision for the future, and the margin of safety for the
present is very small and shrinking rapidly.

The Fund's ability

to continue committing resources to adjustment programs, and to
permit its current holdings to be drawn down significantly further,
depends importantly on assurances that new resources will be

- 15 provided soon.

I will return to our specific proposals in this

area shortly.
The IMF cannot be our only buffer in financial emergencies.
It takes time for borrowers to design' and negotiate lending
programs with the IMF and to develop financing arrangements with
other creditors.

As we have seen in recent cases, the problems

of troubled borrowers can sometimes crystallize too quickly for
that process to reach its conclusion —

in fact, the real liquidity

crunch came in the Mexican and Brazilian cases before such negotiations even started.
Thus, the third element in our strategy is the willingness
of governments and central banks in lending countries to act
quickly to respond to debt emergencies when they occur.

Recent

experience has demonstrated the need to consider providing immediate
and substantial short-term financing —
where system-wide dangers are present —

on a selective basis,
to tide countries through

their negotiations with the IMF and discussions with other
creditors.

We are undertaking this where necessary, on a case-by-

case basis, through ad hoc arrangements among finance ministries
and central banks, often in cooperation with the Bank for International Settlements.

But it must be emphasized that these lending

packages are short-term in nature, designed to last for only a
year at most and normally much less, and cannot substitute for
IMF resources which are designed to help countries through a
multi-year adjustment process.
In fact, IMF resources themselves have only a transitional
and supporting role.

The overall amount of Fund resources, while

substantial, is limited and not in any event adequate to finance
the needs of its members.

While we feel that a sizeable increase

- 16 in IMF resources is essential, this increase is not a substitute
for lending by commercial banks. Private banks have been the
largest single source of international financing in the past to
both industrial and developing countries, and this will have to
be the case in the future as well -- including during the crucial
period of adjustment.
Thus, the fourth essential element in resolving debt problems
is continued commercial bank lending to countries that are pursuing
sound adjustment programs. In the last months of 1982 some banks,
both in United States and abroad, sought to limit or reduce outstanding loans to troubled borrowers. But an orderly resolution
of the present situation requires not only a willingness by banks
to "roll over" or restructure existing debts, but also to increase
their net lending to developing countries, including the most
troubled borrowers, to support effective, non-disruptive adjustment.
The increase in net new commercial bank lending needed for just
three countries — Brazil, Argentina, and Mexico — will approach
$11 billion in 1983. Without this continued lending in support of
orderly and constructive economic adjustment, the programs that
have been formulated with the IMF cannot succeed — and the lenders
have a strong self-interest in helping to assure success. It
should be noted, however, that new bank lending will be at a slower
rate than that which has characterized the last few years — more
in line with the increase in 1982 than what we saw in 1980 or 1981.
The final part of our strategy is to restore sustainable
economic growth and to preserve and strengthen the free trading
system. The world economy is poised for a sustained recovery:
inflation rates in most major countries have receded; nominal
interest rates have fallen sharply; inventory rundowns are largely

- 17 complete.
Solid, observable U.S. recovery is one critical ingredient
missing for world economic expansion. We believe the U.S. recovery
is now getting underway, as evidenced by the recent drop in unemployment and upturns in orders and production in some key industries.
Establishing credible growth in other industrial economies is also
important and we believe the base for recovery is being laid
abroad as well.
However, both we and others must exercise caution at this
turning point. Governments must not give in to political pressures
to stimulate their economies too quickly through excessive monetary
or fiscal expansion. A major shift at this stage could place
renewed upward pressure on inflation and interest rates.
In addition, rising protectionist pressures, both in the
United States and elsewhere, pose a real threat to global recovery
and to the resolution of the debt problem. When one country takes
protectionist measures hoping to capture more than its fair share
of world trade, other countries will retaliate. The result is
that world trade shrinks, and rather than any one country gaining
additional jobs, everybody loses. More importantly for current
debt problems, we must remember that export expansion by countries
facing problems is crucial to their balance of payments adjustment
efforts. Protectionism cuts off the major channel of such expansion.
That adjustment is essential to restoring problem country debtors
to sustainable balance of payments positions and avoiding further
liquidity crises — and as we have seen, it is therefore essential
to the economic and financial health of the United States.

- 18 The only solution is a stronger effort to,resist protectionism.
As the world's largest trading nation, the United States carries a
major responsibility 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.

That

signal would be followed, and would reinforce, continued U.S.
efforts to encourage others to open their markets, and would in
turn be reinforced by IMF program requirements for less restrictive
trade policies by borrowers.
The Role and Resources of the IMF
I have stressed the role of the International Monetary Fund
in dealing with the current financial situation, and now I would
like to expand on that point.

The IMF is the central official

international monetary institution, established to promote a
cooperative and stable monetary framework for the world economy.
As such, it performs many functions beyond the one we are most
concerned with today -- that of providing temporary balance of
payments financing in support of adjustment.

These include

monitoring the appropriateness of its members' foreign exchange
arrangements and policies, examining their economic policies,
reviewing the adequacy of international liquidity, and providing
mechanisms through which its member governments cooperate to
improve the functioning of the international monetary system.
In that context, it becomes clearer that IMF financing is
provided only as part of its ongoing systemic responsibilities.
Its loans to members are made on a temporary basis in order to
safeguard the functioning of the world financial system —

•

- 19 order to provide borrowers with an extra margin of time and money
which they can use to bring their external positions back into
reasonable balance in an orderly manner, without being forced into
abrupt and more restrictive measures to limit imports. The conditionality attached to IMF lending is designed to assure that orderly
adjustment takes place — and that the borrower is restored to a
position which will enable it to repay the IMF over the medium term.
In addition, a borrower's agreement with the IMF on an economic
program is usually viewed by financial market participants as an
international "seal of approval" of the borrower's policies, and
serves as a catalyst for additional private and official financing.
The money which the IMF has available to meet its members'
temporary balance of payments financing needs comes from two
sources: quota subscriptions and IMF borrowing from its members.
The first source, quotas, represents the Fund's main resource
base and presently totals some SDR 61 billion, or about $67
billion at current exchange rates. The IMF periodically reviews
the adequacy of quotas in relation to the growth of international
transactions, the size of likely payments imbalances and financing
needs, and world economic prospects generally.
At the outset of the current quota discussions in 1981, many
IMF member countries favored a doubling or tripling of quotas,
arguing both that large payments imbalances were likely to continue and that the IMF should play a larger intermediary role in
financing them. While agreeing that quotas should be adequate
to meet prospective needs for temporary financing, the United
States felt that effective stabilization and adjustment measures
should lead to a moderation of payments imbalances. We did not

- 20 support the view that the IMF should become a .regular source of
financing, a more or less permanent intermediary between borrowers
and lenders.

Nor did we feel that a massive quota increase would

be an efficient way to equip the IMF to deal with sudden and potentially major financing problems that could threaten the stability
of the system as a whole, and for which the IMF's resources were
inadequate.
Accordingly, the United States proposed a dual approach to
strengthening IMF resources:
First, a quota increase which, while smaller than
many others had wanted, could be expected to position
the IMF to meet members' needs for temporary financing
in normal circumstances.
—

Second, establishment of a contingency borrowing
arrangement that would be available to the IMF on a
stand-by basis for use in situations threatening the
stability of the system as a whole.

This approach has been adopted by the IMF membership, in
agreements reached by the major countries in the Group of Ten
in mid-January, and by all members at the IMF's Interim Committee
meeting last week.
The agreed increase in IMF quotas is 47 percent, an increase
from SDR 61 billion to SDR 90 billion (in current dollar terms, an
increase from $67 billion to $99 billion).

The proposed increase

in the U.S. quota is SDR 5.3 billion ($5.8 billion at current
exchange rates) representing 18 percent of the total increase.
The Group of Ten, working with the IMF's Executive Board,
has agreed to an expansion of the IMF's General Arrangements to
Borrow from the equivalent of about SDR 6.5 billion at present

- 21 to a new total of SDR 17 billion, and to changes in the GAB to
permit its use, under certain circumstances, to finance drawings
on the IMF by any member country.

Under this agreement, the U.S.

commitment to the GAB would rise from $2 billion to SDR 4.25
billion, equivalent to an increase of $2.6 billion at current
exchange rates.
We believe this expansion and revision of the GAB offers
several important attractions and, as a supplement to the IMF's
quotas, greatly strengthens the IMF's role as a backstop to the
system:
First, since GAB credit lines are primarily with
countries that have relatively strong reserve and
balance of payments positions, they can be expected
to provide more effectively usable resources than a
quota increase of comparable size.

Consequently,

expansion of the GAB is 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, since the GAB will not be drawn upon in normal
circumstances, this source of financing will be conserved
for emergency situations.

By demonstrating that the IMF

is positioned to deal with severe systematic threats, an
expanded GAB can provide the confidence to private markets
that is needed to ensure that capital continues to flow,
thus reducing the risk that the problems of one country
will affect others.
—

And third, creditors under this arrangement will have
to concur in decisions on its activation, ensuring

- 22 that it will be used only in cases of systemic need
and in support of effective adjustment efforts by
borrowing countries.
Annex A to my statement contains the texts of the relevant
Interim Committee and Group of Ten communiques.

These substantive

agreements will be codified in formal Governors and Executive
Board decisions in the next few weeks.

In sum, the proposed

increase in U.S. commitments to the IMF totals SDR 7.7 billion
SDR 5.3 billion for the increase in the U.S. quota and SDR
2.4 billion for the increase in the U.S. commitment under the
GAB.

At current exchange rates, the dollar equivalents are $8.4

billion in total, $5.8 billion for the quota increase and $2.6
billion for the GAB increase.
We believe these steps to strengthen the IMF, if enacted,
will safeguard the IMF's ability to respond effectively to current
financial problems.

Given the financing needs we foresee, we feel

it is important that the increases be implemented by the end of
this year.

Without such a timely and adequate increase in IMF

resources, the ability of the monetary system to weather debt and
liquidity problems will be impaired, at substantial direct and
indirect cost to the United States.
The IMF is essentially a non-political institution, with
membership open to any country judged willing and able to meet the
obligations of membership.

But this does not mean that U.S. political

and security interests are not served by the IMF.
—

On the contrary

it serves our interests well by containing economic problems

which could otherwise spread through the international community;
m

inimizing political instability in countries facing the inevitable

- 23 social and economic dislocations which accompany adjustment;
and supporting open, market-oriented economic systems consistent
with Western political values. Judged on this criterion, U.S.
appropriations for the IMF can be an excellent investment if they
can help to avoid political upheaval in countries of critical
interest to the United States.
While this is the first time I have appeared before Congress
to support these specific agreements and proposals to increase IMF
resources, the general issues and outline are familiar to members
of the Committee. Many of you have expressed reservations or
questions about this proposal, and I would like to discuss the
main concerns now.
Is the IMF "Foreign Aid"?
Many perceive money appropriated for IMF use to be just
another form of foreign aid, and question why we should be providing
U.S. funds dollars to foreign governments. Let me assure you that
the IMF is not a development institution. It does not finance dams,
agricultural cooperatives, or infrastructure projects. I have
already made the point that the IMF _is a monetary institution.
Only one of its functions is providing balance of payments financing
to its members in order to promote orderly functioning of the
monetary system, and only then on a temporary basis, on medium-term
maturities, after obtaining agreement to the fulfillment of policy
conditions. We have been working very hard with the IMF to ensure
that both the effectiveness of IMF policy conditions, and the
temporary nature of its financing, are safeguarded. In this way,
the Fund's financing facilities will continue to have a revolving
nature and to promote adjustment.

- 24 IMF conditionality has been controversial^ over the years,
with strong-opinions on both sides. Some observers have worried
that conditionality is so weak and ineffective that conditional
lending is virtually a giveaway. Others believe that conditionality is too tight •— that it imposes unnecessary hardship on
borrowers, and stifles economic growth and development.
Such generalizations reflect a misunderstanding of IMF
conditionality. When providing temporary resources to a country
faced with external financing problems, the IMF seeks to assure
itself that the country is pursuing policies that will enable it
to live within its means — that is, within its ability to obtain
foreign financial resources. It is this that determines the degree
of adjustment that is necessary. It is often the case that appropriate economic policies will strengthen a country's borrowing
capacity, and result in both higher import growth and higher export
growth. In this connection, I would cite the example of Mexico as
an immediate case in point.
Mexico is our third largest trading partner, after Canada
and Japan. And, as recently as 1981, it was a partner with whom
we had an export boom and a substantial trade surplus, exporting
goods to meet the demands of its rapidly growing population and
developing economy. This situation changed dramatically in 1982,
as Mexico began experiencing severe debt and liquidity problems.
By late 1982, Mexico no longer had access to financing sufficient
to maintain either its imports or its domestic economic activity.
As a result, U.S. exports to Mexico dropped by a staggering 60
percent between the fourth quarter of 1981 and the fourth quarter
of 1982. Were our exports to Mexico to stay at their depressed
end-1982 levels, this would represent a $10 billion drop in exports

- 25 exports to our third largest market in the world. Because the
financing crunch got worse as the year wore on, totals for the
full year 1982 don't tell the story quite so dramatically - but
even they are bad enough. Our $4 billion trade surplus with
Mexico in 1981 was transformed into a trade deficit of nearly $4
billion in 1982, due mainly to an annual-average drop in U.S.
exports of one-third. (Chart I.) This $8 billion deterioration was
our worst swing in trade performance with any country in the world,
and it was due almost entirely to the financing problem.
We believe that now this situation will start to turn around,
and we can begin to resume more normal exports to Mexico. If
this happens, it will be due in large part to the fact that, late
in December, an IMF program for Mexico went into effect; and
that program is providing the basis not only for IMF financing,
but for other official financing and for a resumption of commercial
bank lending as well. Mexico must make difficult policy adjustments
if it is to restore creditworthiness. The Mexican authorities
realize this and are embarked on a courageous program. But the
existence of IMF financing and the other financing associated
with it will permit Mexico to resume something more like a normal
level of economic activity and imports while the adjustment
takes place in an orderly manner. Without the IMF program, all
we could look forward to would be ever-deepening depression in
Mexico and still further declines in our exports to that country.
There is another aspect of the distinction between IMF financing and foreign aid which we should be very clear on, since it
goes to the heart of U.S. relations with the Fund. All IMF members
provide financing to the IMF under their quota subscriptions, and
all — industrial and developing alike — have the right to draw

- 26 on the IMF.

Quota subscriptions form a kind of revolving fund,

to which all members contribute and from which all are potential
borrowers.
As an illustration, in practice our quota subscription hasbeen drawn upon many times —

and repaid —

lending to other IMF members.
24 occasions —

over the years for

We in turn have drawn on the IMF on

most recently in November 1978 —

and our total

cumulative drawings, amounting to the equivalent of $6.5 billion,
are the second largest of any member (the United Kingdom has been
the largest user of IMF funds).

(U.S. drawings on the IMF are

described at Annex B.)
Why Spend Money on the IMF?
Another major concern with the proposals to increase IMF
resources is that, in this period of budgetary stringency, many
believe we would be better advised to spend the money at homeThere is also some feeling that if we were to get the U.S. economy
moving forward again, the international financial problem would
take care of itself.

I think I've already been through part of

the response to these concerns when I described the large and
growing impact which foreign trade now has on American growth and
employment.

We will do what is necessary domestically to strengthen

our economy.

But we will leave a major threat to domestic recovery

unaddressed if we do not act to resolve the international financial
situation.

The direct impact alone of international developments

on our economy is so large that, were the international situation
not to improve, there would at a minimum be a tremendous drag on
our economic recovery.

- 27 It is true that an improving U.S. economy is going to help
other nations, both through bur lower interest rates and through
an expanding U.S. market for their exports — providing of course
that we don't cut them off from that market. But they also have
an immediate, short-run financing crunch to get through, and if
we don't handle that right there are substantial downside risks
for the United States.
This might also be the right context in which to discuss how
U.S. participation in the increase in IMF resources would affect
the Federal budget and the Treasury's borrowing requirements.
Under budget and accounting procedures adopted in connection with
the last IMF quota increase, in consultation with the Congress,
both the increase in the U.S. quota and the increase in the U.S.
commitment under the GAB will require authorization and appropriation by the Congress. Because the United States receives a
liquid, interest-earning reserve claim on the IMF in connection
with our actual transfers of cash to the IMF, such transfers do
not result in net budget outlays or an increase in the Federal
budget deficit.
Actual cash transactions with the IMF, under our quota subscription or U.S. credit lines, do affect Treasury borrowing
requirements. The amount in any year depends on a variety of
factors, including the rate of use of IMF resources; the degree
to which the dollar is used in IMF drawings and repayments to the
IMF; and whether the United States itself draws on the IMF. An
analysis appended to this statement at Annex C presents data on
the impact of U.S. transactions between 1970 and 1982 on Treasury
borrowing requirements. Although there have been both increases
and decreases in Treasury borrowing requirements from year to year,

- 28 on average there have been increases amounting^ to $454 million
annually over the entire 13 year period, for a cumulative total
of over $6 billion. The rate has picked up in the last two years
of heavy"IMF activity, as would be expected; but the total is still
relatively small — the $454 million annual impact is only a small
part of the $54 billion annual average Federal borrowing requirement
over the same period, and the $6 billion cumulative impact compares
with an outstanding Federal debt of $1.2 trillion at the end of
1982. These figures also serve to demonstrate the revolving
nature of the IMF.
Is the IMF a Bank "Bail-Out"?
I also know there is a widespread concern that an increase
in IMF resources will amount to a bank bail-out at the expense
of the American taxpayer. Many would contend that the whole debt
and liquidity problem is the fault of the banks — that they've
dug themselves and the rest of us into this hole though greed and
incompetence, and now we intend to have the IMF take the consequences off their hands. This line of argument is dangerously
misleading, and I would like to set the record straight.
First, the steps that are being taken to deal with the
financial problem, including the increase in IMF resources,
require continued involvement by the banks. Far from allowing
them to cut and run, orderly adjustment requires increased bank
lending to troubled LDCs that are prepared to adopt serious
economic programs. That is exactly what is happening.
And it is not a departure from past experience. I have had
Treasury staff review IMF program experience in the 20 countries

- 29 which received the largest net IMF disbursements in the last few
years, to see whether banks had been "bailed out" in the past.
Looking at the period from 1977 to mid-1982, they found that for
the countries which rely most heavily on private bank financing,
IMF programs have been followed up by new bank lending much greater
than the amount disbursed by the Fund itself. This also holds true
for the 20 countries as a group: net IMF disbursements to this
group during the period were $11.5 billion, while net bank lending
totalled $49.7 billion, resulting in a ratio of 4.3 to 1 during
this period.
The second point I would like to stress here is the notion
that the increase in IMF resources is coming mainly from the United
States. The U.S. share in the increase in IMF resources is 18
percent — which obviously means other countries are putting up
the remaining 82 percent, the great bulk of the increase. By
putting up 18 percent of the increase, we will maintain our voting
share at just over 19 percent. The principle of weighted voting on
which the IMF operates has been key to its effectiveness over the
years and to ensuring that we have a voice and vote comparable to
the share of resources we provide. Major policy decisions — such
as those just taken on the quota increase — require an 85 percent
majority vote, which means that we have a veto over all such
decisions. Some of our allies would claim that we aren't pulling
our own weight — that our stake in world trade and finance is
bigger than the share of resources we are proposing to put into
the IMF would indicate.
The third point I would like to make is that the whole debt
and liquidity problem cannot fairly be said to be the fault of
the commercial banks. In fact, the banking system as a whole

- 30 performed admirably over the last decade, in a^period when there
were widespread fears that the international monetary system wot
fall apart for lack of financing in the aftermath of the oil
shocks. The banks managed almost the entire job of "recycling"
the OPEC surplus and getting oil importers through that difficul
period. Some of the innovations and decisions that banks made
in the process, which seemed rational and necessary at the time
to them and to others, may seem doubtful in retrospect, given
the way the world economic environment changed. But I think we
can agree that governments have had a great deal to do with
shaping that environment.
All of this is not to say that there aren't lessons to be
learned in the banking area -- there clearly has been an element
of lack of prudence in lending decisions, and of overlending. S
we should be asking ourselves: What is there that banks could b
doing to improve their screening of foreign loans? What is ther
that bank regulators could do to improve on their analysis of
country risk, examination of bank exposure, and consultations
with senior management?
Our basic starting point in addressing these questions is a
belief that the U.S. government should not get into the business
of dictating the lending practices of private banks. Doing so
would inject a political element into what should be business
decisions, and would potentially expose the government to liabil
for covering loans that were not repaid on time. Moreover, in
general it is bank managements, which have direct experience and
a responsibility to their shareholders and depositors to motivat
them, that are in the best position to make lending decisions.

- 31 In 1979, the bank regulatory agencies (the Federal Reserve,
Comptroller of the Currency and the FDIC) instituted a new system
for evaluating country risk, which has four elements. The first
is a statistical reporting system designed to identify country
exposures at each bank, and to enable regulators to monitor those
exposures. Second is an evaluation of each bank's internal system
for managing country risk, aimed at encouraging more systematic
review of prospective loans. Third, where there is a judgment by
regulators that a country has interrupted its debt service payments,
or is about to do so, all loans to that country may be "classified"
as substandard, doubtful, or a total loss, and such "classification"
may trigger an obligation by the bank to set aside precautionary
loan loss reserves. Fourth, bank examiners review and comment
upon each bank's large foreign lending exposures, drawing upon
the findings of an interagency committee of country analysts.
There are several possible changes that could be made in the
regulatory environment. One would be to set up formal limits on
each bank's exposure in different countries by law or regulation,
in effect setting up "single country" limits analogous to the
"single borrower" limits which are already used. Such limits on
country exposure would necessarily be highly arbitrary and unable
to distinguish among the capabilities of different banks or among
the size and financial health of different countries, especially
if applied by law. If applied judgmentally, on the other hand,
such "single country" limits would require that the U.S. government
make controversial economic and political judgments about other
* countries. The present system, which uses various ratios of exposure as a percentage of capital as a threshhold point for commenting upon loans to certain countries, is more flexible and
should be a useful basis for our future procedures. More intensive

- 32 discussion with senior bank management during the examination
process would probably be desirable.
Another possibility, which has been discussed with banks
here and abroad, would be to require banks to meet specific
criteria in establishing precautionary loan loss reserves agains
troubled loans, or even just against particularly large ones.
Current -procedures are not uniform across banks, and since setti
aside such reserves reduces current earnings, there is some
reluctance to do so unless absolutely required. Also, in the
case of "sovereign loans" to public-sector borrowers, the argume
is often made that the borrower cannot simply "disappear" or go
bankrupt in the sense that a private borrower could, so that
interest and principal arrears are certain to be recovered.
However, the current situation shows that sovereign borrowers,
too, can have protracted difficulties, and that their difficulti
can have a more abrupt impact than would be the case if provisio
against possible loan loss had been made more routinely over tim
Additionally, there is the question of whether banks' curre
disclosure of the size, distribution, terms, and status of their
foreign loans is sufficient. Depositors have a legitimate inter
in knowing what banks are doing with the money entrusted to them
Regulatory agencies have been considering this issue, and there
has been some movement toward greater disclosure. Here again,
there is reason to proceed with caution. When foreign lending
is in vogue, the disclosure that competiting banks are expanding
their foreign loans might generate pressure for other banks to d
the same, even where it is against their best judgment. When
attitudes move the other way, markets may overreact on the basis
of hasty or naive readings of the data. The desire of borrowers

- 33 for confidentiality and other competitive considerations may
also limit the degree of disclosure.
Both in the banking regulatory agencies, and at the Treasury,
we will be reviewing these and other issues to see what changes
might be desirable. We need to be careful in determining how to
deal with such a sensitive and central part of our economy. Any
decisions in this area w.ill have important implications both for
resolving the present situation, and for the evolution of the
banking system in the future. Chairman Volcker, Comptroller
Conover, and FDIC President Isaac are scheduled to appear before
a Subcommittee of the Banking Committee on Thursday to discuss
these matters in more detail.
Conclusion
The IMF plays a crucial role in the solution to current debt
and liquidity problems, and in providing the environment for world
recovery. It is absolutely essential that the proposed increase
in IMF resources become effective by the end of this year, to
enable the IMF to meet these responsibilities. Prompt U.S.
approval is important not only because the financing is needed,
but also because it would be a sign of confidence to other governments and to the public, and would help lay to rest concerns
about the risks to global recovery.
But most importantly, timely approval of these proposals is
essential to our own economic interests — to the prospects for
American businesses and American jobs. The legislation will be
submitted to you in a very few days. I urge that you give it prompt
and favorable consideration.

CHART

OUTSTANDING FOREIGN DEBT OF OIL-IMPORTING LDCs
$ Billion

500

400

Total Debt

300

%%*
*••'»**
>

200

.%»'
.%**

Debt to Commercial Banks
^
*

100

1973

* Series break.

***

82 (est.)

U.S. Treasury Dept.
2-11-83

CHART

NET NEW LENDING BY COMMERCIAL BANKS TO OIL-IMPORTING LDCs
$ Billion

$47
$43
40
$37

30
$20-$25
$22
20

$18

1976

1977

1978

1979

1980

1981

1982
U.S. Treasury Dept.
2-11-83

CHART

|ndex

1970=100

GROWTH OF U.S. AND WORLD EXPORT VOLUME

CHART

SHARE OF U.S. EXPORTS
IN TOTAL U.S. GOODS OUTPUT

Exports 1 9 %
Exports 9 % .

Total U.S. Goods
Output $ 4 6 0 billion
1970

Total U.S. Goods
Output $1,160 billion

1980

U.S. Treasury Dept.
2-11-83

CHART

U.S. AGRICULTURAL EXPORTS

Agricultural 1 9 %
Agricultural 1 7 %

Share in
Total U.S.
Exports:

1970
1980
Net U.S.
Agricultural
Trade
Balance:

Surplus of $1.6 billion

Surplus of $24.3 billion

U.S. Treasury Dept.
2-11-83

CHART

U.S. TRADE BALANCE IN SERVICES

1970

82 (est)

U.S. Treasury Dept.
2-11-83

CHART

U.S. EXPORT-RELATED JOBS

5.1 Million

2.9 Million
(3.7% of Total
Civilian
Employment)

(5.1% of Total
Civilian
Employment)

1970

1980

As of 1980, each $1 billion of U.S. exports w a s
estimated to result in 24,000 jobs.

Source: Commerce Department (ITA) estimates.

U.S. Treasury Dept
2-11-83

,CHART

U.S. EXPORTS TO OIL-IMPORTING
LESS DEVELOPED COUNTRIES
Exports to Oil-Importing
LDCs 2 9 %
Exports to Oil-Importing
LDCs 2 5 %

Share in
Total U.S.
Exports

1970
1980

U.S. Treasury Dept.
2-11-83

CHART

U.S. TRADE WITH MEXICO
$ Billion
18

U.S. Exports to Mexico

/ U.S. Imports
from Mexico

1970

U.S. Trade Balance
with Mexi

U.S. Treasury Dept.
2-11-83

ANNEX A

INTERNATIONAL MONETARY FUND
Press Release NO. 83/11

FOR IMMEDIATE RELEASE
February 11, 1983

Press Communique of the Interim Committee
of the Board of Governors of the
International Monetary Fund
1.
The Interim Committee of the Board of Governors of the
International Monetary Fund held its twentieth meeting in Washington,
D . C , on February 10 and 1-1, 1983, under the chairmanship of
Sir Geoffrey Howe, Chancellor of the Exchequer of the United Kingdom.
Mr. Jacques de Larosiere, Managing Director of the International
Monetary Fund, participated in the meeting. The meeting was also
attended by observers from a number of international and regional
organizations and from Switzerland.
2. The Committee discussed the World Economic Outlook and the
policies needed to cope with the difficult problems faced by most
members of the Fund.
The Committee noted that estimated rates of both growth of output
and inflation had been revised downward since its previous meeting in
September 1982. Anxiety was expressed at the high level of unemployment and the weakness of investment and world trade, against the background of only limited indications of economic recovery. At the same
time, the Committee welcomed the further progress made by some of the
larger industrial countries in their fight against inflation, as well
as the reduction in interest rates that had been facilitated by this
progress—developments that were providing the basis for a sustainable
recovery in economic activity.
Believing that successful handling of the inflation problem is a
necessary—albeit not sufficient—condition for sustained growth over
the medium term, the Committee urged national authorities, in their
efforts to promote sustained recovery, to avoid measures that might
generate harmful expectations with regard to inflation. The importance
of reducing fiscal deficits in a number of countries was also emphasized. Otherwise, the Committee noted, high real interest rates
detrimental to the process of recovery could be generated by market
expectations regarding government borrowing requirements.
It was the Committee's view that, in several major industrial
countries where inflation remained relatively high, present circumstances called for continued restraint in monetary and fiscal policies,
along with effective implementation of the incomes policies now in
place. It was felt, however, that conditions for economic recovery
had improved in those large industrial countries that have been able

External Rc4*itSH§ Rebutment • Washington. D.C. 20431 • Telerjhone 202-477-3011

_ 2 -

to achieve the greatest measure of success in reducing and controlling
inflation. This success—and the reduction in interest rates that it
has permitted—provided the basis, within the pursuit of counterinflationary monetary and fiscal policies, for greater real growth of
activity. The transition to a more stable path of real growth would
be further facilitated by determined efforts to reduce market rigidities and structural imbalances.
,
The Committee deplored the upsurge of protectionist pressures
in the past year or two. It stressed the paramount importance of
resisting these pressures and, indeed, rolling them back.
The unsatisfactory situation facing non-oil developing countries
was a source of particular concern to the Committee, which noted that
growth rates in these countries, after averaging about 6 per cent in
the 1960s and early 1970s, had averaged only 2 1/2 per cent during the
past two years and were not expected to show much improvement in 198S.
The Committee also observed that the modest recent increases in output,
which were barely sufficient to keep pace with rapid population
growth, had been achieved against a background of deteriorating terms
of trade, sluggish markets for exports, high interest rates in international financial markets, and strains in the financing of current .
account deficits. These conditions had necessitated a sharp compression
of imports by the non-oil developing countries—which, in turn, had been
achieved at the cost of lower investment and growth.
Noting the extent of the external adjustment already achieved
by many non-oil developing countries and the uncertainties that most
such countries face in financing their current account deficits, the
Committee attached great importance to the continuing provision of both
official development assistance and private banking flows on an adequate
scale, and it welcomed the special role recently played by the Fund in
this connection.
More generally, the Committee stressed the enhanced importance,
in current circumstances, of the Fund's role in providing its balance
of payments assistance to member countries that engage in adjustment
programs and in exercising firm surveillance over policies, and also
the need to equip the Fund with adequate resources to perform this role.
3. The Committee, noting the progress made by the Executive Board on
the various issues of the Eighth General Review of Quotas, focused its
attention on the remaining issues, and took satisfaction in being able
to reach the following agreement on the subject of quotas:
(a) The total of Fund quotas should be increased under the Eighth
General Review from approximately SDR 61.03 billion to SDR 90 billion
(equivalent to about US$ 98.5 billion).

- 3 -

(b) Forty per cent of the overall increase should be distributed
to all members in proportion to their present individual quotas, and
the balance of sixty per cent should be distributed in the form of
selective adjustments in proportion to each member's share in the total
of the calculated quotas, i.e., the quotas that broadly reflect members'
relative positions in the world economy.
(c) Twenty-five per cent of the increase in each member's quota
should be paid in SDRs or in usable currencies of other members.
The Committee considered the possibility of a special adjustment
of very small quotas, i.e., those quotas that are currently less than
SDR 10 million. It was agreed to refer this matter to the Executive
Board for urgent consideration in connection with the implementation of
the main decision.
4. The question of the limits on access to the Fund's resources was
raised in the Committee. It was noted that the Executive Board will
review this matter before June 30, 1983. The Committee invited the
Executive Board to take note of the views expressed in the Committee by
those favoring maintenance of the present enlarged limits in terms of
multiples of quotas and also by those stressing the need to have regard
to developments in the Fund's liquidity. It also invited the Managing
Director to report on this matter at the next meeting of the Committee.
5. The Committee noted the recent decision of the Finance Ministers
and Central Bank Governors of the participants in the General Arrangements
to Borrow (GAB) to support an increase in the total amount of the commitments under these Arrangements to SDR 17 billion (equivalent to about
US$19 billion) and to make the resources of these Arrangements available
to the Fund to finance also purchases by nonparticipants when the Fund
faces an inadequacy of resources arising from an exceptional situation
involving a threat to the stability of the international monetary system.
In this connection, the Committee welcomed the intention of Switzerland
to become a full participant in the Arrangements, through the Swiss
National Bank, with a credit commitment of SDR 1,020 million.
The Committee also welcomed the willingness of Saudi Arabia to
provide resources to the Fund, in association with the GAB, and for the
same purposes as those of the GAB. They noted with satisfaction the
progress that is being made in setting out the detailed features of this
association.
6. The members of the Committee requested the Executive Board to adopt,
before the end of February 1983, the necessary decisions and other
actions to implement the consensus reached in the Committee. They also
agreed to urge the governments of their constituencies to act promptly
so that the proposals for the increase in the Fund's resources could
be made effective by the end of 1983.

- 4 -

7.
The Committee considered again the question of allocations of
SDRs in the current, i.e., the fourth, basic period which began on
January 1, 1982. Noting the developments since its Toronto meeting,
the Committee agreed that the matter should be reexamined as soon as
possible. It, therefore, requested the Executive Board to review the
latest trends in growth, inflation and international liquidity, with
a view to enabling the Managing Director to determine, not later than
the next meeting of the Interim Committee, whether a proposal for a
new SDR allocation could be made that would command broad support
among members of the Fund.
8. The Committee agreed to hold its next meeting in Washington, D.C,
on September 25, 1983.

January 18,

Group of Ten - Press Communique" of the Ministers and Governors

1.
The Ministers and central bank Governors of the ten
countries participating in the General Arrangements to Borrow
(GAB) met In Paris on January 18, 1983 under the chairmanship
of Mr. Jacques Delors, Minister of Economy and Finance of France.
The Managing Director of the International Monetary Fund (IMF),
Mr. Jacques de Laroslere, took part ln the meting, which was
also attended by Mr. F. Leutwller, President of the Swiss National
Bank, Mr. E. Van Lennep, Secretary-General of the Organisation
for Economic Cooperation and Development (OECD), Mr. A. Lamfalussy,
Assistant General Manager of the Bank for International Settlements, and Mr. F.-X. Ortoli, Vice-President of the Commission of
the European Communities.
2. The Ministers and Governors heard a report by the
Chairman of their Deputies, Mr. Lamberto Dini, on issues relating
to the revision and expansion of the GAB and the Eighth General
Review of Quotas of the IMF. They also heard a report by the
Chairman of the Working Party No. 3 of the Economic Policy Committee of the OECD, Mr. Christopher Mcmahon, on the world economic
outlook.
3. In addressing the world economic situation, the Ministers
and Governors welcomed recent successes in the fight against Inflation and prospects for further progress. They looked toward sound
monetary and fiscal policies and appropriate moderation In the
growth in incomes to encourage lower interest rates, expanding
trade, higher employment, and durable economic growth. These
desirable developments must not be thwarted by trade restrictions
or by disruption of the International financial system. At the
•aae time, it was recognized that soundly based growth would itself
help ease current tensions. To these ends, the Ministers and Governors affirmed their support for a reinforced cooperation enong
industrialized countries on economic, financial, and tr*de policies,

1983

- 2 -

They considered that a sustainable improvement in activity ln the
Industrial countries ln 1983 can make an important contribution to
M lasting solution of the indebtedness problem of many developing
"countries and to limiting the unemployment problem in all countries.
Therefore, they noted with satisfaction that the competent international organizations will examine whether further steps can be
taken to ensure renewed and sustained growth, and will report to
the next ministerial councils, notably in the OECD and IMF framework.
4. Against this background, the Ministers and Governors discussed the International financial situation. They-noted that,
while strains remained in the system and the foreign debt problems
of a number of countries were still a cause for real concern, governments and monetary authorities had been cooperating actively and
effectively with international monetary institutions and commercial
banks to reinforce the stability of the system. In order to ensure
the continuing ability of the financial system to cope with existing
strains and to facilitate the adjustment process, they strongly
supported a substantial Increase of resources available to the
International Monetary Fund.
5. In light of the foregoing, the Ministers and Governors
have decided, subject to the necessary legislative approval, that
their aggregate credit commitments under the GAB should be promptly
increased—-from SDR 6.4 billion to SDR 17 billion (equivalent to
an increase from $7.1 billion to about $19 billion). They welcomed
the intention of Switzerland to become a full-scale participant In
the GAB and decided that necessary adjustments in the arrangements
should be made so as to permit the participation of Switzerland
at an early date. They also decided an adjustment of the participants' shares in the arrangements so as to reflect better their
size and role in the international economy and their ability to
provide financial resources. A list of the new credit commitments
that have been agreed is attached. They further agreed that in
the future the GAB would be available not only for drawings by
participants but also for purchases from the Fund for conditional
financing for all its members, including members that are not GAB
participants, when the Fund was faced with an inadequacy of
resources arising from an exceptional situation associated with
requests from countries with balance of payments problems of a
character or of aggregate size that could pose a threat to the
stability of the International monetary system.
6. The Ministers and Governors also looked to the conclusion of arrangements with other countries that might be willing
and able to provide substantial resources to the Fund for the
sine" purposes and on terms not unlike those agreed umtar the
GAB. In this regard, the Ministers and Governors welcomed the
rece.it contacts that the Chairman of the Group of Ten, and the

- 3 -

Chairman of the Interim Committee and the Managing Director of the
Fund,, have had with the authorities of Saudi Arabia. They asked
the Chairman of the G-10 Deputies, ln collaboration with the
Managing Director of the IMF, to resume such contacts as soon a*
possible.
7. The Ministers and Governors discussed the Issues related
to the Eighth General Review of Quotas. They agreed that a substantial overall increase was called for. They also recognized
the need for a meaningful adjustment of quota shares ln the Fund
to bring these more in line with the relative position of member
countries in the world economy.
8. The Ministers and Governors noted that substantial.progress had been made on the Quota Review Issues, and were of the view
that the conditions were now present for reaching conclusions at
the forthcoming meeting of the Interim Committee on February 10-11,
1983. They emphasized the desirability of having new quotas in
effect by the end of 1983.
9. The Ministers and Governors expressed their gratitude to
the French authorities for their cordial hospitality and for the
excellent meeting arrangements.

Attachment

- 4 -

ATTACHMENT

GAB Credit Commitments for G-10 Countries and Switzerland

In millions of SDRs

United States
Germany
Japan
France
United Kingdom
Italy
Canada
Netherlands
Belgium
Sweden
Switzerland

Shares In per cent

4,250.0
2,380.0
2,125.0
1,700.0
1,700.0
1,105.0
892.5
850.0
595.0
382.5
1,020.0
Total

17,000.0

100.00

ANNEX B
IMF Drawings by the United States

The United States has drawn on the International Monetary
Fund (IMF) on twenty-four occasions over the past 19 years
for a total of about SDR 5.8 billion (equivalent to about
$6.5 billion at the exchange rates prevailing at the time of
each drawing), the second largest amount of cumulative drawings
of any IMF member. None of these drawings were subject to
IMF policy conditionality, as they involved drawings on the
U.S. reserve position in the IMF. Drawings on the reserve
position are available automatically upon representation of
balance of payments need; do not bear interest and are not
subject to repurchase obligations; and do not involve policy "
conditionality.
The U.S. drawings were for the following purposes:
during the 1960's and early 1970's they were designed to
limit foreign purchases of U.S. gold reserves; subsequently,
they were designed to provide the United States with foreign
currencies for the purpose of exchange market operations.
These purposes are explained below. A table listing all
U.S. drawings is attached.
Drawings During the 1960's and Early 1970's
Under the international monetary arrangements in operation
following World War II, each member of the IMF was required
to establish and maintain a "par value" for its currency in
terms of gold. The United States undertook to fulfill its
par value obligations by standing ready to convert dollars
held by foreign monetary authorities into gold at the official
price of $35 per ounce — i.e., the par value of the dollar.
Other countries met their par value obligations by maintaining
exchange rates for their currencies — directly or indirectly
— in terms of the dollar within narrow margins. In this
manner, a structure of currency exchange rates linked to
gold was established and maintained.
During the 1950's and 1960's, large payments imbalances,
substantial losses of U.S. gold and foreign accumulations of
dollar holdings, representing further potential strains on
U.S. gold, put increasing strain on this system. Beginning
in the early 1960's the United States, in cooperation with
foreign monetary authorities, initiated a variety of measures
designed to limit pressures on U.S. gold holdings. U.S.
drawings on the IMF were an integral part of this program.
In general, IMF drawings provided the United States
with foreign currencies that could be used to purchase dollars
from foreign monetary authorities and thus reduce demands
for conversion of official dollar holdings to gold. The
foreign currencies obtained from the IMF were used most

-2-

often in the following types of transactions:
— to facilitate repayment of IMF drawings by other
countries without necessitating use of U.S. gold;
— repayment of U.S. short-term currency swaps with
foreign central banks; and
— direct purchases by the United States of foreign
official dollar holdings that would otherwise be
used to purchase U.S. gold.
Drawings Since the Early 1970's
With the end of the par value/gold convertibility
arrangements in the early 1970's, the basic purpose of
U.S. drawings from the IMF was to finance U.S. intervention in the exchange markets in support of the dollar.
During the 1970's, the U.S. intervened directly in the
foreign exchange market, buying and selling foreign
currencies for dollars, in order to deal with exchange
market pressures on the dollar. The foreign currencies
obtained from U.S. drawings in the IMF provided an
important source of funds for such intervention. In
November 1978, a U.S. drawing of $3 billion of German
marks and Japanese yen was a component of a major program
of U.S. and foreign intervention in the exchange market
to support the dollar.

1/6/82

IMF Drawings by the United States
( SDR Millions )

Date

Amount

Date

Amount

Feb
June
Sept
Dec
Total

125
125
150
125
525

1968: March 200
Total 200

1965

March
July
Sept
Total

75
300
60
435

1971: Jan 250
June
250
Aug
862
Total 1,362

1966

Jan
March
April
May
July
Aug
Sept
Oct
Nov
Dec
Total

100
60
30
30
71
282
35
31
12
30
681

1972: April 200
Total 200

1964:

1970s May
150
Total 150

1978: Nov 2,275
Total 2,275

Grand Total

1/
5,8 28

T7 Equivalent to about $6.5 billion at exchange rates
prevailing at the time of each drawing.

ANNEX C

Budgetary and Accounting Treatment
of Transactions with the IMF under
the U.S. Quota in the IMF
and U.S. Loans to the IMF

Under budget and accounting procedures established in consultations with the Congress at the time of the 1980 increase in
the U.S. IMF quota7 an increase in the U.S. quota or line of credit
to the IMF requires budget authorization and appropriation for the
full amount of increases in the quota or U.S. lending arrangements.
The sum is included in the budget authority totals for the fiscal
year requested. Payment to the IMF of the increased quota subcription is made partly (25 percent) in reserve assets (SDRs or
foreign currencies) and partly in non-interest bearing letters of
credit, which are a contingent liability. Under the credit lines
established pursuant to IMF borrowing arrangements with the United
States, the Treasury is committed to provide funds upon call by the
IMF.
A budget expenditure occurs only as cash is actually transferred
to the IMF, through the 25 percent reserve asset payment, through
encashment of the quota letter of credit, or against the borrowing
arrangements. Simultaneous with such transfers, the U.S. receives
an equal offsetting receipt, representing an increase in the U.S.
reserve position in the IMF — an interest-bearing, liquid international monetary asset that is available unconditionally to the
United States in case of balance of payments need. As a consequence
of these offsetting transactions, transfers to the IMF under the
quota subscription or U.S. lending arrangements therefore do not
result in net budget outlays, or directly affect the budget deficit.
Similarly, payments of dollars by the IMF to the United States (for
example, resulting from repayments by other IMF member countries)
do not result in net budget receipts since the U.S. reserve position
declines simultaneously by a like amount.
Transfers from the United States to the IMF under the U.S.
quota or U.S. lending arrangements increase Treasury borrowing
requirements, while transfers from the IMF to the United States
improve Treasury's cash position and reduce the borrowing requirement.
The net effect of transfers to and from the IMF has varied widely
over the years, resulting in cash outflows from the Treasury in some
years and inflows to the Treasury in other years. Moreover, Treasury
interest costs on borrowings to finance any net transfers to the
IMF need to be balanced against the remuneration (interestx earned
on the U.S. reserve position in the IMF. Finally, the U.S.
may incur exchange gains and losses on the U.S. reserve position in
the IMF due to changes in the dollar value of the SDR.
It is not possible to project the effect on Treasury borrowing
requirements or the net cost of U.S. transactions with the IMF
because
of uncertainties
regarding
the future
of IMF
the portion
of such financing
that would
be inlevel
dollars;
and financing;
movements

-2-

in market interest and exchange rates. However, the figures in
the attached table indicate that for the period from May 1, 1969
to the end of 1982:
— Net increases in Treasury borrowing requirements attributable to transactions with the IMF averaged $454 million
annually, compared to average annual increases in Federal
borrowing of $54 billion.
-- Treasury debt outstanding attributable to transactions
with the IMF averaged $1.6 billion annually. This is not
an annual increase in Treasury borrowing, but an estimate
of the average total debt outstanding each year attributable
to cumulative U.S. transactions with the IMF. As of
December 31, 1982, the outstanding borrowing attributable
to such transactions amounted to $6.3 billion, about 1/2 of
1 percent of the total outstanding Treasury debt of $1.2
trillion.
— Net interest costs to the Treasury associated with all
U.S. transactions with the IMF averaged $42 million
annually. In fiscal 1982, interest costs on total Treasury
debt amounted to $117 billion.
-- Net valuation losses to the U.S. on the U.S. reserve
position in the IMF averaged $69 million.
-- The overall net annual cost to the U.S., taking account of
interest and valuation, thus averaged $111 million.

Estimated Gains and Losses Associated With U.S. Transactions
Under U.S. Quota and U.S. Loans to IMF
(millions of dollars)
Valuation

uumuiauive ivet ltedsuty
Debt(-) or Cash(+) Position
Arisinq From:
U.S.
Transactions
Year Ended
April 30 1/
1970
1971
1972

Interest

Total
Earned on
Gains(+) or
Interest
Borrowing
Net
Holdings
of
Losses(Received Remuneration
Cost(-) or
Gains(+)
Foreign
CurReceived
on U.S.
Reduction(+) by U.S.
or
rencies Drawn
by
U.S.
Reserve
on
Loans
from
Loans
Under U.S.
8/
from IMF 9/ Losses(-)
Quota
2/ to IMF :3/ Total 4/ Column(3) 5/ to IMF 6/ from IMF 7/ Position
(9)
(8)
(6)
(7)
(3)
(5)
(4)
(2)
(1)
-37
+13
-50
-716
-716
-26
+12
-38
-702
-702
*
+19
+19
+445
+445
• )

+811

+39

+34

+73

1973

+704

+54

+108

1974

-300

-22

+70

+48

1975

-940

-52

-182

-225

1976

-2,695

-131

-2,826

-138

+79

+54

—

-2

1977

-2,726

-639

-3,365

-197

+26

+79

+219

+127

1978

-1,368

-329

-1,697

-140

+28

+30

+223

+25

+166

1979

-555

-16

-571

-65

+15

+46

1980

-1,294

-334

-1,628

-192

+16

+22

-203

+63

-294

1981

-3,416

-862

-4,278

-581

+88

+216

-1,134

+75

-1,336

1982

-5,092

-1,216

-6,308

-364

+64

+222

-94

+39

-133

Total Period:
5/1/69-12/31/82 -17,844

-3,527

-21,371

-1,727

+225

+682

-944

+248

-1,516

-258

-1,564

-126

+16

+50

-69

+18

1983
thru 12/31/82

Annual Average

-1,306

-4.

-ill

Footnotes
indicates less than $500,000.
1/ Represents IMF fiscal year.
0

Includes U.S. transfers of dollars to the IMF (i.e., an outflow of dollars from Treasury) and
dollar balances received by the U.S. from the IMF and from sales of foreign currency drawn by
the U.S. from the IMF (i.e., an inflow of dollars to the Treasury).

3/ Includes U.S. loans and repayments under the IMF's General Arrangements to Borrow and
Supplementary Financing Facility.
4/ Transfers to and from the IMF under the U.S. quota subscription or U.S. lending arrangements
result in budget outlays and simultaneous receipts of U.S. reserve position in the
IMF; these transactions have a zero effect on net outlays and the budget deficit.
5/ Equals column 3 times average Treasury 3-month bill rate during period. Payments enter the
U.S. budget as interest on the public debt; inflows reduce Treasury's need to borrow and
thus reduce interest expense.
6/ Enters the U.S. budget as a receipt.
7/ Remuneration on U.S. creditor position; prior to 1975, remuneration was 1.5%, although
special income distributions were made in 1970 and 1971 which raised the effective rate to
2.0 percent in those years. From 1975, the rate was based on short-term market interest
rates in the five largest IMF members (U.S., U.K., Germany, France, Japan). Enters the U.S.
budget as a receipt. Payments are made by IMF annually, as of April 30; FY 1983 figure
represents net accrual as of December 31, 1982.
8/ Reflects changes in the dollar value of the U.S. reserve position in the IMF due to an
appreciation (-) or depreciation ( + ) of the dollar in terms of the SDR. Enters the U.S.
budget as a positive or negative net outlay.
9/ Interest earned on investments of German marks and Japanese yen acquired from U.S. drawing
—
on IMF in November 1978. Enters the U.S. budget as part of the net profit or loss of the
Exchange Stabilization Fund of the Treasury, recorded as a positive or negative net outlay.
10/

Equal to the sum of columns 4 through 8.

TREASURY NEWS
epartment of the Treasury • Washington, ox. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M. February 15, 1983
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $12,400 million, to be issued February 24, 1983.
This offering will provide $1,250 million of new cash for the
Treasury, as the maturing bills were originally issued in the
amount of $ 11,153 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,200
million, representing an additional amount of bills dated
November 26, 1982,
and to mature
May 26, 1983
(CUSIP
No. 912794 CV 4 ) , currently outstanding in the amount of $5,622
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $6,200 million, to be
dated February 24, 1983, and to mature August 25, 1983
(CUSIP No. 912794 DN 1 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing February 24, 1983.
In
addition to the maturing 13-week and 26-week bills , there are
$5,271 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 $1,566 million, and Federal Reserve
Banks for their own account hold $3,133 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
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 $1,246 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
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10 ,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches , or of the Department of the
Treasury.
R-2030

- 2 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, Tuesday,
February 22, 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.
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
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 .

- 3 Public announcement will be made by the Department of the
easury of the amount and price range of accepted bids. Competiye bidders will be advised of the acceptance or rejection of
eir tenders. The Secretary of the Treasury expressly reserves
e right to accept or reject any or all tenders, in whole or in
rt, and the Secretary's action shall be final. Subject to these
servations , noncompetitive tenders for each issue for $500 ,000
less without stated price from any one bidder will be accepted
full at the weighted average price (in three decimals) of
cepted 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
st be made or completed at the Federal Reserve Bank or Branch
February 24, 1983, in cash or other immediately-available funds
in Treasury bills maturing February 24, 1983.
Cash adjustments
11 be made for differences between the par value of the maturing
lis accepted in exchange and the issue price of the new bills.
Under Section 454(b) of the Internal Revenue Code, the
tount of discount at which these bills are sold is considered to
:crue when the bills are sold, redeemed, or otherwise disposed of.
iction 1232(a)(4) provides that any gain on the sale or redemp.on of these bills that does not exceed the ratable share of the
:quisition discount must be included in the Federal income tax
;turn of the owner as ordinary income. The acquisition discount
> the excess of the stated redemption price over the taxpayer's
isis (cost) for the bill. The ratable share of this discount
> determined by multiplying such discount by a fraction , the
imerator of which is the number of days the taxpayer held the
.11 and the denominator of which is the number of days from the
ty following the taxpayer's date of purchase to the maturity of
le bill. If the gain on the sale of a bill exceeds the taxpayer's
itable portion of the acquisition discount , the excess gain is
•eated as short-term capital gain.
Department of the Treasury Circulars, Public Debt Series >s. 26-76 and 27-76, and this notice, prescribe the terms of
lese Treasury bills and govern the conditions of their issue.
ipies of the circulars and tender forms may be obtained from any
ideral Reserve Bank or Branch , or from the Bureau of the Public
;bt.

.<*> ;", ^

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
Tuesday, February 15, 1983
TESTIMONY OF THE HONORABLE DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE
SENATE APPROPRIATIONS COMMITTEE

Mr. Chairman and Members of the Committee:
It is a pleasure to meet with you today and to discuss
the Administration's 1984 budget proposals. The development
of a sound fiscal policy was one of the central objectives of
the Reagan Administration when it came into office two years
ago. For too long a time Americans had watched the share of
GNP accounted for by Federal spending and taxes move upward.
As the government siphoned off resources from the private
sector and the money supply expanded, economic activity
stagnated and inflation soared.
In February 1981 the Administration put before Congress
a four point plan to revitalize the economy. Our program
included spending restraint, tax reductions, regulatory reform,
and support of the Federal Reserve's efforts to attain gradual,
steady reduction in the rate of monetary growth.
The transition to a noninflationary environment has been
somewhat more difficult than anticipated. V7e have seen two
years of serious economic recession as a result of the inflation/tax spiral and monetary volatility.
However, the recession now appears to be over. The unemployment rate declined in January for the first time since
July 1981. There has been clear progress on inflation, and
consumer price growth has dropped dramatically from 12.4 percent in 1980 to 3.9 percent in 1982. The producer price index
fell by 1.0 percent in January — the sharpest drop in the
history of the index. Interest rates, which had been driven
to record levels by inflation, are down from peak levels of
21-1/2 percent on the prime in December 1980 to 11 percent
R-2031

- 2 -

currently, and the stock market last year made new highs.
Indicators such as housing, inventories, and real income show
the economy is poised for recovery. Despite these favorable
developments, further reductions in unemployment are still
necessary.
The task now is to encourage the renewal of economic
growth to reduce unemployment and provide productive job
opportunities in the private sector. In so doing we must
not repeat the errors of the past and return to an inflationary economy.
The current domestic situation is complicated by the
existence of large Federal budget deficits and the threat of
even larger ones in years to come. These budget deficits will
have to be reduced, since their persistence would inevitably
lead to very adverse consequences for the U.S. economy and
its financial markets.
Many of the economic difficulties we face at home are
also faced by countries abroad. The entire international
economy is experiencing a severe slowdown, complicated by
the special debt-servicing problems of a number of countries.
My prepared statement today deals primarily with the U.S.
domestic economy, but it is obvious that the domestic and
international situations are closely linked. The clear
need in both cases is to encourage expansion rather than
undergo further contraction.
It is important to recognize that current difficulties
are the culmination of a long period of deteriorating economic
performance in this country. The U.S. economy was in deep
trouble long before the current recession began. It follows
that our policies must aim at lasting long-run solutions.
There are no quick cures.
Inflation has led to a roughly parallel rise in key
interest rates. As shown in Chart I on interest rates
and inflation, the 3-month Treasury bill rate followed the
rate of inflation very closely over most of the period from
the early 1960's to present. Thus, inflation appears to
have been a major factor in the increase in the bill rate
during that time.
Rising rates of inflation after the mid-1960's did not
lead to more rapid economic growth for any sustained period
of time. Quite the contrary. Inflation and its inevitable
consequence of higher interest rates finally choked off real
growth altogether.

- 3 -

Approach of the Reagan Administration
The Administration's primary economic goal upon coming
to office was a fundamental restructuring of the economy,
including:
° bringing inflation under control;
° shifting the composition of activity away from
government spending toward more productive
endeavors in the private sector;
° providing an environment which would reward
innovation, work effort, saving and investment,
and in which free-market forces could operate
effectively.
Over the past two years we have seen evidence that the
Administration's program is working. The fundamental elements
of recovery are now largely in place. Inflation has been
brought under control. Interest rates are coming down, as
shown in Chart II. Real wage growth is being restored. In
addition, there have been other improvements — notably in
productivity growth and saving behavior -- which mark a shift
away from the problems that contributed to sluggish economic
performance in recent years.
Within this framework of very significant achievements,
there remains the fact that the economy has been in recession
and unemployment is still high. The civilian unemployment rate
of 10.4 percent in January is, of course, a matter of great
concern. The President has indicated in his State of the
Union Message that he will be submitting special legislation
to help deal with the problem.
The Current State of the Economy
The economy now stands poised for recovery. In fact, the
recovery appears to be underway at this moment. It has been
much longer in coming than we, or for that matter nearly all
forecasters, had expected.
The delay occurred primarily because of the persistence
of high interest rates and because of developments in the
international sphere. On the international front, the economies
of our leading trading partners continued to weaken. Weakness
among all the industrialized nations was self-reinforcing.
Furthermore, the financial difficulties of some of the newly
industrializing nations had adverse impacts on economic activity
here. These forces, combined with a general hesitancy on the
part of the consumer, led to another round of inventory cutting

- 4 -

in the second half of 1982 and delayed the expected turnaround
of the economy.
Signals of an Economic Upturn
There are now clear signals that the economy has turned
around and that the recession is now behind us. To summarize
these signals:
° The unemployment rate for the civilian labor
force fell sharply from 10-8 percent in December
to 10.4 percent in January.
0

The index of leading indicators has risen for
eight out of the last nine months.

Housing is in the midst of a rapid recovery.

Business trimmed inventories sharply in the
final quarter of last year. Historically, a
cleanout of inventories typically has been
followed by a shift back to higher rates of
production.

° Retail sales have begun to firm.
0

Total industrial production stabilized in
December and evidence available on employment
and workhours in January indicates that production will almost certainly rise for the
month.

The Typical Recovery
We would all hope for a vigorous recovery, not unlike
those which occurred in the past. The typical postwar recovery
path is shown in Chart III. Excluded from it are two atypical
recoveries — the first of which included the Korean War buildup
and the second which got underway late in 1980 but was shortlived. The five recoveries contained in the average line in
the chart were remarkably similar. Gains over the first eight
quarters from the real GNP trough were within an extrenely
narrow range of 5 to 6 percent at an annual rate.
The contributions of GNP components to real growth during
the typical recovery are shown in Chart IV. As it indicates,
much of the initial thrust for expansion comes from:
0

a resurgence in homebuilding activity, such as
currently is underway;

a swing in inventory investment from decumulation
in the later stages of recession to accumulation;
and

- 5 -

a major contribution from consumer spending, with
purchases of consumer durables registering particularly large increases.

By contrast, Federal spending normally declines as a share
of GNP during recovery, and is not necessary for promoting
expansion.
The Outlook for the Economy
A vigorous recovery of the type outlined would be most
welcome. It would certainly help ease the Nation's budgetary
problems. However, we recognize that the serious problems
still confronting us may well hold growth during the next
year or two below the typical recovery pattern.
0
Our overall trade balance is likely to register
further marked deterioration in the coming year.
0

Real interest rates may persist at high levels,
though remaining below those prevailing a year
ago.
° The economy is in the process of undergoing marked
structural change. Some of our industries may not
quickly regain the vitality they experienced in
the 1950's and 1960's. The shift of resources to
emerging industries will take time.
0
Most fundamentally, we are not yet fully out of
the inflationary woods, and we cannot afford to
direct monetary and fiscal policy toward excessively
rapid economic expansion.
For these reasons, the Administration's official forecast
contains a fairly conservative estimate of real growth at a
3.1 percent rate during the four quarters of 1983, rather than
the typical recovery growth rate of about twice that much.
The favorable results in the January employment survey indicate
that recovery could well be stronger than forecasted, which we
would certainly welcome. Growth is expected to average in the
4 percent range in 1984 and the years beyond.
The Congressional Budget Office forecast for 1983 and 1984
is roughly similar to the Administration's. It also shows moderate growth, well below the average cyclical recovery. Both forecasts are cautious and note uncertainty about the recovery.
However, the CBO is somewhat more optimistic about real GNP
growth, unemployment, inflation, and interest rates in 1983 and
1984. The differences are modest in the first year and narrow
in the second. According to CBO:

- 6 -

Real GNP is expected to grow by 4 percent over
the four quarters of 1983 and 4.7 percent during
1984 (compared to Administration estimates of
3.1 percent and 4.0 percent).
° Unemployment continues at very high levels,
declining only gradually during the recovery,
with average unemployment rates of 10.6 and
9.8 percent for the civilian labor force in
calendar years 1983 and 1984. The Administration estimates 10.7 percent and 9.9 percent,
respectively.
0
The GNP deflator rises 4.7 percent in 1983,
according to CBO estimates, and 4.6 percent
in 1984 (compared to Administration estimates
of 5-6 percent and 5-0 percent, respectively).
On balance, the CBO forecast shows somewhat stronger
growth from 1983 through 1986, although somewhat lower growth
in the following three years.
Policies for the Recovery
In setting policy for the remainder of the 1980's, we
must recognize what we must not do. We no longer have the
freedom of action to revert back to the overly stimulative
monetary and fiscal policies pursued at times in the past,
for these would surely lead to a resurgence of inflationary
pressures and a new round of rising interest rates. Further,
we must not reverse the fundamental tax restructuring put
in place in 1981, for this was designed to provide the
noninflationary incentives without which the private sector
would continue to wither.
Policies for a Changing Economic Structure
For years private sector initiative and dynamic market
forces have been stifled by unnecessary Federal regulation.
It is important that we carry through with policies of reducing the regulatory burden on private industry. Noteworthy
successes have been achieved in this area, particularly in the
deregulation of the financial system. For the first time in
the postwar period, small investors can count on being able
to obtain market rates of return on their savings from banks
and thrift institutions.
Further, we recognize that our economy and those of the
other industrialized nations are undergoing a period of
restructuring. This is an era of rapid technological change,
and comparative advantage in the production of many goods
and services is shifting from the already developed to the
newly developing nations. Those nations which expend all
their energies shoring up declining industries and resisting

- 7 -

change will find themselves with industrial bases that are
obsolete and with declining relative standards of living.
Their more foresighted and innovative neighbors will be
moving forward and capturing newly opening markets.
Government can ease the painful process of structural
change within the economy. We have significant new initiatives in the budget to fight unemployment and we are working
with the Congress on additional jobs programs.
Finally, in setting the proper course of policy for the
1980's, we must work closely with the other industrialized
and newly industrializing nations of the world. The members
of the International Monetary Fund (IMF) have agreed in
principle on measures to strengthen the ability of the IMF to
deal with current strains in the international financial
system. These measures include an increase in IMF quotas of
47.5 percent, from SDR 61 billion (the equivalent of about
$67 billion) to SDR 90 billion (about $99 billion), and an
expansion of the General Arrangements to Borrow (GAB) from
about SDR 6.5 billion ($7 billion) to SDR 17 billion (about
$19 billion). The proposed increase in the U.S. quota would
be about SDR 5.3 billion, to a new level of SDR 17.9 billion,
and our share of the expanded GAB would be SDR 4.25 billion.
The participation of the United States in the increase
in IMF resources is an essential complement to domestic
measures for economic recovery and represents a valuable
investment in defense of the economic interests of the
American farmer, laborer, businessman, and consumer. Legislation providing for budget authorization and appropriation
for the U.S. share of the increase in IMF resources will be
submitted in the near future. The increase in U.S. funding
for the IMF, SDR 7.7 billion ($8.5 billion), does not involve
net budget outlays or affect the budget deficit because any
transfers by the United States to the IMF are simultaneously
offset by an increase in our international monetary reserve
assets. I urge prompt approval by the Congress.
Monetary Policy
In addition to policies aimed at facilitating structural
changes within the economy, we must maintain steady monetary
and fiscal policies directed at reinvigorating economic activity.
Steady, predictable money supply growth at a noninflationary
pace has been, and continues to be, one of the major goals of
the Administration's economic program. The Federal Reserve's
efforts to achieve that goal have been complicated by a number
of factors, such as far-reaching institutional changes in the
banking and thrift industries. Nevertheless, the Fed has
generally been successful, albeit in a somewhat erratic fashion.

- 8 -

Monetary policy faced a difficult and uncertain situation
during much of the last year. Rapid institutional change in
the form of new money market instruments blurred the boundaries
between the various aggregates and made the achievement of any
target rates of growth unusually difficult. There is also
some indication that the recession may have led to an increased
demand for liquidity and precautionary balances. In 1982,
growth in monetary velocity — the rate at which money is used
— turned negative for the first time in nearly three decades.
Under the unusual economic and institutional circumstances of
1982, some temporary offset in the form of above-target rates
of monetary growth was probably desirable.
The Federal Reserve's efforts to slow money growth have
been accompanied by some volatile short-run swings. Growth
in Ml was actually negative on a 13-week basis by mid-summer
of last year, and then soared to the double-digit range by
the end of the year. This recent acceleration has caused some
observers to conclude that the fight against inflationary
money growth has been abandoned. That is not true. Both the
Administration and the Federal Reserve remain committed to
the long-run goal of providing money growth at a noninflationary pace consistent with a steady and sustainable expansion
of economic activity.
Fiscal Policy
The objectives of our fiscal policy upon coming to office
two years ago were two-fold. First, we believed and still
believe it was imperative to correct the disincentives to
economic performance that had been built into the tax structure
over the years. These disincentives arose in large measure,
not by design, but through the interaction of a high rate of
inflation with a progressive tax system and historical cost
accounting of depreciable assets. Second, it was equally
imperative to reverse the seemingly inexorable growth of
Federal spending, thereby freeing resources for use in the
private sector. In moving to achieve these goals, we faced
one major constraint, namely that our defense establishment
had been allowed to deteriorate badly, so that our national
survival mandated a stepped-up rate of defense spending.
The tax reforms that were put in place were designed
primarily to restore an adequate rate of return for investment
in plant and equipment and to put a halt to the steady ratchetting upward of marginal tax rates on labor and savings income.
The investment incentives were necessary to bring long-depressed
rates of business capital investment and productivity growth
back up to acceptable standards. For individuals, the tax
cuts were needed to protect incentives and purchasing power,
and to keep American labor competitive in world markets. For
the average taxpayer, they will only result in an actual dollar

- 9 -

tax cut in 1983, after allowance for the effects of bracket
creep and higher social security taxes. And that 1983 cut and
tax indexing will be needed to offset bracket creep and increases
in social security taxes scheduled to take effect in the future.
These measures will greatly improve the competitive standing
of American capital and labor in the world as economic recovery
proceeds.
I want to discuss briefly the tax cut enacted in 1981 and
address some of the misconceptions about the act, namely that
the tax cut was much too large and as a result, it destroyed our
revenue base and caused the budget deficits we are facing.
Rather than being too large, the tax cut enacted in 1981
just barely offsets rising tax burden on the economy.
Between fiscal 1981 and 1988, ERTA reduces taxes by SI,138
billion, a substantial amount. But a substantial tax cut is
needed to offset the equally substantial tax increases facing
the American taxpayers between fiscal 1981 and 1988.
° " Last summer's tax bill raises taxes by $281 billion.
° The gasoline tax bill raises taxes by $21 billion.
0

Inflation-induced bracket creep raises taxes by
$489 billion.

° Previously-scheduled social security taxes raise
taxes by $214 billion, and the proposed bipartisan
social security rescue plan will raise $56 billion.
The total tax increases amount to $1,061 billion, leaving
the taxpayers with net tax cut of only $77 billion between 1981
and 1988.
Rather than destroying the tax base, as many have suggested,
the 1981 tax cut merely "returns revenues as a percentage of
GNP to approximately the levels that prevailed in the 1960's
and 1970's," according to the Congressional Budget Office's
recent report on the budget.
Under the Administration budget, taxes as a percent of
GNP for fiscal years 1983 to 1986 will average 19.2 percent.
This is a level slightly higher than the 18.6 percent average
for the 1960's and the 18.9 percent average for the 1970's.
It is low only in comparison to the high tax level of the
previous Administration, which reached 20.9 percent in fiscal
1981.
And as CBO points out, the tax burden during the 1980's
"would have moved well above the all-time record of 21.9 percent of GNP reached in 1944" without the tax cuts.

- 10 -

CBO also reports that due to the tax cut individual income
taxes as a percent of taxable personal income will average 12.3
percent for the 1984 to 1988 period. This is a level below the
14.3 percent rate in 1981, the highest level in history, but
close to the 12.2 percent average rate for the 1970's.
Without the tax cut, CBO notes, the tax rate would have
risen to an "unprecedented" 18.4 percent by 1988. And without
indexing, the tax rate would rise to the near-record level of
almost 14 percent by 1988.
Repeal of the remainder of the tax cut would strike
disproportionately at lower income workers and retirees. Repeal
of the third year would cause a 13.9 percent jump in tax liability
for those with less than $10,000 in adjusted gross income, a
12 percent jump for those between $20,000 and $30,000, and only
a 2.7 percent jump for those with $200,000 and over.
The unfairness of repeal is even more pronounced with
indexing. Assuming 4.5 percent inflation, repealing indexing
would produce a 9.4 percent jump in tax liability for those with
less than $10,000 in adjusted gross income, a 3.2 percent jump
for those between $20,000 and $30,000, and a one-half percent
jump for those with $200,000 and over. Even worse, these latter
increases from repeal of indexing would be repeated each year
as long as inflation continues.
Indexing is of relatively greatest importance to lower
bracket taxpayers. First, the lower brackets are narrowest in
percentage terms, and inflation causes income to rise through
the brackets fastest at the bottom. Second, for those in the
lower brackets, personal exemptions and the zero bracket are
large relative to total income. Indexing keeps these exemptions
from losing real value, and keeps inflation from pushing those
too poor to owe tax onto the tax rolls. Third, upper income
taxpayers may already be in the top tax bracket, with no higher
bracket into which to be pushed.
In addition to the significance for individuals of the
third year cut and indexing, both of these measures are of
critical importance for small businesses. Small businesses
tend to be labor intensive, and the Administration's program
of reducing marginal tax rates and indexing will help limit
wage pressures, enabling American labor to maintain competitiveness with workers overseas. In addition, because over
85 percent of small businesses pay only personal income tax,
the Administration's tax program will help directly to safeguard the value of their earnings.
There have been suggestions that proposals to delay retirement COLAs or pay increases should be accompanied by repeal of
the third year or indexing to increase fairness, as if these
proposals somehow impact different groups. In fact, this would
impose an unfair double burden on workers, savers, and pensioners

- 11 -

of all income levels who are simultaneously income recipients
and taxpayers.
We are asking social security recipients to accept a 6-month
delay in their cost-of-living increase, and the taxation of a portion of benefits for upper income retirees to help save the Social
Security System. It would be unfair to raise tax rates on their
other pension or interest income by repealing the third year, or
to subject their fixed retirement incomes to continued bracket
creep year after year.
Federal workers are being asked to accept a COLA freeze in
FY 1984. Many private sector workers are re-negotiating their
labor contracts to strengthen their competitiveness and preserve
their jobs. They are also facing higher payroll taxes to help
preserve the Social Security System. This is particularly true
of self-employed small businessmen, who will pay more on their
own salaries and as employers of others. It would unfairly compound their difficulties if the third year were repealed, and
recompound them every year thereafter if indexing is removed and
income tax rates are made to rise continually.
The only beneficiaries of repeal of the third year and indexing would be here in Washington. As for the country at large,
substantial job loss would result as American workers were made
less competitive by a higher tax burden, and as savers withdrew
from the market as rising tax rates lowered the return on their
savings.
We were relatively successful in working with the Congress
to achieve our goals of tax reform, but we were less successful
in the area of outlay control. A major portion of the savings
we had proposed in our original budget did not receive favorable
action. This, along with much weaker economic activity than
expected, has left us facing the prospect of large deficits
even as the economy recovers.
The proposals in the FY-1984 Budget are directed at the
crucial task of restoring noninflationary economic growth.
This requires the preservation of the investment and work
incentives provided by the tax reforms of 1981 and a reduction
in the high deficits and interest rates which lie ahead unless
corrective action is taken to bring government outlays under
control.
The tax reforms already enacted will enable us to make good
progress in rebuilding and modernizing America's plant and equipment as the recovery progresses. Incentives are in place to
encourage saving and investment and to lower the cost of new
machinery and structures. Taxes on American labor are coming
down. These reforms will lead to a more productive, more
competitive United States. The capital formation program will
be financed by higher levels of personal saving, more generous

- 12 capital consumption allowances, and higher retained earnings
as profits recover from the current slump. These elements, plus
state and local budget surpluses, form the Nation's savings pool.
Spending reduction will contribute to the recovery, and
the recovery will contribute to deficit reduction. The deficit
will fall as the economy advances, particularly if the recovery
is a vigorous one. A strong recovery with 1-1/3 percent more
real growth per year than in our forecast would bring the budget
to near balance by 1988, provided we also curb the growth of
Federal outlays.
However, if we fail to bring spending under control and
if recovery is slow, we will face a deficit problem which is
larger and longer-lasting than we can afford. In such case,
the deficit could run in the range of 6 to 7 percent of GNP
each year through 1988. Our tax reforms were designed to
raise the private savings share, but still we would face the
possibility of draining off a large part of the pool of
savings, leaving less available for new capital formation.
Interest rates could remain high, and the recovery could stall.
This Administration is determined that deficits of such
magnitudes will not come to pass. We came to office with a
program of boosting the rate of capital investment in order to
place the economy on a faster growth track, and we will not
allow ourselves to be diverted from that goal. We will take
whatever measures are necessary to narrow the deficit to
acceptable levels.
° Preferably, all of the necessary narrowing of the
deficit would come from the outlay side. Total
Federal spending represents the amount of resources
absorbed by the government at the expense of the
private sector. This spending can be financed by
both taxes and borrowing, which in either case
amounts to a drain on private resources. Only through
spending reduction will the credit market find itself
in a more favorable position.
0
In the event that the combination of economic growth
and outlay reductions is not sufficient to narrow
the deficit to acceptable levels in the outyears,
we are prepared to request additional revenue raising
measures in those years. If the Congress chooses not
to reduce spending, as we wish, then it is preferable
to have the full cost of federal spending programs
explicitly identified for the taxpayers who bear the
burden of financing government. If additional revenues
are needed, this Administration will do its best to
structure the tax code in a way that minimizes
disincentives for productive effort.

- 13 -

Our Budget Proposals
Spending reduction is crucial. Unfortunately, it has been
difficult to achieve because of the built-in momentum of Federal
spending programs. Consequently, we are proposing strong
medicine. None of us will find it agreeable, but it is critical
to the restoration of vitality to our economy. There must be
assurance that all will share in spending restraint, just as
all of us will share in the benefits of a revitalized recovery.
We, like a great many other nations in the world, have tried
to live beyond our means. Now we must bring our spending into
line with our productive capacity and strengthen the private
sector which produces our national wealth.
The deficit reduction program that we propose contains four
basic elements.
° The first is a freeze on 1984 outlays to the extent
possible. Total outlays should be frozen in real
terms in 1984. The 6-month freeze on COLAs, as
recommended by the Social Security Commission, is
to be extended to other indexed programs. There
will be a 1-year freeze on pay and retirement of
Federal workers, both civilian and military. Many
workers in the private sector have accepted freezes in
their pay. Federal workers can also make a sacrifice,
which hopefully will serve as an example for sectors
of the economy which have not yet recognized the need
for moderation in wage demands. As a final item of
freeze, outlays for a broad range of nonentitlement
programs will be held at 1983 levels.
° The second element of our budgetary program contains
measures to control the so-called "uncontrollables."
Laws have been so written that Federal payments are
automatic to all those declared eligible. We plan a
careful review of all such programs, taking special
care to protect those truly in need.
The third element is a cutback of $55 billion in
defense outlays from original plans.
0

Fourth is a set of proposals involving the revenue
side of the budget, described below.

We are projecting receipts for the current year (fiscal
year 1983) of -$597.5 billion. For fiscal year 1984 we expect
receipts to be $659.7 billion. The 1983 figure represents a
decline of $20.3 billion from the fiscal year 1982 total of
$617.8 billion. This decline, and indeed the absence of an
increase in receipts in the range of $50-70 billion, is

- 14 due primarily to the recession. As I have already explained,
our economic projections throughout the remainder of the
recovery period are cautious. If real GNP grows at a faster
rate than we have projected, then receipts for the current
fiscal year, as well as for subsequent years, will be somewhat
higher than we are now projecting.
In 1984, as the recovery is well underway, receipts are
expected to rise to $659.7 billion, an increase over 1983 of
$62.2 billion, representing an annual growth of 10.4 percent.
This will occur as profit margins recover and other income
shares continue to grow.
For the other years in our forecast period (1985-1988)
we project an average annual growth rate of receipts about
10 percent without contingency taxes (and 11 percent per year
including contingency taxes), with receipts reaching the
$1 trillion mark for the first time in fiscal year 1988. All
of these projections assume the legislative proposals included
in the President's Fiscal Year 1984 Budget. Receipts under
existing legislation will also grow, but at a somewhat lower
9-1/2 percent annual average rate.
The estimates of receipts made by the Congressional Budget Office reflect the higher real economic growth forecast
by CBO in 1983 through 1985 and the somewhat lower growth
thereafter. Thus far, CBO has published only baseline numbers, analogous to current services estimates without policy
changes. As compared to the Administration current services
projections, CBO estimates receipts to grow more quickly during
the first 3 years of the period and more slowly during the
latter three years, because of differences in projected rates
of real economic growth. CBO's outlay estimates run below
the Administration's throughout the period, mainly because
of the difference in the basis for estimating defense spending.
Therefore, on balance, CBO projects smaller baseline deficits
than the Administration does on a current services basis.
It is noteworthy that under Administration proposals
individual income tax receipts will continue to rise over the
1985-1988 period, but only as real income rises. Beginning
in 1985, we will no longer collect hidden taxes in the form
of bracket creep caused by inflation. Without the indexation
provision of ERTA, individuals would pay $6 billion more in
taxes during fiscal year 1985 alone, and about $100 billion
more during the entire forecast period — 1985 through 1988.
There has been a gradual upward trend in unified budget
receipts as a percent of GNP, shown in the top line of Chart V.
As shown in the bottom line of the chart, a major shift in the
composition of receipts has been the rising share of social
insurance and other payroll taxes to fund social security and
other retirement benefits.

- 15 There is no proposed omnibus tax bill in the President's
budget message. However, there are several separate tax items.
Proposed tax legislation in the President's budget can be
conveniently grouped under three broad headings: Proposals
that improve the income security of Americans, proposals that
will improve our ability to produce future output, and, as an
insurance policy, a contingency or standby tax, which is
intended as a clear signal that we will not permit spending
to increase in the outyears unless we pay for it up front.
In the first category, our principal recommendation is
for adoption of the bipartisan social security proposals.
These proposals, which will increase receipts to the social
security funds by $9.8 billion in fiscal year 1984 $11 6
billion in 1985, and $10.6 billion in 1986, are necessary to
insure the solvency and security of these trust funds.
The second category, proposals to improve the utilization
of our human resources, includes the tuition tax credit, the
exclusion of earnings on savings for higher education, the jobs
tax credit for hiring the long-term unemployed, and the enterprise zone tax incentives. These will all improve our production
capacity, either through increased investments in education or,
more directly, by getting our currently underutilized force of'
experienced workers back to work. As a group, these proposals
will reduce taxes $0.5 billion in 1984, $1.2 billion in 1985,
and $1.7 billion in 1986.
Finally, the President has proposed a contingency tax plan
designed to raise revenues of about 1 percent of GNP in the
event that, after Congress has adopted the spending reduction
proposals, there is insufficient economic growth to reduce the
deficit below 2-1/2 percent of GNP. The contingency tax plan
would not go into effect on October 1, 1985, unless the economy
is growing on July 1, 1985. The contingency tax plan is an
insurance program. It is important to have a plan in place
so that the country and the world know that we will not
tolerate a string of deficits that would exceed 2-1/2 percent
of GNP. Chart VI shows the effect on the deficit that the
contingency tax would have if it were implemented. It also
shows how the budget picture would be altered by stronger
expansion such as some private forecasters expect. The deficit
path under high growth reflects the assumption that real GNP
increases 1-1/3 percentage points faster than in the official
forecast path, starting with FY-1983. Such growth would be in
line with the performance from the end of 1960 to late 1966.
The contingency tax plan would contain two elements, each
raising about half of the revenues that may be required. One
element would be a temporary surcharge of 5 percent on individuals
and corporations. The other element would be a temporary
excise tax on domestically produced and imported oil designed
to raise revenues of about $5 per barrel. The contingency tax
alternative shown in the budget raises $146 billion over the

-1636-month period beginning October 1, 1985. The specific contingency tax plan we will be sending to Congress for adoption
this year will be designed to raise revenues of about $130-150
billion over a temporary period of up to 36 months.
If these budget saving proposals are enacted, we will
reduce the projected deficits by a total of $580 billion over
the next five years, or by $2,400 for every man, woman, and
child in the United States. The deficit as a share of GNP
will be down to about 2-1/2 percent in 1988 from the 6-1/2
percent we expect this year. Total outlays will grow by only
7 percent per year in nominal terms over the next five years,
compared with a bloated 13 percent between 1977 and 1981.
In addition, as part of our overall program, over the next
year we will be taking a careful look at the entire structure
of our tax system. We will be searching for ways to simplify
the tax code and make it fairer while at the same time promoting
economic growth by enhancing incentives for work effort, saving,
and investment. This is the true road for putting people back
to work and bringing the budget into balance.
We are confident that the deficit reduction program contained in this realistic budget is the right program for the
economy at this critical juncture. The most important signals
we can send the economy are spending restraint, deficit restraint,
and a commitment to non-inflationary economic growth throughout
the decade. This is the program we have devised. Together with
the Congress, we can make it work.

Chart I

INTEREST RATES AND INFLATION

* Growth from year earlier in G N P deflator.
Plotted quarterly.

Januuy IB. I M 3 A2B

Chart II

INTEREST RATES
Weekly Averages

Percent

18
Prime Rate

,.«.v A a a Corporate Bonds

'~*\

12-

3-Month
Treasury Bills*

\J.-»:
*.„.«:.^*

8
_J 1 1 _ L ^ I _ L L 1

Oct.

' L l - L - L i - l | •• I • l l 1 l I I I I l I I 1 I I I I I I I -I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I Ifi

Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb.
1982
1983
1981

*Bank discount basis
February 14. 1983 A203

THE PATH OF POSTWAR ECONOMIC RECOVERIES
Real G N P trough = 100

115

110
Average of 5
Postwar Recoveries *

1975-76 Recovery

105

Current Cycle

100

* Postwar recoveries excluding the Korean War period
and the short-lived 1980-81 recovery.

January 25, 1983 A 2 1 0

Chart IV

CONTRIBUTIONS TO A TYPICAL RECOVERY
BY REAL GNP COMPONENT
Percentage
Points
11.0

— C o n s u m e r Spending

6.4

4.4
— Inventory Investment

— Business Capital Spending
^xv<^\M
x^i^

— Residential Construction

iii,

— State and Local Purchases

1111111 u i

immfm

First
Four
Quarters

Second
Four
Quarters

Net Exports
Federal Purchases

TOTAL,
First
Eight
Quarters

* Average of postwar recoveries, excluding the Korean War period
and the short-lived 1980-81 recovery.

January 21, 1983-A213

UNIFIED BUDGET RECEIPTS AS A PERCENT OF GNP
Fiscal Years 1954-1988

Percent
25

15
All Other Receipts

v^r10

••• V

5 —
•###««#####

0 1954 56

58 60 62 64

Ill
66 68 70

* Receipts include contingency taxes. ^^ 28< ^^

Social Insurance Taxes

I I II II I II I I I I I
72

74 76

78 80 82

II I

84 86

Chart VI

THE DEFICIT AS A SHARE OF GNP
Percent

Administration Growth Path

No Contingency Tax

J
Contingency ]
Tax
1
*"lli

%%
%%

High Growth Path, \
No Contingency Tax*
•«

"'%>

Trigger for
Contingency Tax

—Trigger base
year

Decision date
1982

•

Fiscal Year
•Higher growth than the official path by 1-1/3 percentage point starting fiscal year 1983.
January 28, 1983-A214

J 0 -> - 3 r

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041

FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 A.M.
Wednesday, February 16, 1983
TESTIMONY OF THE HONORABLE DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE
SENATE BUDGET COMMITTEE
Mr. Chairman and Members of the Committee:
It is a pleasure to meet with you today and to discuss
the Administration's 1984 budget proposals. The development
of a sound fiscal policy was one of the central objectives of
the Reagan Administration when it came into office two years
ago. For too long a time Americans had watched the share of
GNP accounted for by Federal spending and taxes move upward.
As the government siphoned off resources from the private
sector and the money supply expanded, economic activity
stagnated and inflation soared.
In February 1981 the Administration put before Congress
a four point plan to revitalize the economy. Our program
included spending restraint, tax reductions, regulatory reform,
and support of the Federal Reserve's efforts to attain gradual,
steady reduction in the rate of monetary growth.
The transition to a noninflationary environment has been
somewhat more difficult than anticipated. We have seen two
years of serious economic recession as a result of the inflation/tax spiral and monetary volatility.
However, the recession now appears to be over. The unemployment rate declined in January for the first time since
July 1981. There has been clear progress on inflation, and
consumer price growth has dropped dramatically from 12.4 percent in 1980 to 3.9 percent in 1982. The producer price index
fell by 1.0 percent in January — the sharpest drop in the
history of the index. Interest rates, which had been driven
to record levels by inflation, are down from peak levels of
21-1/2 percent on the prime in December 1980 to 11 percent

R-2032

- 2 -

currently, and the stock market this week made new highs.
Indicators such as housing, inventories, and real income show
the economy is poised for recovery. Despite these favorable
developments, further reductions in unemployment are still
necessary.
The task now is to encourage the renewal of economic
growth to reduce unemployment and provide productive job
opportunities in the private sector. In so doing we must
not repeat the errors of the past and return to an inflationary economy.
The current domestic situation is complicated by the
existence of large Federal budget deficits and the threat of
even larger ones in years to come. These budget deficits will
have to be reduced, since their persistence would inevitably
lead to very adverse consequences for the U.S. economy and
its financial markets.
Many of the economic difficulties we face at home are
also faced by countries abroad. The entire international
economy is experiencing a severe slowdown, complicated by
the special debt-servicing problems of a number of countries.
My prepared statement today deals primarily with the U.S.
domestic economy, but it is obvious that the domestic and
international situations are closely linked. The clear
need in both cases is to encourage expansion rather than
undergo further contraction.
It is important to recognize that current difficulties
are the culmination of a long period of deteriorating economic
performance in this country. The U.S. economy was in deep
trouble long before the current recession began. It follows
that our policies must aim at lasting long-run solutions.
There are no quick cures.
Inflation has led to a roughly parallel rise in key
interest rates. As shown in Chart I on interest rates
and inflation, the 3-month Treasury bill rate followed the
rate of inflation very closely over most of the period from
the early 1960's to present. Thus, inflation appears to
have been a major factor in the increase in the bill rate
during that time.
Rising rates of inflation after the mid-1960's did not
lead to more rapid economic growth for any sustained period
of time. Quite the contrary. Inflation and its inevitable
consequence of higher interest rates finally choked off real
growth altogether.

- 3 -

Approach of the Reagan Administration
The Administration's primary economic goal upon coming
to office was a fundamental restructuring of the economy,
including:
bringing inflation under control;
shifting the composition of activity away from
government spending toward more productive
endeavors in the private sector;
providing an environment which would reward
innovation, work effort, saving and investment,
and in which free-market forces could operate
effectively.
Over the past two years we have seen evidence that the
Administration's program is working. The fundamental elements
of recovery are now largely in place. Inflation has been
brought under control. Interest rates are coming down, as
shown in Chart II. Real wage growth is being restored. In
addition, there have been other improvements — notably in
productivity growth and saving behavior — which mark a shift
away from the problems that contributed to sluggish economic
performance in recent years.
Within this framework of very significant achievements,
there remains the fact that the economy has been in recession
and unemployment is still high. The civilian unemployment rate
of 10.4 percent in January is, of course, a matter of great
concern. The President has indicated in his State of the
Union Message that he will be submitting special legislation
to help deal with the problem.
The Current State of the Economy
The economy now stands poised for recovery. In fact, the
recovery appears to be underway at this moment. It has been
much longer in coming than we, or for that matter nearly all
forecasters, had expected.
The delay occurred primarily because of the persistence
of high interest rates and because of developments in the
international sphere. On the international front, the economies
of our leading trading partners continued to weaken. Weakness
among all the industrialized nations was self-reinforcing.
Furthermore, the financial difficulties of some of the newly
industrializing nations had adverse impacts on economic activity
here. These forces, combined with a general hesitancy on the
part of the consumer, led to another round of inventory cutting

- 4 -

in the second half of 1982 and delayed the expected turnaround
of the economy.
Signals of an Economic Upturn
There are now clear signals that the economy has turned
around and that the recession is now behind us. To summarize
these signals:
° The unemployment rate for the civilian labor
force fell sharply from 10.8 percent in December
to 10.4 percent in January.
0

The index of leading indicators has risen for
eight out of the last nine months.

° Housing is in the midst of a rapid recovery.
0

Business trimmed inventories sharply in the
final quarter of last year. Historically, a
cleanout of inventories typically has been
followed by a shift back to higher rates of
production.

Retail sales have begun to firm.

Total industrial production stabilized in
December and evidence available on employment
and workhours in January indicates that production will almost certainly rise for the
month.

The Typical Recovery
We would all hope for a vigorous recovery, not unlike
those which occurred in the past. The typical postwar recovery
path is shown in Chart III. Excluded from it are two atypical
recoveries -- the first of which included the Korean War buildup
and the second which got underway late in 1980 but was shortlived. The five recoveries contained in the average line in
the chart were remarkably similar. Gains over the first eight
quarters from the real GNP trough were within an extremely
narrow range of 5 to 6 percent at an annual rate.
The contributions of GNP components to real growth during
the typical recovery are shown in Chart IV. As it indicates,
much of the initial thrust for expansion comes from:
0

a resurgence in homebuilding activity, such as
currently is underway;

a swing in inventory investment from decumulation
in the later stages of recession to accumulation;
and

- 5 -

a major contribution from consumer spending, with
purchases of consumer durables registering particularly large increases.
By contrast, Federal spending normally declines as a share
of GNP during recovery, and is not necessary for promoting
expansion.
The Outlook for the Economy
A vigorous recovery of the type outlined would be most
welcome. It would certainly help ease the Nation's budgetary
problems. However, we recognize that the serious problems
still confronting us may well hold growth during the next
year or two below the typical recovery pattern.
0
Our overall trade balance is likely to register
further marked deterioration in the coming year.
0

Real interest rates may persist at high levels,
though remaining below those prevailing a year
ago.
0
The economy is in the process of undergoing marked
structural change. Some of our industries may not
quickly regain the vitality they experienced in
the 1950's and 1960's. The shift of resources to
emerging industries will take time.
0
Most fundamentally, we are not yet fully out of
the inflationary woods, and we cannot afford to
direct monetary and fiscal policy toward excessively
rapid economic expansion.
For these reasons, the Administration's official forecast
contains a fairly conservative estimate of real growth at a
3.1 percent rate during the four quarters of 1983, rather than
the typical recovery growth rate of about twice that much.
The favorable results in the January employment survey indicate
that recovery could well be stronger than forecasted, which we
would certainly welcome. Growth is expected to average in the
4 percent range in 1984 and the years beyond.
The Congressional Budget Office forecast for 1983 and 1984
is roughly similar to the Administration's. It also shows moderate growth, well below the average cyclical recovery. Both forecasts are cautious and note uncertainty about the recovery.
However, the CBO is somewhat more optimistic about real GNP
growth, unemployment, inflation, and interest rates in 1983 and
1984. The differences are modest in the first year and narrow
in the second. According to CBO:

- 6

Real GNP is expected to grow by 4 percent over
the four quarters of 1983 and 4.7 percent during
1984 (compared to Administration estimates of
3.1 percent and 4.0 percent).
0
Unemployment continues at very high levels,
declining only gradually during the recovery,
with average unemployment rates of 10.6 and
9.8 percent for the civilian labor force in
calendar years 1983 and 1984. The Administration estimates 10.7 percent and 9.9 percent,
respectively.
° The GNP deflator rises 4.7 percent in 1983,
according to CBO estimates, and 4.6 percent
in 1984 (compared to Administration estimates
of 5.6 percent and 5.0 percent, respectively).
On balance, the CBO forecast shows somewhat stronger
growth from 1983 through 1986, although somewhat lower growth
in the following three years.
Policies for the Recovery
In setting policy for the remainder of the 1980's, we
must recognize what we must not do. We no longer have the
freedom of action to revert back to the overly stimulative
monetary and fiscal policies pursued at times in the past,
for these would surely lead to a resurgence of inflationary
pressures and a new round of rising interest rates. Further,
we must not reverse the fundamental tax restructuring put
in place in 1981, for this was designed to provide the
noninflationary incentives without which the private sector
would continue to wither.
Policies for a Changing Economic Structure
For years private sector initiative and dynamic market
forces have been stifled by unnecessary Federal regulation.
It is important that we carry through with policies of reducing the regulatory burden on private industry. Noteworthy
successes have been achieved in this area, particularly in the
deregulation of the financial system. For the first time in
the postwar period, small investors can count on being able
to obtain market rates of return on their savings from banks
and thrift institutions.
Further, we recognize that our economy and those of the
other industrialized nations are undergoing a period of
restructuring. This is an era of rapid technological change,
and comparative advantage in the production of many goods
and services is shifting from the already developed to the
newly developing nations. Those nations which expend all
their energies shoring up declining industries and resisting

- 7 -

- 8 -

- 9 -

tax cut in 1983, after allowance for the effects of bracket
creep and higher social security taxes. And that 1983 cut and
tax indexing will be needed to offset bracket creep and increases
in social security taxes scheduled to take effect in the future.
These measures will greatly improve the competitive standing
of American capital and labor in the world as economic recovery
proceeds.
I want to discuss briefly the tax cut enacted in 1981 and
address some of the misconceptions about the act, namely that
the tax cut was much too large and as a result, it destroyed our
revenue base and caused the budget deficits we are facing.
Rather than being too large, the tax cut enacted in 1981
just barely offsets rising tax burden on the economy.
Between fiscal 1981 and 1988, ERTA reduces taxes by $1,138
billion, a substantial amount. But a substantial tax cut is
needed to offset the equally substantial tax increases facing
the American taxpayers between fiscal 1981 and 1988.
° r Last summer's tax bill raises taxes by $281 billion.
° The gasoline tax bill raises taxes by $21 billion.
° Inflation-induced bracket creep raises taxes by
$489 billion.
0

Previously-scheduled social security taxes raise
taxes by $214 billion, and the proposed bipartisan
social security rescue plan will raise $56 billion.
The total tax increases amount to $1,061 billion, leaving
the "taxpayers with net tax cut of only $77 billion between 1981
and 1988.
Rather than destroying the tax base, as many have suggested,
the 1981 tax cut merely "returns revenues as a percentage of
GNP to approximately the levels that prevailed in the 1960's
and 1970's," according to the Congressional Budget Office's
recent report on the budget.
Under the Administration budget, taxes as a percent of
GNP for fiscal years 1983 to 1986 will average 19.2 percent.
This is a level slightly higher than the 18.6 percent average
for the 1960's and the 18.9 percent average for the 1970's.
It is low only in comparison to the high tax level of the
previous Administration, which reached 20.9 percent in fiscal
1981.
And as CBO points out, the tax burden during the 1980's
"would have moved well above the all-time record of 21.9 percent of GNP reached in 1944" without the tax cuts.

- 10 -

- 11 -

- 13 -

Our Budget Proposals
Spending reduction is crucial. Unfortunately, it has been
difficult to achieve because of the built-in momentum of Federal
spending programs. Consequently, we are proposing strong
medicine. None of us will find it agreeable, but it is critical
to the restoration of vitality to our economy. There must be
assurance that all will share in spending restraint, just as
all of us will share in the benefits of a revitalized recovery.
We, like a great many other nations in the world, have tried
to live beyond our means. Now we must bring our spending into
line with our productive capacity and strengthen the private
sector which produces our national wealth.
The deficit reduction program that we propose contains four
basic elements.
0

The first is a freeze on 1984 outlays to the extent
possible. Total outlays should be frozen in real
terms in 1984. The 6-month freeze on COLAs, as
recommended by the Social Security Commission, is
to be extended to other indexed programs. There
will be a 1-year freeze on pay and retirement of
Federal workers, both civilian and military. Many
workers in the private sector have accepted freezes in
their pay. Federal workers can also make a sacrifice,
which hopefully will serve as an example for sectors
of the economy which have not yet recognized the need
for moderation in wage demands. As a final item of
freeze, outlays for a broad range of nonentitlement
programs will be held at 1983 levels.
° The second element of our budgetary program contains
measures to control the so-called "uncontrollables."
Laws have been so written that Federal payments are
automatic to all those declared eligible. We plan a
careful review of all such programs, taking special
care to protect those truly in need.
0
The third element is a cutback of $55 billion in
defense outlays from original plans.
° Fourth is a set of proposals involving the revenue
side of the budget, described below.
We are projecting receipts for the current year (fiscal
year 1983) of $597.5 billion. For fiscal year 1984 we expect
receipts to be $659.7 billion. The 1983 figure represents a
decline of $20.3 billion from the fiscal year 1982 total of
$617.8 billion. This decline, and indeed the absence of an
increase in receipts in the range of $50-70 billion, is

- 15 There is no proposed omnibus tax bill in the President's
budget message. However, there are several separate tax items.
Proposed tax legislation in the President's budget can be
conveniently grouped under three broad headings: Proposals
that improve the income security of Americans, proposals that
will improve our ability to produce future output, and, as an
insurance policy, a contingency or standby tax, which is
intended as a clear signal that we will not permit spending
to increase in the outyears unless we pay for it up front.
In the first category, our principal recommendation is
for adoption of the bipartisan social security proposals.
These proposals, which will increase receipts to the social
security funds by $9.8 billion in fiscal year 1984, $11.6
billion in 1985, and $10.6 billion in 1986, are necessary to
insure the solvency and security of these trust funds.
The second category, proposals to improve the utilization
of our human resources, includes the tuition tax credit, the
exclusion of earnings on savings for higher education, the jobs
tax credit for hiring the long-term unemployed, and the enterprise zone tax incentives. These will all improve our production
capacity, either through increased investments in education or,
more directly, by getting our currently underutilized force of
experienced workers back to work. As a group, these proposals
will reduce taxes $0.5 billion in 1984, $1.2 billion in 1985,
and $1.7 billion in 1986.
Finally, the President has proposed a contingency tax plan
designed to raise revenues of about 1 percent of GNP in the
event that, after Congress has adopted the spending reduction
proposals, there is insufficient economic growth to reduce the
deficit below 2-1/2 percent of GNP. The contingency tax plan
would not go into effect on October 1, 1985, unless the economy
is growing on July 1, 1985. The contingency tax plan is an
insurance program. It is important to have a plan in place
so that the country and the world know that we will not
tolerate a string of deficits that would exceed 2-1/2 percent
of GNP. Chart VI shows the effect on the deficit that the
contingency tax would have if it were implemented. It also
shows how the budget picture would be altered by stronger
expansion such as some private forecasters expect. The deficit
path under high growth reflects the assumption that real GNP
increases 1-1/3 percentage points faster than in the official
forecast path, starting with FY-1983. Such growth would be in
line with the performance from the end of 1960 to late 1966.
The contingency tax plan would contain two elements, each
raising about half of the revenues that may be required. One
element would be a temporary surcharge of 5 percent on individuals
and corporations. The other element would be a temporary
excise tax on domestically produced and imported oil designed
to raise revenues of about $5 per barrel. The contingency tax
alternative shown in the budget raises $146 billion over the

Chart I

INTEREST RATES AND INFLATION

* Growth from year earlier in G N P deflator.
Plotted quarterly.

i m w y IS. IM3 A2B

Chart II

INTEREST RATES
Weekly Averages

Percent

18
Prime Rate

16
.-. Aaa Corporate Bonds

v .*»•*

14
12
10

8
Q \

I I I I I i I I I I )

Oct.

I I I I I I I • I I I 1 1 i I I I I I I I I 1 I I I I I II I I I I I I I I I I I I I I I I I I I I I

I I I I

Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb.
1981
1982
1983

*Bank discount basis
February 14, 1983 A203

THE PATH OF POSTWAR ECONOMIC RECOVERIES
Real GNP trough = 100

115

110
Average of 5
Postwar Recoveries *

/>'
m?*

/
^^«#
•*

1975-76 Recovery

105

Current Cycle

•

100

i
-5

X^4
i

-3

-2
-1
0
+1
+2
Quarters from real GNP trough

* Postwar recoveries excluding the Korean War period
and the short-lived 1980-81 recovery.

I
+4

I
+5

I
+6

I I
+7

January 25, 1983 A 2 1 0

Chart IV

CONTRIBUTIONS TO A TYPICAL RECOVERY*
BY REAL GNP COMPONENT
Percentage
Points
11.0

— C o n s u m e r Spending

6.4

4.4
Inventory Investment

— Business Capital Spending

K, '. .. :. ..:

— Residential Construction

State and Local Purchases
Net Exports
Federal Purchases

-2
First
Four
Quarters

Second
Four
Quarters

TOTAL,
First
Eight
Quarters

* Average of postwar recoveries, excluding the Korean War period
and the short-lived 1980-81 recovery.

January 21, 1983-A213

UNIFIED BUDGET RECEIPTS AS A PERCENT OF GNP
Percent
25

Fiscal Years 1954-1988

Percent
25

Total Receipts
20 —

15
All Other Receipts

V^/
10

*••••••*****

^ ~ Social Insurance Taxes

I I I I I I I I I I I I I I I I I I I I I I I I I I I I 0
I I

1954 56

58 60 62 64

66 68

70 72

74 76

78 80 82

84 86

* Receipts include contingency taxes.
January 28, 1983 A215

Chart VI

THE DEFICIT AS A SHARE OF GNP
Percent

Administration Growth Path

No Contingency Tax

J
Contingency |

^i/h

High Growth Path,
No Contingency Tax*

'"%
'%%

%
\

"%%
**,
%
%

%,
%%

Trigger for
Contingency Tax

Decision date —
1982

—Trigger base
year
86

•

Fiscal Year
•Higher growth than the official path by 1-1/3 percentage point starting fiscal year 1983.
January 28, 1983-A214

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041

Statement by
Donald T. Regan
Secretary of the Treasury
February 11, 1983
The Interim Committee has reached agreement on the size and
distribution of an increase in IMP quotas. The proposed increase
in IMF quotas is 47.4 percent, from SDR 61.1 billion to SDR 90
billion.
As you know, agreement was also reached last month by the
major industrial countries on a revision and expansion of the
General Arrangements to Borrow (GAB).
For the United States, these agreements involve
an increase in the U.S. quota in the IMF by about 5.3 billion,
from SDR 12.6 billion to SDR 17.9 billion. At current exchange
rates, this is equivalent to an increase of $5.8 billion, from
roughly $13.8 billion to $19.6 billion.
Our portion of total new IMF quotas will be about 19.9
percent, compared to 20.7 percent at present. Our voting share
will go from 19.52 percent to 19.17 percent.
The U.S. share of the expanded GAB will be SDR 4,250
million, 25 percent of the new total of SDR 17 billion. The U.S.
commitment will, therefore, increase by the equivalent of about
$2.6 billion, at current exchange rates.
We are very pleased with the agreement. It should provide
sufficient resources to the IMF for it to carry out its
responsibilities.
Two important factors bear on our view of this increase.
First, in recent months the U.S. and others of the major
industrialized nations have moved swiftly to provide short term
assistance to the debtor nations. Secondly, we are seeing
increasing signs of economic recovery, both in the U.S. and other
parts of the world. This agreement today—when added to these
two £actors—will provide a strong foundation for increased
confidence in world financial stability and future economic
growth.
R-203^

-2It is important to view quota increases within the context
of world economic conditions. In the 1970's, we witnessed
periods of high and rising inflation and interest rates. Today,
inflation is way down, interest rates are declining, oil prices
are dropping. With this economic environment, we are even more
confident than ever that these quota increases are sufficient for
the foreseeable future.
Within a few days, we will be sending legislation to
Congress requesting approval for the U.S. share of the IMF
increase in resources.
As Congress moves through its
deliberations, I think it will become increasingly clear that
this support for the IMF is in our own national interests.
The American economy operates in a world marketplace. Our
recovery and the recovery of other nations are tied tightly
together. The nations now in debt represent customers for our
exports. Thus, they represent jobs here.

TREASURY NEWS
>epartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE

February 14, 1983

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,200 million of 13-week bills and for $ 6,203 million of
26-week bills, both to be issued on February 17, 1983, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing
May 19, 1983
Discount Investment
Price
Rate
Rate 1/

High
97.922
8.221%
Low
97.908
8.276%
Average
97.913
8.256%
a/ Excepting 1 tender of $100,000.

26-week bills
maturing
August 18, 1983
Discount Investment
Price
Rate
Rate 1/

8.51%
8.57%
8.55%

95.768 a/8.371% 8.86%
95.750
8.407%
8.90%
95.759
8.389% 2/ 8.88%

Tenders at the low price for the 13-week bills were allotted 94%.
Tenders at the low price for the 26-week bills were allotted 17%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Received
Accepted
$
39,315
$
39,315
$
79,315
12,427,230
4,955,610
12,372,350
25,700
25,700
16,470
85,465
60,465
39,920
45,610
40,310
104,315
51,825
51,825
37,310
398,120
1,029,705
756,625
53,455
44,455
:
51,070
14,310
14,290
12,825
38,580
38,580
:
51,620
25,475
20,475
:
19,690
855,610
262,610
:
817,770
248,250
248,250
:
241,030

Accepted
$
39,315
5,286,860
16,470
26,920
61,505
36,810
137,625
40,070
10,825
48,175
14,690
242,470
241,030

$14,940,530

$6,200,005

: $14,600,310

$6,202,765

$12,902,705
999,210
$13,901,915

$4,162,180
999,210
$5,161,390

: $12,258,315
:
718,895
i $12,977,210

$3,860,770
718,895
$4,579,665

967,515

950,000

71,100

673,100

$14,940,530

$6,200,005

: $14,600,310

$6,202,765

Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

U Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
on money market certificates is 8.275%.
R-2034

TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4;00 P.M.
February 15, 1983
TREASURY TO AUCTION $5,500 MILLION
OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury will auction $5,500 million
of 5-year 2-month 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.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
Attachment
oOo

R-2035

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR 2-MONTH NOTES
TO BE ISSUED MARCH 1, 1983
February 15, 1983
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date
Call date
Interest rate
Investment yield
Premium or discount
Interest payment dates
Minimum denomination available
Terms of Sale:
Method of sale
Competitive tenders

Noncompetitive tenders
Accrued interest payable
by investor
,
Payment by non-institutional
investors

$5,500 million
5-year 2-month notes
Series H-1988
(CUSIP No. 912827 PF 3)
May 15, 1988
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
November 15 and May 15 (first
payment on November 15, 1983)
$1,000
Yield Auction
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,00Q
None
Full payment to be
submitted with tender

Deposit guarantee by
designated institutions
Acceptable
Key Dates:
Deadline for receipt of tenders....Wednesday, February 23, 1983,
by 1:30 p.m., EST
Settlement date (final payment
due from institutions)
a) cash or Federal funds
Tuesday, March 1, 1983
b) readily collectible check
Friday, February 25, 1983

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-204'

FOR IMMEDIATE RELEASE
February 16, 1983

Contact:

Marlin Fitzwater
(202) 566-5252

STATEMENT BY
DONALD T. REGAN
SECRETARY OF THE TREASURY
ON INDUSTRIAL PRODUCTION
WEDNESDAY, FEBRUARY 16, 1983
The January rise in industrial production is another
important signal that recovery is in progress.
Led by increased output of autos and homegoods, industrial
production rose a revised 0.1 percent in December, and a strong
0.9 percent in January.
Historically, the upturn in industrial production has marked
the end of recessions. While it is too early to predict whether
this is the case with the present recession, the positive swing
in industrial production along with encouraging developments in
housing, retail sales and inventories reinforces the foundation
for a strong consumer-led recovery.

n ? r 3[

REASURY NEWS
irtment of the Treasury • Washington,
D.C. • Telephone 566-2041
TRc;-,
I n c. o i
Remarks by
The Honorable
Deputy Secretary R. T. McNamar
Chicago Savings Bonds Volunteer Committee
Hyatt Regency Hotel, Chicago, Illinois
Tuesday, February 15, 198 3

Thank you, Bob, for that kind introduction. I am happy to
be here today to break bread with friends from the business
community. I'm also happy to be with all of you to open the
Chicago Area's 1983 Savings Bonds Payroll Savings Campaign.
First, I would like to point out the key features of our new
Savings Bonds program and why it should fit into the average
American's plans for savings and investment.
Second, I would like to discuss briefly the Reagan
Administration's economic policy including signs that the economy
is turning around.
And finally, I would be delighted to use the remaining time
to field your questions.
Nineteen Eighty Three is a very upbeat year for Savings Bonds.
The new variable, market-based rate is the most significant and
most exciting change in Savings Bonds in more than 40 years. It
represents a dramatic new incentive to save, and ensures a positive
competitive rate of return in what has been a stormy savings
environment.
One of your colleagues -- Jim Robinson, Chairman and Chief
Executive Officer of American Express and the Chairman of the
198 3 U. S. Savings Bonds Volunteer Committee — calls Savings
Bonds "one of the best investments in the country."
Jim supported this view with his own full page ad in the
Wall Street Journal on February 4. By the way, the ad lists
Bob Reuss of Centel Corporation and the other members of the
198 3 Savings Bonds Volunteer Committee.

R-2037

- 2 Since 1935, Savings Bonds have been an important stabilizing
force in our Nation's debt-management efforts. Sales of Bonds
help the Treasury reduce the interest costs of the debt to all
taxpayers. Bond sales also help reduce the Treasury's need to
borrow in the open market, thereby reducing pressures on all
interest rates from Federal borrowing.
When Americans cut back on the Savings Bonds habit, there is
more pressure on the Treasury to borrow elsewhere. Increased
Treasury borrowing, in turn, drains funds that otherwise would
be available for private investment. More participation in the
Savings Bonds Program will help remove that pressure. It spreads
the debt to people who are not otherwise involved in the credit
markets. As Jim says in his ad, "Research shows that the payroll
saver buys U. S. Savings Bonds when he wouldn't otherwise save."
Savings Bonds are cost effective for our Government because
they pay less interest than Treasury marketable securities and
because they are held more than twice as long as the marketable
portion of the national debt. This means that the Savings Bonds
portion of the debt does not have to be refunded as often as the
remainder of the debt — for example, our 13, 26, and 52-week
bills and our two and three year notes. All Americans, therefore,
benefit from this reduction in interest expense and from the
relative stability that Savings Bonds offer.
Today, Americans hold more than $68 billion worth of Savings
Bonds. That is $68 billion the Government does not have to borrow
in the open market. That permits new savings the private sector
can pour into new ideas, new products, and new jobs that will lead
the Nation into a future that is bright and prosperous.
Some 80 percent of all Savings Bonds sales are through the
payroll savings plan. The plan has prospered through the support
of thousands of business leaders like you who promote and operate
payroll savings plans. The result has been the enthusiastic
participation of employees who find it the one sure way to
accumulate reserves for their future.
Payroll savings provide a widespread, easy, convenient, and
systematic way to safely put money away. Through this plan,
money is saved at the source — the paycheck — before the money
is in hand and one is tempted to spend it.

- 3 This may not be the most sophisticated way to save, but it
is pragmatic, and it works. With $4 of every $5 in Savings Bonds
coming through payroll savings, the plan has spearheaded the
Bond program's tremendous contribution to the American economy.
The payroll savings program historically has been an ideal
model of government-private sector cooperation. In fact, in the
minds of many Americans, Savings Bonds and payroll savings are
one and the same. Millions of people have never purchased a
Bond in any other way. Certainly the widespread ownership.of
government securities could not have been accomplished without
this automatic thrift plan.
Offering payroll savings in your companies — and volunteering
to convince other business leaders to do the same — is the key to
a successful Bond program.
How else can an individual earn market-based rates —currently
over 11 percent on Savings Bonds — for as little as $25, with
minimal effort? For that amount of money, the saver also gets a
guaranteed minimum return — 1\ percent. He is free from state
and local income taxes.. He can defer reporting the interest on
his Federal return until the Bonds are cashed. And his principal
and interest are guaranteed safe.
Think about it:
11% rate-4% CPI = 7% real return.
m% minimum-4% CPI = 3.5% real return.
No state and local taxes.
Tax deferred on Federal.
But no matter how good the product — no matter how attractive
the interest rates — the success of the program still rests with
you: the individual.
I'm here today on behalf cf President Reagan and Secretary Regan
to thank you personally for spearheading vigorous payroll savings
campaigns in your companies. Your executive leadership skills will
help sell your employees on the merits of Savings Bonds and on the
convenience of payroll savings. No one else can do it. Without your
strong and enthusiastic efforts, Bond sales will not keep pace with
our Nation's financing needs.

- 4We need a strong Savings Bonds Program. The health of our
Nation depends on it. And the success of the Bond Program — in
turn — relies heavily on payroll savings.
A strong payroll savings campaign will sign up people who
have never bought Bonds before. It will sign up those who have
no savings plans at all — and sign up the more sophisticated
savers who have ignored Savings Bonds in the past because they
felt they could get more for their money elsewhere. Such a campaign
will also encourage present payroll savers to increase their payroll
deductions for Bonds. When 1984 rolls around, I predict that you
will be looking back and say:
"This was a great year for the Savings Bonds
Program, and my personal efforts helped to
lower interest rates for all Americans."
Now, I would like to direct my remarks to the progress of
our economy and the encouraging signs we see for economic recovery.
As we enter this new stage, your businesses will play a significant
role. It is you who will be making the critical decisions on
where and when and how much to put into capital investment, when
to rehire and alike. These decisions will be far-reaching because
they determine down the road tne productivity and competitiveness
of your products in the marketplace and this in turn reflects on
your level of employment, earnings, and overall success of your
business.
The development of a sound fiscal and monetary policy was
the central objective of the Reagan Administration when it came
to office two years ago. Year after year, Americans watched as
an increasing share of the Gross National Product was allocated
for Federal spending and taxes. As the Government siphoned off
more and more capital from the private sector and the money supply
expanded, economic activity stagnated and inflation soared.
Early in this Administration, President Reagan put before
Congress a four point plan to revitalize the American economy,
and with it the worlds' economies. His program mandated that:
First, we must stop irresponsible and inflationary
spending. Federal programs must be pruned to fit
financial reality. In short, we've got to cut
unnecessary government spending.
Second, we must reduce excessive taxation because
it suffocates individual incentive and productivity
in the private sector. Raising taxes on working

- 5 Americans does not solve our Government spending
problems. One of the lessons I have learned in
Washington is that Big Government does not tax
to get what it needs — it taxes to get what it
wants. Somehow, someway, our Government has an
uncanny ability of spending all the money it can
get its hands on — and then some.
Third, we must replace the irregular monetary
habits of the past with consistent non-inflationary
practices. One of the great concerns of business
leaders in the country has been and continues to
be the fear of volatile movements in money growth —
on the one hand, swelling the money supply too fast,
spinning us back into the inflationary cycle, and
on the other hand, shrinking it too rapidly, giving
us a protracted recession. Our aim is to achieve a
monetary policy that is accommodative enough to
provide consistent, sustainable, but non-inflationary
economic growth.
Fourth, we must make major reductions and
improvements in government regulations. Regulation
upon regulation written in Washington -- measuring
tens of thousands of pages in the Federal Register —
has reduced the flexibility and productivity of
our society and has crippled its ability to respond
rapidly to changes in the marketplace; We have
made a good start in this regard, but much more
needs to be done. We want to return more decision
making to State Street and get it off Pennsylvania
Avenue.
President Reagan inaugurated his program with the comment:
"It's not my intention to do away with Government.
It is rather to make it work — work with us, not
over us; to stand by our side, not ride our back."
Where are we?
In the past 24 months, we have implemented major portions of
the President's plan. The task now is to encourage the renewal of
economic growth to reduce unemployment and provide productive job
opportunities in the private sector. But we must do this
thoughtfully and not repeat the errors of the past and return to
an inflationary economy.

On the brighter side, we do have clear signals
that our U.S. economy is turning around and that the
recession will soon be behind us. Unfortunately, the
upturn has been much longer in coming than we — or
most forecasters — had expected. The delay in
recovery occurred primarily because of the persistence
of high interest rates and the weakening economies
of our leading trading partners.
When times were good, our exports accounted for
one out of three acres of U.S. agricultural production,
one out of eight manufacturing jobs, and nearly 2 0
percent of U.S. production of all goods. Because of
poor economic growth, high unemployment, and the
alarming debt scheduling problems of many countries,
our trade deficit has widened from $28 billion in
1981 to $36 billion in 1982, and a projected $65-75
billion in 1983.
The weakness in exports -- combined with a
general hesitancy on the part of the U.S. consumer —
has led to slow buying, a drop in consumption, and
a delay in the expected turnaround of the economy.
Now, here are the encouraging signs we see
that the recovery is underway and that the recession
will soon be behind us:
The index of leading indicators has
risen for eight out of the last nine
months.
Housing is in the midst of a rapid
recovery.
Business trimmed inventories sharply
in the final quarter of last year.
Historically, a cleanout of inventories
typically has been followed by a shift
back to higher rates of production.
Durable goods spending is up.
Retail sales have begun to climb.
Total industrial production stabilized in December and appears poised
to turn upward.

- 7 The index of average hourly
earnings of production workers in
the private nonfarm economy rose
at a 5.1 percent annual rate last
month from 6 months earlier and
was up 5.4 percent from 12 months
earlier.
The unemployment rate fell to 10.4
percent (representing 11.4 million
workers) last month from 10.8 percent (12 million) in December.
Claims for new unemployment have
fallen steadily.
Commodity prices have shown some
firming in recent weeks.
As economic recovery gets underway, there
are certain conditions that we must not revert
to. We must not revert to the overly stimulative
monetary and fiscal policies pursued at times in the
past — for these would surely lead to a resurgence
of inflationary pressures and a new round of rising
interest rates.
Further — despite some political demands to
the contrary -- we must not reverse the fundamental
tax restructuring put in place in 1981, for these
tax improvements are designed to provide the noninflationary incentives to fuel the economic engines
of the private sector. In this regard, we welcome
Chairman Rostenkowski's comments that the third
year of the tax cut scheduled for July 1, 1983,
should go into effect. We hope he will see the
wisdom of not tampering with indexing of taxes as
well.
In closing, I want to assure you that the
Administration's program of steady money supply,
new tax philosophy, fewer regulations, and budget
cuts is now clearly working.
It is working, but working slowly. Success
won't occur overnight. We are dealing with the most
complicated economy in the world, but fortunately
the best.

- 8
The real danger is that the cycle of economic
change and the cycle of American patience too often
are at odds. It takes time to turn economic#trends
around while public opinion too often wants instant
results to longstanding problems.
Disinflation and sustained economic growth
don't make good footage for the seven o'clock news.
Unemployment and impatience do. Human hardships
and change are emotional, and require compassion from
all of us.
Those of you with teenage sons and daughters
should listen to the lyrics of the popular singer
Billy Joel when he sings the new top hit record,
"Allentown". It says a lot about how people feel
today about jobs, going to college, the American
work-ethic and economic change.
Yet, change we must if we are to have a
renewal of sustained prosperity and abandon the
stop and go economic policies of the past quarter
century. We must change our anticipations about
energy prices, about inflation, about pay increases,
about savings, and about the Government's ability
to do all things overnight without an adverse
impact on the economy.
The American economy is like a large oil
tanker in mid-ocean. It has enormous momentum to
continue going the same direction. But the captain
of the ship of state -- the President -- has ordered
the change and the bow has begun to swing around
and point to a new period of sustained noninflationary
prosperity. We have set a new course. And we will
stay that course.
To close by returning to where I started, the
new variable rate savings bond plays an important
part in ensuring that we can finance our Government
in the most efficient way with the least pressure on
short-term interest rates. So you who are the business,
Government, and labor leaders of Chicago, have a key
role to play in helping to keep interest rates declining
and to thereby promote the recovery. We've changed
our product, now we need you to change people's attitudes
by showing them the benefits
- 0 - of the new savings bond.

TREASURY NEWS

department of the Treasury • Washington, D.C. • Telephone 566-2
FOR IMMEDIATE RELEASE February 16, 1983
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $7,501 million of
$14,934 million of tenders received from the public for the 2-year
notes, Series R-1985, auctioned today. The notes will be issued
February 28, 1983, and mature February 28, 1985.
The interest rate on the notes will be 9-5/8%. The range
of accepted competitive bids, and the corresponding prices at the
9-5/8% interest rate are as follows:
Bids Prices
Lowest yield 9.65% 99.955
Highest yield
Average yield

9.73%
9.71%

99.813
99.849

Tenders at the high yield were allotted 94%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
83,660
$
49,760
New York
12,443,940
6,127,270
Philadelphia
46,080
46,080
Cleveland
179,995
164,635
Richmond
138,490
117,420
Atlanta
71,650
61,590
Chicago
768,075
360,235
St. Louis
129,775
122,185
Minneapolis
63,430
62,130
Kansas City
97,955
95,895
Dallas
35,510
35,330
872,130
255,110
San Francisco
3,110
3,110
Treasury
$14,933,800
$7,500,750
Totals
The $7,501 million of accepted tenders includes $1,455 million
of noncompetitive tenders and $6,046 million of competitive tenders
from the public.
In addition to the $7,501 million of tenders accepted in the
auction process, $340 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $499 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.

R-2038

TREASURY NEWS

lepartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE

February 17, 1983

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $ 7,750 million of 52-week bills to be issued February 24, 1983,
and to mature February 23, 1984, were accepted today. The details are
as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Price

Discount Rate

High - 91.626 8.282%
Low
91.588
Average 91.600

Investment Rate
(Equivalent Coupon-issue Yield)
8.96%

8.320%
8.308%

9.01%
8.99%

Tenders at the low price were allotted 55%.
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

Accepted

85,370
15,290,600
8,720
121,280
64,435
153,890
771,905
94,535
11,900
21,010
11,000
1,573,610
67,160

$ 41,370
6,918,350
6,720
72,120
24,125
47,390
131,715
45,535
10,900
20,510
6,000
358,360
67,160

$18,275,415

$7,750,255

$16,324,925
555,490
$16,880,415

$5,799,765
555,490
$6,355,255

1,200,000

Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

R-2039

195,000
$18,275,415

195,000
$7,750,255

TREASURY NEWS
iepartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
February 18 , 1983

Contact:

Charles Powers
(202) 566-2041

TREASURY ANNOUNCES PUBLIC MEETING TO DISCUSS
U.S.-FINLAND TAX TREATY ISSUES ON MARCH 7, 1983
The Treasury Department today announced that it will
hold a public meeting on March 7, 1983, to solicit the views
of interested persons regarding issues to be considered
during negotiations of new income tax and estate tax treaties
between the United States and Finland.
The public meeting will be held at the Treasury
Department, at 2:00 p.m., in room 4125. Persons interested
in attending are requested to give notice in writing by March
1, 1983, of their intention to attend. Notices should be
addressed to Leslie J. Schreyer, Deputy International Tax
Counsel, Department of the Treasury, Room 4013, Washington,
D.C. 20220.
Today's announcement of the March public meeting
precedes a second round of negotiations between representatives of the United States and Finland to develop a new
income tax treaty for the avoidance of double taxation and
the prevention of tax evasion and precedes the first round of
negotiations between such representatives to develop a new
estate tax treaty. The existing income tax treaty between
the United States and Finland was signed in 1970, and the
existing estate tax treaty between the two countries was
signed in 1952.
The Treasury seeks the views of interested persons in
regard to the full range of income tax and estate tax treaty
issues, as well as other matters that may have relevance to
the tax treaties between the United States and Finland. The
March 7 public meeting will provide an opportunity for an
exchange of views and will permit discussion of the United
States position in regard to the issues presented.
oOo

R-2040

TREASURY NEWS
iepartment of the Treasury • Washington, D.c. • Telephone 566-204
ICL L

STATEMENT OF BERYL W. SPRINKEL
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
WASHINGTON, D. C.
Tuesday, February 22, 1983
Chairman Garn, Senator Proxmire, distinguished Members of
the Committee, it is my pleasure to be here today to present
Treasury's views on current monetary policy, and to discuss your
concerns and questions on the subject.
Monetary Policy in 1983
The task for monetary policy in 1983 appears to be clear.
Chairman Volcker stated it well in his testimony before this
Committee last week when he said, "Our objective is easy to state
in principle — to maintain progress toward price stability while
providing the money and liquidity necessary to'support economic
growth." From my discussions with other Administration officials,
Federal Reserve officials, businessmen and economists, and from
my reading of the financial press, there appears to be widespread,
general consensus that this is the appropriate goal for monetary
policy in 1983 and the targets set by the Federal Reserve are
broadly consistent with that goal. But general agreement does
not, in and of itself, produce the desired results. If it did,
we presumably would not have had a decade and a half of rising
inflation and interest rates and the resultant economic stagnation; certainly no one sought or desired those results.
The subtleties and complexities of monetary control are such
that achieving a particular desired policy path — regardless of
a consensus that it is appropriate — is never a certainty.
Our knowledge of the exact magnitude and timing of the impact
of monetary actions is imperfect; the lag in their impact on
the economy is variable. For either — or a combination of
both — of these reasons, there is always a risk that actual
monetary policy will not match intentions or goals.
Without great care in the implementation of monetary policy
in the coming months, there is a risk that the Federal Reserve
could err in one direction and be too highly restrictive, or in
the other direction, and be overly expansionary. The danger to
the economy is that the economic recovery could be aborted, or
the gains we have made in reducing inflation could be lost, or
both.
R-2041 It is these risks and dangers that I would like to discuss
with you today.

-2First, I believe it would be instructive briefly to review
where we are, and how we arrived where we are, with respect to
monetary policy.
The General Situation
A deceleration in the trend rate of money growth is necessary
to reduce inflation; it is for this reason that the Administration
originally recommended that money growth be gradually and steadily
slowed. When I met with this Committee last July, I emphasized
the importance of the gradual and steady aspect of that recommendation. Few believed that the slowing of money growth necessary
to control inflation could be achieved without some associated
restraint on the growth of economic activity; but we did believe
that a gradual and steady deceleration would minimize the
constraint on the economy, and that that constraint might be offset
in the long run by the incentive effects of the tax cut. However
it is difficult to characterize the slowdown in money growth that
actually occurred as either gradual or steady. As a consequence,
while impressive.progress has been made on inflation, the
restriction of economic activity associated with that progress
was magnified.
In 1981, money growth was abruptly and significantly reduced
relative to its previous growth path; after four years of money
growth that averaged 7.8%, Ml growth in 1981 was 5%. For calendar
1981, Ml growth was therefore below the target growth range set
by the Federal Reserve. After a short period of rapid growth in
late 1981 and early January 1982, the restraint on money growth
continued until mid-summer of 1982. By mid-1982, the path of Ml
was well below the deceleration path that had been recommended
by the Administration. This severe and prolonged monetary
restriction was an important factor contributing to the onset,
severity and duration of the recession.
By contrast, since July of 1982 money has grown at a very
rapid pace; during the last quarter of the year, Ml grew at an
annual compound rate of nearly 14%. As a consequence, Ml growth
in 1982 averaged 8-1/2%, well above the 5-1/2% path that was the
upper bound of the Federal Reserve's money growth target.
On the positive side, the monetary surge in the last half
of 1982 can be viewed as an abrupt and belated adjustment for the
previous, prolonged undershooting. The rapid pace of money growth
in recent months, in fact, brought the fourth-quarter, 1982 average
of Ml up to the level that was implied by the Administration's
originally recommended path for prudent noninflationary monetary
policy. Although we arrived at approximately the same average
level for Ml by the fourth quarter of 1982, the path by which we
did so was less than ideal.
An important lesson to be learned from the experience of recent
years is that we pay a very high and very real price for monetary
instability. The timing of the relationship between money growth

-3and real economic activity is affected by a variety of factors,
including the public's expectations about fiscal and monetary
policies. Because of the elusiveness of expectations, any
exact quantification of the economic impact of erratic money
growth could be disputed; however, the direction of the effect
seems clear. In short, while monetary policy seems to many to
be academic and arcane, the effects of monetary actions are
neither. The impact of monetary actions is felt in very
practical and real ways — as manifested in inflation, interest
rates, real economic growth and the unemployment statistics.
Looking to the future, the monetary actions taken by the
Federal Reserve will, as they have in the past, be critically
important to economic performance in 1983-84. Obviously we can
all agree that nurturing an economic recovery is our primary
concern. But it is also vitally important that that recovery be
a healthy and sustainable one, rather than either a recovery that
stalls out quickly, or one that consists of an inflationary burst
of economic activity that falters as inflationary expectations
drive interest rates up and choke off expansion.
The challenge is to pursue policies that will provide the
atmosphere needed for a sustainable, noninflationary economic
expansion. With the rapid rate of money growth that has occurred
in the last six months, the risks associated with monetary policy
are that either (1) the monetary expansion would be abruptly
curtailed, restraining output and employment growth as it did in
1981-82; or (2) the Federal Reserve would allow the monetary
expansion to continue too long, reigniting inflationary expectations, driving long-term interest rates up and preventing a
sustained recovery. Great care in the implementation of monetary
actions will be needed if both these pitfalls are to be avoided.
The Danger of Being Overly Restrictive
It would be ill-advised for the Federal Reserve to attempt
to reverse the bulge in money that has occurred in the last few
months. Such a monetary contraction would almost certainly stall
any meaningful economic recovery, and could, depending on its
severity and duration, plunge the economy into a deeper recession.
However, it is clear that money growth cannot continue at
the pace of the last quarter without precipitating economic
disaster. The risk, however, is that an attempt to slow money
growth may result in too severe, or too prolonged, a monetary
squeeze. In the past, periods of rapid money growth have
typically been followed by long periods of restriction. A
prolonged period of slow money growth would again curtail the
growth of employment and output as it did in 1981-82.
The challenge of reinstating noninflationary monetary policy
is to bring down the long-run trend of money growth gradually
enough that the restriction of economic activity is avoided.

-4Permanent and continued progress toward lower inflation and
interest rates requires that we persevere in our efforts to bring
the trend of money growth back to a noninflationary pace. But,
after six months of very rapid money growth, great care must be
taken that those efforts do not result in another severe and
lengthy restraint of money growth. Economic expansion cannot
proceed without the support of adequate liquidity.
The Danger of Excessively Stimulative Monetary Policy
An economic recovery based on highly stimulative monetary
policy is ultimately unsustainable, because the inevitable
consequence of excessive money growth is inflation and rising
interest rates, both of which are powerful deterrents to the
long-run real economic growth we all seek. Rapid money growth
does provide a stimulus to nominal GNP growth; a crucial concern,
however, is whether that nominal income growth consists of
real economic expansion (growth of real GNP), or of inflation.
Rapid money growth may provide a temporary, short-lived stimulus
to the economy, but once inflation and inflationary expectations
emercje, real growth is choked off by rising interest rates.
Once that point is reached, continued stimulative monetary
policy is predominantly inflationary.
The key is the reaction of interest rates to the increase
in money growth. If the financial markets fail to recognize the
implications of rapid money growth, the rise in interest rates
might be postponed, and the positive, stimulative effect of
monetary expansion could last longer. But the more quickly
inflationary expectations, and therefore interest rates, react,
the more ineffective monetary expansion will be in providing
economic stimulus. As has been illustrated often in recent
years, interest rates and money growth can and do move in the
same direction when market expectations and uncertainty about
inflation are sensitive to the inflationary implications of
increases in the money supply.
In this sense, recent developments in the financial markets
contain some foreboding signals. Chart 1, accompanying my prepared
testimony, illustrates the recent course of a representative
short-term and long-term interest rate. While it is widely believed
that the decline in interest rates that occurred last summer was
the result of a more accommodative Federal Reserve policy, this
is not really an accurate portrayal of the timing of events. Money
growth began to accelerate in August and, as can be seen in the
chart, most of the decline in interest rates had already occurred
by August. Some short-term rates are now slightly lower than they
were in late August, but the three-month Treasury bill rate is
slightly higher now than it was the last week in August. The
decline in long-term rates continued into the fall, but then
levelled off; long rates have risen slightly in the last few
months.

-5Therefore while the rapid growth of bank reserves provided
by the Federal Reserve in recent months did push short-term interest
rates down to some extent, attempts to continue to do so are likely
to be self-defeating. We have already seen a leveling off of shortterm rates despite continued rapid reserve and money growth; the
last decrease in the discount rate did not elicit similar
decreases in short-term market rates. As Chairman Volcker has
stated on many occasions, the Federal Reserve has no button to
push to cause interest rates to fall.
In terms of its long-run implications, the failure of longterm rates to follow short rates down and the recent upturn in
long rates, despite continued rapid growth in reserves and
money, is a foreboding signal of the financial markets'
expectations. The only logical explanation of this development
is that the financial markets are observing current reserve
and money growth and making some calculation about expected,
future inflation — or at least some calculation of their fear
or skepticism about future inflation. Inflationary expectations
is the only plausible connection between short-run changes in
money growth and long-term interest rates. Thus, while it may
be possible for the Federal Reserve to temporarily push down,
or hold down, short-term interest rates by injecting more
reserves into the banking system, such actions are not likely
to generate the desired decreases in long-term rates; under certain
market conditions, even the desired declines in short-term rates
may not materialize.
A key element in the behavior of long-term rates is inflationary
expectations. In the current situation, the uncertainty about
the budget situation and about long-run inflation control has
heightened the sensitivity of inflationary expectations. The uptick
in long-term rates in recent months may be the first signal that,
from the viewpoint of the financial markets, the monetary expansion
has gone too far.
This is the danger of using excessively expansionary money
growth in an attempt to stimulate the economy. There may be
limited short-term success, as long as long-run inflationary
expectations do not move adversely. But predicting the timing
of those expectations with any degree of precision is impossible;
helpful, stimulative money growth ultimately turns into excessive
money growth that drives inflationary expectations and interest
rates upward and precludes continued, real economic expansion.
The path of long-term interest rates will be a critical
factor in determining whether or not the incipient recovery will
evolve into a period of sustained real economic growth. In my
view, one of the most troublesome developments over the past
decade and a half has been the successive upward drift of longterm interest rates. Chart 2 illustrates the upward trend of
long rates over the past twenty-five years and relates it to the
rising trend rate of money growth. While there have been many
periods when long-term rates fell — notably during or directly

-6after recessions — the low point of each downturn in long-term
rates has been higher than the previous one. Each upturn has
taken long rates to new highs, and each successive low point has
been at a level higher than the preceding low point. The rising
trend of inflation and long-term interest rates has most likely
contributed to our long-run problems of lagging investment and
productivity growth.
The most important message in Chart 2 for the current
situation is that we have not yet broken this pattern. While
long-term rates are now well below their all-time highs reached
in 1981, they have not yet broken below their previous cyclical
low, which, from a historical standpoint, was not particularly
low. Despite the significant decline in inflation, we have
not yet succeeded in breaking the trend of secularly rising
long-term interest rates. The implications of this for long-run,
real economic growth are not encouraging.
The behavior of long-term rates and their reaction to money
growth is the immediate and practical danger of continuing rapid
money growth. Attempts by the Federal Reserve to push down, or
hold down, short-term interest rates would require continued
rapid growth of reserves and money. Particularly as the economy
grows more strongly and credit demand increases, upward pressures
on short-term rates will emerge; more and more reserve growth
would be required to hold down short-term interest rates in the
face of these market pressures. Ultimately, the resulting money
growth would aggravate inflationary expectations and cause longterm rates to rise, thereby defeating the intended goal of
encouraging lower interest rates.
Where Do We Go From Here?
With economic dangers lurking both on the side of too much
money growth, and on the side of too much restraint, the safest
course is to provide moderate money growth. That is, of course,
easier to state than it is to achieve. The chances of achieving
that goal, however, would be maximized if the Federal Reserve
would move now to restrain the growth of bank reserves in order
to slow money growth gradually from the high rates of recent
months. Efforts by the Federal Reserve to peg or reduce shortterm interest rates are not likely to produce that result.
Actions to return reserve growth to a rate consistent with
moderate money growth may cause immediate, but temporary, increases
in short-term interest rates. Bank reserves have grown very
rapidly for many months, so upward pressure on short-term rates
is the price we now may have to pay to restore more moderate
growth and to protect long-term rates from the large increases
that are inevitable if reserve and money growth is not moderated.
There are many who contend that more rapid money growth now
is acceptable because of the weakness of the economy and because
it can be reversed later on, once the recovery is more strongly

-7underway. This view presumes that sometime in the future will
be the "right time" for bank reserve and money growth to be
easily, conveniently and painlessly brought back under control.
Furthermore, this analysis makes some heroic assumptions about
the precision of monetary control and economic forecasting.
Continuing to allow rapid money growth in order to stimulate
economic recovery presumes that the monetary authority can apply
the appropriate dose of monetary stimulus for just long enough
to provide expansion, but neither too much, nor for too long, to
generate more inflation and inflationary expectations. Given the
inaccuracies of economic forecasting and the deficiencies in our
knowledge about the timing and impact of monetary actions, it is
extremely difficult to determine the moment when helpful stimulus
becomes harmful and inflationary. Furthermore, even if that moment
could be accurately determined, such fine-tuning policies presume
a precision for monetary control that could, but unfortunately,
does not exist. Such monetary fine-tuning sounds logical and
reasonable in casual conversation, but it is extremely difficult
to achieve; it has not worked reliably in the past and the attempts
on average have been very destabilizing.
The money growth target ranges for 1983, announced by
Chairman Volcker last week, are consistent with our goal of
providing enough money growth to support the expansion, without
reigniting inflationary pressures. While the. ranges set for
Ml and M2 for 1983 are higher than their 1982 ranges, these
adjustments were made in order to account for the effects of
institutional change. Changes in the money supply that are
the result of institutional change have no particular economic
meaning. It is therefore appropriate to adjust the money
growth targets to take account of these changes, as they can
best be estimated at this time. The Federal Reserve has stated
that the new targets, after adjustment for institutional change,
are comparable to the 1982 targets in terms of economic meaning.
With respect to the new targets, Chairman Volcker said in
his statement that "... the growth of money and credit will need
to be reduced to encourage a return to reasonable price stability.
The targets set out are consistent with that intent." The
Administration agrees with that goal and intent. Since money
growth exceeded the targets in 1982, average money growth will
be lower in 1983 if the new target ranges are achieved; this is
consistent with the goal, shared by the Administration and the
Federal Reserve, of noninflationary money growth over the long
run.
Conclusion
The sustained, noninflationary economic expansion that we
all desire — and that has repeatedly eluded us over the past
fifteen years — is, I believe, now within our grasp. Whether
or not it becomes a reality obviously does not depend exclusively
on monetary policy, but the monetary actions taken in coming

-8-

On the one hand, another prolonged period of restricted
money growth as we had in 1981 and early 1982, would depress
economic activity and would likely interrupt, if not prevent,
the recovery. On the other hand, attempts to use excessive
money growth as an economic stimulus carry a significant risk
of back-firing. The key is money growth that is supportive of
economic expansion, but not so stimulative that inflationary
expectations move adversely. These expectations, which are
already sensitized by the projected budget deficits, are the
major factors that have held up long-term interest rates even
as the actual rate of inflation has declined.
The immediate contribution that monetary policy can make to
a sustainable economic expansion is to facilitate continued
downward adjustment of price expectations, to allow the entire
structure of interest rates to fall. Downward adjustment of
longterm price expectations over the course of this year is
necessary to assure a meaningful and lasting decrease in the
cost of credit, which is a vital element to meaningful economic
recovery. Holding short-term interest rates down by continuing
to provide more reserves to the banking system, however, is
not likely to produce the desired downward pressures on longer
term interest rates.
The risk of excessive monetary expansion early in 1983 is
not an immediate resurgence of inflation. It- is unlikely that
excessive money growth would have an appreciable effect on the
price indices for more than a year. Instead, the danger comes
from the potential impact of expectations about the longer term
prospects for inflation.

oOo

REPRESENTATIVE SHORT-TERM AND LONG-TERM INTEREST RATES
(weekly averages, January 1982 to February 11, 1983)
Percent
16

/*''*t~"Short-Term Commercial
/
\ Paper Rate (4 months)

Xii,%'N

Long-Term Government
Bond Rate (10 years or more)

•••••I

i i i I i i i I i i i i I i i i I i i i II I I I I II

JAN

FEB

MAR

APR

MAY

JUN
1982

JUL

"
"
"
W
'
"

i I I I l I l I I I I I I I I I I I I I I I I M

AUG

SEP

OCT

NOV

DEC

JAN
1983

FEB

Chart 2

LONG-TERM MONEY GROWTH AND INTEREST RATES
Percent

*Monev Growth is the rate of change in M l over three years, expressed as an annual rate.

TREASURY NEWS

Department of the Treasury • Washington, o.c. • Telephone 566FOR RELEASE AT 4:00 P.M. February 22, 1983
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 12,400 million , to be issued March 3, 1983.
This offering will provide $1,075 million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $ 11,328 million , including $1,164 million currently heid by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2,226 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 $6,200
million, representing an additional amount of bills dated
December 2, 1982,
and to mature June 2, 1983
(CUSIP
No- 912794 CW 2) , currently outstanding in the amount of $5,812
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $6,200 million, to be dated
March 3, 1983,
and to mature September 1, 1983
(CUSIP
No. 912794 DP 6 ) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing March 3, 1983.
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 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 $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.
R-2042

- 2 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,
February 28, 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.
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
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.

- 3 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
on March 3, 1983,
in cash or other immediately-available funds
or in Treasury bills maturing March 3, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch , or from the Bureau of the Public
Debt.

TREASURY NEWS
iepartment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
February 22, 1983
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,201 million of 13-week bills and for $6,201 million of
26-week bills, both to be issued on February 24, 1983, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High

Low
Average

13--week bills
maturing May 26, 1983
Discount Investment
Price
Rate
Rate 1/
98.028
97.998
98.006

7.801%
7.920%
7.888%

8.07%
8.19%
8.16%

(

;
:

26-week bills
maturing August 25, 1983
Discount Investment
Price
Rate
Rate 1/
95.983
95.961
95.969

7.946%
7.989%
7.973%2/

8.39%
8.44%
8.42%

Tenders at the low price for the 13-week bills were allotted 89%.
Tenders at the low price for the 26-week bills were allotted 04%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
$
66,780
$
66,780
$
79,690
10,166,125
4,701,425
J 13,275,670
32,040
32,040
15,935
87,055
71,505
44,395
37,845
37,845
105,510
65,165
65,165
42,870
1,020,875
749,265
585,025
37,770
31,770
63,840
12,480
12,480
15,040
54,500
47,465
47,465
29,700
29,700
:
21,170
745,030
261,730
1,362,705
258,410
258,410
:
230,235

Accepted
$
38,010
4,781,180
15,935
34,395
54,010
39,370
106,375
52,840
13,040
52,635
16,170
766,705
230,235

$12,606,740

$6,201,340

: $16,060,825

$6,200,900

$10,506,450
1,030,800
$11,537,250

$4,101,050
1,030,800
$5,131,850

: $13,914,585
:
770,240
: $14,684,825

$4,054,660
770,240
$4,824,900

1,047,490

1,025,000

22,000

351,000

$12,606,740

$6,201,340

Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

: $16,060,825 • $6,200,900

V Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
on money market certificates is 8.233%.
R-2043 •

2041

TREASURY NEWS

Department of the Treasury • Washington, D.C. • Telephone 566-204
FOR IMMEDIATE RELEASE
February 22, 1983

CONTACT:

Robert E. Nipp
(202) 566-2133

ROBERT J. LEUVER APPOINTED DIRECTOR
OF TREASURY'S
BUREAU OF ENGRAVING AND PRINTING

Secretary of the Treasury Donald T. Regan today announced
the appointment of Robert J. Leuver as Director of the Bureau
of Engraving and Printing. The appointment, effective immediately, fills a vacancy created when Harry R. Clements, the former
director, resigned in early January to return to the private
sector.
Mr. Leuver has most recently been Deputy Director and
Assistant Director (Administration) at the Bureau. He has
broad experience in organization, financial systems, information management, and general administration.
As Director of the Bureau of Engraving and Printing,
Mr. Leuver is responsible for administering the world's largest
security printing facility. The Bureau has annual sales in
excess of $156 million and produces U.S. currency and postage
stamps, public debt securities, and some 700 other miscellaneous
security documents. It operates without an appropriation under
a revolving fund. Public Law requires the Bureau to function
economically and competitively. The Bureau employs 2,300 employees,
all in Washington, D.C.
Before joining the Bureau in April 1979, Mr. Leuver worked
five years in the Office of the Secretary as Chief, Treasury Employee Data and Payroll Division, and Program Manager for Management Information Systems. He served two years with ACTION, the
parent agency for the Peace Corps, as Chief, Planning Division,
and Chief, Management Analysis Staff.
Mr. Leuver was Executive Vice President, Claretians, Inc.,
for four years, and financial officer for 14 years. He also has
served as a consultant to foreign countries and as a teacher and
lecturer at colleges and universities.
A native of Chicago, Mr. Leuver, age 56, is married to the
former Hilda Ortiz, also of Chicago. He graduated from Loyola
University at Los Angeles with majors in Philosophy and English
and has a Masters Degree from Catholic University of America,
Washington, D.C.
R-2044

oOo

TREASURY NEWS
iepartment
of the Treasury • Washington, D.C. • Telephone 566-2041
For Release Upon Delivery
Expected at 10 a.m. EST
February 23, 1983
STATEMENT OF
THE HONORABLE JOHN E. CHAPOTON
ASSISTANT SECRETARY
(TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
OF THE
HOUSE COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Subcommittee:
T am pleased to have the opportunity to present the
views of the Treasury Department on H.P. 1296, which deals
with the tax treatment of farmers who participate in the
Administration's Payment-in-Kind (PIK) program. Although we
have some technical comments on the bill as currently
drafted, the Treasury Department strongly supports
legislation which would remove any disincentives in current
tax law to farmers' participation in the PIK program.
BACKGROUND
The PIK program is a land diversion program designed to
reduce the amount of certain agricultural commodities in the
marketplace, thereby raising the prices of such commodities.
Under the PIK program, the Department of Agriculture will
compensate a participating farmer for removing acreage from
active production by giving the farmer a percentage of the
amount of the commodity he otherwise could have grown. The
commodity is to be available to the farmer at the time ot
normal harvest, although the government will pay storage
costs for up to five additional months.
Income Tax Consequences
Under current income tax law, a farmer would realize
gross income from this transaction equal to the amount of the

R-2045

-2fair market value of the commodity received at the time the
commodity is made available to him. The farmer would take a
tax basis in the commodity equal to the amount included in
income. He would recognize additional income (or loss) from
the sale of the commodity if the amount realized from such
sale exceeds (or is less than) the amount already included in
income. Further, the farmer would be entitled to deduct his
basis in the commodity to the extent it is used for feed.
The current law income tax treatment of the transaction
involved in the PIK program is more complicated in the case
of farmers who have nonrecourse loans outstanding from the
Commodity Credit Corporation (CCC) secured by commodities
which they either store on their own premises or in
warehouses. The Department of Agriculture proposes to
implement the PIK program for these farmers in two steps, as
follows:
(.1) the CCC will purchase the commodity from the farmer
for an amount equal to the outstanding loan which is secured
by the commodity, and the loan will thereby be discharged;
and
(2) the CCC will then deliver that exact commodity or,
in the case of farmers whose commodities are stored in
warehouses, the warehouse receipt representing the commodity,
'to the farmer as his payment-in-kind under the PIK program.
The income tax consequences to a farmer in these
circumstances would depend upon whether the farmer has made
an election under section 77 of the Internal Revenue Code to
treat the nonrecourse loan from the CCC as a sale for tax
purposes. If the farmer makes a section 77 election, the
loan proceeds are included in the farmer's income in the year
of receipt. Since a farmer who has made a section 77
election has already been taxed on the proceeds of his CCC
loan, the cancellation of that loan in exchange for the
commodity securing the loan would'have no further tax
consequences to the farmer. The subsequent transfer of the
commodity back to the farmer would be subject to the same tax
treatment as described above; that is, the farmer would have
gross income equal to the fair market value of the commodity
when it is made available to him and would take a basis in
the commodity equal to that value.
In the case of farmers who do not make a section 77
election, the CCC loan, when made, is treated as a loan
rather than a sale. Therefore, the PIK transaction would be
treated as a sale of the commodity for an amount equal to the
outstanding debt which the commodity secured, followed by

-3•

receipt of the commodity as a PIK payment. The result would
be that the farmer would be taxed first on the amount of the
debt which was discharged in the sale transaction and second
on the amount of the fair market value of the commodity
received in the PIK transaction. However, as discussed
above, the farmer would take a basis in the commodity
received equal to its value.
Estate Tax Consequences
Under section 2032A of the Internal Revenue Code, if
certain requirements are met, real property which is used as
a family farm and which passes to or is acquired by a
qualified heir may be included in a decedent's estate at its
current use value, rather than its full fair market value.
Among the requirements which must be satisfied are: (1) the
property must have been owned by the decedent or a member of
his family and used "as a farm for farming purposes" on the
date of the decedent's death and for periods aggregating five
years or more during the eight-year period ending with the
decedent's death; and (2) there must have been "material
participation" in the operation of the farm by the decedent
or a member of his family for periods aggregating five years
or more out of the eight-year period ending on the date of
the decedent's death.
Section 2032A also provides that the estate tax benefit
of special use valuation generally is recaptured if the
qualified heir disposes of the property to a nonfamily member
or ceases to use the property "as a farm for farming
purposes" within 10 years after the decedent's death and
before the qualified heir's death. With certain exceptions,
the qualified heir ceases to use the property for the
qualified farming use if he or members of his family fail to
participate materially in the farm operation for periods
aggregating more than three years during any eight-year
period ending after the decedent's death and before the
qualified heir's death.
Another estate tax provision relevant to many farmers
participating in the PIK program is section 6166 of the Code,
which allows deferred payment of estate tax attributable to
ualifying closely held business interests owned by
ecedents. The benefits of section 6166 are limited to
interests in active trades or businesses.
A question may arise whether property on which a cash
crop is not being grown as a result of participation in the
PIK program, or in some other acreage-reduction program
sponsored by the Department of Agriculture, is nevertheless

-4being used "as a farm for farming purposes" within the
meaning of section 2032A. Similar questions may be posed as
to whether there has been the requisite "material
participation" for purposes of section 2032A and whether the
property is part of an active trade or business qualifying
for estate tax deferral under section 6166.
None of these estate tax questions is specifically
addressed in the present statute, and neither the regulations
nor the published rulings have addressed these exact issues.
It is Treasury's view, however, that the dedication of land
to an acreage-reduction program sponsored by the Department
of Agriculture generally should not prevent satisfaction of
the requirements of section 2032A or section 6166 under
present law, particularly where a portion of the farm remains
in active production. In such a case, there would still be
property used as a farm for farming purposes and material
participation in its operation. Moreover, nothing in section
2032A or section 6166 requires that its tests be applied on
an acre-by-acre basis. The fact that a portion of a farm is
temporarily left fallow or covered with a conservation crop
pursuant to an agreement with the Department of Agriculture
does not mean that such portion is no longer a part of the
farm or that it is not being used for farming purposes. In
fact, fields are often temporarily removed from active
production for soil conservation or other farming reasons
having nothing to do with Federal acreage-reduction programs.
If a farmer removes his whole farm from active
production, however, the result is somewhat less clear. In
particular, if no portion of the farm is being used for
farming purposes in the traditional sense, it is unclear
whether there can be the required material participation in a
farming operation. Also, it may be argued that if an entire
farm is withdrawn from production, it has ceased to be used
as a farm during that period.
DESCRIPTION OF H.R. 1296
Income Tax Provisions
H.R. 1296 would amend section 451 of the Code, which
relates to the taxable year income is to be taken into
account for tax purposes, by providing that a taxpayer may
elect to exclude the value of commodities received under the
PIK program from income in the year of receipt and to treat
the commodities as if they were grown by him. Any
commodities with respect to which such an election is made
would have a zero basis for tax purposes. Thus, the farmer
would realize income only at the time he sells the

-5commodities or, if he uses the commodities for livestock
feed, at the time he sells the livestock to which the
commodities were fed.
Further, the bill would provide that taxpayers who would
otherwise have to recognize income by reason of the
cancellation of a CCC loan may elect to1defer such income
recognition. Under this election, a portion of the total
proceeds from the cancelled loan would be included in income
in the year the loan is cancelled and in succeeding taxable
years in an amount equal to the proportion of the total
commodity which secured the loan that is sold or consumed in
each such taxable year.
Taxpayers may make either or both of the elections
provided by H.R. 1296 separately with respect to each PIK
payment received and each loan cancelled under the program.
Estate Tax Provisions
H.R. 1296 also would amend section 2032A to provide that
the fact that property is removed from production pursuant to
a "qualified Federal farmland removal program," shall not
prevent (i) such property from being treated as used as a
farm for farming purposes nor (ii) any individual from
materially participating in the operation of the farm with
respect to any property. A "qualified Federal farmland
removal program" is any Federal program for removing land
from agricultural production, including (but not limited to)
the PIK program.
H.R. 1296 does hot contain any provision which
specifically addresses the effect of the PIK program on
section 6166.
DISCUSSION
Timing of Income Recognition
Many farmers participating in the PIK program will have
sold crops in the current taxable year which were harvested
in a prior taxable year. Current law may impose a hardship
on these taxpayers because they will have, in effect, income
from two crops (the income from the prior year's crop that is
sold, plus the income from the PIK payment) in the same
taxable year. In addition, farmers participating in the PIK
program will be under pressure to sell commodities to obtain
cash to pay their income tax liabilities arising from the
actual or constructive receipt of the PIK payments; and those
sales may have to be made in a market flooded with

-6commodities being sold by other farmers facing the same tax
liquidity problem. These tax-motivated sales may cause farm
commodity market problems of the type that the PIK program is
designed to reduce. The potential tax and market problems
also may discourage farmers from participating in the PIK
program, thus frustrating Federal agricultural policy.
In view of these problems, the Treasury Department
strongly supports changes in the current law which adopt the
general policy position underlying H.R. 1296. Because PIK
payments, in effect, are replacements for the commodities
which farmers could have been expected to produce from the
normal use of land devoted to the program, the tax law should
treat farmers who receive commodities under the program as if
they had grown the commodities themselves. Under this
approach, farmers would recognize income only in the year
they actually sell or otherwise dispose of the commodities in
question. However, as I indicated earlier, we do have some
technical comments on the bill as currently drafted.
First, we do not believe that the bill should be drafted
as an amendment to section 451 of the Code. Section 451
relates to the timing of the recognition of income depending
upon the taxpayer's method of accounting. Under either the
cash or accrual method of accounting, a PIK payment would be
recognized for tax purposes in the year the farmer receives
or has a right to receive the payment. The issue is not one
of timing but one of income inclusion. We believe that the
bil] should be drafted to provide an exclusion from gross
income for commodities received under the PIK program and,
further, to provide that those commodities will have a zero
basis for income tax purposes.
Second, the bill would permit farmers who have not made
a section 77 election to take any amounts realized from the
CCC loans ivnto income as the commodities are sold or
consumed, rather than at the time the loans are discharged.
We seriously question whether such relief is warranted. In
such cases, the farmers already have received the cash
necessary to pay any tax resulting from the income realized
from the loan proceeds. Further, this provision of the bill
would provide farmers who have not made a section 77 election
with a significant advantage over those farmers who have made
an election and have already paid tax on the loan proceeds
received.
Third, we believe that the income tax rules provided by
the bill should be mandatory rather than elective. Mandatory
rules would be fully consistent with the objective of
treating farmers who participate in and receive commodities
under the PTK program as if they had grown the commodities

-7themselves. We acknowledge that some taxpayers may have made
the decision to enter into contracts with the Department of
Agriculture based on the tax consequences under current law.
If such taxpayers want taxable income during the current
taxable year, however, they generally can achieve that result
by selling the commodities received pursuant to the program
in the current taxable year.
Special Use Valuation
Treasury generally supports the provisions of H.R. 1296
relating to section 2032A of the Code. To the extent that
present law is unclear, these provisions will assure farmers
that participation in the PIK program will not adversely
affect their eligibility for special use valuation.
Moreover, the provisions in H.R. 1296 dealing with section
2032A are consistent with the general approach of treating
farmers as if they had grown the PIK commodities on the land
they dedicate to the program.
Other Tax Consequences
The questions whether PIK payments should be treated as
if farmers had grown the commodities themselves and whether
farmers who divert some or all of their acreage under the PIK
program should be considered as engaged in the trade or
business of farming are questions that have ramifications for
a number of other provisions of the Code. For instance,
section 447 provides special accounting rules for
corporations engaged in the trade or business of farming.
Section 175 provides special treatment for soil and water
conservation expenditures for taxpayers engaged in farming.
Tax exempt farmers' cooperatives could lose their exemptions
if the commodities received by their members and assigned to
the cooperatives were not treated as produced by the members.
Moreover, a determination of the self-employment income of a
farmer who diverts acreage pursuant to the PIK program also
depends on whether the farmer is deemed to participate
materially in the production of farming commodities or the
management of that production. Finally, a decedent's
eligibility for estate tax deferral under section 6166 could
be threatened if property involved in the PIK program is not
treated as being used in an active trade or business. H.R.
1296 does not deal with any of these ancillary issues.
We believe that farmers who receive PIK payments should
be treated as if they had grown the commodities received for
all purposes of the Code and that participation in a
Department of Agriculture program should be treated as a
farming activity. We believe this result can be reached in

-8most cases under current law. However, the legislation
should address these ancillary issues to the extent that
current law needs to be clarified to ensure appropriate
results.
CONCLUSION
In conclusion, I would like to reiterate our strong
support of legislation that will remove any impediment to the
successful operation of the PIK program which current tax law
may create. While I have noted some technical comments on
the bill as currently drafted, I am confident that we can
work out a satisfactory solution to these problems with the
Subcommittee.
I would be happy to answer your questions.

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
STATEMENT OF THE HONORABLE DONALD T. REGAN ;
SECRETARY OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON FOREIGN RELATIONS
Washington, D.C.
February 23, 1983
IMF Resources, World Financial Stability, and
U.S. Interests
Mr. Chairman and members of the Committee:
It is a pleasure to appear before you today to explain and
support the Administration's proposals for legislation to increase
the resources of the International Monetary Fund. As you have
requested, I will also discuss our proposals for the multilateral
development banks.
After extensive consultations and negotiations among IMF
members, agreement was completed earlier this month on complementary measures to increase IMF resources: an increase in quotas,
the IMF's basic source of financing; and an expansion of the IMF's
General Arrangements to Borrow (GAB), for lending to the IMF on
a contingency basis, if needed to deal with threats to the international monetary system. These must now be confirmed by member
governments, involving Congressional authorization and appropriation
in our case, in order to become effective. As background to the
legislative proposals which we plan to submit formally to the
Congress later this week, I would like to outline the problems
facing the international financial system, the importance to the
United States of an orderly resolution of those problems, and
the key role the IMF must play in solving them.
The International Financial Problem
Since about the middle of last year, the international monetary system has been confronted with serious financial problems.
Last fall the debt and liquidity problems of Argentina, Brazil,
Mexico, and a growing list of other borrowers became front-page news
— and correctly so, since management of these problems is critical
to our economic interests. The debts of many key countries became
too large for them to continue to manage under present policies
and world economic circumstances; lenders began to retrench sharply;
and the borrowers have since been finding it difficult if not
impossible to scrape together the money to meet upcoming debt
payments and to pay for essential imports. As a result, the international financial and economic system is experiencing strains
that are without precedent in the postwar era and which threaten
to derail world economic recovery.
R-2046

- 2 There is a natural tendency under such circumstances for
financial contraction and protectionism — reactions that were
the very seeds of the depression of the 1930s. It was in response
to those tendencies that the International Monetary Fund was
created in the aftermath of World War II, largely at the initiative
of the United States, to provide a cooperative mechanism and a
financial backstop to prevent a recurrence of that slide into
depression. If the IMF is to be able to continue in that role, it
must have adequate resources.
The current problem did not arise overnight, but rather stems
from the economic environment and policies pursued over the last two
decades. Inflationary pressures began mounting during the 1960's,
•and were aggravated by the commodity boom of the early 1970's and
the two oil shocks that followed. For most industrialized countries,
the oil shocks led to a surge of imported inflation, worsening the
already growing inflationary pressures; to large transfers of real
income and wealth to oil exporting countries; and to deterioration
of current account balances. For the oil-importing less developed
countries — the LDCs — this same process was further compounded
by their loss of export earnings when the commodity boom ended.
Rather than allowing their economies to adjust to the oil
shocks, most governments tried to maintain real incomes through
stimulative economic policies, and to protect jobs in uncompetitive
industries through controls and subsidies. Inflationary policies
did bring a short-run boost to real growth at times, but in the
longer run they led to higher inflation, declining investment
and productivity, and worsening prospects for real growth and
employment.
Similarly, while these policies delayed economic adjustment
somewhat, they could not put it off forever. In the meanwhile,
the size of the adjustment needed was getting larger. Important
regions remained dependent on industries whose competitive position
was declining; inflation rates and budget deficits soared; and -most pertinent to today's financial problems — many oil importing
countries experienced persistent, large current account deficits
and unprecedented external borrowing requirements. Some oilexporting countries also borrowed heavily abroad, in effect relying
on increasing future oil revenues to finance ambitious development
plans.
In the inflationary environment of the 1970's, it was fairly
easy for most nations to borrow abroad, even in such large amounts,
and their debts accumulated rapidly. Most of the increased foreign
debt reflected borrowing from commercial banks in industrial
countries. By mid-1982, the total foreign debt of non-OPEC
developing countries was something over $500 billion — more
than five times the level of 1973. Of that total, roughly $270
billion was owed to commercial banks in the industrial countries,
and more than half of that was owed by only three Latin American
countries — Argentina, Brazil, and Mexico. New net lending to
non-OPEC LDCs by banks in the industrial countries grew at a
rising
pace
— America.
about
$37—billion
in 1979,
$43
billion continuing
in 1980,
and
to
go
$47
to
billion
Latin
in 1981
(See
with
Charts
most
Aof
andthe
B.)
increase

- 3 That there has been inadequate adjustment and excessive
borrowing has become painfully clear in the current economic
environment — one of stagnating world trade, disinflation,
declining commodity prices, and interest rates which are still
high by historical standards. Over the past two years, there
has been a strong shift to anti-inflationary policies in most
industrial countries, and this shift has had a major impact on
market attitudes. Market participants are beginning to recognize
that our governments intend to keep inflation under control in
the future and are adjusting their behavior accordingly.
In most important respects, the impact of this change has
been positive. Falling inflation expectations have led to major
declines in interest rates. There has been a significant drop
in the cost of imported oil. On the financial side, there is a
shift toward greater scrutiny of foreign lending which may be
positive for the longer run, even though there are short-term
strains. Lenders are re-evaluating loan portfolios established
under quite different expectations about future inflation.
Levels of debt that were once expected to decline in real terms
because of continued inflation — and therefore to remain easy
for borrowers to manage out of growing export revenues — are
now seen to be high in real terms and not so manageable in a
disinflationary world. As a result, banks have become more
cautious in their lending — not just to LDCs but to domestic
borrowers as well.
There is certainly nothing wrong with greater exercise of
prudence and caution on the part of commercial banks — far from
it. Since banks have to live with the consequences of their
decisions, sound lending judgment is crucial. In addition,
greater scrutiny by lenders puts pressure on borrowers to improve
their capacity to repay, and creates an additional incentive for
borrowing countries to undertake needed adjustment measures.
But a serious short-run problem has arisen as a result of
the size of the debt of several key countries, the turn in the
world economic environment, inadequacy of adjustment policies,
and the speed with which countries' access to external financing
has been cut back. Last year, net new bank lending to non-OPEC
LDCs dropped by roughly half, to something in the range of $20 to
$25 billion for the year as a whole (Chart B), and came to a virtual
standstill for a time at mid-year. This forced LDCs to try to cut
back their trade and current account deficits sharply to match the
reduced amount of available external financing.
The only fast way for these countries to reduce their deficits
significantly in the face of an abrupt cutback in financing is to
cut imports drastically, either by sharply depressing their economies
to reduce demand or by restricting imports directly. Both of these
are damaging to the borrowing countries, politically and socially
disruptive, and painful to industrial economies like the United
States — because almost all of the reduction in LDC imports must
come at the direct expense of exports from industrial countries.

- 4 But as the situation has developed in recent months, there
has been a danger that lenders might move so far in the direction
of caution that they compound the severe adjustment and liquidity
problems already faced by major borrowers, and even push other
countries which are now in reasonably decent shape into serious
financing problems as well.
The question is one of the speed and degree of adjustment.
While the developing countries must adjust their economies to
reduce the pace of external borrowing and maintain their capacity
to service debt, there JLs_ a limit, in both economic and political
terms, to the speed with which major adjustments can be made.
Effective and orderly adjustment takes time, and attempts to
push it too rapidly can be destabilizing".
Importance to the United States of an Orderly Resolution
It is right for American citizens to ask why they and their
government need be concerned about the international debt problem.
Why should we worry if some foreign borrowers get cut off from
bank loans? And why should we worry if banks lose money? Nobody
forced them to lend, and they should live with the consequences
of their own decisions like any other business.
If all the U.S. government had in mind was throwing money
at the borrowers and their lenders, it would be-difficult to
justify using U.S. funds on any efforts to resolve the debt crisis,
especially at a time of domestic spending adjustment.
But of course, there _is_ more to the problem, and to the
solution. First, a further abrupt and large-scale contraction of
LDC imports would do major damage to the U.S. economy. Second,
if the situation were handled badly, the difficulties facing LDC
borrowers might come to appear so hopeless that they would be
tempted to take desperate steps to try to escape. The present
situation is manageable. But a downward spiral of world trade
and billions of dollars in simultaneous loan losses would pose a
fundamental threat to the international economic system, and to
the American economy as well.
In order to appreciate fully the potential impact on the U.S.
economy of rapid cutbacks in LDC imports, it is useful to look at
how important international trade has become to us. Trade was the
fastest growing part of the world economy in the last decade —
but the volume of U.S. exports grew even faster in the last part
of the 1970's, more than twice as fast as the volume of total world
exports. By 1980, nearly 20 percent of total U.S. production of
goods was being exported, up from 9 percent in 1970, although the
proportion has fallen slightly since then. (Charts C and D.)
Among the most dynamic export sectors for this country are
agriculture, services, high technology, crude materials and fuels.
American agriculture is heavily export-oriented: one in three
acres of U.S. agricultural land, and 40 percent of agricultural
production, go to exports. This is one sector in which we run a
consistent trade surplus, a surplus that grew from $1.6 billion

- 5 in 1970 to over $24 billion in 1980.

(Chart E.)

Services trade — for example, shipping, tourism, earnings on
foreign direct investment and lending — is another big U.S. growth
area. The U.S. surplus on services trade grew from $3 billion in
1970 to $34 billion in 1980, and has widened further since. (Chart F.)
When both goods and services are combined, it is estimated that onethird of U.S. corporate profits derive from international activities.
High technology manufactured goods are a leading edge of the
American economy, and not surprisingly net exports of these goods
have grown in importance. The surplus in trade in these products
rose from $7.6 billion in 1970 to $30 billion in 1980. And even in
a sector we do not always think of as dynamic — crude materials and
non-petroleum fuels like coal — net exports rose six-fold, from $2.4
billion to $14.6 billion over the same period.
Vigorous expansion of our export sectors has become critical to
employment in the United States. (Chart G.) The absolute importance
of exports is large enough — they accounted directly for 5 million
jobs in 1982, including one out of every eight jobs in manufacturing
industry. But export-related jobs have been getting even more
important at the margin. A survey in the late 1970s indicated that
four out of every five new jobs in U.S. manufacturing was coming from
foreign trade; on average, it is estimated that every $1 billion
increase in our exports results in 24,000 new jobs. Later I will
detail how Mexican debt problems have caused a $10 billion annual-rate
drop in our exports to Mexico between the end of 1981 and the end of
1982. By the rule of thumb I just gave, that alone — if sustained —
would mean the loss of a quarter of a million American jobs.
These figures serve to illustrate the overall importance of
exports to the U.S. economy. The story can be taken one step
further, to relate it more closely to the present financial situation. Our trading relations with the non-OPEC LDCs have expanded
even more rapidly than our overall trade. Our exports to the LDCs,
which accounted for about 25 percent of total U.S. exports in 1970,
rose to about 29 percent by 1980. (Chart H.) In manufactured
goods, which make up two-thirds of our exports, the share going to
LDCs rose even more strongly — from 29 percent to 39 percent. In
fact, since the mid-1970's trade with LDCs has accounted for more
than half of the overall growth of American exports.
What these figures mean is that the export sector of our
economy — a leader in creating new jobs — is tremendously vulnerable to any sharp cutbacks in imports by the non-OPEC LDCs. Yet
that is exactly the response to which debt and liquidity problems
have been driving them. This is a matter of concern not just to
the banking system, but to American workers, farmers, manufacturers and investors as well.
Even on the banking side, there are indirect impacts of
concern to all Americans. A squeeze on earnings and capital
positions from losses on foreign loans not only would impair
banks'
ability
finance
trade,in
but
also
could
ultimately
mushroom
to domestic
into
customers
ato
significant
and world
anreduction
increase
the
their
cost
ability
of that
to lend
lending.

- 6 Beyond our obvious interest in maintaining world trade and
trade finance, there is another less-recognized U.S. financial
interest. The U.S. government faces a potential exposure through
Federal lending programs administered by Eximbank and the Commodity
Credit Corporation. This exposure — built in support of U.S. export
expansion — amounted to $35 billion at the end of 1982, including
$24 billion of direct credits (mostly from Eximbank) and $11 billion
of guarantees and insurance. Argentina, Brazil and Mexico are high
on the list of borrowers. Should loans extended or guaranteed under
these programs sour, the U.S. Treasury — meaning the U.S. taxpayer
— would be left with the loss. We have a direct interest in
avoiding this addition to Federal financing requirements.
All industrial economies, including the American economy,
will inevitably bear some of the costs of the balance of payments
adjustments LDCs must make and are already making. This adjustment would be much deeper, for both the borrowing countries and
for lending countries like the United States, if banks were to
pull back entirely from new lending this year. In 1983, for
example, a flat standstill would require borrowers to make yet
another $20 to $25 billion cut in their trade and current account
deficits, which would be considerably harder to manage if it
came right on the heels of similar cuts they have already made.
Further adjustments are needed — but again the question is one
of the size and speed of adjustment. If these countries were
somehow to make adjustments of that size for a second consecutive
year, the United States and other industrial countries would then
have to suffer large export losses once again. At the early stages
of U.S. and world economic recovery we are likely to be in this
year, a drop in export production of this size could abort the
gradual rebuilding of consumer and investor confidence we need
for a sustained recovery.
In fact, many borrowers have already taken very difficult
adjustment measures to get this far. If they were forced to
contemplate a second year of further massive cutbacks in available
financing, they could be driven to consider other measures to
reduce the burden of their debts. Here potentially lies a still
greater threat to the financial system.
When interest payments are more than 90 days late, not only
are bank profits reduced by the lost interest income, but they
may also have to begin setting aside precautionary reserves to
cover potential loan losses. If the situation persisted long
enough, the capital of some banks might be reduced.
Banks are required to maintain an adequate ratio between
their underlying capital and their assets — which consist mainly
of loans. For some, shrinkage of their capital base would force
them to cut back on their assets •— meaning their outstanding
loans —> or at least on the growth of their assets — meaning
their new lending. Banks would thus be forced to make fewer
loans to all borrowers, domestic and foreign, and they would
municipal
also be unable
bonds.
to make
Reduced
as many
accessinvestments
to bank financing
in securities
would such as

- 7thus force a cutback in the expenditures which private corporations and local governments can make — and it would also put
upward pressure on interest rates.
The usual perception of international lending is that it
involves only a few large banks in the big cities, concentrated
in half a dozen states." The facts are quite different. We have
reliable information from bank regulatory agencies and Treasury
reports identifying nearly 400 banks in 35 states and Puerto
Rico that have foreign lending exposures of over' $10 million —
and in all likelihood there are hundreds more banks with exposures
below that threshhold but still big enough to make a significant
dent in their capital and their ability to make new loans here at
home. Banks in most states are involved, and the more abruptly
new lending to troubled borrowing countries is cut back, the more *
likely it is that the fallout from their problems will feed back
back on the U.S. financial system and weaken our economy. Many
U.S. corporations also have claims on foreign countries, related
Resolving
the International
Problem
to their exports
and foreign Financial
investments.
Debt and liquidity problems did not come into being overnight,
and a lasting solution will also take some time to put into place.
We have been working on a broad-based strategy involving all the
key players — LDC governments, governments in the industrialized
countries, commercial banks, and the International Monetary Fund.
This strategy has five main parts:
First, and in the long run most important, must be effective
adjustment in borrowing countries. In other words, they must take
steps to get their economies back on a stable course, and to make
sure that imports do not grow faster than their ability to pay for
them. Each of these countries is in a different situation, and
each faces its own unique constraints. But in general, orderly
and effective adjustment will not come overnight. The adjustment
will have to come more slowly, and must involve expansion of
productive investment and exports. In many cases it will entail
multi-year efforts, usually involving measures to address some
combination of the following problems: rigid exchange rates;
subsidies and protectionism; distorted prices; inefficient state
enterprises; uncontrolled government expenditures and large
fiscal deficits; excessive and inflationary money growth; and
interest rate controls which discourage private savings and
distort investment patterns. The need for such corrective policies is recognized, and being acted on, by major borrowers —
with the support and assistance of the IMF.
The second element in our overall strategy is the continued
availability of official balance of payments financing, on a scale
sufficient to help see troubled borrowers through the adjustment
period. The key institution for this purpose is the International
Monetary Fund. The IMF not only provides temporary balance of
payments financing, but also ensures that use of its funds is tied
tightly to implementation of needed policy measures by borrowers.

- 8 It is this aspect — IMF conditionality — that makes the role of
the IMF in resolving the current debt situation and the adequacy
of its resources so important.
IMF resources are derived mainly from members' quota subscriptions, supplemented at times by borrowing from official sources.
Assessing the adequacy of these resources over any extended period
is extremely difficult and subject to wide margins of error. The
potential needs for temporary balance of payments financing depend
on a number of variables, including members' current and prospective
balance of payments positions, the availability of other sources
of financing, the strength of the conditionality associated with
the use of IMF resources, and members' willingness and ability to
implement the conditions of IMF programs. At the same time, the
amount of IMF resources that is effectively available to meet its
members' needs at any point in time depends not only on the size
of quotas and borrowing arrangements, but also on the currency
composition of those resources in relation to balance of payments
patterns, and on the amount of members' liquid claims on the IMF
which might be drawn. In view of all these variables, assessments
of the IMF's "liquidity" —• its ability to meet members' requests
for drawings — can change very quickly.
Still, as difficult as it is to judge the adequacy of IMF
resources in precise terms, most factors point in the same direction
at present. The resources now effectively available to the IMF have
fallen to very low levels in absolute terms, in relation to broad
economic aggregates such as world trade, and in relation to actual
and potential use of the IMF.
At the beginning of this year, the IMF had about SDR 28 billion
available for lending. However, SDR 19 billion of that total had
already been committed under existing IMF programs or was expected
to be committed shortly to programs already negotiated, leaving only
about SDR 9 billion available for new commitments. 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
probable that unless action is taken to increase IMF resources its
ability to commit funds to future adjustment programs will be
exhausted by late 1983 or early 1984. I will return to our
specific proposals in this area shortly.
The IMF cannot be our only buffer in financial emergencies.
It takes time for borrowers to design and negotiate lending
programs with the IMF and to develop financing arrangements with
other creditors. As we have seen in recent cases, the problems
of troubled borrowers can sometimes crystallize too quickly for
that process to reach its conclusion — in fact, the real liquidity
crunch came in the Mexican and Brazilian cases before such negotiations e/en started.
Thus, the third element in our strategy is the willingness
of governments and central banks in lending countries to act
quickly to respond to debt emergencies when they occur. Recent
experience
system-wide
and
negotiations
substantial
has
dangers
with
demonstrated
short-term
the
areIMF
present
and
financing
the
discussions
—
needto—
to
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consider
onwith
countries
a selective
other
providing
creditors.
through
basis,
immediate
their
where

- 9 We are undertaking this where necessary, on a case-by-case basis,
through ad hoc arrangements among finance ministries and central
banks, often in cooperation with the Bank for International
Settlements. But it must be emphasized that these lending
packages are short-term in nature, designed to last for only a
year at most and normally much less, and cannot substitute for
IMF resources which are designed to help countries through a
multi-year adjustment process.
In fact, IMF resources themselves have only a transitional
and supporting role. The overall amount of Fund resources, while
substantial, is limited and not in any event adequate to finance all
the needs of its members. While we feel that a sizeable increase
in IMF resources is essential, this increase is not a substitute
for lending by commercial banks. Private banks have been the
largest single source of international financing in the past to
both industrial and developing countries, and this will have to
be the case in the future as well — including during the crucial
period of adjustment.
Thus, the fourth essential element in resolving debt problems
is continued commercial bank lending to countries that are pursuing
sound adjustment programs. In the last months of 1982 some banks,
both in United States and abroad, sought to limit or reduce outstanding loans to troubled borrowers. But an orderly resolution
of the present situation requires not only a willingness by banks
to "roll over" or restructure existing debts, but also to increase
their net lending to developing countries, including the most
troubled borrowers, to support effective, non-disruptive adjustment.
The increase in net new commercial bank lending needed for just
three countries — Brazil, Argentina, and Mexico — will approach
$11 billion in 1983. Without this continued lending in support of
orderly and constructive economic adjustment, the programs that
have been formulated with the IMF cannot succeed — and the lenders
have a strong self-interest in helping to assure success. It
should be noted, however, that new bank lending will be at a slower
rate than that which has characterized the last few years — more
in line with the increase in 1982 than what we saw in 1980 or 1981.
The final part of our strategy is to restore sustainable
economic growth and to preserve and strengthen the free trading
system. The world economy is poised for a sustained recovery:
inflation rates in most major countries have receded; nominal
interest rates have fallen sharply; inventory rundowns are largely
complete.
Solid, observable U.S. recovery is one critical ingredient
missing for world economic expansion. We believe the U.S. recovery
is now getting underway, as evidenced by the recent drop in unemployment and upturns in orders and production. Establishing
credible growth in other industrial economies is also important
and we believe the base for recovery is being laid abroad as well.
However, both we and others must exercise caution at this
or
turning
to stimulate
fiscal
point.
expansion.
their
Governments
economies
A major
must
too
shift
quickly
notat
give
this
through
instage
to political
excessive
could place
pressures
monetary

- 10 renewed upward pressure on inflation and interest rates.
In addition, rising protectionist pressures, both in the
United States and elsewhere, pose a real threat to global recovery
and to the resolution of the debt problem. When one country takes
protectionist measures hoping to capture more than its fair share
of world trade, other countries,will retaliate. The result is
that world trade shrinks, and rather than any one country gaining
additional jobs, everybody loses. More importantly for current
debt problems, we must remember that export expansion by countries
facing problems is crucial to their balance of payments adjustment
efforts. Protectionism cuts off the major channel of such expansion.
That adjustment is essential to restoring problem country debtors'
to sustainable balance of payments positions and avoiding further
liquidity crises — and as we have seen, it is therefore essential
to the economic and financial health of the United States.
The only solution is a stronger effort to resist protectionism.
As the world's largest trading nation, the United States carries a
major responsibility 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. That
signal would be followed, and would reinforce, continued U.S.
efforts to encourage others to open their markets, and would in
The
and Resources
of program
the IMF requirements for less restrictive
turnRole
be reinforced
by IMF
borrowers.
Itrade
havepolicies
stressedbythe
role of the International Monetary Fund
in dealing with the current financial situation, and now I would
like to expand on that point. The IMF is the central official
international monetary institution, established to promote a
cooperative and stable monetary framework for the world economy.
As such, it performs many functions beyond the one we are most
concerned with today — that of providing temporary balance of
payments financing in support of adjustment. These include
monitoring the appropriateness of its members' foreign exchange
arrangements and policies, examining their economic policies,
reviewing the adequacy of international liquidity, and providing
mechanisms through which its member governments cooperate to
improve the functioning of the international monetary system.
In that context, it becomes clearer that IMF financing is
provided only as part of its ongoing systemic responsibilities.
Its loans to members are made on a temporary basis in order to
safeguard the functioning of the world financial system ~ in
order to provide borrowers with an extra margin of time and money
which they can use to bring their external positions back into
reasonable balance in an orderly manner, without being forced into
abrupt and more restrictive measures to limit imports. The conditionality attached to IMF lending is designed to assure that orderly
adjustment takes place, that the borrower is restored to a position
which will enable it to repay the IMF over the medium term. In

- 11 addition, a borrower's agreement with the IMF on an economic program
is usually viewed by financial market participants as an international
"seal of approval" of the borrower's policies, and serves as a
catalyst for additional private and official financing.
The money which the IMF has available to meet its members'
temporary balance of payments financing needs comes from two
sources: quota subscriptions and IMF borrowing from its members.
The first source, quotas, represents the Fund's main resource
base and presently totals some SDR 61 billion, or about $67
billion at current exchange rates. The IMF periodically reviews
the adequacy of quotas in relation to the growth of international
transactions, the size of likely payments imbalances and financing
needs, and world economic prospects generally.
At the outset of the current quota discussions in 1981, many
IMF member countries favored a doubling or tripling of quotas,
arguing both that large payments imbalances were likely to continue and that the IMF should play a larger intermediary role in
financing them. While agreeing that quotas should be adequate
to meet prospective needs for temporary financing, the United
States felt that effective stabilization and adjustment measures
should lead to a moderation of payments imbalances, and that a
massive quota increase was not warranted. Nor did we feel that
an extremely large quota increase would be the most efficient way
to equip the IMF to deal with unpredictable and-potentially major
financing problems that could threaten the stability of the system
as a whole, and for which the IMF's regular resources were
inadequate.
Accordingly, the United States proposed a dual approach to
strengthening IMF resources:
— First, a quota increase which, while smaller than
many others had wanted, could be expected to position
the IMF to meet members' needs for temporary financing
in normal circumstances.
Second, establishment of a contingency borrowing
arrangement that would be available to the IMF on a
stand-by basis for use in situations threatening the
stability of the system as a whole.
This approach has been adopted by the IMF membership, in
agreements reached by the major countries in the Group of Ten
in mid-January, and by all members at the IMF's Interim Committee
meeting last week.
The agreed increase in IMF quotas is 47 percent, an increase
from SDR 61 billion to SDR 90 billion (in current dollar terms, an
increase from $67 billion to $99 billion). The proposed increase
in the U.S. quota is SDR 5.3 billion ($5.8 billion at current
exchange rates) representing 18 percent of the total increase.

- 12 The Group of Ten, working with the IMF's Fxecutive Board,
has agreed to an expansion of the IMF's General Arrangements to
Borrow from the equivalent of about SDR 6.5 billion at present
to a new total of SDR 17 billion, and to changes in the GAR to
permit its use, under certain circumstances, to finance drawings
on the IMF by any member country. Under this agreement, the U.S.
commitment to the GAB would rise from S2 billion to SDR 4.25
billion, equivalent to an increase of roughly S2.6 billion at
current exchange rates.
We believe this expansion and revision of the GAB offers
several important attractions and, as a supplement to the IMF's
quotas, greatly strengthens the IMF's role as a backstop to the
system:
— First, since GAB credit lines are primarily with
countries that have relatively strong reserve and
balance of payments positions, they can be expected
to provide more effectively usable resources than a
quota increase of comparable size. Consequently,
expansion of the GAB is 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, since the GAB will not be drawn upon in normal
circumstances, this source of financing will be conserved
for emergency situations. By demonstrating that the IMF
is positioned to deal with severe systematic threats, an
expanded GAB can provide the confidence to private markets
that is needed to ensure that capital continues to flow,
thus reducing the risk that the problems of one country
will affect others.
— And third, creditors under this arrangement will have
to concur in decisions on its activation, ensuring
that it will be used only in cases of systemic need
and in support of effective adjustment efforts by
borrowing countries.
Annex A to my statement contains the texts of the relevant
Interim Committee and Group of Ten communiques. These substantive
agreements will be codified in formal Governors and Executive
Board decisions in the next few weeks. In sum, the proposed
increase in U.S. commitments to the IMF totals SDR 7.7 billion
— SDR 5.3 billion for the increase in the U.S. quota and SDR
2.4 billion for the increase in the U.S. commitment under the
GAB. At current exchange rates, the dollar equivalents are $8.4
billion in total, $5.8 billion for the quota increase and $2.6
billion for the GAB increase.
We believe these steps to strengthen the IMF, if enacted,
will safeguard the IMF's ability to respond effectively to current
financial problems. Given the financing needs we foresee, we feel
it is important that the increases be implemented by the end of
resources,
this year. the
Without
ability
such
of athe
timely
monetary
and adequate
system to
increase
weather in
debt
IMF and

- 13 liquidity problems will be impaired, at substantial direct and
indirect cost to the United States.
The U.S. share in the increase in IMF resources is 19 percent,
which obviously means other countries are putting up the remaining
82 percent, the great bulk of the increase. By putting up 18
percent of the increase, we will maintain our voting share at just
over 19 percent. The principle of weighted voting on which the IMF
operates has been key to its effectiveness over the years and to
ensuring that we have a voice and vote comparable to the share of
resources we provide. Major policy decisions — such as those just
taken on the quota increase — require an 85 percent majority vote,
giving us a veto over all such decisions. Some of our allies would
claim that we aren't pulling our own weight — that our stake in
world tra*le and finance is bigger than the share of resources we
are proposing to put into the IMF would indicate.
Political and Security Interests
While fundamentally the IMF is designed to further our economic
interests, in so doing it also benefits U.S. political and security
interests. The IMF is essentially a non-political institution, with
membership open to any country judged willing and able to meet the
obligations of membership. But it serves our interests well by
containing economic problems which could otherwise spread through
the international community; as a stabilizing element in countries
facing the social and economic dislocations which can accompany
adjustment; and supporting open, market-oriented economic systems
consistent with Western political values. Judged on this criterion,
U.S. appropriations for the IMF can be an excellent investment
if they can help to avoid political upheaval in countries of critical
interest to the United States.
I said earlier that the IMF was formed out of conviction that
a cooperative institution was needed to help prevent a recurrence of
the Great Depression of the 1930s. But that is only half the story.
The other half is that the Western leaders who joined together
in 1944 set up the Fund did so in recognition of the fact that the
economic and financial disruptions of the 1930s had been a major
cause of World War II. "Beggar thy neighbor" policies that try to
shift the burden of adjustment to other countries inevitably heighten
worldwide political tensions — and these are the policies that the
IMF is meant to avoid. As volatile as the world environment has
been at times in the postwar era, on balance it has been a period of
unprecedented prosperity, and the international tensions we have
experienced could only have been worse without the IMF.
Some observers have suggested that Fund programs create political instability in countries which use conditional financing by
forcing unpopular econoiric measures on them. The process of economic
adjustment is rarely pleasant — but as we have seen, economic
adjustment has to come in any event, with or without an IMF program.
Without a program, adjustment can be abrupt and destabilizing. By
making the process more rational and orderly, the IMF can help
to
countries
their political
avoid unnecessary
stability.sacrifices and thereby minimize threats

- 14 IMF programs, technical assistance, and general policy advice
all help to support greater reliance on decentralized, marketoriented economic systems. In practice this translates into IMF
support for the private sector, freer markets, the use of price
signals, and a whole array of policies that strengthen the individual's opportunity and incentive to respond and shape economic
developments. It is a central tenet of the American experience that
this is a prerequisite for a strong democratic system. Over time,
this approach helps to foster economic institutions and philosophies that are conducive to democratic values.
In testimony on security and economic assistance last week,
Secretary Shultz made the point that by improving economic conditions
abroad these U.S. appropriations could avoid the necessity of sending
our military forces abroad more often. He noted that there have
been 18 5 incidents since the end of World War II in which our forces
were sent overseas to protect U.S. economic or political interests.
I would not want to stretch this point too far in relation to the
IMF — but surely here, too, it has some validity. The greater
economic stability and reliance on sound economic policies that the
Concerns
about
Increase
in IMF Resources
IMF fosters
canthe
reduce
the potential
for political disruption.
The general outline of our proposals has been known to members
of Congress for some time. Many have expressed reservations or
questions about this proposal, and I would like to discuss some of
the main concerns now.
0
Is the IMF "Foreign Aid"?
Many perceive money appropriated for IMF use to be just another
form of foreign aid, and question why we should be providing U.S.
funds to foreign governments. Let me assure you that the IMF is not
a development institution. It does not finance dams, agricultural
cooperatives, or infrastructure projects. I have already made the
point that the IMF is_ a monetary institution. Only one of its functions
is providing balance of payments financing to its members in order to
promote orderly functioning of the monetary system, and only then on a
temporary basis, on medium-term maturities, after obtaining agreement
to the fulfillment of policy conditions. We have been working very
hard with the IMF to ensure that both the effectiveness of IMF policy
conditions, and the temporary nature of.its financing, are safeguarded.
In this way, the Fund's financing facilities will continue to have a
revolving nature and to promote adjustment.
IMF conditionality has been controversial over the years, with
strong opinions on both sides. Some observers have worried that
conditionality is so weak and ineffective that conditional lending
is virtually a giveaway. Others believe that conditionality is too
tight — that it imposes unnecessary hardship on borrowers, and
stifles economic growth and development.
Such generalizations reflect a misunderstanding of IMF conditionality. When providing temporary resources to a country faced with
external financing problems, the IMF seeks to assure itself that the
country is pursuing policies that will enable it to live within its

- 15 means — that is, within its ability to obtain foreign financial
resources. It is this that determines the degree of adjustment that
is necessary. It is often the case that appropriate economic policies
will strengthen a country's borrowing capacity, and result in both
higher import growth and higher export growth. I would cite the
example of Mexico as an immediate case in point.
Mexico is our third largest trading partner, after Canada and
Japan. And, as recently as 1981, it was a partner with whom we had an
export boom and a substantial trade surplus, exporting goods to meet
the demands of its rapidly growing population and developing economy.
This situation changed dramatically in 1982, as Mexico began experiencing severe debt and liquidity problems. By late 1982, Mexico no
longer had access to financing sufficient to maintain either its
imports or its domestic economic activity. As a result, U.S. exports
to Mexico dropped by a staggering 60 percent between the fourth quarter
of 1981 and the fourth quarter of 1982 . Were our exports to Mexico to
stay at their depressed end-1982 levels, this would represent a $10
billion drop in exports exports to our third largest market in the
world. Because the financing crunch got worse as the year wore on,
totals for the full year 1982 don't tell the story quite so dramatically — but even they are bad enough. Our $4 billion trade surplus
surplus with Mexico in 1981 was transformed into a trade deficit of
nearly $4 billion in 1982, due mainly to an annual-average drop in
U.S. exports of one-third. (Chart I.) This $8 billion deterioration
was our worst swing in trade performance with any country in the
world, and it was due almost entirely to the financing problem.
We believe that now this situation will start to turn around,
and we can begin to resume more normal exports to Mexico. If this
happens, it will be due in large part to the fact that, 'late in
December, an IMF program for Mexico went into effect; and that
program is providing the basis not only for IMF financing, but for
other official financing and for a resumption of commercial bank
lending as well. Mexico must make difficult policy adjustments if it
is to restore creditworthiness. The Mexican authorities realize this
and are embarked on a courageous program. But the existence of IMF
financing and the other financing associated with it will permit Mexico
to resume something more like a normal level of economic activity and
imports while the adjustment takes place in an orderly manner. Without
the IMF program, all we could look forward to would be ever-deepening
depression in Mexico and still further declines in our exports to
that country.
There is another aspect of the distinction between IMF financing
and foreign aid which we should be very clear on, since it goes to
the heart of U.S. relations with the Fund. All IMF members provide
financing to the IMF under their quota subscriptions, and all —
industrial and developing alike — have the right to draw on the IMF.
Quota subscriptions form a kind of revolving fuad, to which all members
contribute and from which all are potential borrowers.
As an illustration, in practice our quota subscription has
been
24
cumulative
lending
occasions
drawn
to upon
other
drawings,
— many
most
IMF members.
amounting
times
recently
— and
in
We
toNovember
the
in
repaid
turn
equivalent
—have
1978
over
—
drawn
of
the
and$6.5
years
on
our
the
billion,
total
for
IMF on

- 16 are the second largest of any member (the United Kingdom has been
the largest user of IMF funds). (U.S. drawings on the IMF are
described at Annex B.)
0

Do IMF Programs Hurt U.S. Exports?

There is a widespread perception that IMF programs are designed
to cut imports by countries which use IMF financing, and thus hurt
U.S. exports to those countries. Some would argue, in fact, that
far from helping to maintain world trade and U.S. exports, our
participation in the increase in IMF resources would contribute to
further reductions in our exports.
This is simply a misreading of the IMF. The whole point of an
IMF program is_ to get a borrower's external balance back within
sustainable limits — but to judge the effects of those programs on
our exports you always have to start by asking what would have happened
without an IMF program. When a country draws on IMF financing, it
usually does so in recognition of the fact that its external deficit
is not going to be sustainable if it stays on its present course. If
the borrower didn't go to the IMF, it would likely be cut off from
further external financing from other sources and would have to cut
back drastically on imports, as we saw in the case of Mexico.
Furthermore, IMF programs are not just directed at slowing the
growth of imports. Reducing import growth is often one of the
short-run priorities, but even then IMF financing can permit a
higher level of imports than would otherwise be the case. And
equally important are steps to increase a country's export capacity,
thereby giving it the ability to pay for higher imports in the
long run.
Exchange rate devaluations are often an important part of IMF
programs — devaluations intended to ensure that the right price
signals are sent to domestic producers, importers and exporters,
and that the competitiveness of domestic industries is restored.
These devaluations have often been accompanied by the removal of
restrictions on trade and capital flows. And, to lay one total misunderstanding to rest, an IMF program never calls for the tightening
of import restrictions — in fact, new or intensified restrictions
° Why
Not Spend
the Money at
are
expressly
prohibited.
TheHome?
IMF does not promote restrictions —
its
purposes
and
policies
go
precisely
in the
Another major concern with the proposals
to opposite
increasedirection.
IMF
resources is that, in this period of budgetary stringency, many
believe we would be better advised to spend the money at home.
There is also some feeling that if we were to get the U.S. economy
moving forward again, the international financial problem would
take care of itself. I think I've already been through part of
the response to these concerns when I described the large and
growing impact which foreign trade now has on American growth and
employment. We will do what is necessary domestically to strengthen
our economy. But we will leave a major threat to domestic recovery

- 17 unaddressed if we do not act to resolve the international financial
situation. The direct impact alone of international developments
on our economy is so large that, were the international situation
not to improve, there would at a minimum be a tremendous drag on
our economic recovery.
It is true that an improving U.S. economy is going to help
other nations, both through our lower interest rates and through
an expanding U.S. market for their exports — providing of course
that we don't cut them off from that market. But they also have
an immediate, short-run financing crunch to get through, and if
we don't handle that right there are substantial downside risks
for the United States.
This might also be the right context in which to discuss how
U.S. participation in the increase in IMF resources would affect
the Federal budget and the Treasury's borrowing requirements.
Because the United States receives a liquid, interest-earning
reserve claim on the IMF in connection with our actual transfers
of cash to the IMF, such transfers do not result in net budget
outlays or an increase in the Federal budget deficit.
Actual cash transactions with the IMF, under our quota subscription or U.S. credit lines, do affect Treasury borrowing
requirements as they occur. An analysis appended to this statement
at Annex C presents data on the impact of U.S. transactions between
1970 and 1982 on Treasury borrowing requirements. Although there
have been both increases and decreases in Treasury borrowing
requirements from year to year, on average there have been increases
amounting to $454 million annually over the entire 13 year period,
for a cumulative total of over $6 billion. The rate has picked
up in the last two years of heavy IMF activity, as would be expected;
but the total is still relatively small — the $454 million annual
impact is only a small part of the $54 billion annual average Federal
borrowing requirement over the same period, and the $6 billion
0
cumulative
impact
compares
with an outstanding Federal debt of $1.2
Is the IMF
a Bank
"Bail-Out"?
trillion at the end of 1982. These figures also serve to demonstrate
Ithe
also
know there
widespread
concern that an increase
revolving
natureisofa the
IMF.
in IMF resources will amount to a bank bail-out at the expense of
the American taxpayer. Many would contend that the whole debt and
liquidity problem is the fault of the banks — that they've dug
themselves and the rest of us into this hole though greed and incompetence, and now we intend to have the IMF take the consequences
off their hands. This line of argument is dangerously misleading,
and I would like to set the record straight.
First, the steps that are being taken to deal with the
financial problem, including the increase in IMF resources, require
continued involvement by the banks. Far from allowing them to cut
and run, orderly adjustment requires increased bank lending to
troubled LDCs that are prepared to adopt serious economic programs.
That is exactly what is happening.

- 18 And it is not a departure from past experience. I have had
Treasury staff review IMF program experience in the 20 countries
which received the largest net IMF disbursements in the last"few
years, to see whether banks had been "bailed out" in the past.
Looking at the period from 1977 to mid-1982, they found that for
the countries which rely most heavily on private bank financing,
IMF programs have been followed up by new bank lending much greater
than the amount disbursed by the Fund itself. This also holds true
for the 20 countries as a group: net IMF disbursements to this
group during the period were $11.5 billion, while net bank lending
totalled $49.7 billion, resulting in a ratio of 4.3 to 1 during
this period.
Another point I would like to make is that the whole debt
and liquidity problem cannot.fairly be said to be the fault of
the commercial banks. In fact, the banking system as a whole
performed admirably over the last decade, in a period when there
were widespread fears that the international monetary system would
fall apart for lack of financing in the aftermath of the oil
shocks. The banks managed almost the entire job of "recycling"
the OPEC surplus and getting oil importers through that difficult
period. Some of the innovations and decisions that banks made
in the process, which seemed rational and necessary at the time
to them and to others, may seem doubtful in retrospect, given
the way the world economic environment changed.. But I think we
can agree that governments have had a great deal more to do with
shaping that environment than banks.
All of this is not to say that there aren't lessons to be
learned in the banking area — there clearly has been an element
of lack of prudence in lending decisions, and of overlending. So
we should be asking ourselves: What is there that banks could be
doing to improve their screening of foreign loans? What is there
that bank regulators could do to improve on their analysis of
country risk, examination of bank exposure, and consultations
with senior management?
Our basic starting point in addressing these questions is a
belief that the U.S. government should not get into the business
of dictating the lending practices of private banks. Doing so
would inject a political element into what should be business
decisions, and would potentially expose the government to liability
for covering loans that were not repaid on time. Moreover, in
general it is bank managements, which have direct experience and
a responsibility to their shareholders and depositors to motivate
them, that are in the best position to make lending decisions.
In 1979, the bank regulatory agencies (the Federal Reserve,
Comptroller of the Currency and the FDIC) instituted a new system
for evaluating country risk, which has four elements. The first
is a statistical reporting system designed to identify country
exposures at each bank, and to enable regulators to monitor those
exposures.
Second
isrisk,
an
evaluation
of
each
bank's
internal
system
or
regulators
review
foris
managing
about
of prospective
that
to
country
do
a country
so,
all
loans.
has
loans
aimed
Third,
interrupted
to
atthat
encouraging
where
country
its
there
debt
more
may
isservice
be
asystematic
judgment
"classified"
payments,
by

- 19 as substandard, doubtful, or a total loss, and such "classification"
may trigger an obligation by the bank to set aside precautionary
loan loss reserves. Fourth, bank examiners review and comment
upon each bank's large foreign lending exposures, drawing upon
the findings of an interagency committee of country analysts.
There are several possible changes that could be made in the
regulatory environment. One would be to set up formal limits on
each bank's exposure in different countries by law or regulation,
in effect setting up "single country" limits analogous to the
"single borrower" limits which are already used. Such limits on
country exposure could be highly arbitrary and unable to distinguish
among the capabilities of different banks or among the size and
financial health of different countries — particularly if dictated
specifically, once and for all, in legislation. If limits were
applied judgmentally, on the other hand, they could require that
the U.S. government make controversial economic and political
judgments about other countries. It may be feasible and desirable
to do something more along these lines, but we should not put
ourselves in too tight a corner on either count, and thus should
try to leave as much scope as possible for bank regulators to
work out the details.
Another possibility, which has been discussed with banks
here and abroad, would be to require banks to meet specific
criteria in establishing precautionary loan loss reserves against
troubled loans, or against particularly large ones. Current procedures are not uniform across banks, and since setting aside such
reserves reduces current earnings, there is some reluctance to do
so unless absolutely required.
Both in the banking regulatory agencies, and at the Treasury,
we will be reviewing these and other issues to see what changes
might be desirable. We need to be careful in determining how to
deal with such a sensitive and central part of our economy. Any
decisions
in thisDevelopment
area will have
The
Multilateral
Banksimportant implications both for
resolving the present situation, and for the evolution of the
I
would system
like to
with some remarks about our proposals
banking
inclose
the future.
for U.S. participation in the multilateral development banks (MDBs).
This year, the Administration will be seeking Congressional approval
of legislation to authorize U.S. participation in replenishments of
the Inter-American Development Bank, the Asian Development Bank,
and the African Development Fund.
The MDBs are proven, effective instruments for promoting economic growth and development, and our participation in the MDBs
represents a significant part of both present and projected U.S.
foreign assistance. We have been making a major effort to further
improve the effectiveness of these institutions so as to maximize
the contribution they make to sustainable economic development.

- 20 The objectives of MDB programs are markedly different from
those of the IMF. The IMF provides temporary financing designed
to support orderly adjustment and to safeguard the functioning of
the international monetary system. Its resources are available
for drawing by all members. In contrast, the MDBs lend primarily
to finance portions of specific investment projects. MDB financing
is longer term — 20 years or more — and it is available only to
developing countries.
Given the leadership role of the United States in the international community and the great diversity of U.S. interests, we
must be able to deliver on the internationally negotiated funding
arrangements for the MDBs. To this end, the Administration has
consulted closely with the Congress both before and during the
MDB funding negotiations.
When these have been completed, we will be proposing legislation
to authorize appropriations of $960 million for the concessional
lending programs of the Inter-American and Asian Development Banks
and the African Development Fund. This respresents a 24.5 percent
reduction from the previous replenishments for these programs. At
the same time, other donors will be providing more than $4 billion.
Agreements are nearing completion for the replenishment of
resources of the Inter-American and Asian Development Banks. When
these are completed, we will be proposing legislation to authorize
an increase in U.S. participation in the African Development Fund
and the capital and concessional lending programs of the InterAmerican and Asian Development Banks. These are larger in total
than the previous replenishments — but U.S. subscriptions will
require less budget authority, since the development banks will
rely more heavily on the private market and there will be an
overall reduction in the concessional windows.
The African Development Fund (AFDF)
Draft legislation authorizing a U.S. contribution to the
third replenishment of the African Development Fund was submitted
to the 97th Congress but was not enacted. U.S. participation in
this replenishment is not only an important way of demonstrating
our continued commitment to economic growth and development in the
world's least developed continent, but also reflects increased
U.S. economic, political, and security interests in that region.
As a result of provisions contained in the replenishment
agreement, the Fund currently has a backlog of approved loans that
cannot be signed until the United States agrees to participate in
the replenishment and makes its first payment. The replenishment,
which is to finance lending in the 1982-84 period, totals about $1.1
billion. The proposed U.S. share is $150 million, or 14 percent
of the total. Appropriations for the first $50 million installment
would be provided under the FY 1983 Continuing Resolution and the
two remaining installments will be sought in fiscal years 1984
and 1985.

- 21 Inter-American Development Bank (IDB) Sixth Replenishment
While negotiations for the Sixth Replenishment of the InterAmerican Development Bank have not been concluded, we expect the
final agreement to entail U.S. budgetary outlays at a lower level'
than the previous replenishment. Our present expectation is that
this replenishment will provide a $13 billion lending program
funded over a four-year period beginning in fiscal 1984, and will
call for a capital increase of $14.8 billion, with a paid-in component of 4.5 percent. We also expect agreement to a replenishment
of the Fund for Special Operations (FSO) totalling $725 million.
The overall replenishment would result in U.S. capital subscriptions of $5,156 million, with paid-in capital of $232 million
($58 million annually) and callable capital of $4,924 million
($1,231 million annually), and in U.S. contributions to the FSO
of $290 million ($72.5 million annually).
This proposed replenishment is consistent with the recommendations of the Administration's MDB Assessment for reduction
of soft window contributions and paid-in capital, while still
providing assistance to the poorest developing countries. The
FSO would be about $1 billion less than that of the last replenishment, with total budgetary saving to the United States as compared
to the previous replenishment of $384 million. This will be the
first IDB replenishment where all borrowing member countries
provide all of their paid-in capital subscriptions and FSO contributions in convertible currency, a solid example .of the willingness
of the more advanced developing countries to assume greater
responsibility in the international economic system.
In order to obtain support for the scaled-back FSO replenishment, the United States agreed to the establishment of an Intermediate
Financing Facility (IFF) to be targeted at the region's poorer
countries. Funding for the IFF would come from FSO net income and
FSO general reserves, and would be combined with regular hard
loans. The IFF would be used to lower the interest cost on IDB
hard window loans by approximately 5 percentage points and, as
presently envisioned, would not require any new contributions.
Inter-American Investment Corporation (IIC)
Partially modeled after the International Finance Corporation, the Inter-American Investment Corporation would be
a separate entity which provides development assistance to the
private sector in Latin America and the Caribbean. The member
countries of the Inter-American Development Bank have discussed
formation of such a Corporation for a number of years and a
meeting will be held this month to finalize an agreement on the
capitalization of the IIC. Assuming there is adequate support
from other IDB member countries, we currently envision U.S.
subscriptions of up to $20 million annually over four years,
beginning in FY 1984.

- 22 The Asian Development Bank (Third GCI)
We expect negotiations to conclude soon on the third general
capital increase to finance ADB's ordinary capital lending for
the CY 1983-1987 period. ADB management has moved from an initial
proposal for a 125 percent GCI with 10 percent paid-in to a
proposal for a 105 percent GCI with 5 percent paid-in. We expect
to join a consensus of ADB member countries on this proposal in
the near future.
In terms of U.S. budgetary costs, the current proposal
represents a U.S. paid-in capital subscription of $66.2 million
($13.2 million annually) and a U.S. callable capital subscription
of $1,257 million ($251.4 million annually) over five years.
Asian Development Fund
During 1982, the Administration completed negotiations on
the fourth replenishment of the Asian Development Fund and now
seeks authorization of U.S. participation in the replenishment.
The U.S. $520 million share of the proposed replenishment is
16.25 percent of the total as compared to a 22 percent U.S. share
in the previous replenishment. Appropriations of $130 million
annually will be sought in the four year period from FY 1983
through 1986.
Conclusion
The IMF plays a crucial role in the solution to current debt
and liquidity problems, and in providing the environment for world
recovery. It is absolutely essential that the proposed increase
in IMF resources become effective by the end of this year, to
enable the IMF to meet these responsibilities. Prompt U.S.
approval is important not only because the financing is needed,
but also because it would be a sign of confidence to other governments and to the public, and would help lay to rest concerns
about the risks to global recovery.
But most importantly, timely approval of these proposals is
essential to our own economic interests — to the prospects for
American businesses and American jobs. The legislation will be
submitted to you in a very few days. I urge that you give it prompt
and favorable consideration.
Both the IMF and the multilateral development banks also serve
broader U.S. political and security interests. To the rest of the
world they are a sign that the bulwark of democracy is also a responsible partner in international economic affairs. To the poorer
nations of the world the multilateral development banks are also
tangible evidence of the support by Western nations for sustainable
economic development. And of direct benefit to the United States,
they help to foster political stability and democratic values in
the developing world.
I have tried to lay out a number of reasons for the United States
to support the IMF and the MDBs. Some of these are at least partly
altruistic,
but the
majority
relate
to ourU.S.
own appropriations
self-interest. for
I
urge
theseyour
institutions.
strong
support
for the
proposed

Chart A

OUTSTANDING FOREIGN DEBT OF NON-OPEC LDCs
$ Billion

500

400 —

Total Debt

300

**•

.%••»**

***
***

200

.X
***•*
«*.*••
*

100

1973

Series break.

Debt to Commercial Banks

%%**

82 (est.)

U.S. Treasury Dept.
2 1183

Chart B

NET NEW LENDING BY COMMERCIAL BANKS TO NON-OPEC LDCs
$Billion
$47
$43
40
$37

30
$20-$25
$22
20

$18

$11
10

0
1976

1977

1978

1979

1980

1981

1982
U.S. Treasury Dept.
2-11-83

Chart C

Index,

GROWTH OF U.S. AND WORLD EXPORT VOLUME

1970=100

1970

Chart D

SHARE OF U.S. EXPORTS
IN TOTAL U.S. GOODS OUTPUT

Exports 1 9 %
Exports 9 %

Total U.S. Goods
Output $ 4 6 0 billion
1970

Total U.S..Goods
Output $1,142 billion
1980

U.S. Treasury Dept.
2-11-83

Chart E

U.S. AGRICULTURAL EXPORTS

Agricultural 1 9 %
Agricultural 1 7 %

Share in
Total U.S.
Exports:

1970
1980
Net U.S.
Agricultural
Trade
Balance:

Surplus of $1.6 billion

Surplus of $24.3 billion

U.S. Treasury Dept.
2-1183

Chart F

U.S. TRADE BALANCE IN SERVICES
$ Billion

1970

82 (est)

U.S. Treasury Dept.
2 11-83

Chart G

U.S. EXPORT-RELATED JOBS

5.1 Million

2.9 Million

(3.7% of Total
Civilian
Employment)

(5.1% of Total
Civilian
Employment)

1970

1980

As of 1980, each $1 billion off U.S. exports was
estimated to result in 24,000 Jobs.

Source: Commerce Department (ITA) estimates.

U.S. Treasury Dept.
2-11 83

Chart H

U.S. EXPORTS TO NON-OPEC
LESS DEVELOPED COUNTRIES
Exports to Non-OPEC
LDCs 2 9 %
Exports to Non-OPEC
LDCs 2 5 %

Share in
Total U.S.
Exports

1970
1980

U.S. Treasury Dept.
2-11-83

Chart I

U.S. TRADE WITH MEXICO
$ Billion
18
U.S. Exports to Mexico.

16
14
12
10
8
6
4
2
0

-4

1970

71
U.S. Treasury Dept.
2 1183

APPENDIX A

INTERNATIONAL MONETARY FU
Press Release NO. 83/11

FOR IMMEDIATE RELEASE
February 11, 1983

Press Communique1 of Che Interim Commie tee
of the Board of Governors of the
International Monetary Fund«
1. The Interim Committee of the Board of Governors of the
International Monetary Fund held its twentieth meeting in Washington,
D . C , on February 10 and 11, 1983, under the chairmanship of
Sir Geoffrey Howe, Chancellor of the Exchequer of the United Kingdom.
Mr. Jacques de Larosi&re, Managing Director of the International
Monetary Fund, participated in the meeting. The meeting was also
attended by observers from a number of international and regional
organizations and from Switzerland.
2. The Committee discussed the World Economic. Outlook and the
policies needed to cope with the difficult problems faced by most
members of the Fund.
The Committee noted that estimated rates of both growth of output
and inflation had been revised downward since its previous meeting in
September 1982. Anxiety was expressed at the high level of unemployment and the weakness of investment and world trade, against the background of only limited indications of economic recovery. At the same
time, the Committee welcomed the further progress made by some of the
larger industrial countries in their fight against inflation, as well
as the reduction in interest rates that had been facilitated by this
progress—developments that were providing the basis for a sustainable
recovery in economic activity.
Believing that successful handling of the inflation problem is a
necessary—albeit not sufficient—condition for sustained growth over
the medium term, the Committee urged national authorities, in their
efforts to promote sustained recovery, to avoid measures that might
generate harmful expectations with regard to inflation. The importance
of reducing fiscal deficits in a number of countries was also emphasized. Otherwise, the Committee noted, high real interest rates
detrimental to the process of recovery could be generated by market
expectations regarding government borrowing requirements.
It was the Committee's view that, ln several major industrial
countries where inflation remained relatively high, present circumstances called for continued restraint in monetary and fiscal policies,
along with effective implementation of the incomes policies now in
place. It was felt, however, that conditions for economic recovery
had improved in those large industrial countries that have been able

• Washington, D.C 20431 • Telephone 202-477-3011

- 2 -

to achieve the greatest measure of success in reducing and controlling
inflation. This success—and the reduction in interest rates that it
has permitted—provided the basis, within the pursuit of counterinflationary monetary and fiscal policies, for greater real growth of
activity. The transition to a more stable path of real growth would
be further facilitated by determined efforts to reduce market rigidities and structural Imbalances.
The Committee deplored the upsurge of protectionist pressures
in the past year or two. It stressed the paramount importance of
resisting these pressures and, indeed, rolling them back.
The unsatisfactory situation facing non-oil developing countries
was a source of particular concern to the Committee, which noted that
growth rates in these countries, after averaging about 6 per cent in
the 1960s and early 1970s, had averaged only 2 1/2 per cent during the
past two years and were not expected to show much improvement in 1983.
The Committee also observed that the modest recent increases in output,
which were barely sufficient to keep pace with rapid population
growth, had been achieved against a background of deteriorating terms
of trade, sluggish markets for exports, high Interest rates in international financial markets, and strains in the financing of current
account deficits. These conditions had necessitated a sharp compression
of imports by the non-oil developing countries—which, in turn, had been
achieved at the cost of lower investment and growth.
Noting the extent of the external adjustment already achieved
by many non-oil developing countries and the uncertainties that most
such countries face in financing their current account deficits, the
Committee attached great importance to the continuing provision of both
official development assistance and private banking flows on an adequate
scale, and it welcomed the special role recently played by the Fund in
this connection.
More generally, the Committee stressed the enhanced Importance,
in current circumstances, of the Fund's role in providing its balance
of payments assistance to member countries that engage in adjustment
programs and in exercising firm surveillance over policies, and also
the need to equip the Fund with adequate resources to perform this role.
3. The Committee, noting the progress made by the Executive Board on
the various issues of the Eighth General Review of Quotas, focused its
attention on the remaining issues, and took satisfaction in being able
to reach the following agreement on the subject of quotas:
(a) The total of Fund quotas should be Increased under the Eighth
General Review from approximately SDR 61.03 billion to SDR 90 billion
(equivalent to about US$ 98.5 billion).

- 3 -

(b) Forty per cent of the overall increase should be distributed
to all members in proportion to their present individual quotas, and
the balance of sixty per cent should be distributed in the form of
selective adjustments in proportion to each member's share in the total
of the calculated quotas, i.e., the quotas that broadly reflect members'
relative positions in the world economy.
(c) Twenty-five per cent of the increase in each member's quota
should be paid in SDRs or in usable currencies of other members.
The Committee considered the possibility of a special adjustment
of very small quotas, i.e., those quotas that are currently less than
SDR 10 million. It was agreed to refer this matter to the Executive
Board for urgent consideration in connection with the implementation of
the main decision.
4. The question of the limits on access to the Fund's resources was
raised in the Committee. It was noted that the Executive Board will
review this matter before June 30, 1983. The Committee invited the
Executive Board to take note of the views expressed in the Committee by
those favoring maintenance of the present enlarged limits in terms of
multiples of quotas and also by those stressing the need to have regard
to developments in the Fund's liquidity. It also 'invited the Managing
Director to report on this matter at the next meeting of the Committee.
5. The Committee noted the recent decision of the Finance Ministers
and Central Bank Governors of the participants in the General Arrangements
to Borrow (GAB) to support an increase in the total amount of the commitments under these Arrangements to SDR 17 billion (equivalent to about
US$19 billion) and to make the resources of these Arrangements available
to the Fund to finance also purchases by nonparticipants when the Fund
faces an inadequacy of resources arising from an exceptional situation
involving a threat to the stability of the international monetary system.
In this connection, the Committee welcomed the intention of Switzerland
to become a full participant in the Arrangements, through the Swiss
National Bank, with a credit commitment of SDR 1,020 million.
The Committee also welcomed the willingness of Saudi Arabia to
provide resources to the Fund, in association with the GAB, and for the
same purposes as those of the GAB. They noted with satisfaction the
progress that is being made in setting out the detailed features of this
association.
6. The members of the Committee requested the Executive Board to adopt,
before the end of February 1983, the necessary decisions and other
actions to implement the consensus reached in the Committee. They also
agreed to urge the governments of their constituencies to act promptly
so that the proposals for the increase in the Fund's resources could
be made effective by the end of 1983.

- 4 -

January 1
Press Communique of the
Ministers and Governors of
The Group of Ten

1.
The Ministers and central bank Governors of the ten
countries participating ln the General Arrangements to Borrow
(GAB) met in Paris on January 18, 1983 under the chairmanship
of Mr. Jacques Oelors, Minister of Economy and Finance of France.
The Managing Director of the International Monetary Fund (IMF),
Mr. Jacques de Larosiere, took part in the meeting, which was
also attended by Mr. F. Leutwller, President of Che Swiss National
Bank, Mr. E. Van Lennep, Secretary-General of the Organisation
for Economic Cooperation and Development (OECD), Mr. A. Lamfalussy,
Assistant General Manager of Che Bank for International Settlements, and Mr. F.-X. Ortoli, Vice-President of Che Commission of
Che European Communities.
2. The Ministers and Governors heard a report by the
Chairman of their Deputies, Mr. Lamberto Dlni, on issues relating
to the revision and expansion of Che GAB and Che Eighth General
Review of QuoCas of Che IMF* They also heard a report by the
Chairman of the Working Party No. 3 of the Economic Policy Committee of the OECD, Mr. Christopher Mentation, on Che world economic
outlook.
3. In addressing Che world economic situation, che Ministers
and Governors welcomed recent successes in the fight against inflation and prospects for further progress. They looked coward sound
monetary and fiscal policies and approprlace moderaclon ln Che
growth in incomes to encourage lower interest rates, expanding
trade, higher employment, and durable economic growth. These
desirable developments oust not be thwarted by trade restrictions
or by disruption of the International financial system. At the
same elme, it was recognized that soundly based growth would Itself
help ease current tensions. To these ends, the Ministers and Governors affirmed their support for a reinforced cooperation among
industrialized countries on economic, financial, and trade policies.
They considered that a sustainable Improvement in activity in the
industrial countries in 1983 can make an important contribution to
a lasting solution of the Indebtedness problem of many developing
countries and to limiting the unemployment problem in all countries.
Therefore, they noted wlch satisfaction chac Che compecenc internaeional orgaaizaCions will examine whecher furcher steps can be
eaken Co ensure renewed and sustained growth, and will report to
the next ministerial councils, notably in the OECD and IMF framework.

4.
Against this background, the Ministers and Governors discussed the International financial situation. They noted that,
while strains remained in the system and the foreign debt problems
of a number of countries were still a cause for real concern, governments and monetary authorities had been cooperating actively and
effectively with International monetary institutions and commercial
banks to reinforce the stability of the system. In order to ensure
the continuing ability of the financial system to cope with existing
strains and Co faciliCate Che adjuscmenc process, Chey scrongly
supported a substantial increase of resources available to the
International Monetary Fund.
5. In light of the foregoing, the Ministers and Governors
have decided, subject Co Che necessary legislacive approval, Chat
their aggregate credit commitments under the GAB should be promptly
Increased—from SDR 6.4 billion to SDR 17 billion (equivalent to
an increase from $7.1 billion to about $19 billion). They welcomed
the Intention of Switzerland to become a full-scale participant in
the GAB and decided that necessary adjustments In the arrangements
should be made so as to permit Che participation of Switzerland
a& an early date. They also decided an adjustment of the participants' shares ln the arrangements so as to reflect better their
size and role in the international economy and their ability to
provide financial resources. A list of the new credit commitments
that have been agreed is attached. They further agreed that in
the future the GAB would be available not only for drawings by
participants but also for purchases from the Fund for conditional
financing for all its members, Including members that are not GAB
participants, when the Fund was faced with an inadequacy of
resources arising from an exceptional situation associated with
requests from countries with balance of payments problems of a
character or of aggregate size that could pose a threat to the
stability of the International monetary system.
6. The Ministers and Governors also looked to the conclu- «,
slon of arrangements with other countries that might be willing
and able to provide substantial resources to the Fund for the
sitae purposes and oo terms not unlike those agreed under the
GAB. In this regard, the Ministers and Governors welcomed the
recent contacts that the Chairman of the Group of Ten, and the

- 3 -

Chairman of the Interim Committee and the Managing Director of the
Fund, have had with the authorities of Saudi Arabia. They asked
the Chairman of the G-10 Deputies, in collaboration with the
Managing Director of the IMF, to resume such contacts as soon as
possible.
7. The Ministers and Governors discussed the Issues related
to the Eighth General Review of Quotas. They agreed that a substantial overall increase was called for. They also recognized
the need for a meaningful adjustment of quota shares in the Fund
to bring these more in line with the relative position of member
countries in the world economy.
8. The Ministers and Governors noted that substantial progress had been made on the Quota Review issues, and were of the view
that the conditions were now present for reaching conclusions at
the forthcoming meeting of the Interim Committee on February 10-11,
1983. They emphasized the desirability of having new quotas in
effect by the end of 1983.
9. The Ministers and Governors expressed their gratitude to
the French authorities for their cordial hospitality and for the
excellent meeting arrangements.

Attachment

4 -

ATTACHMENT

GAB Credit Commitments for G-10 Countries and Switzerland

In millions of SDRs
United States
Germany
Japan
France
United Kingdom
Italy
Canada
Netherlands
Belgium
Sweden
Switzerland
Total

Shares in per cent

4,250.0
2,380.0
2,125.0
1,700.0
1,700.0
1,105.0
892.5
850.0
595.0
382.5
1,020.0

25.00
14.00
12.50
10.00
10.00
6.50
5.25
5.00
3.50
2.25
6.00

17,000.0

100.00

APPENDIX B
IMF Drawings by the United States
The United states has drawn on the International Monetary
Fund (IMF) on twenty-four occasions over the past 19 years
for a total of about SDR 5.8 billion (equivalent to about
$6.5 billion at the exchange rates prevailing at the time of
each drawing), the second largest amount of cumulative drawings
of any IMF member. None of these drawings was subject to
IMF policy conditionality, as they all involved drawings on the
U.S. reserve position in the IMF. Drawings on the reserve
position are available automatically upon representation of
balance of payments need; do not bear interest and are not
subject to repurchase obligations; and do not involve policy
conditionality.
The U.S. drawings were for the following purposes:
during the 1960s and early 1970s they were designed to
limit foreign purchases of U.S. gold reserves: subsequently,
they were designed to provide the United States with foreign
currencies for the purpose of exchange market operations.
These purposes are explained below. A table listing all
U.S. drawings is attached.
Drawings During the 1960s and 1970s
Under the international monetary arrangements in operation
following World War II, each member of the IMF was required
to establish and maintain a "par value" for its currency in
terms of gold. The United States undertook to fulfill its
par value obligations by standing ready to convert dollars
held by foreign monetary authorities into gold at the official
price of $35 per ounce -- i.e., the par value of the dollar.
Other countries met their par value obligations by maintaining
exchange rates for their currencies — directly or indirectly
— in terms of the dollar within narrow margins. In this
manner, a strucuture of currency exchange rates linked to
gold was established and maintained.
During the 1950s and 1960s, large payments imbalances,
substantial losses of U.S. gold and foreign accumulations of
dollar holdings, representing further potential strains on
U.S. gold, put increasing strain on this system. Beginning
in the early 1960s the United States, in cooperation with
foreign monetary authorities, initiated a variety of measures
designed to limit pressures on U.S. gold holdings. U.S.
drawings on the IMF were an integral part of this program.
In general, IMF drawings provided the United states
with foreign currencies that could be used to purchase dollars
from foreign monetary authorities and thus reduce demands
for conversion of official dollar holdings to gold. The
foreignincurrencies
obtained
the IMF were used most
often
the following
types from
of transactions:

- 2 to facilitate repayment of IMF drawings by other
countries without necessitating the use of U.S. gold;
repayment of U.S. short-term currency swaps with
foreign central banks; and
— direct purchases by the United States of foreign
official dollar holdings that would otherwise be
used to purchase U.S. gold.
Drawings Since the Early 1970s
With the end of the par value/gold convertibility
arrangements in the early 1970s, the basic purpose of U.S.
drawings from the IMF was to finance U.S. intervention in
the exchange markets in support of the dollar. During the
1970s, the U.S. intervened directly in the foreign exchange
market, buying and selling foreign currencies for dollars,
in order to deal with exchange market pressures on the
dollar. The foreign currencies obtained from U.S. drawings
in the IMF provided an important source of funds for such
intervention. In November 1978, a U.S. drawing of S3 billion
of German marks and Japanese yen was a component of a major
program of U.S. and foreign intervention in the exchange
market to support the dollar.

IMF Drawings by the United States
( SDR Millions )

Date
1964:

1965

1966

Amount

Feb
125
June
125
Sept
150
Dec
125
Total 525
March
75
July
300
Sept
60
Total T5T
100
Jan
60
March
30
April
30
May
71
July
282
Aug
35
Sept
31
Oct
12
Nov
30
Dec
Tei"
Total

Date

Amount

1968: March 200
Total 200
1970: May 150
Total 150
1971: Jan
250
June
25 0
Aug
862
Total 1,362
1972: April 200
Total 200
1978: Nov
Total

Grand Total

2,275
2,275

1/
5,828"

1/ Equivalent to about $6.5 billion at exchange rates
prevailing at the tine of each drawing.

APPENDIX C

Budgetary and Accounting Treatment
of Transactions with the IMF under
the U.S. Quota in the IMF
and U.S. Loans to the IMF
Under budget and accounting procedures established in consultation with the Congress at the time of the 1980 increase in
the U.S. IMF quota, an increase in the U.S. quota or line of credit
to the IMF requires budget authorization and appropriation for the
full amount of increases in the quota or U.S. lending arrangements.
The sum is included in the budget authority totals for the fiscal
year requested. Payment to the IMF of the increased quota subscription is made partly (25 percent) in reserve assets (SDRs or
foreign currencies) and partly in non-interest bearing letters of
credit, which are a contingent liability. Under the credit lines
established pursuant to IMF borrowing arrangements with the United
States, the Treasury is committed to provide funds upon call by the
IMF.
A budget expenditure occurs only as cash is actually transferred
to the IMF, through the 25 percent reserve assert payment, through
encashment of the quota letter of credit, or against the borrowing
arrangements. Simultaneous with such transfers, the U.S. receives
an equal offsetting receipt, representing an increase in the U.S.
reserve position in the IMF — an interest-bearing, liquid international monetary asset that is available unconditionally to the
United States in case of balance of payments need. As a consequence
of these offsetting transactions, transfers to the IMF under the
quota subscription or U.S. lending arrangements therefore do not
result in net budget outlays, or directly affect the budget deficit.
Similarly, payments of dollars by the IMF to the United States (for
example, resulting from repayments by other IMF member countries)
do not result in net budget receipts since the U.S. reserve position
declines simultaneously by a like amount.
Transfers from the United States to the IMF under the U.S.
quota or U.S. lending arrangements increase Treasury borrowing
requirements, while transfers from the IMF to the United States
improve the Treasury's cash position and reduce its borrowing
requirement. The net effect of transfers to and from the IMF has
varied widely over the years, resulting in cash outflows from the
Treasury in some years and inflows to the Treasury in other years.
Moreover, Treasury interest costs on borrowings to finance any net
transfers to the IMF need to be balanced against the remuneration
(interest) earned on the U.S. reserve position in the IMF. Finally,
the U.S. may incur exchange gains and losses on the U.S. reserve
position in the IMF due to changes in the dollar value of the SDR.
It
because
the
requirements
is
portion
not
of possible
uncertainties
of
or such
the net
financing
to project
cost
regarding
of
that
U.S.
thewould
the
effect
transactions
future
be on
inlevel
dollars;
Treasury
with
of IMF
the
and
borrowing
IMF
financing;
movements

in market interest and exchange rates. However, the figures 'in
the attached table indicate that for the period from May 1, 1969
to the end of 1982:
— Net increases in Treasury borrowing requirements attributable to transactions with the IMF averaged $454 million
annually, compared to average annual increases in Federal
borrowing of $54 billion.
— Treasury debt outstanding attributable to transactions
with the IMF averaged $1.6 billion annually. This is not
an annual increase in Treasury borrowing, but an estimate
of the average total debt outstanding each year attributable
to cumulative U.S. transactions with the IMF. As of
December 31, 1982, the outstanding borrowing attributable
to such transactions amounted to $6.3 billion, about 1/2 of
1 percent of the total outstanding Treasury debt of $1.2
trillion.
-- Net interest costs to the Treasury associated with all
U.S. transactions with the IMF averaged $42 million
annually. In fiscal 1982, interest costs on total Treasury
debt amounted to $117 billion.
— Net annual valuation losses to the U.S. on the U.S. reserve
position in the IMF averaged $69 million.
— The overall net annual cost to the U.S., taking account of
interest and valuation, thus averaged $111 million.

Estimated Gains and Losses Associated With U.S. Transactions
Under U.S. Quota and U.S. Loans to IMF
(millions of dollars)

Year Ended
April 30 1/

Cumulative Net Treasury
Valuation Interest
nebt(-) or Cash(+) Position
Borrowing
Interest
Gains(+) or
Earned on
Arising Fran:
Cost(-) or
Received Remuneration
Losses(-)
Holdings of
Transactions U.S.
Reduction(+) by U.S.
Received
on U.S.
Foreign CurUnder U.S.
Loans
from
on Loans
by U.S.
Reserve
rencies Drawn
Quota
2/ to IMF 3/ Total 4/ Column(3) 5/ to IMF 6/ from IMF 7/ Position 8/ from IMF 9/
(2)
(1)
(3)
(4)
(5)
(6)
(7)
(8)

Total
Net
Gains(+)
or
Losses(-) 10/
(9)

1970 -716

-716

-50

+13

-37

1971 -702

-702

-38

+12

-26

1972 +445

+445

+19

1973 +811

+811

+39

1974 +704

+704

+54

+100

1975 -300

-300

-22

+70

+48

1976 -940

-940

-52

—

. -182

-225

+34

+73

1977 -2,695

-131

-2,826

-138

+79

+54

-2

1978 -2,726

-639

-3,365

-197

+26

+79

+219

+127

1979 -1,368

-329

-1,697

-140

+28

+30

+223

1900 -555

-16

-571

-65

1901 -1,294

-334

-1,628

-192

+16

+22

1982 -3,416

-862

-4,278

-581

+88

-1,216

-6,308

-364

1983
thru 12/31/82

-5,092

Total Period:
5/1/69-12/31/82
Annual Average -1,306

•1,727
-258

-1,564

-126

+25

+166

+15

+46

-4

-203

+63

-294

+216

-1,134

+75

-1,336

+64

+222

-94

+39

-133

+225

+682

-944

+248

-1,516

+16

+50

-69

+18

-111

Footnotes
•indicates less than $500,000.
Represents IMF fiscal year.
Includes U.S. transfers of dollars to the IMF (i.e., an outflow of dollars from Treasury) and
dollar balances received by the U.S. from ttfe IMF and from sales of foreign currency drawn by
the U.S. from the IMF (i.e., an inflow of dollars to the-Treasury).
Includes U.S. loans and repayments under the IMF's General Arrangements to Borrow and
Supplementary Financing Facility.
Transfers to and from the IMF under the U.S. quota subscription or U.S. lending arrangements
result in budget outlays and simultaneous receipts of U.S. reserve position in the IMF; these
transactions have a zero effect on net outlays and the budget deficit.
Equals column 3 times average Treasury 3-month bill rate during period. Payments enter the
U.S. budget as interest on the public debt? inflows reduce Treasury^ need to borrow and
thus reduce interest expense.
Enters the U.S. budget as a receipt.
Remuneration on U.S. creditor position; prior to 1975, remuneration was 1.5%, although
special income distributions were made in 1970 and 1971 which raised the effective rate to
2.0 percent in those years. From 1975, the rate was based on short-term market interest
rates in the five largest IMF members (U.S., U.K., Germany, France, Japan). Enters the U.S.
budget as a receipt. Payments are made by IMF. annually, as of April 30; FY 1903 figure
represents net accrual as of December 31, 1982.
Reflects changes in the dollar value of the U.S. reserve position in the IMF due to an
appreciation (-) or depreciation (+) of the dollar in terms of the SDR. Enters the U.S.
budget as a positive or negative net outlay.
Interest earned on investments of German marks and Japanese yen acquired from U.S. drawing
on IMF in November 1978. Enters the U.S. budget as part of the net profit or loss of the
Exchange Stabilization Fund of the Treasury, recorded as a positive or negative net outlay.
Equal to the sum of columns 4 through 8.

TREASURY NEWS
iepartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE February 23, 1983
RESULTS OF AUCTION OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury has accepted $5,500 million
of $10,944 million of tenders received from the public for the
5-year 2-month notes, Series H-1988, auctioned today. The notes
will be issued March 1, 1983, and mature May 15, 1988.
The interest rate on the notes will be 9-7/8%. The range
of accepted competitive bids, and the corresponding prices at the
9-7/8% interest rate are as follows:
Bids
Prices
Lowest yield 9.94% 99.646
Highest yield
Average yield

10.00%
9.96%

99.406
99.566

Tenders at the high yield were allotted 15%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
$
11,722
Boston
$
12,147
New York
9,160,002
4,545,057
Philadelphia
8,665
10,365
Cleveland
88,633
73,633
Richmond
48,815
24,815
Atlanta
30,123
28,848
Chicago
781,743
237,018
St. Louis
64,262
59,265
Minneapolis
8,228
8,223
Kansas City
28,463
25,188
Dallas
14,681
14,681
San Francisco
695,190
461,690
Treasury
1,661
1,661
$5,500,466
$10,944,313
Totals
The $5,500 million of accepted tenders includes $911
million of noncompetitive tenders and $4,589 million of competitive tenders from the public.
In addition to the $5,500 million of tenders accepted in
the auction process, $435 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.

R-2047

TREASURY NEWS

Department of the Treasury • Washington, ox.°# Telephone
FOR RELEASE UPON DELIVERY ,u
EXPECTED AT 1:00 P.M.
Address
By
Donald T. Regan
Secretary of the Treasury
before the
International Forum of the
U.S. Chamber of Commerce
Thursday, February 24, 1983
Good Afternoon.
I am delighted to be here at the Chamber where so many of the
pronouncements and policy statements are so wise, far sighted and
logical — that is to say, where you agree with the
Administration! Seriously, I would like to say that we in the
Administration have appreciated your active interest and support
over the past two years and we look forward to a close working
relationship in the future.
I would like to spend the next few minutes today talking
about the need for additional resources for the International
Monetary Fund. Now I know this is a little like preaching to the
converted. The Board of the Chamber has formally endorsed the
IMF quota increase and that vote of support is very much
appreciated. But the subject is one which needs much more
communications and understanding.
Two weeks ago finance ministers representing 146 nations met
here in Washington and hammered out a final agreement to increase
the lending capacity of the IMF.
The agreed increase in IMF quotas (that is, subscription
contributions to be made by the member countries) is roughly 47
percent. In dollar terms, this 47 percent increase is roughly
equivalent to an increase from $67 billion to $99 billion. In
addition to the quotas, there is also a special fund at the IMF
and we agreed to increase that from $7 billion to about $19

R-2048

- 2 billion. The total increase for both the quotas and the GAB is
roughly $43 billion with the American share of that increase
being $8.4 billion.
While we in the Administration have reached agreement with
our foreign friends, the arrangement must be approved by our
friends on Capitol Hill. In a few days, draft legislation will
be sent to Congress formally requesting approval for the American
share of this increase.
I know that most of you are very familiar with all this.
But, to many outside Washington, all of this may seem like a lot
of government gobbledygook — and to make matters worse its
international gobbledygook. But underneath the jargon of IMF,
GAB, CFF, SDR and the like, there is an issue that has a very
direct impact on our own economic well being and on the American
business community in particular.
As the world's central international monetary institution,
the IMF makes loans to members on a temporary basis in order to
safeguard the functioning of the world financial system. It
provides borrowers with an extra margin of time and money which
they can use to bring their payments situation back into
reasonable balance in an orderly fashion ... and without being
forced into abrupt and even more restrictive measures to limit
imports. In addition, a borrower's agreement with the IMF on an
economic program is usually viewed by the financial market as an
international "seal of approval" of the borrower's policies and
serves as a catalyst for additional private and official lending.
The IMF has been playing this role — and playing it very
well I might add — for several decades. But, over the past year
international debt problems and the IMF have become front page
news on a regular basis. The reason is that the world economy is
going through a major transitional phase and the debt problems of
Argentina, Brazil, Mexico and the growing list of other nations
is a manifestation of this transition. It is a complicated
situation because there are at least five major components —
large scale trends, if you will — that are taking place
simultaneously.
First, there is the movement to curtail spending.
The entire world — not just the United States — has been on
a "spending binge" for the past two decades. And we have all

-3been riding that binge for so long that the basic way of looking
at expenditures has become distorted.
The 1960s and 1970s were the decades of rising expectations.
Many lesser developed countries were experiencing a heightened
awareness of modernization, technology and economic growth. And
there emerged a clamoring impatience for development. Aided by
the thinking of a number of big spending economists in developed
nations, many countries became convinced that they too could
spend their way to prosperity. But the current international
debt situation is stark, powerful testimony that too much
spending does not bring growth and stability. If continued too
long, it brings chaos.
The present state of the world economy has its roots in the
inflationary pressures of the 1960's, and the twin oil shocks of
the 1970's. The appropriate response to these problems should
have been monetary and fiscal restraint to counter the
inflationary pressures and to get those economies back on a sound
footing. Instead, many countries tried to maintain real incomes
at the levels that prevailed before the onset of inflation. And
at the same time, they tried to preserve employment in
uncompetitive industries. Reluctant to pay for these things
directly, many countries resorted to debt financed increases in
spending and monetization of the resulting deficits.
So by the end of 1981 total non-OPEC Developing Country debt
had mushroomed to over $500 billion — five times the level of
1973. By June of last year, the stock of debt owed to private
Western Banks by non-OPEC developing countries had grown to about
$265 billion, of which almost $170 billion was owed by countries
of Latin America. Today Mexico and Brazil have external debts of
over $80 billion dollars, Argentina's debt is probably over $40
billion and there is a long list of other nations with huge
debts.
But for too many years, the world has been mesmerized by the
modern day money mentality. If spending $10 billion is good,
then spending $20 billion must be better.
And for too many years, nations — including the United
States — have bought and bought and bought on a massive scale.
And instead of paying, they say "Charge it."

-4-

The second trend has to do with inflation. Most economies of
the world — led by the U.S. — are moving from high and rising
inflation and interest rates to declining inflation and interest
rates.
In the inflationary environment of the last decade, debtor
nations were able to keep on accumulating that debt, and failed
to take the adjustment measures needed to cool their overheated
economies and bring external financing requirements back to
sustainable levels. But with the shift to a disinflationary
world economic environment, their debts have become very
difficult for them to manage. Commercial banks involved in
international lending took a more pessimistic view of prospects
for repayment, and began to retrench sharply. As a result the
borrowers have been finding it difficult if not impossible to
scrape together the money to meet upcoming debt payments. As a
consequence, the international financial and economic system is
experiencing strains that are without precedent in the postwar
era and which threaten to derail world economic recovery.
Thirdly, of course, is the recession which has contributed to
slack demand for both raw materials and for finished products.
Since 1980, for example, the IMF all-commodity price index
declined 27 percent. Measured from 1980 to the end of last year,
copper was down 32 percent; sugar — down 80 percent; rubber —
down 43 percent.
Fourth the world economy is at the same time in the process
of shifting increasingly toward the service sectors —
particularly high technology — and away from the traditional
"smoke stack" industries. Services in this country now account
for about 66 percent of the gross national product and, according
to the U.S. International Trade Commission, services will account
for $135 billion in U.S. current account this year, a 52 percent
increase over 1980. The U.S. trade balance in services rose from
$3 billion in 1970 to an estimated $38 billion last year. The
growth of the services and technology industries is a world-wide
phenomenon and I am not certain anyone really understands the
dimensions of this ongoing transition.
And finally, as if all this were not enough, we are currently
witnessing some important changes in the world oil market.

-5On balance, a decline in oil prices is clearly to be desired.
It would contribute toward economic recovery, reduce inflationary
pressures, improve the external payments situation of most
nations and reduce the debt problems of the oil importing LDCs.
Let me review these effects in greater detail — using a
hypothetical 10 percent fall in oil prices from last month's
average of about $33 per barrel. Please be very clear: I am not
predicting such a decline, but rather attempting to provide a
rough unit of measurement for whatever does happen to oil prices.
Generally speaking, we can assume that the effects are
proportional. That is, a price reduction of 20 percent would
result in roughly twice the effects.
A 10 percent cut in oil prices would lower our annual oil
bill by more than 10 billion dollars. This would stimulate
expansion and employment. All told, it would not be unreasonable
to asume that U.S. real GNP would increase between 1/4 - 1/2
percentage points. And for the OECD countries as a whole —
which together consume over 400 billion dollars in oil — there
would be similar positive effects.
The oil-importing LDCs would benefit most dramatically. A 10
percent price cut could reduce their oil bill by 8 billion
dollars. And it is worth noting that of the 10 largest LDC
debtor nations, eight are oil importers.
Obviously, the big losers from an oil price decline would be
the oil exporting LDCs — the OPEC nations plus a handful of
non-OPEC oil exporters. If oil prices were to remain unchanged,
the OPEC nations would probably have experienced a small
collective 1983 deficit on current account. With a 10 percent
cut, OPEC oil export revenues would be more than $20 billion
lower in the first full year following such a price decline and
revenues of the four major non-OPEC oil exporters (Mexico, Egypt,
Peru and Malaysia) would be lower by $2-3 billion.
As for the Arab Gulf OPEC producers, about which fears have
been raised about potential disruptive effects on their
investment flows, a 10 percent price cut would probably still
leave them in payments surplus.
As far as the effect of the international financial system is
concerned, it is generally accepted that the overall quality of

-6-

banks' international loan portfolios.would imporve. This would
reflect the generally improved position of non-oil LDCs, even
though loans to some large borrowers heavily dependent on oil
exports might become more vulnerable. Indonesia, Mexico, and
Venezuela are most frequently mentioned in this regard.
When all this interwoven maze of currents and cross-currents
is added together, you have commodity prices which have dropped,
declining demand for exports particularly from the developing
nations, and high and rising debt burdens. And it is within this
international economic environment that the IMF is playing such a
key role in assisting nations to move through this very difficult
period.with a minimum disruption.
If there was too much international lending in the decade of
the 70s that contributed to today's problems, too little lending
in the 80s would be disasterous. The key here is to pursue a
prudent and balanced approach.
Many have asked: What difference does all this make to us?
To the businessman in Phoenix, or the banker in St. Louis or the
housewife in Boston? The short answer is that it makes a
tremendous difference, because the ability of these countries to
successfully adjust to these new realities will have a direct and
powerful impact on economic activity here in the United States.
U.S. exports in 1980 accounted for 19 percent of total
production of goods compared to only 9 percent ten years earlier.
And during the same period, export related jobs rose 75 percent,
to over 5 million.
Let me cite Mexico as an immediate case in point.
Mexico is our third largest trading partner, after Canada and
Japan. And, as recently as 1981, it was a partner with whom we
had an export boom and a substantial trade surplus. This
situation changed dramatically in 1982, as Mexico began
experiencing severe debt and liquidity problems. As a result,
U.S. exports to Mexico dropped by a staggering 60 percent between
the fourth quarter of 1981 and the fourth quarter of 1982. Our
$4 billion trade surplus with Mexico in 1981 was transformed into
a trade deficit of nearly $4 billion in 1982, due mainly to an
annual average drop in U.S. exports of one-third. This $8
billion deterioration was our worst swing in trade performance
with any country in the world, and it was due almost entirely to
the financing problem.

-7-

We believe that this situation will start to turn around, and
we can begin to resume more normal exports to Mexico. If this
happens, it will be due in large part to the fact that, late in
December, an IMF program for Mexico went into effect. This
program and the financing associated with it will permit
resumption of more normal levels of economic activity and
imports. Without the IMF program, all we could look forward to
would be ever-deepening depression in Mexico and still further
declines in our exports to that country. Improvement in the
Mexican situation will translate directly into more jobs in the
U.S.
And there is a second way in which all this affects us.
What if debtor nations cannot service their debts? If
interest payments to U.S. banks 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 capital off the bank is reduced. In
that case the creditors banks' capital/asset ratios would shrink.
American banks would then have to take measures to restore the
capital/asset ratios. Banks would be forced to make fewer loans
to all borrowers, domestic and foreign. Auto loans in
Cincinnati, housing loans in Dallas, capital expansion loans in
California — all would be affected.
There are also those who cannot understand how the
Administration can endorse such a large increase for the IMF at a
time when we are trying to hold the line at home on the Federal
budget. But, international monetary activities should not be
confused with foreign aid.
When the U.S. increases its commitment to the IMF, a "line of
credit" is established which the fund may draw upon, if needed,
in conjunction with commitments provided by other nations. As
our line of credit is used, the U.S. receives a corresponding
increase in liquid international monetary reserve assets which
earn interest. Consequently, our increase in "quotas" doesn't
affect budget outlays or the budget deficit, although transfers
to and from the U.S. and the IMF affect Treasury borrowing.

-8I know there is a widespread concern that an increase in IMF
resources will amount to a bank bail-out at the expense of the
American taxpayer. Many would contend that the whole debt and
liquidity problem is the fault of the banks — that they've dug
themselves and the rest of us into this whole through greed and
incompetence, and now we intend to have the IMF take the
consequences off their hands. This line of argument is
dangerously misleading, and I would like to set the record
straight.
First, the steps that are being taken to deal with the
financial problem, including the increase in IMF resources,
require continued bank involvement. Far from allowing them to
cut and run, orderly adjustment requires increased bank lending
to troubled borrowers that are prepared to adopt serious economic
programs. That is exactly what is happening — for example the
banks will be putting more than $10 billion of new money into
Argentina, Brazil, and Mexico in 1983.
It is also a mistake to think that the increase in IMF
resources is coming mainly from the United States. The U.S.
shares in the increase in IMF quotas is 18 percent — which means
other countries are putting up the remaining 72 percent, the
great bulk of the increase. This will keep our voting share at
slightly over 19 percent, which will maintain our veto over major
IMF decisions and provide a needed margin of protection for the
future. Some of our allies would claim that we aren't pulling
our own weight — that our stake in world trade and finance is
bigger than the share of resources we are proposing to put into
the IMF would indicate.
The whole debt and liquidity problem cannot fairly be said to
be the fault of the commercial banks. In fact, the banking
system as a whole performed admirably over the last decade, in a
period when there were widespread fears that the international
monetary system would fall apart for lack of financing in the
aftermath of the oil shocks. The banks managed almost the entire
job of "recycling" the OPEC surplus and getting oil importers
through that difficult period.
The task before us now is one of education and communications
— which is where I began my remarks. I am confident that once
the nature of the problem and the true role of the IMF is clearly
understood, that support for the requested increase will be
forthcoming.

-9-

You and your organization can play a crucial role in
communicating that message and, in particular, in articulating
the importance of the issue in terms of American business,
American jobs and American economic prosperity.
Thank you.

TREASURY NEWS _
epartment of the Treasury • Washington, D.C- • Telephone 566-2041

Foe Release Upon Delivery
Expected at 8:30 a.m. EST
February 25, 1983
STATEMENT OF
ROBERT G. WOODWARD
ASSOCIATE TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE SENATE COMMITTEE ON FINANCE
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before you today on behalf of the
Treasury Department to discuss the general treatment of
expenses incurred by taxpayers traveling away from home on
business, and the special rules in this area applicable to
State legislators and Members of Congress. This discussion
is intended to aid you in your consideration of S. 70, which
deals with the deduction of travel expenses by Members of
Congress.
Description of S. 70
S. 70 would repeal the special rule enacted in 1952
which establishes as a Member's "tax home" the Member's place
of residence within the State, Congressional district or
possession that the Member represents in Congress. The bill
also would repeal the $3,000 limit on the amount of the
deduction for living expenses incurred by Members while away
from their tax homes on business.

R-2C49

-2-

General Treatment of Expenses for Traveling Away From Home on
Business
In general, a taxpayer may not deduct expenditures for
personal, living, or family expenses. However, Internal
Revenue Code section 162(a) provides an exception for
ordinary and necessary expenses incurred while traveling away
from home in pursuit of a trade or business. For this
purpose, an individual is "away from home" only if he is
traveling on business overnight or for a period sufficient to
require sleep or rest.
If a taxpayer is traveling away from home on business,
his deductible expenses include expenditures for
transportation, meals, and lodging, together with incidental
expenses such as laundry. Deductions for lodging expenses
incurred away from home are appropriate to reflect a
duplication or increased level of expense which the taxpayer
would not incur in the absence of business necessity.
Similarly, deductions for meal expenses incurred away from
home are appropriate to reflect the additional expense of
eating outside the home which the taxpayer incurs for
business reasons.
Because an individual may only deduct living expenses
incurred while away from home, it is necessary to determine
the location of the individual's "tax home." Under the rules
the Internal Revenue Service applies to taxpayers generally,
an individual's tax home is his principal place of
business.1/ If an individual conducts his business at more
than one Tocation, his principal place of business is
determined on the basis of facts and circumstances. The most
important considerations in making this determination are:
the amount of time spent at each location; the amount of
income derived at each location; and the degree of business
activity
at each
location.
1/
At least
one Circuit
Court of Appeals, in deciding the
locale of an individual's tax home, has framed the issue in
terms of whether, based on all the facts, it would be
reasonable for the taxpayer to live in the vicinity of where
he is employed. See Six v. United States, 450 F.2d 66 (2d
Cir. 1971). Although this approach rejects the IRS'
"principal place of business" formulation, the results
reached under either test would in most instances be the
same.

-3-

Generally, before a deduction for travel expenses may be
claimed, a taxpayer must substantiate the amount of the
expense, the time and place of travel, and the business
purpose of the expense. In general, the taxpayer must
maintain an account book, diary, statement of expense, or
similar record, together with documentary evidence, such as
receipts or paid bills, for expenditures of $25 of more.
Expenditures made for political purposes, including
costs of campaigning and attending political conventions, are
considered nondeductible personal expenses. This rule is
applicable whether or not the campaign is successful and
whether or not the campaign is for a new position or for
reelection to a position previously held.
State Legislators
Prior to 1976, the rules generally applicable to all
taxpayers for deducting travel expenses were applied to State
legislators. Most State legislators treated their residences
as their tax homes for tax purposes and deducted their
traveling expenses while at the State capital; however, the
Internal Revenue Service often challenged 'these deductions.
The tax home of each State legislator was 'thus determined on
a case-by-case basis.
The tendency toward more frequent and lengthy State
legislative sessions often made it unclear whether the
legislator's tax home was the State capital or his home
district. In some cases, the legislator's tax home would
shift from year to year. This, in turn, caused recordkeeping
difficulties for legislators as they tried to provide the
required substantiation for travel expenses without knowing
the location of their tax homes in advance.
In recognition of this problem, special temporary rules
for State legislators were enacted as part of the Tax Reform
Act of 1976. Under these rules, a State legislator could
elect as his tax home his place of residence within the
legislative district which he represented. He thus could
claim deductions for transportation costs and living expenses
incurred while away from his home district. The deductible
living expenses could be claimed without substantiation. The
amount was computed by multiplying the legislator's total
number of "legislative days" for the year by the per diem

-4amount generally allowable to Federal employees for travel
away from home. For this purpose, "legislative days"
included (1) days in which the legislature was in session
(including any day in which the legislature was not in
session for 4 consecutive days or less, i.e., weekends) and
(2) days on which the legislature was not in session but the
legislator attended a meeting of a legislative committee.
Revenue Ruling 82-33, 1982-10 I.R.B. 4, holds that for
purposes of these rules the "generally allowable" Federal per
diem is the maximum Federal per diem authorized for the seat
of the legislature. The Federal per diem travel allowance is
$50 for most areas of the United States but is higher for
certain high cost areas, including a number of State
capitals.
In 1981 the temporary elective provisions for State
legislators were modified and made permanent. The amendments
increased the amount of the deduction allowed per day without
substantiation to the greater of (i) the amount generally
allowable to Federal employees in travel status or (ii) the
amount generally allowable by the State to its employees for
travel away from home, up to 110 percent of the appropriate
Federal per diem.
A second amendment made in 1981 created a conclusive
presumotion that a legislator was away from home on business
on each legislative day. This amendment reversed the
decision of the Tax Court in Chappie v. Commissioner, 73 T.C.
823 (1980), which affirmed the Internal Revenue Service's
position that a State legislator must comply with the normal
rules requiring a taxpayer to be "away from home" in order to
deduct living expenses.
The third amendment made in 1981 excluded from
application of the elective provisions any State legislator
whose place of residence within his legislative district is
50 or fewer miles from the State capitol building.

-5-

Members of Congress
Members of Congress, like other business travelers, are
entitled to deduct ordinary and necessary travel expenses
incurred in pursuit of their trade or business as a
representative of their legislative districts. One of the
first issues to arise in connection with the deductibility of
a Member's travel expenses involved the location of a
Member's tax home.
In a 1936 decision, the Board of Tax Appeals held on the
facts presented that the "tax home" of one particular Member
of Congress was the District of Columbia. Lindsay v.
Commissioner, 34 B.T.A. 840 (1936). Under this decision,
Members of Congress were generally not permitted to deduct
any of their living expenses while at the nation's capital.
Subsequently, in 1952, Congress reversed the rule in Lindsay
and amended the predecessor of Code section 162 to provide
that a Member's tax home shall be his or her residence in the
district he or she represents. The Senate Report explained
that the amendment was intended "to permit the Members of
Congress to claim deductions for tax purposes to the same
extent as other persons whose business or profession requires
absence from 'home' for varying periods of- time." S. Rept.
1828, 82d Cong., 2d Sess., reprinted in 1952-2 C.B. 374. In
addition, allowable deductions for living expenses incurred
by Members while away from their tax homes on business were
limited to $3,000 per year.
In 1981 Congress made three amendments to the rules
affecting the tax treatment of living expenses of Members in
the Washington, D.C. area. First, the $3,000 cap on
deductible expenses was eliminated. Second, section 280A of
the Code was amended to provide an exception to the general
rule which denies business expense deductions with respect to
any dwelling unit used by a taxpayer or his family for
personal purposes for more than 14 days a year. Under this
amendment, the general rule does not apply in cases where the

-6residence is used by the taxpayer while away from home on
business. Third, section 280A was further amended to direct
the Treasury Department to prescribe amounts deductible,
without substantiation, for a Member's living expenses while
away from home in the District of Columbia area. Pursuant to
this directive, Treasury promulgated regulations in January
1982 setting forth a series of rules which were patterned
after the rules applicable to State legislators.
As part of the Urgent Supplemental Appropriations Act of
1982, Congress repealed two of the three 1981 amendments
affecting the deductibility of living expenses by Members of
Congress. The 1982 legislation restored the $3,000 cap on
deductible living expenses incurred by Members of Congress
while away from their tax homes on business. The legislation
also repealed the special rule permitting Members to deduct
designated amounts prescribed by Treasury regulations for
living expenses without substantiation. The 1982 legislation
did not affect the 1981 amendment to section 280A that
provided an exception for deductions with respect to dwelling
units used by taxpayers while away from home on business.
The 1982 legislation is effective for taxable years beginning
after December 31, 1981.
This concludes my prepared remarks. "I will be happy to
respond to any questions that you may have.

rREASURY NEWS
partment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
February 25, 1983
TREASURY OFFERS $9,000 MILLION OF 45-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $9,000 million of 45-day
Treasury bills to be issued March 7, 1983, representing an additional amount of bills dated April 22, 1982, maturing April 21,
1983 (CUSIP No. 912794 CB 8 ) .
Competitive tenders will be received at all Federal Reserve
Banks and Branches up to 1:30 p.m., Eastern Standard time, Wednesday,
March 2, 1983. 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.
Noncompetitive tenders from the public will not be accepted.
Tenders will not be received at the Department of the Treasury,
Washington.
The bills will be issued on a discount basis under competitive bidding, and at maturity their par amount will be payable
without interest. The bills will be issued entirely in book-entry
form.in a minimum denomination of $10,000 and in any higher $5,000
multiple, on the records of the Federal Reserve Banks and Branches.
Additional amounts of the bills may be issued to Federal Reserve
Banks as agents for foreign and international monetary authorities
at the average price of accepted competitive tenders.
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
R-2050

- 2 and forward transactions as well as holdings of outstanding bills
with the same maturity date as the new offering, e. g., bills with
three months to maturity previously offered as six-month bills.
Dealers, who make primary markets in Government securities and report
daily to the Federal Reserve Bank of New York their positions in
and borrowings on such securities, when submitting tenders for
customers, must submit a separate tender for each customer whose
net long position in the bill being offered exceeds $200 million.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities. A deposit of 2 percent of the par
amount of the bills applied for must accompany tenders for such
bills from others, unless an express guaranty of payment by an
incorporated bank or trust company accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids. Those
submitting tenders will be advised of the acceptance or rejection
of their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Settlement for
accepted tenders in accordance with the bids must be made or completed at the Federal Reserve Bank or Branch in cash or other
immediately-available funds on Monday, March 7, 1983.
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.

For Release Upon Delivery
Expected at 10 a.m. EST
February 28, 1983

STATEMENT OF
J. GREGORY BALLENTINE
DEPUTY ASSISTANT SECRETARY (TAX ANALYSIS)
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON OVERSIGHT
OF THE
HOUSE COMMITTEE ON WAYS AND MEANS

Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to appear before
you today to discuss Federal contract leasing practices in
general and the Navy TAKX program in particular.
In General
I would like to begin my testimony by describing
briefly a typical type of leasing transaction which is
commonly called a "leveraged lease." A leveraged lease
generally involves three parties: a lessor, a lessee, and a
lender to the lessor. In the usual case, the lessor will
purchase the property to be leased, financing the
acquisition with a downpayment of (say) 30 percent of the
cost of the property, and borrowing the balance from a third
party lender. The property is then leased to the lessee on
a net lease basis (i.e., the lessee has agreed to bear the
everyday operating costs of the property) for a term that
covers a substantial part of the useful life of the
property. The lessee's rental payments to the lessor,
together with the expected residual value of the property at
the end of the lease plus the anticipated tax benefits on
the property, are generally sufficient to discharge the
lessor's payments to the lender, repay the lessor's
investment and provide the lessor a reasonable return on
that investment. If the transaction is considered a "true"
R-2051

- 2 lease for Federal tax purposes, the lessor will be
considered the owner of the property. In that event the
lessor will be entitled to claim' the investment tax credit
and cost recovery deductions attributable to the property
and will be required to report the lessee's payments as
rental income.
If the transaction fails to qualify as a true lease for
Federal tax purposes, the purported lessee would be treated
as the owner of the property and the purported lessor would
be viewed as merely financing the lessee's purchase of the
property. In that case the lessor would not be entitled to
any investment tax credit or cost recovery deductions with
respect to the property. Any amount received by the lessor
as "rent" under the agreement generally would be considered"
payments of the sales price of the property, on which the
lessor may have gain or loss. The lessee would not be
entitled to any rental deductions for payments under the
agreement, but would instead acquire a basis in the property
generally equal to the principal amount payable over the
term of the agreement. In addition, as the property's
owner, the lessee would be entitled to claim any investment
credit or cost recovery deductions allowable with respect to
the property.
The determination of whether a transaction which is a
lease in form is in fact a lease for Federal tax purposes or
whether it is a conditional sale or other form of financing
arrangement will depend on the facts of the particular case.
The issue of a transaction's status as a lease or a mere
financing arrangement has been litigated many times. There
are no definitive criteria used for categorizing such
transactions under current law. In the case of Frank Lyon
Co. v. United States 1/, the Supreme Court stated that a
transaction will be treated as a true lease for tax purposes
where "the lessor retains significant and genuine attributes
of the traditional lessor status." The Court went on to
explain, however, that "what those attributes are in any
particular case will necessarily depend on its facts."
Revenue Procedure 75-21
While no specific formula for a true lease exists,
in 1975 the Internal Revenue Service published Revenue
Procedure 75-21 2/ which contains a set of guidelines
1/ 435 U.S. 561 (1978).
2/ 1975-1 C.B. 715.

- 3 indicating the conditions under which the Service will issue
advance rulings requested by interested taxpayers on whether
certain transactions are true leases of property for Federal
tax purposes. These guidelines, which have been
supplemented and amended several times, do not (and are not
intended to) define the factors necessary to having a true
lease for Federal tax purposes. Rather, they merely outline
the circumstances under which the Service will issue an
advance ruling. Indeed, there are a number of court
decisions upholding the parties' characterization of a
transaction as a lease even though the transaction would
have failed to meet the conditions of the Service's
guidelines.
In general, before the Service will issue an advance
ruling on the status of a leasing transaction, the
guidelines require (i) that the lessor have, and
maintain throughout the lease term, a minimum "at risk"
investment in the property equal to 20 percent of the
property's cost; (ii) that the residual value of the
property at the end of the lease term be equal to at
least 20 percent of its cost; and (iii) that the
property have a remaining useful life of 20 percent of
its originally estimated useful life. In addition, the
lessor must show that it expects to receive a profit
from the transaction exclusive of tax benefits'. The
guidelines also restrict the use of options allowing the
lessee to purchase the property for less than the property's
fair market value, and the use of lessee loans to the lessor
or guarantees of any indebtedness incurred by the lessor to
purchase the property.
Service Agreements
Service contracts or agreements, as such, are not
expressly dealt with in Revenue Procedure 75-21. The use
of service contracts has significance for Federal tax
purposes in cases where a direct lease of the property to
its ultimate user would limit the amount of tax benefits
available to the owner of the property. For example, under
section 48(a)(5) of the Internal Revenue Code, the direct
use of property by a governmental unit or tax exempt entity
under a lease agreement would generally operate to disallow
any investment tax credit otherwise available with respect
to the property. In contrast, if the parties enter into a
valid service agreement under which the owner itself will
use the property in performing services for the governmental
unit or tax exempt entity, the investment tax credit
limitation may be avoided.

- 4 -

In a typical lease, a lessor will transfer possession
and control of the property to the lessee for the term of
the lease, and the lessee will be responsible for its
day-to-day operation. In contrast, under a valid service
agreement, the ultimate user of the property may be able to
direct when and where the property is to be used; but
control, possession, and day-to-day operation of tho
property remain with the supplier of the service.
Whether an agreement is a service contract or a lease
is an inherently factual determination. The Service has
issued several published and private rulings on attempts to
use service agreements to avoid the investment tax credit
limitation in section 48(a)(5). In one ruling the IRS
concluded that rental agreements under which copying
machines were placed with tax exempt organizations and
governmental units were not service contracts (thus ruling
that the machines did not qualify for the investment
credit), reasoning that the supplier of the equipment had
given up possession and use of the equipment to such an
extent that the user was able to provide services for
itself. 3/ This conclusion was later rejected by the Court
of Claims in Xerox Corp. v. United States 4/ where the court
interpreted the facts differently and held that the taxpayer
"was providing a service to its customers under the rental
agreements with the machines an integral part of this
service."
Navy Program
You have asked us to comment on whether the IRS would
characterize the Navy Department's "convert and charter
program" for one of its 13 TAKX ships as a valid lease and
service contract. The transaction, very simply, is
structured as a net lease of the ship by an investor
partnership as lessor to an unrelated corporation as lessee.
The lessee, in turn, will time charter the vessel to the
Navy Department under a time charter party. The initial
period of the time charter is for 5 years with 4 successive
options for the Navy to renew the charter agreement for 5
years each.
Although the IRS has reviewed the agreements relating
to the Navy transaction that were supplied by the Subcommittee, it would need more information before it could
3/ Rev. Rul. 71-397, 1971-2 C. B. 63.
4/ 656 F.2d 659 (1981).

- 5 render its opinion on the validity of the lease (the
bareboat charter) and service contract (the time charter).
But even if the Service possessed all the relevant facts,
the Service could not express an opinion publicly on the
transaction since the transaction involves known taxpayers.
However, it should be noted that the IRS has ruled favorably
on similar arrangements in the past, although each case is
different and must stand on its own facts.
Tax Indemnification Agreement
You have also requested that we comment on the tax
indemnification provision included wifthin the "Time Charter
Party" agreement.
In' a typical lease arrangement, the rents charged
are a function, among other factors, of the tax benefits
attributable to the leased property that may be available
to the lessor. In other words, the availability of the tax
benefits on the leased property are an essential component
of the lessor's return on the transaction. If the
transaction ultimately is found to be a mere financing
transaction rather than a valid lease, any tax benefits will
be available to the lessee rather than the lessor. It is
not uncommon, therefore, for a lease agreement to provide
that the lessee will indemnify the lessor against the loss
of the anticipated tax benefits.
In the Time Charter Party, the Navy Department has
agreed to indemnify the ship's owner, under certain
circumstances, for the loss of cost recovery deductions and
the investment tax credit with respect to the ship. This
provision appears to be consistent with the normal business
practice of insuring that the benefit of the bargained for
tax deductions and credits are available as anticipated by
the parties.
Government Leasing
I will now discuss the economics of government leasing
with particular emphasis on the role of financing costs and
correct, consistent budget accounting for private capital
formation incentives.
One financial aspect of Government lease arrangements
generally substitutes private financing for Federal
borrowing. Since the Federal Government can always borrow
at lower rates than private borrowers, this financial aspect
favors Government purchases with Federal borrowing over
leasing. I should like to stress, however, there frequently
are other financial aspects of a lease arrangement or other
cost or policy advantages that can make leasing the
preferred alternative.

- 6 -

It is helpful to distinguish two kinds of fact
situations concerning the use by the government of durable
capital goods. In one situation, the legal arrangements combine the leasing of durable goods with a contract
for services not necessarily or customarily performed by the
government. In such cases, the rental or lease charges are
only partially determined by the capital costs comprising
the "net lease" terms I have described above; management and
other costs of producing the services associated with the
capital goods loom larger. Frequently, in these situations,
evaluation of the management and other cost differentials as
between government ownership and leasing are closely, if not
inextricably, combined with the "lease-buy" choice. Indeed,
in view of the discipline of competition to which private
ownership and management of this kind of assets is subject,
in this fact situation there may well be an efficiency
presumption favoring leasing over government ownership and
management.
In contrast, the other fact situation concerns those
instances in which few if any services associated with the
asset are contracted for, or, if there are associated
services, these are of a kind customarily performed by
government. In these cases, the only relevant aspect of the
lease-buy choice is the difference in financing method.
Whether the government leases or buys, it will ultimately
manage the asset in the same way, incurring the same
operating and maintenance costs, and deriving the same flow
of services. In such a fact situation a major difference in
budget cost as between buying or leasing becomes financing
cost. Even in this situation other cost advantages may make
leasing the more attractive alternative.
In general, because Federal Government loans are
perceived by lenders to be virtually riskiess, the
government enjoys a borrowing rate lower than that of
private parties. Moreover, due to the unavoidability of
certain transaction costs inherent in Federal loan
guarantees, private borrowing rates even on guaranteed loans
range up to 150 basis points (1.5 percentage points) higher
than on direct government borrowing. Thus, under a leasing
arrangement with the government which in effect guarantees
the lessor's own loan to finance the acquisition of the
asset to be leased, the cost of funds will be higher than if
the government purchased the asset and financed the purchase
by borrowing. In these instances in which there is no
question of managerial difference and no other financial
lease advantage, the lower government cost of funds yields a
predisposition favoring outright government ownership over
leasing. Government ownership avoids incurring fundraising

- 7 transaction costs that are unnecessary to accomplish the
government objective that will be served by the capital
good.
Of course, in the real world of government operations,
the task of distinguishing those fact situations in which
there is a presumption in favor of leasing from those in
which the presumption favors outright government ownership
is not an easy one. Other policy objectives of government
may be served on occasion by a leasing arrangement that
justifies somewhat higher financing costs; and differences
in budgetary tracks for procurement and operation and
maintenance programs may cause leases at particular times to
result in real cost savings that more than offset higher
financing costs. For example, the TAKX charter periods' were
structured in 5-year periods which gives the Navy the
flexibility to terminate the contracts if our defense needs
change without the U.S. Government bearing a potentially
substantial loss on the residual value of the ship.
Therefore, I question whether there can be a simple policy
favoring or disfavoring leasing by government. Rather, the
need is for procedures and techniques for evaluating
lease-buy choices, a subject to which the remainder of my
remarks is addressed.
Demonstration of the intuitively obvious 'truth that
leasing, per se, cannot reduce the government's cost of
obtaining the use of durable capital goods is complicated by
budgeting conventions. The unified budget is fundamentally
a document summarizing cash inflows and outflows, and,
therefore, does not lend itself to portrayal of the annual
costs of service from durable assets. In particular, budget
accounting for obligational authority and outlays does not
distinguish between a single capital outlay to provide
services for many fiscal years and other outlays to cover a
single year's service.
If the government invests in a ship that is expected to
provide a stream of military services over, say, 25 years,
the cost of acquiring that ship—$184 million in the case
before you—appears in the budget as that much obligational
authority in the year in which it is appropriated and as
outlays during the year(s) in which the procurement occurs.
However, it can be shown that for particular assumptions as
to the 25-year stream of effectiveness and government
borrowing cost, if the annual costs could be shown as lease
rentals, they would be $20.3 million a year. At the
government's borrowing rate, which is the budget cost of
shifting payments over time, this stream of annual outlays
would be exactly equivalent to the $184 million (single
year) outlay in terms of social cost. Moreover, accounting

- 8 for the cost of the ship as a $20.3 million outlay annually
has the additional valuable attribute of correctly
distributing its full cost over the 25 years of that ship's
service to the country.
Thus, leasing could actually contribute to better
budgetary control of government programs. If a lease
arrangement yields a set of annual lease rental costs that
approximately matches the expected stream of services to be
realized from the leased asset and which, when discounted,
costs no more than outright purchase, then leasing rather
than outright purchase has the virtue of distributing budget
costs to be financed by taxes among successive generations
of taxpayers who enjoy the benefits. The same result might
be achieved, for example, if government agencies contemplating the acquisition of durable assets were required to
finance the purchase through the Federal Financing Bank
under an agreement by which they obligate themselves to
service and retire the debt thus incurred over the period
the asset will be in productive service. The annual budget
charge for debt service and retirement under such an
arrangement would be, of course, substantively the same
as a lease rental; but since the annual charge would
reflect the government borrowing rate, budget cost
would be minimized. The potential benefit of leasing
for the budgetary process has been recognized by 0MB in
Circulars A-94 and A-104 which provide guidance in the
selection of a discount rate and for evaluating the choice
whether to lease or buy.
However, there are additional problems posed by budget
accounting conventions that confound evaluation of potential
government leases by simply discounting proposed lease
rentals at the guideline government borrowing rate. These
problems, to which I now turn, will invariably cause an
understatement of the budget cost of leasing. If these
problems are not carefully resolved, they will not only bias
the lease-buy choice in favor of leasing, they may lead to
the acceptance of leases that impose higher costs than
outright purchase and that nevertheless understate program
costs.
These budget accounting problems are rooted in
provisions of the income tax laws that have been designed
to encourage private capital formation. Specifically, the
Investment Tax Credit (ITC) and Accelerated Cost Recovery
System (ACHS) reduce the private cost of acquiring and using
assets. These incentives were introduced to help offset the
income tax deterrence to private capital formation. Since
in a "true" lease arrangement the lessor will receive the
ITC and can depreciate his asset using the ACRS schedule,

- 9 the effect of these incentives is to reduce the lease
rentals a private lessor must charge to recover his own
investment in the asset and to earn his rate of return.
When the government is the lessee, it pays these lower
rentals, which will appear as outlays, but the budget will
not associate with the program supported by these lease
rentals the reduction in tax revenues which made these lower
budget outlays possible. I shall illustrate the nature of
these problems in the case of the ITC and ACRS.
The ITC operates to reduce the private cost of
acquiring a qualified asset in much the same way as does
a capital grant. The ITC therefore proportionately reduces
any lease rentals that must be charged. If the ITC were
paid directly to the owner with appropriated funds, the
amount of the grant would appear in the budget among the
outlays and would be associated with the program that is
thus supported. But since the ITC is taken as a credit
against income tax otherwise due, the budget effect is
merely a reduction in tax deposits (receipts) and is not
associated with the program it supports. Proper evaluation
of a government lease therefore requires that account be
taken of the ITC allowed the lessor at the beginning of the
lease term by effectively adding the ITC to the rental
stream being discounted.
Accelerated cost recovery with respect to the portion
of the asset's cost representing the owner-lessor's own
investment of private funds affords him the benefit of tax
deferral. For example, the Navy lease of cargo ships which
you are reviewing extends for 25 years. Twenty-five years
is thus the period over which the lessor would predicate
recovery of his recoverable costs in determining his annual
lease rental charges, yet the ACRS provisions of the Code
permit him to recover this in tax deductions during the
first 5 years of the ship-lease term. As a consequence, the
lessor will deposit less tax during the first 5 years of the
lease contract, more during the remaining 20 years, hence
the descriptive term "tax deferral." The present value of
this tax deferral will reduce the lessor's required lease

-inpayments, but that present value, like the value of the ITC,
must be added to the government's rental stream to calculate
the true cost of the lease to the government. 5/
Obviously, if the full budgetary consequences of lease
rentals on both the outlay and revenue side of the budget
are accounted for and discounted at the government borrowing
rate, the choice whether to lease or buy will hinge on
the total cost to the Government under the two alternatives.
This total cost will include tax costs, financing costs, and
any other cost differences.
In those cases in which government leasing is
justified, the budget cost of the lease can be minimized if
the private financing is arranged through the Federal
Financing Bank, which is authorized to finance government
guaranteed obligations. I understand that Navy Department
officials are inquiring into these possibilities with regard
to the leases under review.
The particular characteristic of this analytical
accounting of government leasing costs that I should like to
call to your attention is that it computes all amounts as
"pre-tax," or market price magnitudes. This follows the
convention used in both our national accounts and budgeting
which takes market prices as the measure of both product
(GNP) and income payments, or shares. In budgeting, the
rationale for using pre-tax magnitudes is that, on the
expenditure side, these represent the opportunity costs of
the resources devoted to public purposes; on the revenue
side, pre-tax magnitudes represent the share of national
product taken as taxes. Thus, the adjustments to lease
rentals I have suggested above simply perform the function
5/
Present values never appear in budgets, only annual
cash flows. Thus, when tax is deferred, tax deposits
diminish and increase the deficit, in the same manner
as net lending. In later years, as the deferral is
repaid (assuming no new investment to generate
deferrals), tax deposits rise. The present value of
the deferrals exceeds that of the repayments, and this
may be likened to positive "average" tax deferral over
the life of the lease. Naturally, this average
deferral implies some net average government borrowing.
The deferral benefit is therefore the interest avoided
by the lessor, the consequences of which are interest
payment outlays.

- 11 of expressing the full resource costs of government leases
in terms that are consistent with other expenditures,
including procurement of an item that might be leased.
Consistent with the correct use of pre-tax values, the
form of analytical accounting for leases I have outlined
does not include offsets for the taxes on the income earned
by lessors and their lenders. That is, just as tho cost of
hiring a government employee is not reduced by the taxes
that employee will pay, the income paid to lessors should
not be reduced by the taxes they pay on that income. The
only tax amounts that should be included in the evaluation
of the lease are those that are unique to the lease
transaction as opposed to government purchase and borrowing.
Those are the value of the ITC and the tax deferral value of
ACRS. This procedure is in accordance with the general •
reason for maintaining government and national accounts in
pre-tax magnitudes, namely, so that the sum of government
and private sector activity will represent the national
product (GNP).
Conclusion
There are six basic points made in my testimony:
(1) Whether or not specific transactions' are
characterized for tax purposes as a lease or a
financing transaction is a factual issue that
cannot be determined without an examination of all
the details of the purported lease arrangement.
(2) Similarly, whether or not a specific transaction
is a valid service contract for tax purposes is a
factual issue that cannot be determined without an
examination of all the details of the agreement.
(3) Since the transactions in question involve known
taxpayers neither the Treasury nor the IRS can
comment publicly on their validity.
(4) To the extent that a lease arrangement simply
involves substituting private financing for public
financing, it is more costly than a direct
purchase.
(5) In many cases other cost and policy advantages can
dominate any additional financial costs of
leasing.
(6) Proper accounting for the costs of a Government
lease arrangement must include the revenue cost
from allowing the Investment Tax Credit and the
deferral advantage of ACRS.
This concludes my remarks and I will be happy to
respond to any questions you may have.

TREASURY NEWS

Department of the Treasury • Washington, D.C. • Telephone 56
FOR IMMEDIATE RELEASE CONTACT: Robert Don Levine
—
r= TcTol
(202) 566-2041
February 25, 1983
Secretary Regan
Announces Treasury Executive Institute
Secretary of the Treasury Donald T. Regan today announced
the establishment of the Treasury Executive Institute which will
provide developmental services to Senior Executive Service (SES)
executives and candidates to support achievement of their
organizational and individual goals.
The Institute will use management seminars, cross-bureau
assignments and department-wide task forces to deal with specific
problems.
Secretary Regan said in a memorandum to Treasury Department
bureaus that, "It is my hope that the Institute will become a
vehicle for more than just traditional executive development
activities. It is my belief that we often miss many of the
opportunities to share the innovations bureaus are experimenting
with and implementing — many of which can have applications in
other bureaus."
The operation of the Institute will be under the direction
of a Treasury Career Advisory Panel composed of senior Treasury
career officials.
Chairing the Panel for the first six months of the
Institute's existence will be James I. Owens, Deputy
Commissioner, Internal Revenue Service. Others serving on the
Panel will be Stephen E. Higgins, Acting Director, Bureau of
Alcohol, Tobacco and Firearms, H. Joe Selby, Senior Deputy
Comptroller for National Operations, Office of the Comptroller of
the Currency, Alfred R. DeAngelus, Deputy Commissioner, U.S.
Customs Service, Robert J. Leuver, Acting Director, Bureau of
Engraving and Printing, David W. McKinley, Acting Director,
Federal Law Enforcement Training Center, Margery Waxman, Deputy
General Counsel, William E. Douglas, Commissioner, Bureau of
Government Financial Operations, Larry E. Rolufs, Deputy
Director, Bureau of the Mint, W. M. Gregg, Acting Commissioner,
Bureau of the Public Debt, Steven R. Mead, Executive Director,
U.S. Savdngs Bonds Division, John R. Simpson, Director, U.S.
R-2052 Service, and David S. Burckman, Director of Personnel,
Secret
Department of the Treasury.

- 2-

Diane Herrmann, Director, Office of Equal Opportunity
Program, will serve for the first six months as the Executive
Director. She will be responsible for managing the day-to-day
operations of the Institute.
The Treasury Career Advisory Panel will meet for the first
time on Monday, February 28th to organize the Institute's work.
The Institute will be financed out of the budgets of
participating bureaus.

TREASURY NEWS
iepartment of the Treasury • Washington, D.C. • Telephone
FOR IMMEDIATE RELEASE

February 28, 1983

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,207 million of 13-week bills and for $ 6,200 million of
26-week bills, both to be issued on
March 3, 1983,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing
June 2, 1983
Discount Investment
Price
Rate
Rate 1/

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

High
98.008 a/7.880%
8.17%
Low
97.983
7.979%
8.28%
Average
97.992
7.944%
8.24%
a/ Excepting 2 tenders totaling $1,355,000.

96.011 7.890% 8.36%
95.968 7.975%
8.45%
95.982 7.948% 2/
8.42%

Tenders at the low price for the 13-week bills were allotted 24%.
Tenders at the low price for the 26-week bills were allotted 72%.

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
$
35,150
$
35,150
: $
106,465
11,018,050
4,835,050
11,612,650
25,545
25,545
:
14,760
60,895
35,895
:
78,510
50,985
44,485
42,360
49,050
49,050
i
64,035
1,019,080
527,080
740,210
50,230
43,230
56,750
7,780
7,780
37,400
40,190
40,190
50,220
25,365
25,365
:
17,845
842,315
320,315
1,172,870
217,525
217,525
219,305

Accepted
$
51,465
4,656,650
14,760
73,510
42,360
64,035
283,210
44,750
37,400
47,300
17,845
647,860
219,305

$13,442,160

$6,206,660

: $14,213,380

$6,200,450

$11,310,300
854,275
$12,164,575

$4,074,800
854,275
$4,929,075

: $11,921,470
i
654,510
' $12,575,980

$3,908,540
654,510
$4,563,050

1,209,385

1,200,000

68,200

437,400

$13,442,160

$6,206,660

. $14,213,380-

$6,200,450

U Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
on money market certificates is 8.163%.
R-2053

2041

FOR IMMEDIATE RELEASE FEBRUARY 14, 1983
The Treasury announced today that the 2-1/2 year
Treasury yield curve rate for the five business days ending
February 14, 1983, averaged 9,^0 % rounded to the nearest
five basis points. Ceiling rates based on this rate will be
in effect from Tuesday, February 15, 1983 through Monday,
February 28, 1983.
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.

y / •

Approved

,
Francis X. Cavanaugh, Director
Office of Government Finance
& Market Analysis

federal financing bank
WASHINGTON, D.C. 20220

February 28, 1983

FOR IMMEDIATE RELEASE

FEDERAL FINANCING BANK ACTIVITY
November and December 1982
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following:
FFB holdings of obligations issued, sold, or guaranteed by other Federal agencies on December 31, 1982
totaled $126.4 billion, an increase of $0.7 billion
over the November 30 level. FFB increased holdings of
agency debt issues by $0.3 billion and holdings of agency
guaranteed debt by $0.8 billion. Holdings of agency
assets purchased decreased by $0.4 billion. In November,
FFB had increased its holdings by $0.6 billion to $125.7
billion, including $0.1 billion of agency debt issues and
$0.6 billion of guaranteed issues. Agency assets held by
FFB decreased by $0.01 billion in November.' A total .of
307 disbursements were made during December, compared with
283 disbursements in November.
Attached to this release are tables presenting
FFB loan activity and new FFB commitments to lend
during November and December and tables summarizing
FFB holdings as of November 30 and December 31, 1982.
# 0 #

R-2054

FEDERAL FINANCING BANK
NOVEMBER 1982 ACTIVITY
BORROWER

DATE

AMOUNT
OF ADVANCE

Page 2 of 15
FINAL
MATURITY

INTEREST
RATE
(semiannual)

ON-BUDGET AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Note #269 11/12 $ 45,000,000.00 1/6/83 8.381%
Note #270
11/19
125,000,000.00
Power Bond 1982 E
11/19
200,000,000.00
Note #271
11/30
75,000,000.00

1/6/83
8.784%
11/30/12 10.725%
3/3/83
8.483%

NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
Note
Note
Note
Note
Note
-Wote
+Note
Note
+Note
+Note
•Note
Note

#129
#130
#131
#132
#133
#134
#135
#136
#137
#138
#139
#140

11/1
11/3
11/3
11/5
11/9
11/15
11/15
11/17
11/18
11/18
11/22
11/29

72,907.00
1,500,000.00
2,228,161.00
720,000.00
750,000.00
2,000,000.00
11,613,000.00
1,432,126.00
2,000,000.00
5,000,000.^0
7,013,000.00
14,450,000.00

1/31/83
12/3/82
12/30/82
2/3/83
2/3/83
12/15/82
2/14/83
12/30/82
2/16/83
2/16/83
2/21/83
1/28/83

8.259%
8.206%
8.206%
8.106%
8.364%
8.670%
8.670%
8.795%
8.763%
8.763%
8.364%
8.291%

9/10/87
8/1/85
6/15/12
9/1/09
2/16/12
5/5/94
12/31/93
9/1/92
12/22/10
3/16/90
11/22/90
9/10/87
5/5/92
12/22/10
3/16/90
9/1/09
2/16/12
3/14/87
1/15/88
6/15/12
9/20/94
3/20/90
3/15/93
12/31/93
2/15/88
6/15/91
9/20/84
5/25/88
4/30/11
9/20/94

10.359%
10.284%
10.770%
10.651%
10.680%
10.469%
10.454%
10.459%
10.615%
10.360%
10.414%
10.085%
10.519%
10.675%
10.448%
10.622%
10.616%
10.065%
10.189%
10.584%
10.594%
10.367%
10.492%
10.526%
10.204%
10.426%
9.521%
10.334%
10.674%
10.693%

AGENCY ASSETS
DEPARTMENT OF HEALTH & HUMAN SERVICES
Medical Facilities Loans
Series G 11/19 3,014,497.00 7/1/97 10.583%
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE - FOREIGN MILITARY SALES
Philippines 7
Ecuador 5
Egypt 3
Israel 8
Israel 13
Kenya 10
Korea 15
Somalia 1
Turkey 11
Jordan 7
Jordan 8
Philippines 7
Tunisia 11
Turkey 11
Jordan 7
Israel 8
Israel 13
Cameroon 4
Cameroon 5
Egypt 3
Honduras 9
Indonesia 7
Kenya 9
Korea 15

Peru 7
Spain 5
Thailand 3
Ecuador 5
Greece 14
Honduras 9
•Rollover

11/1
11/3
11/3
11/4
11/4
11/5
11/5
11/5
11/5
11/8
11/8
11/8
11/8
11/8
11/9
11/10
11/10
11/12
11/12
11/12
11/12
11/12
11/12
11/12
11/12
11/12
11/12
11/15
11/15
11/15

102,300.62
816,879.50
101,723,030.97
1,360,356.01
6,810,910.44
2,219,470.00
170,351.00
1,015,073.00
485,996.95
3,821,611.18
1,382,880.00
1,585,726.43
542,403.16
87,310.32
46,195.80
1,881,949.00
13,095,386.67
149,850.00
1,500,000.00
625,595.14
2,211,418.88
172,310.60
236,692.00
288,441.00
500,841.00
763,853.18
21,613.00
371,153.00
263,750.00
998,582.50

INTERESTRATE
(other than
semi-annual)

FEDERAL FINANCING BANK

Page 3 of 15

NOVEMBER 1982 ACTIVITY
AMOUNT
OF ADVANCE

DATE

BORROWER

FINAL
MATURITY

INTEREST
RATE
(semiannual

INTEREST
RATE
(other than
semi-annual)

DEPARTMENT OF DEFENSE - FOREIGN MILITARY SALES (Cont'd)
Turkey 9
Israel 13
Israel 8
Israel 13
Egypt 3
Turkey 11
Honduras 6
Israel 8
Israel 13
Turkey 11
Philippines 7

11/15
11/16
11/19
11/19
11/22
11/22
11/22
11/23
11/23
11/24
11/26

6,486,959.21
6,035,536.46
•51,837,000.00
7,484,230.43
151,986,269.69
728,884.93
56,998.37
2,449,974.53
7,288,910.90
6,584.18
39,718.54

6/22/92
2/16/12
9/1/09
2/16/12
6/15/12
12/22/10
4/25/91
9/1/09
2/16/12
12/22/10
9/10/87

10.619%
10.752%
10.571%
10.559%
10.528%
10.532%
10.410%
10.556%
10.555%
10.647%
10.032%

7/1/02
1/3/83
1/3/83
7/1/02

11.683%
8.856%
9.204%
11.331%

DEPARTMENT OF ENERGY
Synthetic Fuels Guarantees - Non-Nuclear Act
Great Plains
Gasification Assoc,.

#36

#37
#38
#39

11/1
11/8
11/15
11/22

5,000,000.00
13,000,000.00
15,500,000.00
14,000,000.00

DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development Block Grant Guarantees
Owensboro, KY
Jefferson County, KY
Lawrence, MA
Owensboro, KY
Hamonri, IN
Washington County, 3?A
Louisville, KY

11/5
11/9
11/9
11/9
11/26
11/26
11/30

27,855.60
309,197.00
40,000.00
281,379.49
45,084.00
23,975.00
1,320,000.00

9/1/83
11/30/83
1/1/83
9/1/83
5/1/84
8/1/83 .
11/30/84

9.005%
9.395%
8.364%
9.235%
9.615%
8.975%
9.869%

9.163% ann.
9.616% ann.
9.398%
9.846%
9.083%
10.112%

ann.
ann.
ann.
ann.

Public Housing Notes
Sale #27

11/5

25,167,489.42

11/1/0411/1/18

10.746%

11.035% ann.

8,000,000.00

10/1/92

10.459%

10.732% ann.

65,000.00
69,000.00
100,000.00
128,000.00
150,000.00
977,000.00
1,056,000.00
1,128,000.00
2,548,000.00
4,327,000.00
5,690,000.00
5,921,000.00
7,785,000.00
7,969,000.00
3,739,000.00
1,579,000.00
4,054,000.00
840,000.00
967,000.00
5,625,000.00
6,255,000.00
3,259,000.00
987,000.00

12/31/13
12/31/13
12/31/13
12/31/14
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/14
12/31/13
12/31/13
12/31/14
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13

11.025%
11.025%
11.025%
11.038%
11.025%
11.025%
11.025%
11.025%
11.025%
11.038%
11.025%
11.025%
11.038%
11.025%
11.025%
11.025%
11.025%
11.025%
11.025%
11.025%
11.025%
11.025%
11.025%

10.877%
10.877%
10.877%
10.890%
10.877%
10.877%
10.877%
10.877%
10.877%
10.890%
10.877%
10.877%
10.890%
10.877%
10.877%
10.877%
10.877%
10.877%
10.877%
10.877%
10.877%
10.877%
10.877%

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
Space Communications Company

11/22

RURAL ELECTRIFICATION ADMINISTRATION
°Tri-State
°Tri-State
Tri-State
°Tri-State
°Tri-State
°Tri-State
°Tri-State
Tri-State
°Tri-State
Tri-State
"Tri-State
Tri-State
Tri-State
Tri-State
Tri-State
Tri-State
Tri-State
Tri-State
Tri-State
Tri-State
Tri-State
Tri-State
Tri-State

G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T
G&T

°early extension

#37
#37
#37
#37
#37
#79
#79
#79
#89
#89
#89
#89
#89
#89
#89
#79
#89
#79
#89
#89
#89
#89
#79

11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1
11/1

qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.

FEDERAL FINANCING BANK

Page 4 of 1:

NOVEMBER 1982 ACTIVITY

BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual

INTEREST
RATE
(other than
semi-annual)

RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
Tri-State G&T #89
Tri-State G&T #37
Saluda River Electric #186
S. Mississippi Electric #171
Arkansas Electric #142
Arkansas Electric #221
Colorado Ute Electric #96
Tex-La Electric #208
Kansas Eletric #216
Plains Electric G&T #149
Plains Electric G&T #215
*Seminole Electric #141
*Southern Illinois Power #38
•San Miguel Electric #110
United Power #145
United Power #139
Cont. Tele, of Kansas #201
•Sierra Telephone #59
°Basin Electric #137
*Western Illinois Power #162
Hoosier Energy #107
Wolverine Electric #233
Wabash Valley Power #104
Allegheny Electric #175
New Hampshire Electric #192
East Kentucky Power #73
East Kentucky Power #140
East Kentucky Power #188
N. Michigan Electric #234
Deseret G&T #211
*Corn Belt Power #166
•Wolverine Electric #100
•Colorado Ute Electric #96
*N. Michigan Electric #101
*Deseret G&T #170
•Central Electric Power #131
Central Electric Power #131
New Hampshire Electric #192
•Oglethorpe Power #74
•Oglethorpe Power #150
New Hampshire Electric #192
•Soyland Power Coop. #165
•N. Michigan Electric #101
•Western Illinois Power #99
Seminole Electric #141
Oglethorpe Power #74
Seminole Electric #141
Tri-State G&T #157
•South Mississippi Electric #3
Big Rivers Electric #58
Big Rivers Electric #91
•Central Iowa Power #169
•East Kentucky Power #73
Big Rivers Electric #91
Big Rivers Electric #143
Big Rivers Electric #179
Western Illinois Power #225
Wabash Valley Power #206
Big Rivers Electric #179
•South Mississippi Electric #4
•South Mississippi Electric #90
"Big Rivers Electric #136
°Big Rivers Electric #143
"Big Rivers Electric #179
"Big Rivers Electric #58
°Big Rivers Electric #91
°Big Rivers Electric #136
"early extension
•maturity extension

11/1
11/1
11/1
11/1
11/1
11/1
11/3
11/3
11/4
11/5
11/5
11/5
11/6
11/8
11/9
11/9
11/9
11/9
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/12
11/12
11/13
11/13
11/13
11/14
11/14
11/15
11/15
11/15
11/15
11/15
11/17
11/17
11/17
11/18
11/18
11/19
11/19
11/20
11/20
11/20
11/20
11/22
11/22
11/22
11/22
11/23
11/23
11/24
11/24
11/24
11/24
11/24
11/24
11/24
11/24
11/24

6,485,000.00
300,000.00
2,250,000.00
2,769,000.00
9,788,000.00
1,231,000.00
1,133,000.00
760,000.00
4,226,000.00
1,270,000.00
923,000.00
2,032,000.00
855,000.00
10,000,000.00
1,150,000.00
3,700,000.00
531,000.00
120,000.00
35,000,000.00
2,221,000.00
15,000,000.00
4,380,000.00
269,000.00
4,160,000.00
565,000.00
900,000.00
600,000.00
5,500,000.00
5,456,000.00
4,671,000.00
400,000.00
1,305,000.00
1,486,000.00
2,543,000.00
695,000.00
120,000.00
500,000.00
985,000.00
6,210,000.00
7,057,000.00
7,760,000.00
8,562,000.00
140,000.00
1,584,000.00
11,747,000.00
4,829,000.00
5,410,000.00
1,440,000.00
9,125,000.00
4,340,000.00
3,780,000.00
4,031,000.00
7,243,000.00
237,000.00
968,000.00
27,336,000.00
2,688,000.00
192,000.00
5,500,000.00
824,000.00
1,321,000.00
134,000.00
100,000.00
5,534,000.00
$ 1,825,000.00
1,551,000.00
1,161,000.00

12/31/13
12/31/13
11/1/84
11/2/84
12/31/16
12/31/16
11/3/84
11/3/84
12/31/16
12/31/16
12/31/16
12/31/14
12/31/12
12/31/13
12/31/16
12/31/16
12/31/16
11/9/85
12/31/14
12/31/14
11/10/84
11/10/84
12/31/16
12/31A6
12/31/16
12/31/16
12/31/16
12/31/16
11/10/84
11/15/84
12/31/14
11/13/85
11/13/85
11/13/84
11/14/84
11/14/84
11/15/84
12/31/16
12/31/14
12/31/14
12/31/16
11/17/84
11/17/84
12/31/12
12/31/16
12/31/16
12/31/14
12/31/16
12/31/09
11/20/85
11/20/85
12/31/14
12/31/12
11/22/84
11/22/84
11/22/84
12/31/16
12/31/16
11/24/84
11/22/85
11/22/85
12/31/15
12/31/15
12/31/15
12/31/13
12/31/13
12/31/13

11.025%
11.025%
9.975%
9.975%
11.062%
11.062%
9.805%
9.805%
10.780%
10.725%
10.725%
10.705%
10.699%
10.713%
10.751%
10.751%
10.751%
10.095%
10.601%
10.601%
9.865%
9.865%
10.594%
10.594%
10.594%
10.594%
10.594%
10.594%
9.865%
9.895%
10.557%
10.155%
10.155%
9.995%
9.995%
9.995%
9.995%
10.606%
10.628%
10.628%
10.606%
10.025%
10.025%
10.777%
10.691%
10.691%
10.526%
10.513%
10.525%
10.005%
10.005%
10.515%
10.522%
9.915%
9.915%
9.915%
10.557%
10.557%
9.855%
10.035%
10.035%
10.624%
10.624%
10.624%
10.628%
10.628%
10.628%

10.877% qtr.
10.877% qtr.
9.854% qtr.
9.854% qtr.
10.913% qtr.
10.913% qtr.
9.688% qtr.
9.688% qtr.
10.639% qtr.
10.585% qtr.
10.585% qtr.
10.565% qtr.
10.560% qtr.
10.564% qtr.
10.610% qtr.
10.610% qtr.
10.610% qtr.
9.971 qtr.
10.464% qtr.
10.464% qtr.
9.746% qtr.
9.746% qtr.
10.457% qtr.
10.457% qtr.
10.457% qtr.
10.457% qtr.
10.457% qtr.
10.457% qtr.
9.746% qtr.
9.776% qtr.
10.421% qtr.
10.029% qtr.
10.029% qtr.
9.873% otr.
9.873% qtr.
9.873% qtr.
9.873% qtr.
10.469% qtr.
10.490% qtr.
10.490% qtr.
10.469% qtr.
9.902% qtr.
9.902% qtr.
10.636% qtr.
10.552% qtr.
10.552% qtr.
10.391% qtr.
10.378% qtr.
10.390% qtr.
9.883% qtr.
9.883% qtr.
10.380% qtr.
10.387% qtr.
9.795% qtr.
9.795% qtr.
9.795% qtr.
10.421% qtr.
10.421% qtr.
9.737% qtr.
9.912% qtr.
9.912% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.

FEDERAL FINANCING BANK

Page 5 of 15

NOVEMBER 1982 ACTIVITY

BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual

INTEREST
RATE
(other than
semi-annual)

ION (Cc nt'd)
11/24
°Big Rivers Electric #58
°Big Rivers Electric #91
11/24
"Big Rivers Electric #58
11/24
11/24
"Big Rivers Electric #65
°3ig Rivers Electric #91
11/24
°Big Rivers Electric #136
11/24
11/24
°Biq Rivers Electric #58
°Big Rivers Electric #65
11/24
°Big Rivers Electric #91
11/24
"Big Rivers Electric #136
11/24
°Big Rivers Electric #58
11/24
"Big Rivers Electric #91
11/24
"Big Rivers Electric #136
11/24
°Big Rivers Electric #58
11/24
°Biq Rivers Electric #136
11/24
11/24
°Big Rivers Electric #91
°Big Rivers Electric #91
11/24
"Big Rivers Electric #136
11/24
°Big Rivers Electric #143
11/24
11/24
°Big Rivers Electric #179
°Big Rivers Electric #91
11/24
11/24
"Big Rivers Electric #136
11/24
°Big Rivers Electric #143
11/24
°Big Rivers Electric #179
11/24
°Big Rivers Electric #91
11/24
°Big Rivers Electric #136
11/24
°Big Rivers Electric #143
11/24
°Big Rivers Electric #179
11/24
°Big Rivers Electric #91
11/24
°Big Rivers Electric #179
11/24
"Big Rivers Electric #179
11/24
°Big Rivers Electric #91
11/25
•Colorado Ute Electric #168
11/25
•Big Rivers Electric #58
11/25
•Big Rivers Electric #91
11/25
•Big Rivers Electric #136
11/25
•Big Rivers Electric #143
11/26
•Basin Electric #87
11/26
•Brazos Electric #108
11/26
•Brazos Electric #144
11/28
•South Texas Electric #109
11/29
North Carolina Electric #185
11/29
Chugach Electric #204
11/29
Associated Electric #132
Western Farmers Electric #220 11/29
Western Farmers Electric #133 11/29
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/29
"Associated Electric #132
11/30
Colorado Ute Electric #168
11/30
Tex-La Electric #208
Seminole Electric #141
11/30
11/30
Plains Electric G&T #158
11/30
•Allegheny Electric #93
•Southern Illinois Power #38
11/30
•Southern Illinois Power #38
11/30
•maturity extension
"early extension

3,905,000.00
4,367,000.00
2,464,000.00
50,000.00
2,532,000.00
364,000.00
2,742,000.00
228,000.00
1,910,000.00
288,000.00
2,420,000.00
1,236,000.00
123,000.00
2,497,000.00
1,328,000.00
5,200,000.00
1,004,000.00
519,000.00
22,000.00
6,377,000.00
345,000.00
357,000.00
35,000.00
6,794,000.00
392,000.00
182,000.00
45,000.00
12,192,000.00
328,000.00
2,874,000.00
16,248,000.00
380,000.00
27,000,000.00
170,000.00
1,059,000.00
123,000.00
46,000.00
838,000.00
632,000.00
820,000.00
527,000.00
4,755,000.00
750,000.00
9,195,000.00
5,225,000.00
460,000.00
300,000.00
10,500,000.00
8,000,000.00
17,300,000.00
10,500,000.00
13,850,000.00
2,750,000.00
10,000,000.00
12,100,000.00
4,100,000.00
12,000,000.00
12,660,000.00
800,000.00
3,542,000.00
13,157,000.00
2,638,000.00
3,415,000.00
1,100,000.00

12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
4/25/85
11/25/84
11/25/84
11/25/84
11/25/84
12/31/14
12/31/14
12/31/14
11/28/84
11/29/84
12/31/16
12/31/16
12/31/16
12/31/16
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
3/31/85
11/30/84
12/31/16
12/31/16
12/31/14
12/31/11
12/31/13

10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.628%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
10.624%
9.985%
9.925%
9.925%
9.925%
9.925%
10.683%
10.683%
10.683%
9.885%
9.885%
10.610%
10.610%
10.610%
10.610%
10.616%
10.616%
10.616%
10.616%
10.616%
10.616%
10.612%
10.612%
10.612%
10.612%
10.612%
9.955%
10.065%
10.875%
10.875%
10.878%
10.881%
10.879%

10.490% atr.
10.490% qtr.
10.490% atr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.490% qtr.
10.487% atr.
10.487% qtr.
10.487% atr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
10.487% qtr.
9.863% atr.
9.805% qtr.
9.805% atr.
9.805% qtr.
9.805% qtr.
10.544% qtr.
10.544% qtr.
10.544% qtr.
9.766% atr.
9.766% qtr.
10.473% atr.
10.473% qtr.
10.473% atr.
10.473% qtr.
10.479% qtr.
10.479% qtr.
10.479% qtr.
10.479% qtr.
10.479% qtr.
10.479% qtr.
10.475% qtr.
10.475% qtr.
10.475% qtr.
10.475% qtr.
10.475% qtr.
9.834% qtr.
9.941% qtr.
10.731% qtr.
10.731% qtr.
10.734% qtr.
10.737% qtr.
10.735% qtr.

FEDERAL FINANCING BANK

Page 6 of 15

NOVEMBER 1982 ACTIVITY
BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual

SMALL BUSINESS ADMINISTRATION
State & Local Development Company Debentures
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10
11/10

San Diego County LDC
Iowa Business Growth Company
Atlanta LDC
San Diego County LDC
Caprock LDC
Scioto EDC
Maine Development Foundation
Grand Rapids LDC
Old Colorado City Dev. Co.
Grand Rapids LDC
Commonwealth SBDC
Metro. Growth & Dev. Corp.
Greater Spokane BDA
Bedco Development Corporation
Androscoggin Valley RPC
Texas Certified Dev. Co. Inc.
Evergreen Community DCA
Greater Kenosha Dev. Corp.
Texas Certified DCI
Greater Kenosha Dev. Corp.
South Shore EDC
St. Louis LDC
San Diego County LDC
City-Wide SBDC
Milwaukee Economic Dev. Corp.
Long Beach LDC
St. Paul 503 Dev. Co.
Tuscon LDC
St. Louis LDC
Columbus Countywide Dev. Corp.
Ocean State BDA Inc.
Columbus Countywide Dev. Corp.
St. Paul 503 Dev. Co.
McPherson County SBA
San Diego County LDC
Milvaukee Economic Dev. Corp.
Bay Colony Development Corp.
Hazen Community Dev. Inc.
Columbus Countywide Dev. Corp.
Bedco Development Corporation
Bay Area Employment Dev. Co.
Bay Area Employment Dev. Co.

53,000.00
54,000.00
59,000.00
69,000.00
82,000.00
98,000.00
126,000.00
164,000.00
175,000.00
196,000.00
210,000.00
280,000.00
52,000.00
56,000.00
60,000.00
67,000.00
67,000.00
70,000.00
70,000.00
83,000.00
97,000.00
103,000.00
118,000.00
132,000.00
168,000.00
370,000.00
47,000.00
57,000.00
67,000.00
84,000.00
92,000.00
105,000.00
123,000.00
129,000.00
134,000.00
195,000.00
200,000.00
220,000.00
252,000.00
282,000.00
364,000.00
500,000.00

11/1/97
11/1/97
11/1/97
11/1/97
11/1/97
11/1/97
11/1/97
11/1/97
11/1/97
11/1/97
11/1/97
11/1/97
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/02
11/1/07
11/1/Q7
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07
11/1/07

10.663%
10.663%
10.663%
10.663%
10.663%
10.663%
10.663%
10.663%
10.663%
10.663%
10.663%
10.663%
10.176%
10.176%
10.176%
10.176%
10.176%
10.176%
10.176%
10.176%
10.176%
10.176%
10.176%
10.176%
10.176%
10.176%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%
10.745%

500,000.00
300,000.00
4,000,000.00
500,000.00
500,000.00
1,500,000.00
1,000,000.00
1,000,000.00
500,000.00
1,500,000.00
400,000.00

11/1/87
11/1/89
11/1/92
11/1/92
11/1/92
11/1/92
11/1/92
11/1/92
11/1/92
11/1/92
11/1/92

10.375%
10.565%
10.555%
10.555%
10.555%
10.555%
10.555%
10.555%
10.555%
10.555%
10.555%

11/30

482,236,194.07

2/28/83

8.480%

11/22

649,115.00

6/30/06

10.541%

Small Business Investment Company Debentures
Texas Capital Corp.
Crosspoint Investment Corp.
Brentwood Capital Corp.
J&D Capital Corp.
Noro Capital Corp.
Rust Capital LTD
Seafirst Capital Corp.
South Texas SBI Co.
TLC Funding Corp.
Texas Capital Corp.
Universal Investment Corp.

11/24
11/24
11/24
11/24
11/24
11/24
11/24
11/24
11/24
11/24
11/24

TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation

Note A-83-2
DEPARTMENT OF TRANSFORATION
Section 511
Milwaukee Road 511-2

INTEREST
RATE
(other than
semi-annual)

Page 7
FEDERAL FINANCING BANK
November 1982 Commitments
BORROWER
Beaumont, TX
Lynn, MA
Schenectady, NY
St. Paul, MN
Baltimore, MD
Gary, IN
Nashville/Davidson
County, TN
Baldwin Park, CA
Gulfport, MS
Des Moines, 10

AMOUNT
S

GUARANTOR

COMMITMENT
EXPIRES

MATURITY

1,050,000.00
10,500,000.00
1,500,000.00
5,000,000.00
2,000,000.00
967,000.00

HUD
HUD
HUD
HUD
HUD
HUD

9/1/83
8/15/84
8/15/84
8/1/83
1/2/84
9/1/83

9/1/83
8/15/93
8/15/84
8/1/03
1/2/04
9/1/83

2,500,000.00
800,000.00
235,000.00
750,000.00

HUD
HUD
HUD
HUD

6/1/84
8/15/84
6/15/84
2/15/84

6/1/84
8/15/91
6/15/84
2/15/84

CN
CO
CD O

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•O •
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VO
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CN
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o c o cc cn cn cn o v o c r r r c r H r ^ m L P o r ^
rnorrr^-pHr^incNrncNr^ocNinroLPaNr^
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8
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FEDERAL FINANCING BANK

Page 9 of 15

DECEMBER 1982 ACTIVITY

BORROWER

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

20,000,000.00
75,000,000.00

3/3/83
3/3/83

8.404%
8.435%

369,000,000.00
223,000,000.00

12/1/92
12/1/92

10.915%
10.638%

12/1
12/3
12/14
12/15
12/16
12/16
12/17
12/20

3,000,000.00
500,000.00
14,987,000.00
2,000,000.00
1,500,000.00
13,000,000.00
500,000.00
13,500,000.00

3/1/83
12/17/82
3/14/83
3/1/83
12/30/82
2/14/83
12/29/82
3/21/83

8.668%
8.423%
8.398%
8.034%
7.981%
7.981%
8.191%
8.227%

12/27

4,623,063.54

12/26/90

10.585%

2,476,919.06

7/1/027/11/04

10.596%

DATE

INTEREST
RATE
(other than
semi-annual)

ON-BUDGET AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Note #272
Note #275

12/10
12/31

EXPORT-IMPORT BANK
Note #45
Note #46

12/1
12/1

NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
Note #141
Note #142
Note #143
Note #144
Note #145
Note #146
Note #147
Note #148
OFF-BUDGET AGENCY DEBT
UNITED STATES RAILWAY ASSOCIATION
Note #33
AGENCY ASSETS
DEPARTMENT OF HEALTH & HUMAN SERVICES
Health Maintenance Organization Notes
Block #26 12/15
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE - FOREIGN MILITARY SALES
Egypt 3
Greece 13
Indonesia 7
Indonesia 8
Jamaica 2
Jordan 7
Korea 15
Morocco 9
Spain 4
Ecuador 6
Israel 8
Israel 13
Spain 5
Turkey 11
Turkey 13
Egypt 3
Israel 8
Thailand 10
Columbia 4
Egypt 3
Greece 14
Honduras 9
Israel 13
Tunisia 11
Turkey 11

12/1
12/1
12/1
12/1
12/1
12/1
12/1
12/1
12/1
12/3
12/3
12/3
12/3
12/3
12/3
12/6
12/6
12/6
12/7
12/8
12/8
12/8
12/8
12/8
12/8

3,774,529.47
100,800.00
1,813,000.00
2,205,023.00
41,482.00
1,192,267.21
250,000.00
5,086,938.77
40,299.19
$ 471,845.00
1,186,118.00
5,164,324.58
912,248.42
1,806,518.00
2,514,200.00
5,341,596.48
250,000.00
1,636,000.00
42,311.30
23,767,733.37
348,828.48
719,910.38
11,947,231.17
452,312.00
459,039.64

10.896%
6/15/12
9/22/90
10.505%
3/20/90
10.461%
5/5/91
10.574%
12/20/93 10.788%
3/16/90
10.461%
12/31/93 10.724%
3/31/94
10.738%
4/25/90
10.464%
6/20/89
10.354%
9/1/09
10.796%
2/16/12
10.796%
6/15/91
10.475%
12/22/10 10.799%
3/24/12
10.797%
6/15/12
10.586%
9/1/09
10.586%
7/10/94
10.524%
7/10/86
9.831%
6/15/12
10.595%
4/30/11
10.596%
9/20/94
10.556%
2/16/12
10.595%
5/5/92
10.433%
12/22/10 10.596%

10.770% qtr.
10.500% qtr.

FEDERAL FINANCING BANK

Page 10 of 15

DECEMBER 1982 ACTIVITY
BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual

INTEREST
RATE
(other than
semi-annual)

DEPARTMENT OF DEFENSE -- FOREIGN MILITARY SALES (Cont'd)
Korea 15
Israel 8
Israel 13
Columbia 4
Egypt 3
Indonesia 8
Jordan 7
Philippines 7
Turkey 9
Jordan 7
Oman 5
Thailand 6
Thailand 7
Thailand 8
Thailand 9
Israel 8
Honduras 9
Indonesia 8
Israel 13
Egypt 3
El Salvador 4
Israel 8
Jamaica 2
Tunisia 11
Turkey 9
Dominican Republic 5
Honduras 9
Peru 7
Philippines 7
Turkey 13
Honduras 9
Korea 15
Philippines 7
Egypt 3
Greece 14
Honduras 9
Egypt 3
Greece 14
Israel 8
Jordan 8
Peru 7
Spain 6
Thailand 9

12/9
12/9
12/9
12/9
12/10
12/10
12/10
12/10
12/14
12/15
12/15
12/15
12/15
12/15
12/15
12/15
12/16
12/16
12/17
12/21
12/21
12/21
12/21
12/21
12/23
12/23
12/23
12/23
12/23
12/23
12/27
12/27
12/27
12/29
12/29
12/29
12/30
12/30
12/30
12/30
12/30
12/30
12/30

716,589.00
582,198.76
9,854,993.24
68,502.00
345,220.14
7,025,865.00
1,620,837.11
198,609.23
322,694.00
5,034,417.40
2,916,601.74
1,361,993.00
102,214.28
1,109,847.00
19,836,078.00
3,710,000.00
1,029,550.00
1,151,452.00
10,557,739.28
199,135,979.94
85,556.00
2,000,000.00
47,267.29
41,057,779.53
2,089,715.33
3,509.42
224,614.54
1,398.00
904,140.72
971,589.25
1,504,834.37
1,463,635.97
836,025.00
1,999,792.96
1,330,983.96
222,181.00
3,217,526.28
171,941.91
669,345.00
1,876,421.89
300,000.00
8,090,000.00
2,865,612.00

12/31/93
9/1/09
2/16/12
7/10/86
6/15/12
5/5/91
3/16/90
9/10/87
6/22/92
3/16/90
5/25/90
9/20/85
8/25/86
8/10/90
9/15/93
9/1/09
9/20/94
5/5/91
2/16/12
6/15/12
12/5/93
9/1/09
12/20/93
5/5/92
6/22/92
4/30/89
9/20/94
2/15/88
9/10/87
3/24/12
9/20/94
12/31/93
9/10/87
6/15/12
4/30/11
9/20/94
6/15/12
4/30/11
9/1/09
11/22/90
2/15/88
9/15/92
9/15/93

10.571%
10.733%
10.730%
9.941%
10.695%
10.458%
10.345%
10.095%
10.577%
10.149%
10.170%
9.476%
9.670%
10.296%
10.472%
10.582%
10.564%
10.310%
10.731%
10.834%
10.727%
10.827%
10.731%
10.619%
10.492%
10.170%
10.612%
10.025%
9.958%
10.746%
10.540%
10.443%
9.900%
10.655%
10.656%
10.510%
10.697%
10.696%
10.693%
10.282%
9.987%
10.404%
10.505%

7/1/02
7/1/02
4/1/83
4/1/83
7/1/83

11.624%
11.525%
9.305%
9.015%
9.345%

1/2/04
6/1/83
10/1/03
8/1/83
8/1/83
5/1/84
8/15/90
9/1/83
8/31/02
2/15/84
9/1/83

10.888%
9.185%
10.887%
9.295%
8.935%
9.525%
10.405%
9.015%
10.701%
9.005%
8.565%

DEPARTMENT OF ENERGY
Synthetic Fuels Guarantees -• Non-Nuclear Act
Great Plains
Gasification Assoc:. #40

#41
#42
#43
#44

12/1
12/6
12/13
12/20
12/27

10,500,000.00
7,000,000.00
15,500,000.00
9,000,000.00
8,500,000.00

DEPARTMENT OF HOUSING &: URBAN DEVELOPMENT
Community Development Block Grant Guarantees
Baltimore, MD
Kenosha, WI
Phil. Auth. for Ind . Dev.
Washington County, PA
Washington County, PA
Hammond, IN
Phila. Housing Dev. Auth
Gary, IN
Rochester, NY
Des Moines, Iowa
Gary, IN

12/1
12/1
12/1
12/1
12/7
12/7
12/8
12/10
12/14
12/15
12/15

250,000.00
14,000.00
850,000.00
139,580.95
53,613.18
115,530.00
3,509,742.00
345,000.00
334,000.00
230,000.00
142,000.00

11.184% ann.
11.183%
9.406%
9.029%
9.752%
10.676%
9.140%
10.987%
9.208%
8.673%

ann.
ann.
ann.
ann.
ann.
ann.
ann.
ann.
ann.

FEDERAL FINANCING BANK

Page n of 15

DECEMBER 1982 ACTIVITY

BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual

INTEREST
RATE
(other than
semi-annual)

Community Development Block Grant Guarantees (Cont'd)
Washington, PA
12/15
12/20
Baltimore, MD
Kenosha, WI
12/20
Lawrence, Mass.
12/20
Tacoma, WA
12/20
Niagera Falls Urban Renewal Ag 12/22
Hammond, IN
12/30
Kenosha, WI
12/30
Long Beach, CA
12/30

8.580% ann.
11.028% ann.

29,024.62
205,000.00
24,100.00
23,400.00
1,000,000.00
575,000.00
460,389.00
57,463.46
1,824,632.00

8/1/83
1/2/04
6/1/83
1/1/83
10/15/03
7/1/04
5/1/84
6/1/83
2/1/85

8.505%
10.740%
8.615%
8.227%
10.739%
10.722%
9.025%
8.665%
9.436%

22,872,250.12

11/1/0211/1/19

10.696%

10.982% ann.

17,000,000.00
14,900,000.00

10/1/92
10/1/92

10.709%
10.553%

10.996% ann.
10.831% ann.

958,000.00
5,795,000.00
150,000.00
4,688,000.00
1,500,000.00
4,569,000.00
106,000.00
18,329,000.00
600,000.00
13,824,000.00
65,000,000.00
1,771,000.00
500,000.00
550,000.00
1,400,000.00
3,191,000.00
3,755,000.00
1,300,000.00
699,000.00
3,852,000.00
6,991,000.00
230,000.00
3,366,000.00
27,315,000.00
4,899,000.00
3,190,000.00
2,000,000.00
1,338,000.00
1,540,000.00
9,900,000.00
1,020,000.00
1 650,000.00
1,400,000.00
6,900,000.00
4,048,000.00
993,000.00
1,420,000.00
33,000,000.00
500,000.00
3,176,000.00
1,805,000.00
1,428,000.00
10,786,000.00
6,156,000.00
10,000,000.00

12/1/84
12/1/84
12/2/84
12/2/84
12/31/16
12/31/16
12/31/16
12/31/16
12/1/84
12/31/14
12/31/14
12/3/84
12/31/12
12/6/84
12/31/12
12/31/15
12/31/15
12/31/16
12/9/84
12/10/84
12/10/84
12/10/84
12/31/84
12/31/16
12/10/84
12/31/14
12/10/84
12/10/84
12/11/84
12/31/12
12/11/84
12/31/14
12/31/16
12/31/16
12/14/84
12/14/85
12/31/14
12/31/14
12/31/14
12/15/84
12/15/84
12/31/12
12/31/14
12/31/14
12/15/84

10.085%
10.085%
10.085%
10.085%
10.863%
10.863%
10.863%
10.863%
10.085%
10.895%
10.841%
10.015%
10.581%
9.845%
10.581%
10.592%
10.592%
10.705%
9.975%
9.955%
9.955%
9.955%
9.965%
10.674%
9.955%
10.679%
9.955%
9.955%
9.995%
10.773%
9.995%
10.773%
10.773%
10.773%
9.965%
10.125%
10.599%
10.599%
10.599%
9.665%
9.665%
10.593%
10.597%
10.597%
9.665%

9.961% atr.
9.961% qtr.
9.961% atr.
9.961% qtr.
10.719% qtr.
10.719% qtr.
10.719% qtr.
10.719% qtr.
9.961% qtr.
10.751% qtr.
10.698% qtr.
9.893% qtr.
10.445% qtr.
9.727% qtr.
10.445% qtr.
10.455% qtr.
10.455% qtr.
10.565% qtr.
9.854% qtr.
9.834% qtr.
9.834% qtr.
9.834% qtr.
9.844% qtr.
10.535% qtr.
9.834% qtr.
10.540% qtr.
9.834% qtr.
9.834% qtr.
9.873% qtr.
10.632% qtr.
9.873% atr.
10.632% qtr.
10.632% qtr.
10.632% qtr.
9.844% qtr.
10.000% atr.
10.462% qtr.
10.462% qtr.
10.462% qtr.
9.551% qtt.
9.551% qtr.
10.456% qtr.
10.460% qtr.
10.460% qtr.
9.551% qtr.

11.027% ann.
11.009% ann.
9.417% ann.
9.659% ann.

Public Housing Notes
Sale #28

12/10

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
Space Communications Company

12/1
12/20

RURAL ELECTRIFICATION ADMINISTRATION
Brazos Electric #108
Brazos Electric #230
S. Mississippi Electric #90
S. Mississippi Electric #171
Saluda River Electric #186
North Florida Tele. #186
Arkansas Electric #221
Arkansas Electric #142
•Big Rivers Electric #91
•Arkansas Electric #142
•S. Mississippi Electric #171
Sugar Land Telephone Co. #69
•Southern Illinois Power #38
Central Electric Power #131
•Eastern Iowa L&T #61
"United Power #86
°United Power #139
Sho-me Power #164
Dairyland Power #54
Wolverine Electric #233
Wabash Valley Power #104
Wabash Valley Power #206
Allegheny Electric #175
Deseret G&T #211
N. Michigan Electric #234
*Wabash Valley Power #104
*East River Electric #117
*N. Michigan Electric #101
•Colorado Ute Electric #96
•Alabama Electric #26
•Wolverine Electric #100
•Sunflower Electric #63
East Kentucky Power #140
East Kentucky Power #188
•Northwest Iowa Power #95
Colorado Ute Electric #203
•Deseret G&T #170
•Cajun Electric #147
•East Kentucky Power #140
Colorado Ute Electric #96
New Hampshire Electric #192
•Western Illinois Power #99
•Oglethorpe Electric Corp. #150
•Oglethorpe Electric Corp. #74
•Dairyland Power #173

"early extension
•maturity extension

12/1
12/1
12/1
12/1
12/1
12/1
12/1
12/1
12/1
12/1
12/2
12/3
12/4
12/6
12/6
12/8
12/8
12/9
12/9
12/10
12/10
12/10
12/10
12/10
12/10
12/10
12/10
12/10
12/11
12/11
12/11
12/12
12/13
12/13
12/14
12/14
12/15
12/15
12/15
12/15
12/15
12/15
12A5
12/15
12/15

FEDERAL FINANCING BANK

Page 12 of 15

DECEMBER 1982 ACTIVITY

BORROWEF

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATF
(semiannual

INTEREST
RATE
(other than
semi-annual)

RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
Colorado Ute Electric #203 12/16 $ 7,229,000.00 12/16/84
Mid-Georgia Telephone #229
12/16
2,036,000.00
•San Miguel Electric Coop. #110 12/16
3,400,000.00
Northwest Iowa Power #95
12/17
2,252,000.00
Upper Missouri G&T #172
12/17
192,000.00
Eastern Iowa L&P #184
12/17
1,994,000.00
United Power Assoc. #145
12/17
875,000.00
United Power Assoc. #139
12/17
4,100,000.00
"Sierra Telephone #59
12/17
281,904.00
"Sierra Telephone #59
12/17
48,000.00
"Sierra Telephone #59
12/17
300,000.00
"Sierra Telephone #59
12/17
1,271,000.00
"Sierra Telephone #59
12/17
232,826.00
"Sierra Telephone #59
12/17
273,013.00
"Sierra Telephone #59
12/17
248,000.00
"Sierra Telephone #59
12/17
492,000.00
"Sierra Telephone #59
12/17
220,000.00
"Sierra Telephone #59
12/17
108,160.00
"Sierra Telephone #59
12/17
148,645.00
"Sierra Telephone #59
12/17
74,000.00
"Sierra Telephone #59
12/17
120,000.00
"Sierra Telephone #59
12/17
265,000.00
"Sierra Telephone #59
12/17
121,000.00
"Sierra Telephone #59
12/17
92,000.00
"Sierra Telephone #59
12/17
76,000.00
"Sierra Telephone #59
12/17
207,000.00
"Sierra Telephone #59
12/17
15,000.00
•Seminole Electric Coop. #141
12/17
4,424,000.00
Western Illinois Power #162
12/17
2,315,000.00
Colorado Ute Electric #168
12/18
8,014,000.00
•St. Joseph T&T *13
12/20
439,000.00
•Big Rivers Electric #58
12/20
3,033,000.00
Big Rivers Electric #65
12/20
104,000.00
•Big Rivers Electric #91
12/20
3,840,000.00
Soyland Power #226
12/20
13,800,000.00
Basin Electric #232
12/20
9,512,000.00
•San Miguel Electric #110
12/20
10,000,000.00
Big Rivers Electric #91
12/21
4,713,000.00
Big Rivers Electric #143
12/21
1,815,000.00
Big Rivers Electric #179
12/21
3,513,000.00
Seminole Electric Coop. *141
12/21
22,639,000.00
Wabash Valley Power #252
12/22
37,015,000.00
Wabash Valley Power #252
12/22
2,000,000.00
Wabash Valley Power #252
12/22
350,000.00
Wabash Valley Power #252
12/22
2,000,000.00
Wabash Valley Power #252
12/22
400,000.00
Wabash Valley Power #252
12/22
2,000,000.00
Wabash Valley Power #252
12/22
450,000.00
Wabash Valley Power #252
12/22
2,000,000.00
Wabash Valley Power #252
12/22
500,000.00
Wabash Valley Power #252
12/22
30,000,000.00
Oglethorpe Power Corp. #74
12/22
26,521,000.00
•Big Rivers Electric #58
12/22
82,000.00
•Big Rivers Electric #91
12/22
1,865,000.00
•Big Rivers Electric #136
12/22
405,000.00
*Big Rivers Electric #143
12/22
22,000.00
•Colorado Ute Electric #71
12/23
1,720,000.00
•Brazos Electric #108
12/24
1,287,000.00
•Brazos Electric #144
12/24
3,523,000.00
Soyland Power #105
12/26
7,248,000.00
Kamo Electric #209
12/27
1,943,000.00
•East Kentucky Power #73
12/27
5,040,000.00
Wabash Valley Power #206
12/28
111,000.00
•East Ascension Tele. #39
12/28
500,000.00
Wolverine Electric #233
12/29
13,834,000.00
N. Michigan Electric #234
12/29
17,482,000.00
N. Carolina Electric #185
12/29
29,785,000.00
"early extension
•maturity extension

12/31/16
12/31/14
12/17/84
12/17/84
12/31/16
12/31/16
12/31/16
12/31/11
12/31/11
12/31/11
12/31/11
12/31/11
12/31/11
12/31/11
12/31/12
12/31/12
12/31/12
12/31/12
12/31/12
12/31/12
12/31/13
12/31/13
12/31/14
12/31/14
12/31/15
12/31/16
12/31/14
12/31/14
1/18/85
12/20/84
12/31/12
12/31/12
12/31/12
12/20/84
12/20/84
12/31/12
12/31/16
12/31/16
12/31/16
12/31/16
12/22/84
6/22/85
12/22/85
6/22/86
12/22/86
6/22/87
12/22/87
6/22/88
12/22/88
12/31/16
12/31/16
12/31/14
12/31/14
12/31/14
12/31/14
2/23/85
12/31/14
12/31/14
12/26/85
12/31/16
12/31/12
12/28/84
12/31/12
12/29/84
12/29/84
12/29/84

9.715%
10.655%
10.651%
9.715%
9.715%
10.766%
10.766%
10.766%
10.631%
10.631%
10.631%
10.631%
10.632%
10.632%
10.632%
10.638%
10.638%
10.638%
10.638%
10.638%
10.638%
10.645%
10.645%
10.650%
10.650%
10.655%
10.658%
10.758%
10.758%
9.815%
9.785%
10.773%
10.773%
10.773%
9.785%
9.785%
10.769%
10.864%
10.864%
10.864%
10.864%
9.675%
9.845%
10.005%
10.135%
10.235%
10.285%
10.335%
10.425%
10.515%
10.706%
10.706%
10.714%
10.714%
10.714%
10.714%
9.735%
10.691%
10.691%
9.935%
10.682%
10.702%
9.665%
10.652%
9.655%
9.655%
9.655%

9.600% qtr.
10.517% qtr.
10.513% atr.
9.600% qtr.
9.600% qtr.
10.625% qtr.
10.625% qtr.
10.625% qtr.
10.493% atr.
10.493% qtr.
10.493% qtr.
10.493% qtr.
10.494% qtr.
10.494% qtr.
10.494% ctr.
10.500% qtr.
10.500% qtr.
10.500% qtr.
10.500% qtr.
10.500% qtr.
10.500% qtr.
10.507% qtr.
10.507% qtr.
10.512% qtr.
10.512% atr.
10.517% qtr.
10.520% atr.
10.617% qtr.
10.617% qtr.
9.697% qtr.
9.668% qtr.
10.632% qtr.
10.632% qtr.
10.632% qtr.
9.668% qtr.
9.668% qtr.
10.628% qtr.
10.720% qtr.
10.720% qtr.
10.720% qtr.
10.720% qtr.
9.561% qtr.
9.727% qtr.
9.883% qtr.
10.010% qtr.
10.107% qtr.
10.156% qtr.
10.205% qtr.
10.293% qtr.
10.380% qtr.
10.566% qtr.
10.566% qtr.
10.574% qtr.
10.574% qtr.
10.574% qtr.
10.574% qtr.
9.619% qtr.
10.552% qtr.
10.552% qtr.
9.815% qtr.
10.543% qtr.
10.563% qtr.
9.551% qtr.
10.514% qtr.
9.541% qtr.
9.541% qtr.
9.541% qtr.

FEDERAL FINANCING BANK

Page 13 of 15

DECEMBER 1982 ACTIVITY
BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual

INTEREST
RATE
(other than
semi-annual)

RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
Plains Electric G&T #158
*Wolverine Electric #100
•Southern Illinois Power #38
Wabash Valley Power #104
Wabash Valley Power #206
New Hampshire Electric #192
Basin Electric #232
Tex-La Electric #208
Allegheny Electric #175
Associated Electric #132
Sunflower Electric #174
Big Rivers Electric #58
Big Rivers Electric #179
Saluda River Electric #186
•Southern Illinois Power #38
•Allegheny Electric #93
•Basin Electric #87
•Wabash Valley Power
•South Mississippi Power #3
•South Mississippi Power #90
•Wolverine Electric #182
•Wolverine Electric #100
•Big Rivers Electric #91
N. Michigan Electric #183
N. Michigan Electric #101
•Tri-State G&T #89
•Tri-State G&T #37
•Tri-State G&T #89
•Tri-State G&T #89
•Tri-State G&T #37
•Tri-State G&T #79

12/29
12/29
12/29
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31

S 3,998 ,000.00
1,516 ,000.00
650 ,000.00
9,328 ,000.00
432 ,000.00
1,280 ,000.00
2,692 ,000.00
3,436 ,000.00
7,042 ,000.00
16,475 ,000.00
18,750 ,000.00
2,010 ,000.00
3,340 ,000.00
10,569 ,000.00
2,960 ,000.00
3,114 ,000.00
2,846 ,000.00
3,920 ,000.00
504 ,000.00
246 ,000.00
14,946 ,000.00
1,997 ,000.00
3,024 ,000.00
21,772 ,000.00
2,446 ,000.00
6,075 ,000.00
300 ,000.00
9,135 ,000.00
9,308 ,000.00
90 ,000.00
1,937 ,000.00

12/31/16
12/29/84
12/13/12
12/30/84
12/30/84
12/30/84
12/30/84
12/30/84
1/31/85
12/31/16
12/31/16
12/31/16
12/31/16
12/31/16
12/31/11
12/31/14
12/31/14
12/31/14
12/31/12
12/31/12
12/31/84
12/31/84
12/31/14
12/31/84
12/31/84
12/31/12
12/31/12
12/31/12
12/31/12
12/31/12
12/31/12

10.622%
9.655%
10.647%
9.665%
9.665%
9.665%
9.665%
9.665%
9.695%
10.674%
10.674%
10.674%
10.674%
10.674%
10.685%
10.664%
10.664%
10.664%
10.678%
10.678%
9.645%
9.645%
10.664%
9.645%
9.645%
10.678%
10.678%
10.678%
10.678%
10.678%
10.678%

12/1/85
12/1/87
12/1/87
12/1/89
12/1/89
12/1/89
12/1/92
12/1/92
12/1/92
12/1/92
12/1/92
12/1/92

10.095%
10.425%
10.425%
10.815%
10.815%
10.815%
10.825%
10.825%
10.825%
10.825%
10.825%
10.825%

12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/97
12/1/02
12/1/02
12/1/02
12/1/02

10.528%
10.528%
10.528%
10.528%
10.528%
10.528%
10.528%
10.528%
10.528%
10.528%
10.528%
10.528%
10.528%
10.528%
10.559%
10.559%
10.559%
10.559%

12/1/02

10.559%

SMALL BUSINESS ADMINISTRATION
Small Business Investment Company Debentures
Edwards Capital Company 12/22 600,000.00
National City Capital Corp.
12/22
1,000,000.00
New West Partners
12/22
600,000.00
Frontenac Capital Corp.
12/22
1,000,000.00
Miami Valley Capital, Inc.
12/22
500,000.00
Rice Investment Company
12/22
600,000.00
Bando-McGlocklin Inv. Co.
12/22
1,500,000.00
Charleston Capital Corp.
12/22
500,000.00
Clinton Capital Corp.
12/22
900,000.00
Delta Capital, Inc.
12/22
850,000.00
First North Fiordia SBIC
12/22
500,000.00
Nelson Capital Corp.
12/22
330,000.00
State & Local Development Company Debentures
St. Louis Local Dev. Co.
12/8
Metropolitan Growth & Dev. Cor.12/8
Texas Certified Dev. Co. Inc. 12/8
Corp. for Econ. in Des Moines 12/8
Iowa Business Growth Co.
12/8
St. Louis Local Dev. Co.
12/8
N. Regional Planning Comm.Inc. 12/8
Wisconsin Bus. Dev. Fin. Corp. 12/8
Citywide SBD Corp.
12/8
Commonwealth SBD Corp.
12/8
Northshore Bus. Fin. Corp.
12/8
Cleveland Area Dev. Fin. Corp. 12/8
Greater Muskegon Ind. Fund Inc.12/8
Bedco Development Corp.
12/8
Grand Rapids Local Dev. Corp. 12/8
Texas Certified Dev. Co. Inc. 12/8
Ocean State Bus. Dev. Auth Inc.12/8
San Antonio Local Dev. Co. Inc.12/8
Iowa Business Growth Co.
12/8
turity extension

16,000.00
26,000.00
43,000.00
44,000.00
47,000.00
51,000.00
63,000.00
99,000.00
115,000.00
162,000.00
168,000.00
289,000.00
462,000.00
500,000.00
81,000.00
104,000.00
162,000.00
165,000.00
270,000.00

10.485% qtr.
9.541% qtr.
10.509% qtr.
9.551% qtr.
9.551% qtr.
9.551% qtr.
9.551% qtr.
9.551% qtr.
9.580% qtr.
10.535% qtr.
10.535% qtr.
10.535% qtr.
10.535% qtr.
10.535% qtr.
10.546% qtr.
10.526% qtr.
10.526% qtr.
10.526% qtr.
10.539% qtr.
10.539% qtr.
9.531% qtr.
9.531% qtr.
10.526% qtr.
9.531% qtr.
9.531% qtr.
10.539% qtr.
10.539% atr.
10.539% qtr.
10.539% qtr.
10.539% qtr.
10.539% qtr.

FEDERAL FINANCING BANK

Page 14 of 15

DECEMBER 1982 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual

INTEREST
RATE
(other than
semi-annual)

State & Local Development Company Debentures; (Cont'd)
(Cont'd)
Arvin Development Corp. 12/8
Bay Area Employment Dev. Co.
12/8
South Shore Economic Dev. Corp.12/8
Texas Certified Dev. Co. Inc. 12/8
City-Wide SBD Corp.
12/8
Columbus Countywide Dev. Corp. 12/8
Wisconsin Bus. Dev. Fin. Corp. 12/8
Saint Paul 503 Local Dev. Co. 12/8
Lawndale Local Dev. Corp.
12/8
Econ. Dev. of Sacramento
12/8
Birmingham City Wide LDC
12/8
Springfield Cert. Dev. Co.
12/8
Saint Paul 503 Local Dev. Co. 12/8
Evergreen Comm. Dev. Assoc.
12/8
Bay Area Employ. Dev. Co.
12/8
Brattleboro Dev. Credit Corp. 12/8
La Habra Local Dev. Co. Inc.
12/8
Wisconsin Bus. Dev. Fin. Corp. 12/8
San Diego County LDC
12/8
Bay Coloney Dev. Corp.
12/8
Columbus Countywide Dev. Corp. 12/8

322,000.00
328,000.00
349,000.00
386,000.00
416,000.00
30,000.00
42,000.00
42,000.00
75,000.00
89,000.00
92,000.00
126,000.00
131,000.00
168,000.00
187,000.00
200,000.00
242,000.00
260,000.00
500,000.00
500,000.00
500,000.00

12/1/02
12/1/02
12/1/02
12/1/02
12/1/02
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07
12/1/07

10.559%
10.559%
10.559%
10.559%
10.559%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%
10.569%

447,425,024.26

3/31/83

8.509%

999,984.00

6/30/06

10.747%

TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
Note A-83-03 12/30
DEPARTMENT OF TRANSPORTATION
Section 511
Milwaukee Road #2

12/22

FEDERAL FINANCING BANK
December 1982 Commitments

BORROWER

AMOUNT

El Salvador
Honduras
Morocco
Turkey
Pomonna, CA

16,500,000.00
9,000,000.00
20,000,000.00
150,000,000.00
1,500,000.00

GUARANTOR

DOD
DOD
DOD
DOD
HUD

COMMITMENT
EXPIRES
11/30/84
11/30/84
11/30/84
11/30/84
8/1/84

MATURITY
11/30/94
11/30/94
11/30/94
11/30/12
8/1/84

FEDERAL FINANCING BANK HOLDINGS
(in mill ons)

Page 15 of 15

Program
On-Budget Agency Debt November 30, 1982
Tennessee Valley Authority $ 12,545.0
Export-Import Bank
NCUA-Central Liquidity Facility

December 31, 1982
$

Net Change
12/1/82-12/31/82
$

95.0
222.7
-32.3

Net Change
10/1/82-12/31/82
$

355.0
222.7
-27.1

13,953.9
135.3

12,640.0
14,176.7
103.0

191.5

1,221.0
194.3

-02.7

-0-.6

114.3
148.8
2.1.5
3,123.7
56.7

53,261.0
116.8
148.8
19.4
3,123.7
56.1

-400.0
2.5
-0-2.2
-0-.6

-475.0
-14.3
3.0
-2.2
-0-2.0

5,000.0
40.9
426.0
115.6
33.5
1,652.8
420.1
36.0
29.5
782.4
16,750.2
731.6
59.6
1,246.1
855.4
187.1
177.0

12,279.1
5,000.0
40.9
476.5
125.8
33.5
1,675.7
419.1
36.0
29.5
814.3
17,156.7
732.1
67.4
1,257.2
855.0
188.0
177.0

288.6
-0-050.5
10.2
-022.9
-1.0
-0-031.9
406.5
.5
7.8
11.1
-.4
1.0
-0-

843.2
-04.3
136.5
8.8
-051.4
-1.4
-0-056.5
.875.2
' 20.1
19.0
-.7
-.4
-4.9
-0-

717.4

$ 2,067.2

Off-Budget Agency Debt
U.S. Postal Service 1,221.0
U.S. Railway Association
Agency Assets
Farmers Home Administration 53,661.0
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp
Rural Electrification Admin.-CBO
Small Business Administration
Government-Guaranteed Loans
DOD-Foreign Military Sales 11,990.5
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loans
DOE-Non-Nuclear Act (Great Plains)
mUD-Canmunity Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes
General Services Administration
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co.
Rural Electrification Admin.
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Amtrak
FOr-Section 511
DOT-WMATA
TOTALS* $ 125,707.0

*figiires"may not total due to rounding

$ 126,424.4

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041

For Release Upon Delivery
Expected at 2 p.m. EST
February 28, 1983
STATEMENT OF
THE HONORABLE JOHN E. CHAPOTON
ASSISTANT SECRETARY
(TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON ENERGY AND AGRICULTURAL TAXATION
AND THE
SUBCOMMITTEE ON OVERSIGHT OF THE INTERNAL REVENUE SERVICE
OF THE
SENATE FINANCE COMMITTEE
Messrs. Chairmen and Members of the Subcommittees:
I am pleased to have the opportunity to present the
views of the Treasury Department on S. 446, S. 495, and S.
527. All three of these bills deal with the tax treatment of
farmers who participate in the Administration's
Payment-in-Kind (PIK) program. Although we have some
technical comments on the bills as currently drafted, the
Treasury Department strongly supports legislation which would
remove any disincentives in current tax law to farmers'
participation in the PIK program.
BACKGROUND
The PIK program is a land diversion program designed to
reduce the amount of certain agricultural commodities in the
marketplace, thereby raising the prices of such commodities.
Under the PIK program, the Department of Agriculture will
compensate a participating farmer for removing acreage from
active production by giving the farmer a percentage of the

R-2055

-2amount of the commodity he otherwise could have grown. The
commodity is to be available to the farmer at the time of
normal harvest, although the government will pay storage
costs for up to five additional months.
Income Tax Consequences
Under current income tax law, a farmer would realize
gross income from this transaction equal to the amount of the
fair market value of the commodity received at the time the
commodity is made available to him. The farmer would take a
tax basis in the commodity equal to the amount included in
income. He would recognize additional income (or loss) from
the sale of the commodity if the amount realized from such
sale exceeds (or is less than) the amount already included in
income. Further, the farmer would be entitled to deduct his
basis in the commodity to the extent it is used for feed.
The current law income tax treatment of the transaction
involved in the PIK program is more complicated in the case
of farmers who have nonrecourse loans outstanding from the
Commodity Credit Corporation (CCC) secured by commodities
which they either store on their own premises or in
warehouses. The Department of Agriculture proposes to
implement the PIK program for these farmers in two steps, as
follows:
(1) the CCC will purchase the commodity from the farmer
for an amount equal to the outstanding loan which is secured
by the commodity, and the loan will thereby be discharged;
and
(2) the CCC will then deliver that exact commodity or,
in the case of farmers whose commodities are stored in
warehouses, the warehouse receipt representing the commodity,
to the farmer as his payment-in-kind under the PIK program.
The income tax consequences to a farmer in these
circumstances would depend upon whether the farmer has made
an election under section 77 of the Internal Revenue Code to
treat the nonrecourse loan from the CCC as a sale for tax
purposes. If the farmer makes a section 77 election, the
loan proceeds are included in the farmer's income in the year
of receipt. Since a farmer who has made a section 77
election has already been taxed on the proceeds of his CCC
loan, the cancellation of that loan in exchange for the
commodity securing the loan would have no further tax
consequences to the farmer. The subsequent transfer of the
commodity back to the farmer would be subject to the same tax
treatment as described above; that is, the farmer would have

-3gross income equal to the fair market value of the commodity
when it is made available to him and would take a basis in
the commodity equal to that value.
In the case of farmers who do not make a section 77
election, the CCC loan, when made, is treated as a loan
rather than a sale. Therefore, the PIK transaction would be
treated as a sale of the commodity for an amount equal to the
outstanding debt which the commodity secured, followed by
receipt of the commodity as a PIK payment. The result would
be that the farmer would be taxed first on the amount of the
debt which was discharged in the sale transaction and second
on the amount of the fair market value of the commodity
received in the PIK transaction. However, as discussed
above, the farmer would take a basis in the commodity
received equal to its value.
Estate Tax Consequences
Under section 2032A of the Internal Revenue Code, if
certain requirements are met, real property which is used as
a family farm and which passes to or is acquired by a
qualified heir may be included in a decedent's estate at its
current use value, rather than its full fair market value.
Among the requirements which must be satisfied are: (1) the
property must have been owned by the decedent or a member of
his family and used "as a farm for farming purposes" on the
date of the decedent's death and for periods aggregating five
years or more during the eight-year period ending with the
decedent's death; and (2) there must have been "material
participation" in the operation of the farm by the decedent
or a member of his family for periods aggregating five years
or more out of the eight-year period ending on the date of
the decedent's death.
Section 2032A also provides that the estate tax benefit
of special use valuation generally is recaptured if the
qualified heir disposes of the property to a nonfamily member
or ceases to use the property "as a farm for farming
purposes" within 10 years after the decedent's death and
before the qualified heir's death. With certain exceptions,
the qualified heir ceases to use the property for the
qualified farming use if he or members of his family fail to
participate materially in the farm operation for periods
aggregating more than three years during any eight-year
period ending after the decedent's death and before the
qualified heir's death.

-4Another estate tax provision relevant to many farmers
participating in the PIK program is section 6166 of the Code,
which allows deferred payment of estate tax attributable to
qualifying closely held business interests owned by
decedents. The benefits of section 6166 are limited to
interests in active trades or businesses.
A question may arise whether property on which a cash
crop is not being grown as a result of participation in the
PIK program, or in some other acreage-reduction program
sponsored by the Department of Agriculture, is nevertheless
being used "as a farm for farming purposes" within the
meaning of section 2032A. Similar questions may be posed as
to whether there has been the requisite "material
participation" for purposes of section 2032A and whether the
property is part of an active trade or business qualifying
for estate tax deferral under section 6166.
Although none of these estate tax questions is
specifically addressed in the present statute or regulations,
we believe that the dedication of land to an acreagereduction program sponsored by the Department of Agriculture
generally will not prevent satisfaction of the requirements
of section 2032A or section 6166 under present law. As I
indicated in my testimony delivered before the Select Revenue
Measures Subcommittee of the House Ways and Means Committee
last Wednesday, February 23, we initially had some question
about the result in cases where a farmer removes his entire
farm from active production under an acreage-reduction
program sponsored by the Department of Agriculture. Based on
our further study of the issues involved, however, we are now
of the view that land dedicated to such a program should be
considered as used for farming purposes and that material
participation in such a program should be viewed as material
participation in an active farming business for all relevant
tax purposes. I anticipate that the Internal Revenue Service
will issue a formal announcement this week to confirm this
treatment under current law.
DESCRIPTION OF S. 495
S. 495 is identical in all relevant respects to H.R.
1296, a bill on which I testified on Wednesday, February 23,
before the Subcommittee on Select Revenue Measures of the
House Ways and Means Committee. At that hearing I expressed
Treasury's strong support for legislation adopting the
general policy position of H.R. 1296 and S. 495, although I
noted a number of technical comments on the bill. A copy of
my written statement before the Select Revenue Measures
Subcommittee is attached to this statement. In light of my

-5previous testimony, I will confine the balance of my remarks
today to the other two bills, S. 446 and S. 527.
DESCRIPTION OF S. 446 AND S. 527
Income Tax Provisions
S. 446 would amend section 451 of the Code, which
relates to the taxable year income is to be taken into
account for tax purposes, by providing that no income would
be realized upon the receipt or right to receive any
commodity under a certified payment-in-kind program (which
would include the current PIK program), but that income would
be realized from a subsequent sale or exchange of such
commodity. For purposes of determining the amount realized
from such sale or exchange, the farmer would have a zero tax
basis in the commodity and the character of the income from
the sale or exchange would be ordinary. S. 527 contains
similar provisions. In addition, S. 527 provides that the
cost basis of a taxpayer's payment in kind will be zero for
all purposes of the Code, and that the character of the gain
realized from the sale or exchange of the payment in kind (or
any property the basis of which is determined by reference to
the basis of the payment in kind) will be taxed in the same
manner as a crop grown by the taxpayer.
S. 527 also provides that where farmers have outstanding
CCC loans, the tax treatment of the receipt of the payment in
kind will be determined without regard to any related
transaction involving the loan. Where a taxpayer has made an
election under section 77 with respect to a loan, the loan
aspect of the PIK transaction will be treated as the closing
of the sale deemed made pursuant to the section 77 election.
Where no section 77 election has been made, the taxpayer
would be deemed to have sold the commodity securing the loan
in exchange for a cancellation of the loan.
In addition, S. 527 addresses a number of ancillary
income tax issues raised by the PIK program. The bill
provides that for purposes of the Internal Revenue Code and
the Social Security Act, any income received from the sale or
exchange of a taxpayer's payment in kind will be treated as
income from the trade or business of farming and that a
taxpayer will be treated as engaged in the trade or business
of farming with respect to any land diverted pursuant to the
PIK program. With respect to a cash basis taxpayer, S. 527
provides that any amount a taxpayer is entitled to receive as
reimbursement for storage will not be included in income
until actually received by the taxpayer.

-6S. 527 also contains special rules for cooperatives
which provide that any cooperative which markets a commodity
received by, or on behalf of, a member or patron under a
certified payment-in-kind program will be treated as
marketing the product of such member or patron.
Estate Tax Provisions
S. 446 also would amend section 2032A of the Code to
provide that any commodity received by a person under a
certified payment-in-kind program shall be treated as having
been produced by such person on the property dedicated to
such program. The bill does not refer specifically to either
the qualified use test or the material participation test.
S. 527 would add two new paragraphs to section 2032A to
provide that property diverted from farm use for up to three
years under a certified payment-in-kind program shall be
treated as used for a qualified use. This bill has no
corresponding provision, however, relating to the material
participation test.
S. 446 has no provision which addresses the effect of
the PIK program on section 6166. S. 527, on the other hand,
provides that property used in the trade or business of
farming shall not be treated as withdrawn from such trade or
business if such property is diverted from use for farming
purposes solely by reason of participation in a certified
payment-in-kind program. This provision would not apply,
however, in determining whether the estate of a farmer who
died with all or a portion of his property withdrawn from
active farm production pursuant to a certified payment-inkind program would remain eligible for estate tax deferral
under section 6166.
DISCUSSION
Timing of Income Recognition
Many farmers participating in the PIK program will have
sold crops in the current taxable year which were harvested
in a prior taxable year. Current law may impose a hardship
on these taxpayers because they will have, in effect, income
from two crops (the income from the prior year's crop that is
sold, plus the income from the PIK payment) in the same
taxable year. In addition, under current law, farmers
participating, in the PIK program will be under pressure to
sell commodities to obtain cash to pay their income tax
liabilities arising from the actual or constructive receipt
of the PIK payments; and those sales may have to be made in a

-7market flooded with commodities being sold by other farmers
facing the same tax liquidity problem. These tax-motivated
sales may cause farm commodity market problems of the type
that the PIK program is designed to reduce. The potential
tax and market problems also may discourage farmers from
participating in the PIK program, thus frustrating Federal
agricultural policy.
In view of these problems, the Treasury Department
strongly supports changes in the current law which adopt the
general policy position underlying S. 446 and S. 527.
Because PIK payments, in effect, are replacements for the
commodities which farmers could have been expected to produce
from the normal use of land devoted to the program, the tax
law should treat farmers who receive commodities under the
program as if they had grown the commodities themselves.
Under this approach, farmers would recognize income only in
the year they actually sell or otherwise dispose of the
commodities in question. However, as I indicated earlier, we
do have some technical comments on the bills as currently
drafted.
First, we do not believe that the legislation should be
drafted as an amendment to section 451 of the Code. Section
451 relates to the timing of the recognition of income
depending upon the taxpayer's method of accounting. Under
either the cash or accrual method of accounting, a PIK
payment would be recognized for tax purposes in the year the
farmer receives or has a right to receive the payment. The
issue is not one of timing but one of income inclusion. We
believe that the bill should be drafted to provide an
exclusion from gross income for commodities received under
the PIK program and, further, to provide that those
commodities will have a zero basis for income tax purposes.
Second, we believe any bill enacted by Congress in this
area should make it clear that a taxpayer will have a zero
cost basis in any commodity received under the PIK program
for all purposes of the Code and not just on the sale or
exchange of the commodity. While S. 527 accomplishes this
result, S. 446 does not.
Third, the questions whether PIK payments should be
treated as if farmers had grown the commodities themselves
and whether farmers who divert some or all of their acreage
under the PIK program should be considered as engaged in the
trade or business of farming are questions that have
ramifications for a number of other provisions of the Code.
For instance, section 447 provides special accounting rules
for corporations engaged in the trade or business of farming.

-8Section 175 provides special treatment for soil and water
conservation expenditures for taxpayers engaged in farming.
Tax exempt farmers' cooperatives could lose their exemptions
if the commodities received by their members and assigned to
the cooperatives were not treated as produced by the members.
Moreover, a determination of the self-employment income of a
farmer who diverts acreage pursuant to the PIK program also
depends on whether the farmer is deemed to participate
materially in the production of farming commodities or the
management of that production.
We believe that farmers who receive PIK payments should
be treated as if they had grown the commodities received for
all purposes of the Code and that participation in a
Department of Agriculture program should be treated as a
farming activity. We believe this result can be reached in
most cases under current law. However, the legislation
should address these ancillary issues to the extent that
current law needs to be clarified to ensure appropriate
results. S. 527 addresses these ancillary issues, but S. 446
does not.
Estate Tax Consequences
Treasury generally supports legislation which would make
it clear to farmers that participation in the PIK program
will not adversely affect their eligibility for special use
valuation under section 2032A or estate tax deferral under
section 6166. We believe that any such legislation should
apply to the pre-death qualification requirements of these
two sections as well as the post-death recapture provisions
of section 2032A(c) and acceleration provisions of section
6166(g).
Neither S. 446 nor S. 527 addresses all these concerns.
With respect to section 2032A, S. 446 simply provides that a
person who receives a crop pursuant to a certified
payment-in-kind program will be treated as if he had grown
the crop. While the language of the bill reflects the
general approach .which we believe is correct, some additional
and more specific language relating to the qualified use and
material participation tests may be desirable. S. 527 has
the desired specificity for the qualified use test, but does
not deal with the material participation test.
As noted above, S. 446 has no provision dealing with
section 6166 whatsoever. S. 527 adequately addresses the
post-death concerns by providing, in effect, that
participation in the PIK program cannot cause an acceleration
of estate tax deferred under section 6166. S. 527 fails,

-9however, to cover the equally important pre-death
qualification test of this section. If legislation is
desired to clarify the results under section 6166, the bill
should contain a comprehensive provision addressing all
relevant concerns.
CONCLUSION
In conclusion, I would like to reiterate Treasury's
strong support of legislation that will remove any impediment
to the successful operation of the PIK program which current
tax law may create. While I have noted some technical
comments on the bills as currently drafted, I am confident
that we can work out a satisfactory solution to these
problems with the Subcommittees.
I would be happy to answer your questions.

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M. March 1, 1983
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 12,400 million , to be issued March 10, 1983.
This offering will provide $950
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $ 11,453 million , including $952
million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2,494 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 $6,200
million , representing an additional amount of bills dated
December 9, 1982,
and to mature June 9, 1983
(CUSIP
No. 912794 CX 0) , currently outstanding in the amount of $ 5,822
million , the additional and original bills to be freely
interchangeable.
182-day bills (to maturity date) for approximately $ 6,200
million , representing an additional amount of bills dated
September 9, 1982,
and to mature September 8, 1983 (CUSIP
No. 912794 DC 5) , currently outstanding in the amount of $7,127
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 March 10, 1983.
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 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 $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.

R-2056

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20226, up to 1:30 p.m., Eastern Standard time, Monday,
March 7, 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.
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
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 .

- 3 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
on March 10, 1983,
in cash or other immediately-available funds
or in Treasury bills maturing March 10, 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.
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 and tender forms may be obtained from any
Federal Reserve Bank or Branch , or from the Bureau of the Public
Debt.

TREASURY NEWS
iepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Wednesday, March 2, 1983

Contact:

Charley Powers
(202) 566-2041

TREASURY ISSUES WITHHOLDING RULE REVISIONS
The Department of the Treasury today announced revisions to
the regulations regarding withholding on dividends and interest
and on the broadened information reporting rules, to take into
account concerns raised by Members of Congress and affected
financial institutions.
The announcement states that Treasury will defer the
effective date for withholding with respect to original issue
discount instruments until January 1, 1984. The Treasury stated
that it recognized that withholding on original issue discount
before that time would result in undue hardship to institutions.
Similar relief is provided concerning the new information
reporting requirements. All other withholding provisions are
effective July 1, 1983. Treasury and the Internal Revenue
Service will commence publication of information regarding
outstanding original discount instruments in June 1983.
Today's other revisions relate to: payee unknown, year-end
withholding, transactional reporting, nominees, and backup
withholding.
"The Administration remains committed to the withholding
provisions," said Treasury Secretary Donald T. Regan. "We think
it is the most effective'means of improving the collection of
taxes on unreported interest and dividend income. We believe
that the changes described in today's announcement and
forthcoming regulations will go far to respond to the concerns
raised by the financial industry. They will simplify the
operation of the withholding rules. We look forward to
continuing to work with the industry to assure that withholding
goes into effect on July 1 with minimum disruption."
The announcement is attached.

R-2057

J«
^ *ot,\ ^ fh , iLy[

0L £
+ ~^-'"''
-

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*-*-

The Treasury Department and the Internal Revenue Service are
completing their review of the comments received regarding the
regulations under the interest and dividend withholding and
broadened information reporting provisions of the Tax Equity and
Fiscal Responsibility Act of 1982. It is expected that these
regulations, revised to take into account the comments received,
will be published as final regulations in the near future.
Proposed regulations concerning the allocation of the credit for
tax withheld from interest and dividends among trusts and estates
and their beneficiaries will be published shortly thereafter.
Discussed below are some of the areas in which the
withholding and information reporting regulations will be
revised.
(1) Original Issue Discount. A number of persons expressed
concern that payors would be unable to determine the amount
subject to withholding with respect to instruments issued at a
discount. The Treasury Department and Internal Revenue Service
will take the following steps to insure that payors are able to
calculate readily the original issue discount attributable to
these instruments:
(a) Treasury Bills. Commencing June 15, 1983, the
Treasury will publish on a quarterly basis a list showing the
original issue discount (based on the noncompetitive price),
maturity date, and CUSIP number for Treasury bills maturing
during the following quarter. Attached is a sample schedule
setting forth the information which will be provided. This
information will enable payors to determine readily the
amount of discount income associated with Treasury bills.
Persons are encouraged to comment on the format for
presenting this information.
(b) Other Discount Instruments. On June 15, 1983, the
Internal Revenue Service will commence publication of
information concerning outstanding publicly-traded discount
instruments. The publication will provide the following
information: (i) for long-term discount instruments
(maturities in excess of 1 year), the name of the issuer,
identification of issue, date of issue, and amount of
discount to be reported to a holder during the calendar year;
and (ii) for short-term instruments (not exceeding 1 year),
the name of the issuer, identification of issue, date of
issue, issue price, redemption price and original issue
discount. The withholding and information reporting
regulations will relieve payors of liability for failure to
withhold tax or furnish information on original issue
discount on any instruments with respect to which information
is not provided in the publication.

- 2 (2) Undue Hardship. Under the temporary and proposed
regulations, applications for deferral of application of some or
all of the withholding provisions were to be made, in general,
not prior to April 1. A revenue procedure will be issued within
a few days providing detailed information as to the circumstances
under which an institution will be considered unable to comply
with the withholding provisions without undue hardship, thereby
qualifying for deferral of some or all of the withholding
provisions (but, in accordance with the law, not beyond December
31, 1983). A rule will be provided concerning the availability
of relief under this provision with respect to the requirement of
withholding on original issue discount. Many persons have
commented that it will be difficult or impossible to commence
withholding on July 1 with respect to original issue discount.
Although the publications described in (1) above ultimately will
alleviate the problems of withholding on original issue discount,
it is clear that payors generally will not be able to develop
procedures for withholding on original issue discount by July 1,
1983 notwithstanding their efforts to do so. Accordingly, the
Treasury Department will permit payors to delay the application
of the withholding provisions to original issue discount until
December 31, 1983 because of the undue hardship that would result
from payors attempting to comply with such withholding
requirements prior to that time. Payors will not be required to
make application to the Internal Revenue Service to qualify for
the delay in application of the withholding rules to original
issue discount. Payors who are able to commence withholding on
original issue discount prior to December 31 may do so, also
without application to the Internal Revenue Service. The
Internal Revenue Service also will consider the lack of
information regarding original issue discount instruments to
constitute reasonable cause for failure to comply with the
expanded information reporting requirements added by the Tax
Equity and Fiscal Responsibility Act of 1982 until December 31,
1983. The Internal Revenue Service previously stated that
reasonable cause for failure to comply with these reporting
requirements would be considered to exist for discount
instruments until April 1 and July 1 in Announcement 83-6.
(3) Payee Unknown. Many financial institutions stated that
it would be' difficult to administer a rule requiring withholding
upon payments with respect to which the institution is unable to
determine the identity of the payee at the time the payment is
first received. In many of these cases, institutions are able to
identify the payee as an exempt recipient within a short time
after receiving the payment. The final regulations will allow
up to 60 days to confirm the ownership of payments in these
situations before withholding will be required.
(4)
Year-End
Withholding.
The
final
regulations
will
confirm
that the
election to
defer
withholding
until
year-end

- 2 (2) Undue Hardship. Under the temporary and proposed
regulations, applications for deferral of application of some or
all of the withholding provisions were to be made, in general,
not prior to April 1. A revenue procedure will be issued within
a few days providing detailed information as to the circumstances
under which an institution will be considered unable to comply
with the withholding provisions without undue hardship, thereby
qualifying 'for deferral of some or all of the withholding
provisions (but, in accordance with the law, not beyond December
31, 1983). A rule will be provided concerning the availability
of relief under this provision with respect to the requirement of
withholding on original issue discount. Many persons have
commented that it will be difficult or impossible to commence
withholding on July 1 with respect to original issue discount.
Although the publications described in (1) above ultimately will
alleviate the problems of withholding on original issue discount,
it is clear that payors generally will not be able to develop
procedures for withholding on original issue discount by July 1,
1983 notwithstanding their efforts to do so. Accordingly, the
Treasury Department will permit payors to delay the application
of the withholding provisions to original issue discount until
December 31, 1983 because of the undue hardship that would result
from payors attempting to comply with such withholding
requirements prior to that time. Payors will not be required to
make application to the Internal Revenue Service to qualify for
the delay in application of the withholding rules to original
issue discount. Payors who are able to commence withholding on
original issue discount prior to December 31 may do so, also
without application to the Internal Revenue Service. The
Internal Revenue Service also will consider the lack of
information regarding original issue discount instruments to
constitute reasonable cause for failure to comply with the
expanded information reporting requirements added by the Tax
Equity and Fiscal Responsibility Act of 1982 until December 31,
1983. The Internal Revenue Service previously stated that
reasonable cause for failure to comply with these reporting
requirements would be considered to exist for discount
instruments until April 1 and July 1 in Announcement 83-6.
(3) Payee Unknown. Many financial institutions stated that
it would be' difficult to administer a rule requiring withholding
upon payments with respect to which the institution is unable to
determine the identity of the payee at the time the payment is
first received. In many of these cases, institutions are able to
identify the payee as an exempt recipient within a short time
after receiving the payment. The final regulations will allow
up to 60 days to confirm the ownership of payments in these
situations before withholding will be required.
(4) Year-End Withholding. The final regulations will
confirm that the election to defer withholding until year-end

- 3 will be available for regular savings accounts, interest-bearing
checking accounts and their equivalents, including the new money
market accounts and SUPER-NOW checking accounts.
(5) Transactional Reporting.
(a) Where an interest coupon or savings bond is
presented to a middleman for payment, the regulations
will provide that only the name of the middleman, and
not the name of the issuer of the obligation, should be
reported on Form 1099. In addition, one Form 1099 may
be used to show all payments made as part of a single
transaction irrespective of whether the payments are
made on obligations of different issuers.
(b) Persons presenting coupons from tax-exempt
obligations must certify in writing that interest
represented by the coupon is tax-exempt. Payors can
rely on such certifications in not withholding or filing
information reports with respect to such coupons. A
statement that interest coupons are tax-exempt on the
envelope commonly used by financial institutions to
process such coupons, signed by the taxpayer, will be
sufficient for this purpose if the envelope is properly
completed (i.e., shows the name, address and taxpayer
identification number of the taxpayer).
(6) Nominees. The final regulations will provide that
nominees may be treated as exempt recipients without being
required to file an exemption certificate if the nominee is known
generally in the investment community as a nominee or is listed
in the American Society of Corporate Secretaries, Inc. Nominee
List.
(7) Backup Withholding. The backup withholding provisions
added by the Tax Equity and Fiscal Responsibility Act of 1982
will not apply to payments of interest, dividends or patronage
dividends that are within the scope of the 10 percent withholding
provisions. The backup withholding provisions will not apply
even if one or more exceptions to the 10 percent withholding
rules applies to the payment (such as the exception for payments
to exempt tecipients, exempt individuals, and the minimal
interest payment exception).

MATURITY
DATE

CUSIP
912794
CL6
CM4
CN2
CAO
CP7

EARLIEST
ISSUE DATE

NONCOMPETITIVE
PRICE

ORIGINAL
ISSUE
DISCOUNT

9/2/82
9/9/82
9/16/82
3/25/82
9/30/82

95.073
95.144
95.094
87.352
95.351

4.927
4.856
4.906
12. 648
4.649

CQ5
CR3
CB8
CS1

10/7/82
10/14/82
4/22/82
10/28/82

95.334
96.090
87.128
95.717

4.666
3.910
12. 872
4.,283

5
12
19
26

CT9
CU6
CC6
CV4

11/4/82
11/12/82
5/20/82
11/26/82

95.839
95.778
87.671
95.923

4.,161
4.,222
12..329
4.,077

June

2
9
16
23
30

CW2
CXO
CD4
CY8
CZ5

12/2/82
12/9/82
6/17/82
12/23/82
12/30/82

95.697
95.827
87.692
95.903
95.930

4,.303
4,.173
12,.308
4 .097
4 .070

July

7
14
21
28

DH4
DA9
DJO
DK7

1/6/83
7/15/82
1/20/83
1/27/83

95.983
87.545
96.093
95.883

4 .017
12 .455
3 .907
4 .117

Aug.

4
11
18
25

DL5
DB7
DM3
DN1

2/3/83
8/12/82
2/17/83
2/24/83

95.842
88-681
95.759
95.969

4 .158
11 .319
4 .241
4 .031

March

3
10
17
24
31

April

7
14
21
28

May

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-204*
STATEMENT BY DONALD T. REGAN
SECRETARY OF THE TREASURY
WEDNESDAY, MARCH 2, 1983
We have announced today revisions to the regulations
regarding withholding on interest and dividends in response to
the concerns raised by financial institutions and many Members of
Congress.
I met this morning with Congressional leaders — Howard
Baker, Bob Dole, Dan Rostenkowski, Bob Michel, Barber Conable and
a representative of Speaker O'Neill — and discussed these
revisions with them.
All of them reaffirmed their commitment to withholding and
expressed their determination to oppose any attempt to repeal it.
It seems clear that the leadership, as well as other Members of
Congress, are convinced that withholding is a reasonable approach
that must be maintained.
"We believe today's announcement and the forthcoming
regulations respond to the legitimate concerns raised by the
financial industry and individuals," Senator Howard Baker said in
the meeting this morning.
We will continue to work with the industry, but we will not
back off of withholding. It is the most effective means of
collecting taxes which are owed but not being paid.

30SJ

(ktfcl *ftf^""*<

0 _.

[W*

1^^"

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone

REMARKS BY
R.T. MCNAMAR
DEPUTY SECRTARY OF THE TREASURY
BEFORE THE
NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS
MONDAY, FEBRUARY 28, 1983
WASHINGTON, D.C.
Framework for the Future
Good afternoon. It's a pleasure for me to meet with you
today. Last November I wrote to Saul that I hoped The Mutual
Savings Banks would consider some of our views on deregulation.
He said, "We'll do even better. Come speak at our February
meeting and make your case." So here I am.
I was going to bring along some exemption forms for
withholding of dividends and interest. But somehow that didn't
seem like the right foot to get off on to discuss deregulation so
I'll move right into deregulation with a somewhat more congenial
set of opening remarks about the economy.
First, inflation is down, interest rates are down, oil
prices are falling, and the general health of your industry seems
much improved. That's good news for all of us.
After more than a year of wrong economic projections,
conflicting economic indicators, and many disappointments during
the recession, today I feel fairly confident in saying that the
recovery has in fact started. However, I am reminded of the joke
President Reagan tells about the guy at the Halloween party who
put egg on his face and went as an economist.
Somehow that line is a little funnier now than it was a few
months ago when the recession seemed darkest. But now we do see
numerous signs of improvement — from a 21 percent prime to a
10.5 percent prime, from 12 percent inflation to something
between 2 and 4 percent.

R-2059

-2041

-2Of course, we're never totally out of the woods with
inflation. It lurks in the trees like a cagey old coyote, and I
urge all of you to remember its ravages on your industry as we
hear the occasional cries for loose money or "just a little more
inflation." It's still the villian that has produced today's
record high real interest rates, and can scare interest rates
back up — and that we don't need.
Nevertheless, today we are in a much better economic
climate. We have made considerable progress in meeting the
original economic objectives of this Administration.
As this audience knows, one of the basic laws governing the
financial industry, the Glass Steagall Act, was rolled out of
Congress about the same time Henry Ford revolutionized the auto
industry with the Model A. Both were great accomplishments. But
today we wouldn't expect a Model A to compete at Indy. Likewise
we should't expect the financial industry's laws of the 1920's to
be appropriate for the end of the 20th Century.
The auto industry has come a long way since the Model A.
Well, the thrift industry has also come a long way, but we're
only part way to where we will be.
As you know, last year the Administration sent a proposal to
the 97th Congress that would have allowed bank holding companies
through subsidiaries to offer a broad range of services. This
legislation sought to enhance further the competitive ability of
traditional depository institutions. Although it was not voted
on in the 97th Congress, we will be reintroducing the legislation
this year.
We all recognize the importance of keeping safety and
soundness in the financial services industry. So the goal of
that legislation is to define a framework for financial
institutions where they can take banking risks and other
financial or commercial risks. Thus, a broader range of services
can be offered while insuring the soundness of the system,
fostering competition, and permitting individual companies to
make decisions about their own business strategies. In short, to
permit managers and institutions to succeed of fail on their own.
Getting this kind of legislation passed into law will not be
easy. We'll need your help and the support of the entire
financial industry. We think it's in all of our interest to put
the legislative framework in place during a time of recovery.

-3Our proposal would allow bank holding companies, through
subsidiaries, to engage in any additional activities "of a
financial nature."
For example, the bill would authorize bank
holding company subidiaries to engage in insurance underwriting
and brokerage; real estate investment, development, and
brokerage. In the securities field, bank holding company
subsidiaries could deal in and underwrite U.S. and most state and
municipal securities, including revenue bonds. They could
sponsor, control and advise an investment company and they could
deal in and distribute bank certificates of deposit and
commercial paper of its parent holding company or any of the
holding company's subsidiaries.
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 by
banks themselves into non-banking activities would be unsound
policy for two principal reasons. First, allowing banks to offer
non-banking services would create opportunities for unequal
competition. Second, by subjecting banks to new commercial
risks, it might jeopardize their safety and soundness. Thus, the
rationale for the upstream holding company.
Upstream holding companies are, of course, legally separate
from banks they own and control, and the capital invested in a
holding company's non-banking subsidiaries is not the subsidiary
banks' capital. Rather, it is the capital raised by a holding
company in competition with other borrowers in the credit
markets, i.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. 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
candown-stream
be converted
intoS&L,
an equity
investment
that is company
infused debt
in the
bank,
insurance
company,

-4or other financial services activity. Thus, the opportunities to
raise new capital to support traditional financial services can
be enhanced. But, obviously by contrast, 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.
During the most recent session of Congress, the principle
that holding companies should be allowed to expand into
activities otherwise forbidden to banks was finally accepted. In
passing the Export Trading Company Act, Congress authorized bank
holding companies to own export trading companies — firms that
would purchase goods and services in the United States and sell
them abroad. But the Act specifically excluded banks from such
ownership. This commercial dealing activity, is from a public
policy standapoint far too risky for banks themselves. Hence, it
was authorized for bank holding companies because these entities
are legally separate from their subsidiary banks and because
their commercial activities would not create risks for their
subsidiary banks.
The public policy objective of the holding company structure
is to have functionally equivalent competitive activities
capitalized by equivalent market sources and at equivalent costs
for the venture. In modern stock portfolio practice, this would
be a variant of the beta theory of stock volatility reflecting
the variability of earnings. It is precisely for these reasons
that the Administration is unalterably opposed to these
additional powers being in downstream holding companies of
so-called service corporations under a bank, savings and loan or
mutual savings bank. For a mutual savings bank that would
provide federally insured low cost capital for non-savings bank
activities.
The underlying purpose of the Adminstration proposal, then,
is to permit banks — if they choose — to become part of
diversified financial services firms so that they will be able to
adapt to and compete in a rapidly evolving market. By utlizing
the bank holding company framework, the proposal seeks to expand
the range of services that banking organizations are associated
with, without exposing banks themselves or their capital to the
risks of non-banking activities.
The Administration's proposal enhances competitive equality
because any organization performing only activities in which a
bank holding company may engage, may itself organize a holding
company and acquire a subsidiary bank or banks, or other service
firm. As a result, deregulation of bank holding companies is a
two-way street with banks able to expand into other financial
businesses and competing firms able to expand into banking.

-5At this point, you may ask why should mutual savings banks
care about or support a bill for commercial banks and commercial
bank holding companies? The answer is two-fold. First, some
mutual savings banks and savings and loans will wish to consider
converting to a stock form to take advantage of the additional
financial services powers that will someday be available through
a holding company. Others, and perhaps most, will not. However,
they also have a stake in ensuring that the lines of competition
between S&Ls, mutual savings banks, and commercial banks are
fairly drawn. And this means that a mutual savings bank trustee
should be concerned that the stock form of an S&L or a commercial
bank not have an unfair advantage by engaging in other activities
through the bank itself or a service corporation that pyramids
the S&L or bank's capital in ways or businesses that are
prohibited by the mutual savings bank. Thus, even a mutual
savings bank that does not plan to change its form should have an
interest in ensuring that the government's legal framework for
commercial banks and S&Ls doesn't provide the stock form of
ownership with unfair competitive advantages in the mutual
savings banks' competitive arena.
Too many organizations view the proposed new activities 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 "businesssmen love competition, but hate to
compete."
Finally, let's dwell for a moment on how all these changes
might specifically influence the mutual savings bank industry.
We hope that the high inflation, high interest rate
environment of the last few years is behind the savings bank
industry. The Garn-St Germain Act should help the industry
remain viable while it rebuilds its surplus and deposits which
were so seriously depleted during this period.
As the savings bank industry begins its recovery, it needs
to think about its future. The industry will need time to
rebuild its surplus and deposits or customer base.
At the same time, it will be crucial for mutual savings
banks to decide what kinds of institutions you want to be and
which customers you want to serve. Most of you will not be able
to do all things for all people and rebuild your earnings power
and net worth at the same time.
Mutual savings banks have long been recognized as more
bank-like than S&Ls despite your large mortgage portfolios. This
difference is recognized in the industry's expanded authority for
commercial lending and in its tax treatment. In the future, does
the mutual savings bank industry want to be more like commercial
banks, or more like S&Ls or something in between? Your proposed
merger with the Mutual Savings and Loan League suggests both are
giving serious consideration to what you will look like in the
future.

-6What other types of activities are MSBs interested in
pursuing? Some have indicated an interest in the mutual fund
business, and I am sure there are other activities that other
institutions are examining. The Administration is also concerned
about the future of the savings bank industry.
The Garn-St Germain Act of 1982 authorizes Federal Mutual
Savings Banks to make commercial loans equal to 15 percent of
assets and consumer loans equal to 30 percent of assets.
To expand these activities fully, MSBs will have to develop
management and markets that can produce real profits. This will
not be easy given the location of the industry in the same
markets as the strongest commercial banks. It, therefore, seems
very important that individual MSBs define their goals very
clearly.
While the future presents many challenges for the industry,
it also presents many opportunities. A recovery of the housing
market has already begun and MSBs should be able to take
advantage of the recovery to restore profitability to the major
segment of their business. Real estate finance is an area the
industry knows well and should be able to serve profitably very
quickly.
The money market deposit account affords the industry an
excellent opportunity to serve retail customers who now have a
renewed interest in saving at thrift institutions. The funds and
customers gained through the use of this popular account should
be retained with more expansive credit programs. Herein lies an
opportunity to fund expanded consumer lending.
Without the interest rate differential, thrift institutions
will have to offer more services to retain their customers. The
purpose of the Garn-St Germain Act was to give you the authority
to more effectively expand your services. But the lack of the
differential makes it an absolute necessity.
For those MSBs who can build on their real estate business
with commercial lending or who have a good potential with small
business customers, your increased consumer lending powers should
be helpful. This is just one more arrow in your sling.
I know some members of your industry that have shown great
interest in our bank holding company proposal for expanded
commercial bank activities. This proposal did not include thrift
institutions which have just obtained extensive new commercial
lending powers.
Given the condition of the thrift industry, we think it
ought to focus on rebuilding its existing business and developing
those activities already authorized under the Garn-St Germain
Act. After that, and as soon as possible, I personally believe
thrift institutions should be able to take on some of the
additional financial services activities that we are proposing
for commercial banks so they can compete with non-depository
financial organizations.

TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
REMARKS BY
THE HONORABLE JOHN E. CHAPOTON
ASSISTANT SECRETARY
(TAX POLICY)
ANNUAL MEETING OF
THE ASSOCIATION FOR ADVANCED LIFE UNDERWRITING
WASHINGTON, D.C.
March 1, 1983
I am happy to be back before the annual meeting of the
Association for Advanced Life Underwriting "for a third time
in as many years. When I first spoke to you in 1981, the
Administration had already presented the President's Program
for Economic Recovery. At that time, my comments focused on
the tax proposals that were a major element of the
President's program: the across-the-board reduction in
individual tax rates and the accelerated cost recovery
system (ACRS) .
My discussion of the issues that related directly to the
professional interests of this group was limited to
administrative issues, primarily the tax treatment of the
so-called "wraparound annuities." In late 1981, the
Internal Revenue Service issued a ruling discussing the tax
treatment of mutual fund wraparound annuities. Subsequently,
the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA") revised the rules governing withdrawals from
annuities and imposed a five percent penalty on withdrawals
made within 10 years of the purchase of most deferred
annuities. The net effect of these changes is to preserve
the benefit of deferral of tax on earnings through an annuity
for traditional deferred annuity contracts, while denying
much of this benefit where an annuity is used as a short-term
investment vehicle. We think this is a satisfactory solution
and we have no plans to seek any further changes in the tax
treatment of annuities.
Last year in speaking to this group, my comments
reflected the Administration's realization that certain
Internal Revenue Code provisions affecting life insurance
companies required repair. In particulai^we recognised that
the use of modified coinsurance was enabling most segments of
the
life insurance industry to obtain unintended tax
R-2060
benefits. The Administration's legislative proposal in the

-2insurance area was limited: repeal section 820, which
established special tax rules for modified coinsurance
arrangements. I discussed with you our recognition that it
might be appropriate to reexamine, in consultation with
representatives of the life insurance industry, other
Internal Revenue Code provisions affecting the taxation of
life insurance companies. However, I stated our view that a
broader revision should await a thorough examination of the
proper method of taxing life insurance companies and life
insurance products.
As you know, 1982 saw the enactment of significant
legislation affecting life insurance companies and life
insurance products. Many provisions adopted in 1982 apply
only for a "stopgap" period, that is for taxable years 1982
and 1983. These stopgap provisions include interim changes
sought by the life insurance industry until a more
fundamental revision could be made to Subchapter L of the
Internal Revenue Code. Also included in the stopgap
provisions were statutory guidelines governing the
characterization of Universal life insurance as life
insurance for tax purposes. As mentioned, a permanent change
in the tax treatment of annuities also was made.
The enactment of provisions that would remain in effect
for only a two-year period was intended to give Congress
sufficient time to design and enact permanent tax changes
applicable to the life insurance industry. This means,
however, that unless legislation is enacted during 1983, most
of the stopgap provisions will expire, and this could create
imbalances in the tax treatment of different life insurance
products sold by competing segments of the industry.
Only ten months remain until stopgap runs out. During
this period, Congress must consider many difficult and
controversial tax matters, including social security issues.
The legislative clock is running. Yet fundamental changes
remain to be considered with respect to the tax treatment
both of life insurance products and the industry itself. I
hope that the industry, the Treasury and the tax-writing
committees can work together in a timely manner to fashion
the structural changes needed.
I would like to take the opportunity of my invitation to
speak before you this year to outline several factors we
think should be considered in formulating a permanent
legislative replacement for the temporary Internal Revenue
Code provisions adopted in 1982.

-3General Considerations
First, tax legislation affecting insurance companies and
their products should reflect the significant changes in the
operations of all financial intermediaries that has occurred
in recent years. The enactment of the Garn-St. Germain bill
in 1982 has expanded the powers of banks and savings and loan
associations. In addition, the life insurance industry has
been developing a variety of new products that contain
predominantly investment features found in certificates of
deposits, mutual funds and money market funds, as well as
traditional insurance features.
Of course, the Administration remains committed to
encouraging savings by individuals. Steady growth in
long-term savings is essential to the continuation of our
economic recovery. We are pleased with Internal Revenue Code
changes which encourage increased savings, such as the
increased availability of Individual Retirement Accounts.
Indeed, in the context of more long-term, comprehensive
tax reform, a concern about increasing savings, which I
share, might lead to the replacement of the current system
with a tax on consumed income. Under this system, which
could be far simpler than current law, deductions would be
allowed for all saving, with the proceeds of all borrowing
subject to tax. With a properly designed rate structure,
this system could retain the same degree of progressivity as
we have now, but within each income class those who save
would pay less tax than those who spend.
It must be recognized, however, that while the existing
tax system contains many features that are consistent with a
consumed income tax, such as the exclusion from tax for
savings through qualified retirement plans and IRAs, it is
primarily a tax on income. The income earned on investments
in mutual funds, bank and thrift deposits, and most other
securities, generally is subject to tax when earned, unless
it is exempted for certain well-defined policy reasons. For
example, the investment income earned on tax deductible
contributions to pension plans and Individual Retirement
Accounts is effectively untaxed in order to encourage savings
for retirement. It should be noted that these tax-favored
forms of retirement savings are subject to significant
restrictions, particularly in terms of the amounts that can
be invested.

-4Taxation of Life Insurance Products
Historically, the income earned on investments made
through life insurance generally has not been subject to
federal income tax. The laudable social policy supporting
this exemption is encouragement for individuals to protect
their families against economic hardships that could result
from premature death of the family breadwinners.
While we are not proposing to reconsider this rule or
the policy it reflects with respect to traditional "garden
variety" life insurance contracts designed primarily to
protect against untimely death, it is plain that this
historic treatment cannot be applied automatically to all
arrangements offered by insurance companies, in light of the
increasing investment orientation of the products offered by
the life insurance industry. As an article pointed out in
the Wall Street Journal only last week, life insurers are
increasingly offering policies that look very much like
• investments offered by other financial institutions. In some
policies, the traditional function of life insurance —
protection for the beneficiaries of the policy against the
premature death of the insured — is becoming a secondary
factor. Yet the existing tax rules applicable to investments
made through life insurance companies are markedly different
from those applicable to investments made through other
financial intermediaries. In most cases they are more
favorable, and in many instances investments through life .
insurance companies are tax exempt. This distorts investment
decisions and encourages the development of new life
insurance products to take increasing advantage of an uneven
playing field.
Consequently, in fashioning permanent tax legislation,
we should recognize the similarity of these
investment-oriented life insurance policies to other
investments. One possibility might be to establish more
favorable tax treatment for long-term savings generally (in
addition to retirement savings) that could be offered by all
financial institutions. It might be appropriate, or
necessary for budgetary reasons, to delay taking such a step
or to limit the amount that could be invested in tax-favored
long-term savings plans, just as limitations are imposed on
contributions to pension plans.
It also might be appropriate to restrict the types of
life insurance policies that receive favorable tax treatment.
In effect, a policy that is primarily an investment vehicle,
particularly a short-term investment vehicle, would not be
treated, for tax purposes, as life insurance. This approach

-5is illustrated by TEFRA's provision governing the tax
treatment of Universal life insurance: unless there is a
sufficient element of insurance protection, the policy will
not be subject to the favorable tax rules applicable to life
insurance. Still another approach might be to bifurcate life
policies that are weighted toward investment into the
traditional whole life insurance feature and the investment
feature, and limit the favorable life insurance tax rules to
the insurance side of the arrangement. Of course, other
approaches could be developed that would tend to equalize the
tax treatment of comparable investments.
If it is determined that income from investment-oriented
life insurance should be. subject to taxation, it also would
be necessary to determine whether the resulting tax should be
collected directly from the policyholders, as generally
occurs with respect to tax imposed on investment income, or
collected from the life insurance company serving as a tax
paying agent of the policyholders, with no tax being
collected directly from the individual policyholders. This
latter approach would reduce both the compliance and the
paperwork burden on the companies. In form, this could be
accomplished by imposing a supplemental tax on certain
portions of the investment income of life insurance companies
that would serve as a "proxy" for the tax that otherwise
would be imposed at the policyholder level. The proxy tax
rate could be set at a low rate that fairly approximates the
average marginal tax rate of the policyholders.
A separate question that arises under the present tax
rules for taxation of life insurance is whether tax benefits
should be denied in the case of insurance arrangements (other
than term insurance) designed to result in little net
savings. For example, in TEFRA Congress treated certain
borrowings from pension plans as taxable pension plan
distributions. Similar policy questions arise from the
expanding use of certain life insurance policies that
emphasize the tax beneifts arising from systematic policy
loans.
Taxation of Life Insurance Companies
Turning to the tax treatment of the life insurance
companies, I believe that the tax rules to be put in place
following expiration of the TEFRA stopgap provisions should
not be based on an arbitrary division of a predetermined
revenue target between the stock and mutual life insurance
companies. In a fair tax system, competing products sold by
mutual and stock life insurance companies should be subjected
to comparable tax rates on comparable income.

-6Rather than focusing on revenue targets, the tax system
--applicable to the life insurance industry should focus on the
correct measurement of economic income, even though
mechanical approximations may be a practical necessity in
certain instances. Under current law, the relationship
between the industry's taxable income and its economic income
is obscured. One cause of this obscurity is the present tax
rules alloWing reserves that significantly overstate the
corresponding economic liability. It also results from tax
provisions, including certain so-called "special deductions,"
that were designed to balance the industry's tax liability at
a predetermined 'level and mix. If it is decided that the
industry's tax liability is excessive, then adjustments
should be explicit, rather than being made through the
interplay of complex provisions of obscure origin that defy
understanding and make analysis burdensome.
Conclusion
By building a short expiration date into the stopgap
provisions of TEFRA, Congress guaranteed that policymakers
would have to address issues of insurance taxation before the
end of this year. I have attempted to set out some guiding
principles which we will be using in our analysis, and I can
assure you that we will temper them with pragmatism where
necessary.
The life insurance industry has played a key role in the
encouragement of personal savings through the provision of
life insurance protection for many generations, and I am
confident that the industry will continue to play this role
for many generations to come. In changing the tax rules
applicable to a changing industry, great care must be taken
not to undermine this characteristic, particularly at a time
when increased savings are so crucial to the future
well-being of our nation.

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-

FOR RELEASE UPON DELIVERY
EXPECTED AT 9:45 A.M.
Wednesday March 2, 1983
STATEMENT OF
THE HONORABLE JOHN E. CHAPOTON
ASSISTANT SECRETARY (TAX POLICY)
BEFORE THE
HOUSE BUDGET COMMITTEE TASK FORCE ON TAX POLICY
Mr. Chairman and members of the Committee:
It is a pleasure to meet with you today to discuss the
Administration's contingency tax plan. The President
included in his budget message a contingency tax plan in
order to ensure financial markets, the business community,
and the American taxpayer that future deficits -- which may
occur after full economic recovery -- will not be excessive.
Like any other insurance program, the contingency tax
plan is necessary for sound financial management. It
provides certainty with respect to future deficit reductions
if sufficient growth fails to keep those deficits within a
tolerable range.
Also, as with any other insurance program, we earnestly
hope that the conditions under which the contingency taxes
would become effective never occur. If economic growth is
sufficiently strong and government spending is sufficiently
restrained over the next two or three years, then the
contingency taxes will never be needed. However, it is
because we cannot guarantee, with certainty, the rate of
long-term growth in the economy that we need a contingency
tax plan. In a very uncertain world this plan provides a
measure of certainty that is necessary for orderly long-term
financial and economic decisions that must be made by
individuals and businesses alike.
R-2061

-2General Design of the Contingency Tax Plan
The contingency tax plan proposed by the President is
designed to raise revenues — and consequently reduce the
deficit — by about 1 percent of GNP, provided that Congress
has adopted spending reduction proposals along the lines
proposed by the Administration and that there is insufficient
economic growth to keep the deficit below 2 1/2 percent of
GNP. The contingency tax plan would go into effect on
October 1, 1985, if the economy is growing on July 1, 1985,
and if the forecasted deficit for fiscal year 1986 exceeds
2 1/2 percent of GNP. Chart 1 shows the effect on the
deficit that the contingency taxes would have if they are
implemented. It also shows how the budget picture would be
altered by a much stronger expansion that would never require
implementation of the contingency taxes. This high economic
growth path reflects the assumption that real GNP increases
1 1/3 percentage points faster per year than under the
official forecast, starting with fiscal year 1983. Such a
growth assumption is not unrealistic.
The contingency tax plan would have only two provisions,
each raising about half the required revenue. The first
provision would be an across-the-board tax on individuals and
corporations equivalent to a 5 percent surcharge on taxes
otherwise due. The other provision would be an excise tax on
domestically produced and imported oil of $5 per barrel. In
order not to give an unintended price advantage to imported
refined products, an excise tax equivalent to a $5 per barrel
tax on crude oil would be levied also on imported refined
products, such as heating oil, diesel fuel, gasoline and jet
fuel. Both provisions of the plan would be temporary taxes,
staying in place for no more than 36 months.
The contingency tax alternative shown in the budget
raises $146 billion over the 36-month period beginning
October 1, 1985. These estimates were based upon one of
several alternatives under consideration. The specific plan
we will be sending to Congress for adoption this year will
conform to the general outline I mentioned earlier.
Projected revenues from this plan will be in the range of
$130-$150 billion over a 36-month period. The exact amount
will depend upon the specific details of the structure.
A surcharge on individual income taxes has been selected
as one component of the contingency tax plan because it will
have a broad impact and will not change the distribution of
taxes paid. It would be an across-the-board 5 percent tax
increase for everybody. For example, a family of four
earning $10,000 would pay a surcharge of $15, or 5 percent of
its $291 tax liability. At $50,000 of income, the family of
four would pay a surcharge of $358, or 5 percent of the
$7,165 in tax it would otherwise owe. At $100,000 of income
a family of four would pay a surcharge of about $1,100.

-3The $5 per barrel oil excise tax has been selected for
the other component of the contingency tax plan because it
raises the needed revenues in a way that also has a very
broad temporary impact on all taxpayers and all sectors of
the economy. The increased burden of the oil tax on consumers will be relatively small. The $5 tax on a barrel of
oil would translate roughly into a 12 cent increase in the
price of a gallon of gasoline and a 12 cent increase in the
price of a gallon of home heating oil. Both of these price
increases have been more than offset by recent reductions in
the world price of oil; and, current actions being contemplated by oil producing countries suggest that prices may be
reduced further during the next few years. For a typical car
owner who drives 10,000 miles a year, the 12 cent per gallon
increase would amount to a $62 annual increase in the cost of
gasoline he consumes. For the average home heated by oil,
the 12 cent per gallon increase in the cost of home heating
oil will mean an increase in fuel costs of about $60 a year.
Also taken into consideration in the selection of an
excise tax on oil as one element of the contingency tax plan
is the fact that individuals and businesses will be encouraged to conserve on their consumption of oil from whatever
level of use would otherwise prevail in 1986-1988. This
would be a small but significant step toward further reducing
our reliance on uncertain foreign supplies, which could
potentially create a national emergency if interrupted.
Relationship to Other Tax Policies
Some may inquire why we are proposing contingency taxes
to take effect in the fall of 1985, if needed, when the
Economic Recovery Tax Act of 1981 (ERTA) provides a further
10 percent across-the-board individual income tax reduction
in July of this year and indexation of the individual income
tax structure beginning January 1, 1986. It is a fundamental
mistake to consider delay or repeal of the third year of the
tax reduction and delay or repeal of indexation as a
substitute for the contingency tax plan. Repeal of the
third-year tax cut and indexation would have effects entirely
different from those of a temporary surcharge.
Economic impact. The individual income tax reductions
Congress enacted in 1981 must be retained if we are to
correct the serious disincentives to work and save that had
been built into the prior tax structure. For the most part
these disincentives did not occur by design but simply grew
over the years as high rates of inflation pushed taxpayers'
incomes into ever higher marginal rate brackets. The acrossthe-board tax reductions rolled back the steady upward trend
of marginal tax rates on labor and savings income and the
indexation provision places a halt on this trend for the
future.

-4If we look at the experience of a typical family of four
that earned the median income of about $24,300 in 1980, the
first two phases of the across-the-board rate reductions
enacted under ERTA provide a tax cut in 1983 of $533, but
almost 80 percent of that tax cut is lost through bracket
creep so that the net tax cut is only $109. The third-year
reduction almost triples this net tax cut from $109 to $294.
By 1985 this median income family will receive a net tax
increase of $101 if the third year reduction and indexing are
repealed. If those provisions are retained, however, this
tax increase is converted into a net tax cut totaling $399.
Repeal of the remaining tax reductions already in the
law would substantially reduce any real tax cut for most
taxpayers. Consequently, repeal would also deny much of the
incentive required to maintain the noninflationary growth
necessary to avoid the contingency taxes. Lower real growth
over the next few years would cause high interest rates and
higher deficits. Repeal at this time, when the economy is
struggling out of the recession, would be particularly
senseless and counterproductive.
The contingency surcharge, by contrast is a temporary
tax measure that, by design, can only be implemented if the
economy is in a period of growth. It will temporarily
mitigate, but not permanently eliminate, the tax incentives
to work and save now part of the law.
Distributional impact. Even if the economic impact of a
temporary surcharge in fiscal year 1986 were identical to
the impact of repealing permanent tax cuts this year, the two
measures are unlikely substitutes for each other because of
the enormous differences in the way they affect taxpayers at
different levels of income. Both the third-year of the tax
cut and indexation provide the largest percentage reductions
in tax at the lowest income levels. Repeal of both those
provisions of ERTA would raise taxes 24.3 percent on those
earning less than $10,000, as shown on Table 1. For those
with incomes between $10,000 and $50,000, tax increases would
be a little over 15 percent. At higher income levels this
percentage declines sharply. For those earning more than
$200,000, repeal would mean a tax hike of only 3.1 percent.
This percent is quite low, in large measure, because tax on
income in excess of $162,400 on joint returns and $81,800 on
single returns is unaffected by the third-year cut. Those
with income below $50,000 would pay 72 percent of the tax
increase arising from repeal of the third-year cut and
78 percent of the tax increase from repeal of indexation. In
contrast, a temporary surcharge would limit large tax
increases for lower and middle incomes to 5 percent while
raising the tax increase for wealthy taxpayers to 5 percent.
The portion of all surcharge revenues raised from those with

-5incomes lower than $50,000 would be reduced from well over
70 percent attributable to repeal to just about 67 percent —
exactly the same fraction of tax currently paid by taxpayers
earning less than $50,000.
Responsible budgeting. The three-year phased-in tax
reduction put in place in 1981 was proper tax policy to enact
at that time and even more necessary a year and a half later,
as the economy begins to grow again. The indexing provision
enacted in 1981 is not only the proper tax policy to assure
strong growth in the future but it is also the linch pin to
responsible budgeting. Repeal of the indexing provision of
ERTA would permit Congress to finance ever higher levels of
government spending without once enacting another tax
increase. To many, this is a very tempting prospect because
automatic tax increases are easier to accept than explicit
ones that must be legislated. This does not mean, however,
that they affect taxpayers and taxpayer incentives any
differently. If revenue is to be raised, repeal of indexing
is the worst alternative because that would foreclose
weighing the benefits of future government spending against
the burdens of future taxes.
Further, under a non-indexed system, the higher the rate
of inflation, the more revenue there will be available.
Thus, there would be an incentive for Congress to pursue
inflationary policies. For this same reason, the money
markets would likely anticipate renewed inflationary policies
if indexation is repealed.
This Administration firmly believes in the principle of
accountability. There should not be another tax increase
without explicit legislation. The legislative process forces
tough debate and tough decisions, all subject to review and
criticism by affected constituencies. This is the only way
responsible budget policy can be formulated.
Another caution is in order. Currently, there is great
pressure on Congress to repeal the provisions of the Tax
Equity and Fiscal Responsibility Act of 1982 (TEFRA)
requiring withholding on dividends and interest. Unfortunately, much of the pressure to repeal withholding comes from
persons who misunderstand the impact withholding will
achieve. At a time in which we are facing high deficits it
would be grossly unfair to repeal these tax provisions.
Under withholding, there is no tax increase on honest and
careful taxpayers; nearly three-fourths of the revenue
increase comes from taxpayers who are not paying the tax that
they owe. Repealing withholding would result in a revenue
loss of over $18 billion over the next six fiscal years.
(This figure excludes the effect of the information reporting
provisions of TEFRA. If the information reporting provisions
were also repealed the revenue loss would be $23 billion.)
We can hardly ask honest taxpayers to pick up this additional

-6burden. Repealing withholding at this time would also send a
message that the government does not take seriously the major
effort initiated last year to insure better compliance with
the tax laws in general.
Conclusion
In conclusion, Mr. Chairman, there are probably some
sitting on this committee who sincerely believe we will need
higher revenues in order to avoid intolerable long-term
deficits. There may be others equally convinced that future
spending reductions and economic growth will be sufficient to
avoid large post-recovery deficits.
The Administration is
not prepared to guarantee the results of any 2 to 5 year
forecast. The art of long-terra economic forecasting is not
now, and may never be, sufficiently developed to become an
exact science: there are simply too many influences that
cannot be predicted. Nor is the Administration prepared to
second-guess future Congressional action on spending
reductions. It is precisely because of these uncertainties
that it is imperative to have the insurance that our
contingency tax plan will provide. It should satisfy the
concerns of those who are certain we will need revenue
increases, those who are convinced that we won't, and those,
like myself, who are candidly uncertain about our future
revenue needs.
Reversing tax reductions already in the Code is not a
substitute for contingency taxes. The former are permanent
tax reductions designed to provide incentives for the level
of growth that is required to avoid large deficits in the
future. The contingency tax plan is insurance against
uncertainty and unforeseen events that may restrain full
recovery.
A strong sustained recovery, together with a
determined program of restraint on domestic spending, should
reduce the deficit without implementation of the contingency
taxes. While we hope this occurs, consumers, investors and
businesses alike need the assurance that only the contingency
tax plan will provide in order for them to make sensible,
orderly financial and economic decisions.

Chart 1

THE DEFICIT AS A SHARE OF GNP
Percent

Administration Growth Path

No Contingency Tax

J
Contingency |

High Growth Path, \
No Contingency Tax*
%

'%
*'%>
%'
"*,.
'"/,

X
Trigger for
Contingency Tax

—Trigger base
year

Decision date
0
1982

Fiscal Year
* Higher growth than the official path by 1-1/3 percentage point starting fiscal year 1983.

Table 1
The Effect of Repealing the Third Phase of the Tax Reduction and Indexing
Distributed by Adjusted Gross Income Class
(1981 Levels, 1984 Law)

Tax liability
under
1984 law

Ad justed
gross
income
class

Amount

($000)

$m ill ions)

Less than 10

4,518

Percentage
distribution

(percent)
2.1%

Change in tax liability due to :
Repealing the
Repealing
third phase
indexing
of the rate
reduction
Percentage
Percent
Amount
Percentage
. Amount
Percent
increase distribution
increase distribution
in tax
in tax
liability
liability
(percent)
($m ill ions)
(percent)
($mill ions)

628

13.9%

2.6%

424

9.4%

6.5%

Repealing the third phase
of the rate reduction
and indexing 1/
Percentage
Percent
: Amount
increase distribution
in tax
liability
($m ill ions)
(percent)
? 1,099

24.3%

3.5%

10 -

12,742

5.8

1,372

10.8

5.8

489

3.8

7.4

1,934

15.2

6.2

15 -

17,780

8.1

2,018

11.3

8.5

602

3.8

9.2

2,717

15.3

8.8

- 30

45,579

20.7

5,489

12.0

23.1

1,458

3.2

22.2

7,115

15.6

22.9

65,901

29.9

7,618

11.6

32.1

2,128

3.2

32.4

10,011

15.2

32.3

50 - 100

39,018

17.7

4,466

11.4

18.8

1,072

2.7

16.3

5,638

14.4

18.2

100 - 200

18,899

8.6

1,706

9.0

7.2

317

1.7

4.8

2,011

10.6

6.5

200 and over

15,619

7.1

420

2.7

1.8

0.5

1.2

482

3.1

1.6

10.8%

100.0%

14.1%

100.0%

30 -

Total

$220,057

100.0%

$23,717

Office of the Secretary of the Treasury
Office of Tax Analysis
1/ Assumes 4.5 percent rate of inflation for prior year.
Note: Details may not add to totals due to rounding.

$6,569

3.0%

100.0%

$31,007

TREASURY NEWS

department
of theUPON
Treasury
D.C. • Telephone 566-20*
FOR RELEASE
DELIVERY• Washinaton.
Contact: Marlin Fitzwater
Wednesday, March 2, 1983

(202) 566-5252

REMARKS BY
DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE
GREATER NYC TAKES STOCK IN AMERICA
U.S. SAVINGS BOND COMMITTEE
NEW YORK, N.Y.
MARCH 2, 1983
Good afternoon and thank you for that kind introduction.
I am here on behalf of President Reagan to thank you
personally for spearheading the vigorous payroll savings
campaigns in your companies. Nineteen Eighty Three is a very
upbeat year for Savings Bonds. The new variable, market based
rate is the most significant and most exciting change in Savings
Bonds in more than 40 years. It marks a dramatic new incentive
to save, and ensures a positive competitive rate of return in
what has been a stormy savings environment.
Savings Bonds have been an important stabilizing force in
our nation's debt-management efforts. We couldn't have done so
well in the past without you, and we certainly will need your
help in the future.
Since taking on the position as Secretary of the Treasury, I
always look forward to speaking events in New York. I worked
here for several years. Since leaving, I've learned very quickly
that a home is more than just a place to hang one's hat. It is a
place where our friends forgive our faults; where our
eccentricities are looked upon as evidence of a sturdy character;
and our accomplishments are generously magnified. Again, thank
you for that kind introduction.
When I look back on the years that I worked in New York, I
find it interesting to think how I always thought that the world,
more or less, revolved around New York City.
On significant issues like this, I don't like to be proven
wrong. However, when I left New York City, I found a group of
people who disagreed with me. This group was comprised mostly of
a breed called bureaucrats, led by a merry group of warriors
called Congressmen, who were convinced that Washington, D.C. was
the hub of the world.
R-2062

This created some confusion. However, after spending a
short time in our nation's capitol, I quickly came to my senses.
I realize now that if Washington is the hub, then New York is the
axle, drive shaft, transmission and engine. So rest assured that
I still believe the business and industrial sector is still
considered the moving force behind this great nation.
Therefore, as leaders of the business world, you have a
great responsiblity. And that is the responsiblity of duty to
your employees, to your companies, to your community, to the
economy, and to the health of our country.
Thomas Jefferson once said, "Responsiblity and duty is a
tremendous engine in a free government." This is as true now as
it was in 1791 when Jefferson delivered this message to Congress.
This Administration understands responsibility. It also
understands that destiny which results from duty performed may
bring anxiety and perils, but seldom failure.
This is what I want to talk about with you today. The duty
that we all share in implementing a strategy and program to
permanently strengthen our economy and our nation.
You and I both know that a government, like any business,
can for a while spend more than it earns. But unlike many
Administrations of the past, you and I also understand that a
countenance of this bad habit means bankruptcy.
When President Reagan arrived in Washington, it was obvious
that the irresponsible spending habits of the past had taken
their toll. Twenty-five months ago interest rates were at 21.5
percent. Public spending as a percentage of GNP had reached a
postwar high. Taxes had doubled since 1970. Regulation was the
master of business and industry, and inflation - public enemy
number one - had reached 12.4 percent.
When President Reagan came to office, he shared with the
people of this country a desire for a new beginning. He said
that the old ways of managing an economy were producing more
hardships than happiness. And as an alternative, he offered a
program of economic recovery that was based on a belief that this
nation's prosperity could be shared by'more people in greater
quantities. Our program mandated that:
First, irresponsible and inflationary spending habits of the
past were to be stopped.
Second, taxation which had suffocated incentive and
productivity was to be cut.

Third, the irregular monetary habits of the past were to be
replaced by consistent, non-inflationary practices.
And fourth, the regulatory morass which had chained the
productive capacities of the private sector were to be cut and
disposed of.
In structuring this program, we were guided by our
responsibility and duty to the economy and our nation. To that
list of driving influences we need to add the term conviction.
History has proven that one thing people cannot permanently
resist is the force of great conviction. It was because of the
President's conviction of what our economy and nation should be
that he was elected. I share with the President his conviction
that the plan we have set for economic recovery is the right
approach and that our goals and our strategy will not change or
be abandoned.
During 1981 and 1982, we implemented significant portions of
the President's Economic Recovery Program. We set a foundation
for sustainable economic growth. And we've gotten results.
Consider inflation being brought from 12.4 percent to 3.9
percent.
Consider the prime interest rate, slashed from an incredible
21.5 percent in January 1980 to 10.5 percent.
Consider that the out-of-control federal spending rate which
was at 17.4 percent in 1980 has been reduced to 10.5 percent this
year and with the new budget, to 5.4 percent.next year.
And consider an out-of-control income tax burden —
threatening to rise from 13 to 18 percent of personal income
between 1980 and 1988 — now brought under control and held to
its historical 12 to 12.5 percent level.
This is progress. But we have achieved these goals because
of our unswerving loyalty to economic recovery. And because of
our conviction that despite some initial discouragement, our
approach was what the people of this nation wanted and deserved.
Those facts provide the foundation for economic progress.
Now we see indications that the rest of the house is getting
underway. In fact, as indicated by the steady improvements of
key economic indicators that usually proceed economic growth, the
recovery may be well underway at this time. Encouraging signs
include:

The Consumer Price Index increase of 3.9 percent since
January 1982, is the smallest 12 month increase in ten years.
Housing starts leaped by 36 percent between December and
January to the highest monthly level since September, 1979.
The index of leading indicators was up 3.6 percent in
January. It has risen for nine of the last ten months, and now
the coincidental indicators are also up — for January.
Industrial production increased in January by 0.9 percent
after a 0.1 percent gain in December.
New orders for durable goods were up a solid 4.5 percent in
January, the third consecutive monthly increase.
Businesses trimmed inventories sharply in the final quarter
of calendar year 1982. And real inventory liquidation during
this period was the largest in any quarter since World War II.
And finally, unemployment dropped in January from 10.8 to
10.4 percent.
The task, however, is not over yet.
Our challenge in the months ahead reminds me of a story
about Winston Churchill. During a debate in the British House of
Commons, a Parliamentary Member commented on Mr. Churchill's
voluminous appetite for spirits, by saying that Mr. Churchill had
consumed enough alcohol to fill half of the entire chamber.
After the speaker went to his chair, Mr. Churchill proceeded to
the podium, looked to the ceiling and said, "Indeed a great
accomplishment, but there is so much left to do, with so little
time."
In the coming two years, we cannot afford to rest on our
achievements. We still have a great deal left to do.
Perhaps the greatest task before us is controlling the
growth of federal spending and harnessing the federal deficit.
If we allow deficits to grow, we take the chance of draining off
a large part of the savings pool, leaving less available for
capital formation. Interest rates could remain high and recovery
could stall.
This Administration is determined that deficits of such
magnitudes will not come to pass. We came to office with a
program for boosting private sector investment, and we will not
allow ourselves to be diverted from that goal.

This is the objective of the President's deficit reduction
program that he proposed during the State Of The Union Address
this year. The four basic elements include: a freeze on 1984
spending for COLAs, federal retirement payments, and for a broad
range of nonentitlement programs; a program to control the
so-called "uncontrollables" better known as entitlement programs;
a cutback of $55 billion in defense spending; and, a contingency
tax starting October 1, 1985, that would be used only if after
implementing the President's spending cuts and freeze, there is
still insufficient growth to reduce the deficit below 2 1/2
percent of GNP.
This is a practical cour°se to follow.
As the economy awakens and comes to life, we must continue
to put into action our entire program of economic recovery.
However, there are certain things we must not do. We must not
revert to the overly stimulative monetary and fiscal policies of
the past — for these would surely lead to a resurgence of
inflationary pressures and a new round of rising interest rates.
Further, despite some political demands to the contrary, we
must not reverse the fundamental tax restructuring put in place
in 1981, for these tax improvements provide the non-inflationary
incentives to fuel the economic engines of the private sector.
Recently we have heard talk that the Reagan tax cuts are too
large and that they should be eliminated. These claims are
groundless.
In fact, the tax cuts adopted in 1981 did little more than
keep our heads above water. They put a halt to a rapidly
increasing tax burden and returned revenues as a percentage c*f.
GNP to the levels of the 1960's and 70's.
The second claim we hear is that the tax cuts are unfair and
that the third year cut and indexing should be eliminated. This
claim is also groundless.
The truth is that all tax rates were reduced by the same
amount for all taxpayers. Those who earned between $10,000 and
$60,000 dollars — what is generally defined as the the broad
middle class of Americans — pay about three-quarters of all
income taxes. And they receive about three-quarters of the t.-\x
cut. Moreover, far too little has been said about the
disproportionate benefits to those at the lower end of the income
scale as a result of our success in reducing inflation.

-6Repeal of the third year of the tax cut would strilte at the
lower and middle income workers and retirees. It would cause a
13.9 percent jump in tax liability for those with less than
$10,000 in adjusted gross income, a 12 percent jump for those
between $20,000 and $30,000, and only a 2.7 percent jump for
those with $200,000 and over.
The repeal of indexing is even more unfair. Without
indexing, inflation and social security increases will wipe out
the third year cut by 1986 and the entire 23 percent cut by 1987.
Indexing is also critical to small businesses. Since 85 percent
of small businesses pay taxes through the individual tax rate
system, repeal of indexing directly increases taxes and labor
costs. Without indexing, only the federal government will
benefit from higher inflation by collecting more and more tax
dollars as people are pushed into higher tax brackets.
I want to mention one other thing that we must not do. We
must not let the international financial system fall to ruin.
Since about the middle of last year, the international
monetary system has been confronted with serious financial
problems. The debt and liquidity problems of Argentina, Brazil,
Mexico and a growing list of other countries have become front
page news.
The biggest factors of the international debt crisis are
high interest rates and the worldwide recession. These
conditions have choked the demand of industrialized nations for
imports and, therefore, stifled the ability of developing nations
to export. As a result, the debts of many developing countries
have become too large for them to handle under present economic
circumstances. The international financial and economic system
is experiencing strains unprecedented since the postwar era —
strains which threaten the world economic recovery.
The problem is serious but not unmanageable.
The first objective must be to bring some degree of
liquidity to the international lending system. The IMF was
created in 1944 to assist countries that are experiencing
temporary balance of payment problems. If the IMF is to be able
to continue in this role, it must have adequate resources to deal
with the current situation.
I understand those who ask, "Why bail out the banks and
spend more money abroad when we need it at home?"

-7The reason for concern about the international financial
crisis is simple — exports and jobs.
The United States exports 20 percent of everything it
produces. This accounted directly for over 5 million jobs in
1982, including one out of every eight jobs in manufacturing
industries. Of even greater importance to revitalizing our
economy it was estimated that in the 1970s, four out of every
five new jobs in U.S. manufacturing came from foreign trade. On
average it is agreed that a $1 billion increase in exports
results in 24,000 new jobs.
I am sure you know that the U.S. has agreed to an increase
in funding of the IMF of 47 percent. I look at this as an
insurance policy against a loss of jobs — insurance against
catastrophic losses.
We cannot afford to lose the exports, the jobs, or the
momentum for general economic recovery that is just beginning to
take hold. We cannot afford to abandon our friends and our
interests overseas, for their sakes and ours.
I began talking about duty. I want to get back to that
theme because that is why we are here today.
It is the duty of every American to serve his nation. Your
role in supporting U.S. Savings Bonds is a significant
contribution that has not gone unrecognized in the Department of
the Treasury.
Besides acting as a secure investment for the individual,
savings bonds play a key role in our nation's debt servicing.
Since 1935, savings bonds have helped reduce the Treasury's need
to borrow in the open market, thereby reducing pressures on
interest rates from federal borrowing.
When Americans cut back on savings bonds purchases, there is
more pressure on the Treasury to borrow from the market.
Increased Treasury borrowing, in turn, drains funds that
otherwise would be available for capital investment. More
participation in the Savings Bonds Program will help get the
government out of the market-borrowing business and create more
room for economic expansion.
Today, Americans hold more than $68 billion wo^th of savings
bonds. That is $68 billion that the government does not have to

-8borrow in the open market. That permits new savings that the
private sector can pour into new ideas, new products, and new
jobs that will lead the nation into a future that is bright and
prosperous.
Savings bonds play an important role in our economy, and
here is where your role comes into play. Some 80 percent of all
savings bonds are through the payroll savings plan. The plan has
prospered though the support of thousands of business leaders,
like you, who promote and operate payroll savings plans. The
result has been the enthusiastic participation of employees who
find it the one sure way to accumulate reserves for their future.
With $4 of every $5 dollars in savings bonds coming through
payroll savings, the plan has spearheaded the bond program's
tremendous contribution to the American economy.
Offering payroll savings in your companies, and volunteering
to convince other business leaders to do the same, is the key to
a successful bond program. And this shouldn't be hard. Between
the last quarter of 1982, savings bonds sales were up 19 percent
over the year before, and in January were up 23 percent.
The rush to buy bonds makes sense. How else can an
individual better earn market-based rates, currently at over 11
percent for savings bonds, for as little as $25? For that amount
of money, the saver also gets a guaranteed minimum return of 7
1/2 percent. The investment is free from state and local income
tax. The principal and interest are guaranteed safe, and it is a
great investment in the future of this nation.
The new variable rate on savings bonds makes this investment
instrument competitive in the big leagues of the investment
world. It further plays an important part in ensuring that we do
not finance our government's needs, at the expense of investment
and growth, in the private market. So you, who are the the
business leaders of our nation, have a key role to play in
helping to keep interest rates declining and, thereby, promoting
the economic recovery.
In closing, I want to refer to a statement made by
President Woodrow Wilson that sums up my feelings about the
potential of America. "Great achievements are the product of
great people. They are the result of many generations of effort,
toil, and discipline. They do not stand by themselves; they are
more than individual. They are the incarnation of the spirit of
a people."
The success of our economic recovery, and ultimately our
nation, depends on great achievements and great people. We have

-9in this country the resources to make our economic system work,
and with the right measures of duty and conviction we will ensure
that it does.
Thank you.
***

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE

March 2, 1983

RESULTS OF TREASURY'S AUCTION OF 45-DAY CASH MANAGEMENT BILLS
Tenders for $9,004 million of 45-day Treasury bills to be
issued on March 7, 1983, and to mature April 21, 1983, were accepted
at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Investment Rate
Price Discount Rate
High - 98.988 8.096% 8.32%
Low
- 98.981
8.152%
Average - 98.984
8.128%

(Equivalent Coupon-Issue Yield)
8.37%
8.35%

Tenders at the low price were allotted 20%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS.
(In Thousands)
Location
Received
Accepted
$
120,000
44,000
Boston
$
New York
28,628,000
8,,564,000
—
—
Philadelphia
Cleveland
115,000
10,000
9,000
200
Richmond
—
9,000
Atlanta
1,702,000
66,000
Chicago
—
St. Louis
10,000
—
50,000
Minneapolis
20,000
10,000
Kansas City
-Dallas
2,860,000
310,000
San Francisco
$33,523,000
$9,,004,200
TOTALS

R-2063

THE SECRETARY OF THE TREASURY
WASHINGTON

SOtlO

March 2, 1983

Dear Mr. Chairman:
The purpose of this letter is to respond to the
questions raised during my appearance before the Committee
on February 3 concerning the revenue estimate for interest
and dividend withholding and the current level of underreporting of interest and dividend income.
The revenue estimate for withholding was derived in
the following manner:
The base for the estimate is the amount of unreported
interest and dividend income. Excluded from this base
(throughout this letter) are interest and dividend payments
that are not affected by the withholding rules, such as
interest paid by individuals. Based on the Internal Revenue
Service's research programs, including the Taxpayer Compliance Measurement Program, it is estimated that, at 1983
levels, $25 billion of interest and dividend income that
should be reported on tax returns will not be reported in
the absence of the Tax Equity and Fiscal Responsibility Act
of 1982 (TEFRA).
We wish to make clear that this estimate of the
interest and dividend tax gap is based upon conservative
assumptions. An estimate based on all payments of interest
and dividends and on claimed deductions of interest (the
National Income Accounts analysis) by the Bureau of Economic
Analysis of the Department of Commerce concludes that the
tax gap of unreported interest and dividends is almost twice
as large as that estimated by the Treasury Department. We
believe, however, that the absence of certainty as to the
cause of this discrepancy requires the use of the more
conservative estimate of the size of the gap of unreported
Interest and dividends, rather than the much larger number
indicated by the National Income Accounts, or an average of
the two numbers.
Approximately 86 percent of all interest and dividend
payments — including most interest paid by banks and thrift
institutions — were subject to information reporting prior
to enactment of TEFRA. As mentioned above and based on the

-2
conservative estimating techniques also noted above, the
amount of interest and dividend income earned but not
reported prior to TEFRA was $25 billion (interest earned but
not reported was about $18 billion and unreported dividend
income was about $6.5 billion).
For Interest payments on bearer obligations and on most
Federal obligations, there was no Information reporting
required prior to TEFRA. For payments not subject to
information reporting, the rate of compliance was only about
78 percent. Thus, in the absence of any of the TEFRA
provisions 22 percent ($7.billion) of interest on
obligations not subject to information reporting would go
unreported by taxpayers. Because the amount of payments not
subject to information reporting was small compared to the
amount of payments for which information reports were
required to be filed, the combined rate of compliance for
all interest and dividends without the TEFRA provisions is
estimated to be about 90 percent, leaving the total gap of
$25 billion mentioned above.
_
A comprehensive system of information reporting will
Increase the rate of compliance on all payments to 91
percent. Thus, the broadened information reporting
introduced by TEFRA will, by itself, only reduce the amount
of unreported Interest and dividends to $21 billion, still
an unacceptable gap.
The withholding provisions in TEFRA reduce the revenue
loss from the $21 billion that goes unreported even after
the broadened information reporting in TEFRA. The 10
Percent withholding on that amount improves compliance by
2*1 billion of additional tax collections at 1983 levels,
even if withholding causes no further increase in reporting.
(The total revenues raised through 1988 from the improved
compliance due to withholding is $13.1 billion.) In fact,
compliance will increase more than this amount because some
persons who do not now report receipts of interest and
dividends (and who would not report such receipts even under
the expanded Information reporting provided by TEFRA) will
be Inclined to report and pay tax on the entire payment once
such payments are subject to withholding. The amount of
induced compliance resulting from this tendency again was
conservatively estimated.
-^—

-3
It is useful to compare the above figures on
noncompliance and unpaid taxes on interest and dividend
Income with corresponding experience with respect to wages
subject to withholding. Mot only is the compliance rate on
wages significantly higher than that on Interest and
dividends, but even when wage income is not reported on tax
returns, taxes are collected through the existing
withholding system. As a result essentially 100 percent of
taxes due on wages subject to withholding are collected.
With respect to payments that are currently reported by
taxpayers, the new withholding provision will raise a small
amount of revenue — about $0.3 billion — generated on an
annual basis because of an acceleration of tax collections.
In addition, in the period Immediately after withholding
becomes effective, there will be a one-time acceleration of
receipts of $3.9 billion. This is because no credits from
prior year withholding will offset current withholding
receipts in the first year. This acceleration of tax
payments required by withholding wilh*treat taxes due on
interest and dividends essentially like taxes due on wages.
Taxes on all these sources of Income will be paid on a
timely and fair basis, as the income is earned.
The enclosed table shows the breakout of the three
components of the withholding revenue estimate: increased
compliance resulting from expanded information reportingr
increased compliance from the imposition of withholding, and
the acceleration or speedup of tax payments.
I would like also to correct any misleading impression
that may have arisen from a 1981 study undertaken by the
Internal Revenue Service. Some persons have asserted that
this study found a 97 percent rate of compliance for all
dividends and interest. That is incorrect. This study was
not designed to measure the level of interest and dividend
compliance generally. Rather, the study focused on certain
limited situations that are not at all representative of the
overall compliance problem. Specifically, the study
measured noncompliance only In cases meeting each of the
following three conditions:

(1) the taxpayer had filed a proper tax return,
(ii) the payor had filed an information return (Form '
1099), and
{
|
i
f
(ill) the information return was readable and contained a
proper taxpayer identification number.
Unfortunately, one or more of these conditions are not
met in a great many situations. Many taxpayers who should
file tax returns do not. Currently, between 5 and 6 million
taxpayers fail to file required tax returns. In addition,
over 11 percent of information returns for interest and
dividends lack a taxpayer identification number, or show an
improper number. For taxpayers who file income tax returns
on a timely basis, and provide payors with information that
enables them to file a proper Form 1099, it is not
Surprising that voluntary compliance is at a materially
igher level than occurs in situations where either a tax
return is not properly filed or accurate information is not
provided to the payor. As.reported above, it is estimated
that prior to TEFRA the rate of taxpayer compliance for
interest and dividend income of all taxpayers is 90 percent,
based on conservative assumptions.
Many have suggested that the compliance levels sought
through interest and dividend withholding could be achieved
by a vastly enlarged IRS audit program. This is simply npt
a realistic proposal. An attempt to achieve the compliance
levels that will be obtained under withholding would require
literally millions of new taxpayer contacts, audits, and
legal proceedings. Consequently, attempts to resolve the
compliance problem through a stepped-up audit program would
be perceived correctly .as harrassment. This would seriously
damage ongoing efforts to insure honest taxpayers that our
tax system is fair and uniformly applied in such a way as to
encourage the highest degree of voluntary compliance with
the law.
Sincerely,

/%JZ7S*£<7.

/£ca+t^
Donald T. Regan

The Honorable
Robert Dole
Chairman, Senate Finance Committee
Washington, D. C. 20510

Revenue Effect of Withholding on Interest end Dividends (Including Expended Information Reporting)

s
t 1983

: 1984

($ billions)
Fiscal Tears
i 1985 t 1986

: 1987

jCumulative total
: 1988"":
(1983-1988)

Reporting (compliance) •

0.1

0.4

0.7

0.9

1.2

1.3

4.6

Withholding:
Interest:
Speedup
Compliance
Total interest ...

0.7
Q.2
0.9

1.9
1.6
3.5

0.2
1.7
1.9

0.2
1.8
2.0

0.2
1.9
2.2

3.4
9.0
12.4

Dividends:
Speedup
Compliance
Total dividends ••

0.2
Q.i
0.2

1.1
0.7
1.8

0.1
0.8
0.8

0.1
0.8
0.9

0.1
0.9
1*0

0.1
0.9
1.1

1.7
4.1
5.8

0.9
0.3

3.0
2.3

0.3
2.4

0.2
2.5

0.3
2.7

0.4
2.9

5.1
13.1

1.1

177

IT?

37o

371

TsTT

0.9
0.4
1.2

3.0
2.7
5.7

0.3
3.1
3.4

0.2
3.5
3.7

0.3
3.8
4.2

0.4
4.2

5.1
17.7
22.7

Total:Speedup ......
Compliance ...
Total
withholding.
Grand total:
Speedup
Compliance
Total

Office of the Secretary of the Treasury
Office of Tax Analysis

Note: Details may not add to totals due to rounding.

v* March 1, 1983

TREASURY NEWS

Department of the Treasury • Washington, D.C. • Telephone 566-204:
FOR IMMEDIATE RELEASE
MARCH 3 r 1983

CONTACT:

Robert Don Levine
566-2041

TREASURY BULLETIN GOES QUARTERLY
The winter (February 1983) Treasury bulletin came off the
presses today redesigned as a quarterly. Extensive changes in
content from the former monthly format aim at cutting production
costs while continuing to make available in a more compact and
usable form information gathered by the Treasury Department.
Excessive detail and data available from other published
sources have been eliminated from the statistical tables. The
Bulletin, much streamlined as a result, continues to provide its
users with vital information, principally in summary form.
Secretary of the Treasury Donald T. Regan says in an
introduction to the new Bullletin "We view the changes as
constructive ones that will strengthen the Bulletin as an
informative and timely publication."
The new quarterly Treasury bulletin is divided into four
major sections: financial operations, international statistics,
cash management/debt collection, and special reports. The first
section incorporates tables relating to federal fiscal
operations, federal obligations, the federal debt and financial
operations of government agencies and funds. The second brings
together international financial statistics and information on
capital movements and foreign currency positions. Statistics on
receivables due from the public, reflecting the major
governmental debt collection effort, are included in the third.
Finally, the fourth section is comprised of miscellaneous
reports.
###

R-2064

Department of the Treasury • Washington, D.c. • Telephone 566-2041
3-2-83
FOR RELEASE AT 12:00 NOON

STATEMENT OF THE HONORABLE BERYL W. SPRINKEL
UNDER SECRETARY OF THE TREASURY
FOR MONETARY AFFAIRS
BEFORE THE
HERITAGE FOUNDATION/PHILADELPHIA SOCIETY
CONFERENCE IN MEMORY OF WILSON E. SCHMIDT
Washington, D.C.
March 3, 1983
Solving International Credit Problems
Wil Schmidt was a .close and long-time friend. We served
together on the Shadow Open Market Committee, which benefitted from
his insightful international monetary analysis. During his brief
tenure as nominee for Executive Director to the World Bank, he
contributed the major intellectual input to our Multilateral Development Bank Assessment, and was therefore indirectly reponsible for
the shift toward a market-oriented development policy which is a
hallmark of the Reagan Administration. I am grateful for the
knowledge he imparted to me and others, and I miss his friendly,
competent, and honest counsel. I am honored to participate in this
conference dedicated to his memory.
Since the middle of last year the international financial
system has been confronted with serious strains, as a number of
major borrowers experienced difficulty servicing their external
debt. I would like to outline my view of the dimensions of the
current problem, the potential dangers it poses, and the measures
which have been or are being taken to see us through.
R-2065

Defining the Problem
Over the past year Argentina, Brazil, Mexico, and a growing
list of other countries have been finding their foreign debt burdens
too large to manage. International lenders have become pessimistic
about prospects for these countries, which are largely middle or
upper-income developing nations, and have been pulling back sharply
from further lending to them. The resulting strains on the international financial system threaten to derail world economic recovery
— and if handled badly could fundamentally disrupt the international
monetary system.
In the well-publicized cases of Argentina, Mexico, and Brazil,
the lending exposure of banks is so large that the liquidity problems of borrowers have led to some market speculation that the
solvency of lenders in turn might be in jeopardy. As of mid-1982,
these three countries owed $145 billion to foreign banks, and the
share of U.S. banks in that total was about S55 billion. While the
danger to U.S. banks has been overstated in some cases, many banks
have become more cautious in their lending as a result of this
experience. This may be a positive sign for the longer run, but under
present'circumstances there is a danger that the banks could go too far,
thereby compounding existing debt problems and driving other countries
which are now in reasonably good shape into financial difficulties.
This situation didn't develop overnight, but over a period
of years. And the key players were not just a few big banks and
undisciplined borrowers, but people and governments everywhere.
The essence of the problem has been an unwillingness to accept
the fact that there are finite limits to how fast an economy can
grow, and how fast the standards of living of its citizens can
improve without significant policy changes. Our governments acted

as if there were, in fact, such a thing as a free lunch. Thus, in
the 1960s and 1970s economic policy in virtually all countries
became more and more inflationary. Monetary and fiscal discipline
were abandoned in the search for faster growth — but in the end we
found that inflationary policies weren't buying us higher real growth.
There was some short-term stimulus at times, but in the longer run
investment and productivity were declining, both inflation and
unemployment were rising, and longer-term growth prospects were
deteriorating. For developing countries, where there was an obvious
need for major improvements in standards of living, there was also
an irresistible temptation to push development plans too far, too
fast with inappropriate economic policies. In both developed and
developing countries, the resulting inflationary psychology depressed
saving and increased borrowing. Supply side incentives were frequently
suppressed.
On top of this came the oil shocks. These further stimulated
inflation in the short run, and at the same time created a need for
further major structural adjustments in oil-importing economies. In
most of our countries, the necessary structural adjustment was not
allowed to occur, but was instead impeded by controls, subsidies,
and inflationary economic policies. One counterpart of this failure
to adjust was the persistence of unprecedentedly large current account
deficits and foreign borrowing requirements in the oil-importing
countries, especially developing countries. Some oil-exporting
countries also borrowed heavily abroad, relying on increasing future
oil revenues to finance ambitious development schemes. Most of this
borrowing was provided by commercial banks in industrial countries
like the United States.

By the middle of 1982, the total debt of non-OPEC developing
countries was over $500 billion — roughly five times the level of
their debt in 1973. Net new borrowing by these countries from
commercial banks in the major industrialized countries rose to $37
billion in 1979, $43 billion in 1980, and $47 billion in 1981. By
the middle of 1982, the stock of debt owed to the private Western
banks by non-OPEC developing countries totaled around $270 billion,
of which more than half was owed by just three countries in Latin
America — Argentina, Brazil, and Mexico.
Over the last two years, there has been a pronounced shift to
non-inflationary policies in most industrial countries, and this
shift has had a major impact. Markets are beginning to recognize
that the world economy is now in a disinflationary period, and that
this disinflation is going to last a while longer. Inflation
expectations which became so entrenched in the 1970s are changing
dramatically, and lenders are re-evaluating loan portfolios that
they established in a quite different economic environment. Levels
of debt which were once expected to decline in real terms (and
therefore to remain easy for borrowers to manage, relative to growing
export receipts under conditions of high inflation) are now seen to
be high in real terms and not so manageable in a world of weak export
prices and slow economic growth. Banks have become more cautious on
all their lending — not just to developing country governments but
to domestic corporations as well.
In the resulting credit squeeze many international borrowers
are finding it more difficult, and more costly, to obtain new
loans. And as some borrowers are late in meeting payments, or
reschedule their debts, lenders in turn face a squeeze on current
earnings from problem loans.

Importance of an Orderly Resolution
If that were the entire substance of the international debt
problem, it would be difficult for governments or the public to worry
very much. Why should we be concerned if some foreign borrowers get
cut off from bank loans? And why worry if banks lose some money?
Nobody forced them to make those loans, and it is reasonable to expect
them to live with the consequences of their own decisions like any
other business. If all the U.S. government had in mind was throwing
money at the borrowers and their lenders, it would be difficult to
justify spending the taxpayer's money on any efforts to resolve the
debt crisis, especially at a time when we are cutting back so much on
domestic spending.
But of course, there _is more to the problem — and to the
solution. There is the potential that, if the situation were handled
badly, the difficulties facing LDC borrowers might come to appear so
hopeless that they would be tempted to take abrupt and destabilizing
measures. The present situation is manageable, but billions of dollars
in simultaneous loan losses would pose a threat to the basic soundness
of the international financial system, and to the American financial
system as well. Such an outcome would have profound consequences for
growth and employment in both the industrialized countries whose banks
do most of the lending, and in the borrowing countries.
For the United States, there are both direct and indirect effects.
As a general matter-, the economic health of LDC borrowers is important
to U.S. exporters, farmers, and investors as well as to the banking
system. There are downside risks for the U.S. growth and employment
outlook, associated with the debt problem. And a squeeze on bank
earnings and capital positions could mushroom into a significant
reduction in banks' ability to lend to domestic customers.

Last year, new lending to non-OPEC developing countries dropped
by roughly half, to something in the range of $20 to $25 billion.
Some of this reduction was probably intended by the borrowers themselves, as their past adjustment efforts reduced their external
borrowing requirements. But the cutback in new lending has gone far
beyond that point, and has been forcing developing countries to cut
back their trade and current account deficits sharply to match the
reduced amount they can now borrow.
The only quick way for these countries to significantly reduce

trade and current account deficits is to cut imports, either by depressing their economies or by restricting imports directly through
tariffs and quotas. Both of these are painful to the borrowing
countries and difficult to sell politically to their citizens. And
they are also painful for the United States economy, because a very
large part of the reduction in LDC imports — about one-third —
comes at the direct expense of our exports.
International trade is tremendously important to the United
States. Trade was the fastest-growing part of the world economy
in the last decade — but export volume grew even faster in the
United States in the last part of that decade, more than twice as
fast as the volume of total world exports. Exports of goods and
services as a share of U.S. gross national product doubled between
1970 and 1979, and now account for about 12 percent of GNP. By the
end of the decade, one out of every three acres of U.S. agricultural
land was devoted to production for export. In manufacturing, one
out of every eight jobs produced for export, and nearly 20 percent
of our total manufactured goods output was exported. But of our
total exports, nearly 30 percent goes to non-OPEC developing countries
— thus, all that U.S. production and all those U.S. jobs are very
vulnerable to sharp cutbacks in their imports.

This adjustment would, at minimum, become much more painful for
both the borrowing countries, and for lending countries like the
United States, if banks were to pull back entirely from new lending.
This would require borrowers to make yet another $20 to $25 billion
cut in their trade and current account deficits, which would be
considerably harder to manage if it came right on the heels of the
cuts they have already made. At minimum this would result in painful
export losses for the United States and other industrial countries
which could threaten our recovery.
There is certainly nothing wrong with greater exercise of
prudence and caution on the part of commercial banks — far from
it. Since banks have to live with the consequences of their
decisions, sound lending judgment is crucial. In addition, greater
scrutiny by lenders puts pressure on borrowers to improve their
capacity to repay, and creates an additional incentive for borrowing countries to undertake needed adjustment measures.
But a serious short-run problem has arisen as a result of
the size of the debt of several key countries, the turn in the
world economic environment, inadequacy of adjustment policies,
and the speed with which countries' access to external financing
has been cut back.
The question is one of the speed and degree of adjustment.
While the developing countries must adjust their economies to
reduce the pace of external borrowing and maintain their capacity
to service debt, there _is a limit, in both economic and political
terms, to the speed with which major adjustments can be made.
Effective and orderly adjustment takes time, and attempts to push
it too rapidly can be destabilizing.

The greater threat to the economic and financial system stems
from the fact that borrowing countries have already taken such difficult adjustment measures to get this far that if they were forced to
contemplate a second year of massive cutbacks in available financing,
they would be strongly tempted to use other measures to reduce the
burden of their debts — measures which would result in widespread
banking loan losses.
When interest payments are more than 90 days late, not only
are bank profits reduced by the lost interest income, but they may
also have to begin setting aside precautionary reserves to cover
potential loan losses. If the situation persisted long enough,
the capital of the banks would be reduced.
Banks are required to maintain an adequate ratio between
their underlying capital and their assets -- which consist mainly
of loans. For some, shrinkage of their capital base would force
them to cut back on their assets — meaning their outstanding
loans — or at least on the growth of their assets — meaning
their new lending. Banks would thus be forced to make fewer loans
to all borrowers, domestic and foreign, and they would also be unable to make as many investments in securities such as municipal
bonds. Reduced access to bank financing would thus force a cutback in the expenditures which private corporations and local
governments can make — and it would also put upward pressure on
interest rates. The more abruptly new lending to troubled borrowing
countries is cut back, the more likely it is that the fallout from
their problems will feed back on the U.S. financial system and
weaken our economy.

Resolving the Debt Problem
There are many major players in this drama — governments in
developing countries, industrial country governments, commercial
banks, and private firms and citizens — and all stand to lose if
this situation is not properly resolved. Thus, all should, and
indeed must, play important parts in solving the problem. The
solution we have been working on has five major elements:
o Economic Adjustment
First, and in the long run most important, must be effective
adjustment in borrowing countries. The object is not just to
reduce external borrowing requirements, but also to get sound
policies in place which lead to a higher economic growth rate and
a greater ability to pay for imports in the long run.
Each of these countries is in a different situation, and each
faces its own unique constraints. But as a general matter, because there are inherent limits to how much it is possible to
depress their economies and cut back their imports, orderly and
effective adjustment cannot occur overnight. The adjustment will
have to come more slowly, and must involve expanding their exports
as well as cutting imports. Thus, it will entail a multi-year effort
in most countries, involving measures to address such problems as:
rigid exchange rates, subsidies and protectionism, distorted prices,
inefficient state enterprises, uncontrolled government expenditures
and large fiscal deficits, excessive and inflationary money growth,
and interest rate controls which discourage private savings and
distort investment patterns.
o The Role of the IMF
The second element in our overall strategy is the continued
availability of official financing balance of payments financing

from the IMF, on a scale sufficient to see troubled borrowers through
the adjustment process. The IMF has a key role because it not only
provides temporary balance of payments financing, but also ensures
that disbursement of those funds, is tied to the condition that borrowers
take appropriate policy measures which lead to adjustment. It is
this aspect — IMF conditionality — which makes the IMF's role in
resolving the current debt situation so important.
While it is difficult to judge the adequacy of IMF resources in
precise terms, most factors point in the same direction at present.1
The resources now effectively available to the IMF have fallen to
very low levels in absolute terms, in relation to broad economic
aggregates such as world trade, and in relation to actual and
potential use of the IMF.
At the beginning of this year", the IMF had about SDR 28 billion
available for lending. However, SDR 19 billion of that total had
already been committed under existing IMF programs or was expected
to be committed shortly to programs already negotiated, leaving
only about SDR 9 billion available for new commitments. 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 probable that unless action is taken to increase IMF resources
its ability to commit funds to future adjustment programs will be
exhausted by late 1983 or early 1984.
We recently concluded negotiations which have been underway in
the IMF since early 1981 on a further increase in IMF quotas, the
permanent resource base of the Fund. At the outset of those negotiations, many IMF member countries favored a doubling or tripling of
quotas, arguing both that large payments imbalances were likely to
continue and that the IMF should play a larger intermediary role in

financing them. While agreeing that quotas should be adequate to
meet prospective needs for temporary financing, the United States
felt that effective stabilization and adjustment measures should lead
to a moderation of payments imbalances. We also felt that the IMF
should have the ability to respond to extraordinary situations for
which its ordinary resources would be inadequate, but that a massive
quota increase would be an inefficient means of accomplishing this.
Accordingly, the United States proposed a dual approach to
strengthening IMF resources, which was adopted by the IMF membership
in agreements over the last two months:
— First, a quota increase which, while smaller than many
others had wanted, would enable the IMF to meet members'
needs in normal circumstances. The agreed increase in IMF
quotas as is 47 percent, an increase from SDR 61 billion to
SDR 90 billion (in current dollar terms, an increase from
$67 billion to $99 billion). The proposed increase in the
U.S. quota is SDR 5.3 billion ($5.8 billion at current exchange
rates) representing 18 percent of the total increase. This
would leave us with a quota share of just over 19 percent.
— Our second proposal was the establishment of a contingency
borrowing arrangement that would be available to the IMF on
a stand-by basis for use in situations threatening the stability
of the system as a whole. The Group of Ten, working with
the IMF Executive Board, has altered the IMF's General
Arrangements to Borrow for this purpose. The GAB is to be
expanded from the equivalent of about SDR 6.5 billion at
present to a new total of SDR 17 billion, and the GAB will be
usable, under certain circumstances, to finance drawings on
the IMF by any member country. Under this agreement, the U.S.

commitment to the GAB would rise from $2 billion to SDR 4.
billion, equivalent to an increase of roughly $2.7 billion
current exchange rates.
We believe this expansion and revision of the GAB offers
several important attractions and, as a supplement to the IMF's
quotas, greatly strengthens the IMF's role as a backstop to the
system:
•— First, since GAB credit lines come primarily from
countries that have relatively strong reserve and
balance of payments positions, they can be expected to
provide more effectively usable resources than a quota
increase of comparable size.
— Second, since the GAB will not be drawn upon in normal
circumstances, this source of financing will be conserved
for emergency situations. By demonstrating that the IMF
is positioned to deal with severe systemic threats, an
expanded GAB can provide the confidence to private markets
that is needed to ensure that capital continues to flow,
thus reducing the risk that the problems of one country
will affect others.
-- And third, creditors under this arrangement will have to
concur in decisions on its activation, ensuring that it
will be used only in cases of systemic need and in support
of effective adjustment efforts by borrowing countries.
We believe these steps to strengthen the IMF, if enacted,
will safeguard the IMF's ability to respond effectively to current
financial problems. Given the financing needs we foresee, we
feel it is important that the increases be implemented by the
end of this year. Without such a timely and adequate increase

- 13 in IMF resources, the ability of the monetary system to weather
debt and liquidity problems will be impaired, at substantial
direct and indirect cost to the United States.
o "Bridge" Financing
However, it takes time for borrowers to design and negotiate
lending programs with the IMF and financing arrangements with other
creditors. The debt problems of troubled borrowers are sometimes
too immediate to wait for that process to reach its conclusion -in fact, the real liquidity crunch came in the Mexican and Brazilian
cases before such negotiations even started.
Thus, the third element in our strategy is the willingness of
governments and central banks in lending countries to act quickly to
provide immediate and substantial short-term financing packages
— on a selective basis, where system-wide dangers are present —
to tide countries through their negotiations. We have been doing this
through arrangements among Finance Ministries and Central Banks,
often in cooperation with the Bank for International Settlements.
But it must be emphasized that these lending packages are short-term
in nature, designed to last for only a year at most and normally
much less, and simply cannot substitute for IMF resources which
are designed to help countries through a multi-year adjustment
process.
o Commercial Bank Lending
In fact, IMF resources in turn have only a transitional and
supporting role. The overall amount of Fund resources, while
substantial, is limited and not in any event adequate to finance
all the needs of the LDCs. While we feel that a sizeable increase
in IMF resources is essential, this increase is not a substitute
for lending by commercial banks. Bank lending has been the largest

- 14 single source of LDC financing in the past, and this will have to
be the case in the future as well.
Thus, the fourth essential element in resolving debt problems is
continued commercial bank lending to developing countries which are
pursuing sound adjustment programs. In the last months of 1982 some
banks, both in United States and abroad, sought to limit or reduce
outstanding loans to troubled LDC borrowers. But an orderly resolution
of the present situation requires increases in net lending to developing countries, including the most troubled borrowers, to support
effective, non-disruptive adjustment. The increase needed for just
three countries — Brazil, Argentina, and Mexico — will exceed
$10 billion in 1983, and it now appears that that financing will be
available.
o Sustainable Growth and Free Trade
The final part of our strategy is sustainable economic growth
and maintenance of a free trading system. The world economy is poised
for a sustained recovery: inflation rates in most major countries
have receded; nominal interest rates have fallen sharply; inventory
rundowns are largely complete. Solid, observable U.S. recovery has
been one critical ingredient missing for world economic expansion.
We believe this is now getting underway, as evidenced by the recent
drop in unemployment and upturns in production. Establishing credible
growth in the other industrial economies is also important, and we
believe the basis is being laid in most of those countries as well.
However, both we and they must exercise caution at this turning
point. Governments must not give in to political pressures to stimulate their economies too much through excessive monetary or fiscal
expansion. A major shift at this stage could place upward pressure
on inflation and interest rates.

- 15 In addition, rising protectionist pressures, both in the United
States and elsewhere, pose a real threat to global recovery and to
the resolution of the debt problem.

Protectionist measures bring

retaliation, and everybody loses as a result.

More importantly for

the debt problems, we must remember that export expansion by the
developing countries is crucial to their balance of payments adjustment
efforts.

Protectionism in the United States and other industrial

countries cuts off the major channel of such expansion.

That adjustment

is essential to restoring developing country debtors to sustainable
balance of payments positions and avoiding further liquidity crises
—

and as we have seen, it is therefore essential to the economic

and financial health of the United States.
The only solution is a stronger effort to resist protectionism.
As the world's largest trading nation, the United States carries a
major responsibility 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 Oil Market Situation
While it was clearly not a part of our strategy for resolving
the debt problem, the timing of the drop in world oil prices is
fortuitous.

We believe this will be a significant positive factor

for world economic recovery.
Some observers have worried about the negative impacts of falling
oil prices —

confusion in financial markets, rearrangement of energy

investment plans, and strains on some banks heavily involved in
energy lending.

There are costs of this type in the short run, but

they are far outweighed by the gains to both the U.S. and world

economy. These gains include stronger growth, higher employment,
lower inflation, and improvement in the trade balances of oilimporting countries. While some countries and some firms may incur
transitional costs, the winners outnumber the losers.
Conclusion
The international debt problem is a serious one, with potentially
severe consequences if it were not handled well. But the problem is
manageable, and it is being managed. Much more remains to be done
— by governments, by borrowers, by lenders — and it would still
be possible for the United States in particular to take actions
which would make the situation worse.
Our hope is that the United States will instead follow the
path toward a successful resolution — a path of sound monetary
and fiscal policies for a sustainable economic recovery, of support
for the International Monetary Fund in its crucial role in tiding
countries through necessary adjustment periods, of continued willingness to provide private financing to developing countries, and of
commitment to a free trading system. Our position as a world leader
requires it. Our own self-interest requires it as well.

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-204
FOR IMMEDIATE RELEASE
February 22, 1983

CONTACT:

Marlin Fitzwater
202/566-5252

ROGER MEHLE TO RETURN TO PRIVATE SECTOR

Roger Mehle, Assistant Secretary of the Treasury for
Domestic Finance, today announced his intention to leave
government and return to the private sector. Mehle will remain
in his present position while a successor is being selected, but
intends to leave in about a month.
Donald T. Regan, Secretary of the Treasury, said, "Roger has
produced a significant record of accomplishment. He developed
and guided the financing and credit policies of the Federal
government in the securities marketplace during a time of
unprecedented government borrowing.
"He has helped guide the Depository Institutions
Deregulation Committee through a series of actions to increase
competition in the financial industry. The Garn-St Germain bill
has helped restore the health of the thrift industry. And our
proposal for increasing bank powers through holding companies now
hasrwidespread industry support. Roger was our point man in all
of t'hese achievements."
"I* feel we have made important strides in deregulation and
modernization of the laws governing financial institutions,"
Mehle said. "I am proud of our record and this is an appropriate
time for me to return to the private sector."
R-2066

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
STATEMENT OF THE HONORABLE DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE BUDGET COMMITTEE
TASK FORCE ON INTERNATIONAL FINANCE AND TRADE
Washington, D.C.
March 7, 1983
The World Financial Situation and the IMF;
The Multilateral Development Banks; and
The Export-Import Bank
Mr. Chairman and members of the Task Force:
It is a pleasure to appear before you today to explain and
support the Administration's proposals for legislation to increase
the resources of the International Monetary Fund. At the request
of the Task Force, I will also discuss our FY 1984 proposals for
the multilateral development banks and the Eximbank.
After extensive consultations and negotiations among IMF
members, agreement was completed earlier this month on complementary measures to increase IMF resources: an increase in quotas,
the IMF's basic source of financing; and an expansion of the IMF's
General Arrangements to Borrow (GAB), for lending to the IMF on
a contingency basis, if needed to deal with threats to the international monetary system. These must now be confirmed by member
governments, involving Congressional authorization and appropriation
in our case, in order to become effective. As background to the
legislative proposals which were submitted to the Congress last
week, I would like to outline the problems facing the international
financial system, the importance to the United States of an orderly
resolution of those problems, and the key role the IMF must play in
solving them.
The International Financial Problem
Since about the middle of last year, the international monetary system has been confronted with serious financial problems.
Last fall the debt and liquidity problems of Argentina, Brazil,
Mexico, and a growing list of other borrowers became front-page news
— and correctly so, since management of these problems is critical
to our economic interests. The debts of many key countries became
too large for them to continue to manage under present policies
and world economic circumstances; lenders began to retrench sharply;
and the borrowers have since been finding it difficult if not
impossible to scrape together the money to meet upcoming debt
payments and to pay for essential imports. As a result, the international
financial and economic system is experiencing strains
R-2067
that are without precedent in the postwar era and which threaten
to derail world economic recovery.

- 2 There is a natural tendency under such circumstances for
financial contraction and protectionism — reactions that were
the very seeds of the depression of the 1930s. It was in response
to those tendencies that the International Monetary Fund was
created in the aftermath of World War II, largely at the initiative
of the United States, to provide a cooperative mechanism and a
financial backstop to prevent a recurrence of that slide into
depression. If the IMF is to be able to continue in that role, it
must have adequate resources.
The current problem did not arise overnight, but rather stems
from the economic environment and policies pursued over the last two
decades. Inflationary pressures began mounting during the 1960's,
and were aggravated by the commodity boom of the early 1970's and
the two oil shocks that followed. For most industrialized countries,
the oil shocks led to a surge of imported inflation, worsening the
already growing inflationary pressures; to large transfers of real
income and wealth to oil exporting countries; and to deterioration
of current account balances. For the oil-importing less developed
countries — the LDCs — this same process was further compounded
by their loss of export earnings when the commodity boom ended.
Rather than allowing their economies to adjust to the oil
shocks, most governments tried to maintain real incomes through
stimulative economic policies, and to protect jobs in uncompetitive
industries through controls and subsidies. Inflationary policies
did bring a short-run boost to real growth at times, but in the
longer run they led to higher inflation, declining investment
and productivity, and worsening prospects for real growth and
employment.
Similarly, while these policies delayed economic adjustment
somewhat, they could not put it off forever. In the meanwhile,
the size of the adjustment needed was getting larger. Important
regions remained dependent on industries whose competitive position
was declining; inflation rates and budget deficits soared; and —
most pertinent to today's financial problems — many oil importing
countries experienced persistent, large current account deficits
and unprecedented external borrowing requirements. Some oilexporting countries also borrowed heavily abroad, in effect relying
on increasing future oil revenues to finance ambitious development
plans.
In the inflationary environment of the 1970's, it was fairly
easy for most nations to borrow abroad, even in such large amounts,
and their debts accumulated rapidly. Most of the increased foreign
debt reflected borrowing from commercial banks in industrial
countries. By mid-1982, the total foreign debt of non-OPEC
developing countries was something over $500 billion — more
than five times the level of 1973. Of that total, roughly $270
billion was owed to commercial banks in the industrial countries,
and more than half of that was owed by only three Latin American
countries •— Argentina, Brazil, and Mexico. New net lending to
non-OPEC LDCs by banks in the industrial countries grew at a
rising pace — about $37 billion in 1979, $43 billion in 1980,
and $47 billion in 1981 —
with most of the increase continuing
to go to Latin America. (See Charts A and B.)

- 4 But as the situation has developed in recent months, there
has been a danger that lenders might move so far in the direction
of caution that they compound the severe adjustment and liquidity
problems already faced by major borrowers, and even push other
countries which are now in reasonably decent shape into serious
financing problems as well.
The question is one of the speed and degree of adjustment.
While the developing countries must adjust their economies to
reduce the pace of external borrowing and maintain their capacity
to service debt, there is_ a limit, in both economic and political
terms, to the speed with which major adjustments can be made.
Effective and orderly adjustment takes time, and attempts to
push it too rapidly can be destabilizing.
Importance to the United States of an Orderly Resolution
It is right for American citizens to ask why they and their
government need be concerned about the international debt problem.
Why should we worry if some foreign borrowers get cut off from
bank loans? And why should we worry if banks lose money? Nobody
forced them to lend, and they should live with the consequences
of their own decisions like any other business.
If all the U.S. government had in mind was throwing money
at the borrowers and their lenders, it would be difficult to
justify using U.S. funds on any efforts to resolve the debt crisis,
especially at a time of domestic spending adjustment.
But of course, there _is_ more to the problem, and to the
solution. First, a further abrupt and large-scale contraction of
LDC imports would do major damage to the U.S. economy. Second,
if the situation were handled badly, the difficulties facing LDC
borrowers might come to appear so hopeless that they would be
tempted to take desperate steps to try to escape. The present
situation is manageable. But a downward spiral of world trade
and billions of dollars in simultaneous loan losses would pose a
fundamental threat to the international economic system, and to
the American economy as well.
In order to appreciate fully the potential impact on the U.S.
economy of rapid cutbacks in LDC imports, it is useful to look at
how important international trade has become to us. Trade was the
fastest growing part of the world economy in the last decade —
but the volume of U.S. exports grew even faster in the last part
of the 1970's, more than twice as fast as the volume of total world
exports. By 1980, nearly 20 percent of total U.S. production of
goods was being exported, up from 9 percent in 1970, although the
proportion has fallen slightly since then. (Charts C and D.)
Among the most dynamic export sectors for this country are
agriculture, services, high technology, crude materials and fuels.
American agriculture is heavily export-oriented: one in three
acres of U.S. agricultural land, and 40 percent of agricultural
production, go to exports. This is one sector in which we run a

- 5 consistent trade surplus, a surplus that grew from $1.6 billion
in 1970 to over $24 billion in 1980. (Chart E.)
Services trade — for example, shipping, tourism, earnings on
foreign direct investment and lending — is another big U.S. growth
area. The U.S. surplus on services trade grew from $3 billion in
1970 to $34 billion in 1980, and has widened further since. (Chart F.)
When both goods and services are combined, it is estimated that onethird of U.S. corporate profits derive from international activities.
High technology manufactured goods are a leading edge of the
American economy, and not surprisingly net exports of these goods
have grown in importance. The surplus in trade in these products
rose from $7.6 billion in 1970 to $30 billion in 1980. And even in
a sector we do not always think of as dynamic — crude materials and
non-petroleum fuels like coal — net exports rose six-fold, from $2.4
billion to $14.6 billion over the same period.
Vigorous expansion of our export sectors has become critical to
employment in the United States. (Chart G.) The absolute importance
of exports is large enough — they accounted directly for 5 million
jobs in 1982, including one out of every eight jobs in manufacturing
industry. But export-related jobs have been getting even more
important at the margin. A survey in the late 1970s indicated that
four out of every five new jobs in U.S. manufacturing was coming from
foreign trade; on average, it is estimated that every $1 billion
increase in our exports results in 24,000 new jobs. Later I will
detail how Mexican debt problems have caused a $10 billion annual-rate
drop in our exports to Mexico between the end of 1981 and the end of
1982. By the rule of thumb I just gave, that alone — if sustained -would mean the loss of a quarter of a million American jobs.
These figures serve to illustrate the overall importance of
exports to the U.S. economy. The story can be taken one step
further, to relate it more closely to the present financial situation. Our trading relations with the non-OPEC LDCs have expanded
even more rapidly than our overall trade. Our exports to the LDCs,
which accounted for about 25 percent of total U.S. exports in 1970,
rose to about 29 percent by 1980. (Chart H.) In manufactured
goods, which make up two-thirds of our exports, the share going to
LDCs rose even more strongly — from 29 percent to 39 percent.
What these figures mean is that the export sector of our
economy — a leader in creating new jobs — is tremendously vulnerable to any sharp cutbacks in imports by the non-OPEC LDCs. Yet
that is exactly the response to which debt and liquidity problems
have been driving them. This is a matter of concern not just to
the banking system, but to American workers, farmers, manufacturers and investors as well.
Even on the banking side, there are indirect impacts of
concern to all Americans. A squeeze on earnings and capital
positions from losses on foreign loans not only would impair
banks' ability to finance world trade, but also could ultimately
mushroom into a significant reduction in their ability to lend
to domestic customers and an increase in the cost of that lending.

- 6 Beyond our obvious interest in maintaining world trade and
trade finance, there is another less-recognized U.S. financial
interest. The U.S. government faces a potential exposure through
Federal lending programs administered by Eximbank and the Commodity
Credit Corporation. This exposure — built in support of U.S. export
expansion — amounted to $35 billion at the end of 1982, including
$24 billion of direct credits (mostly from Eximbank) and $11 billion
of guarantees and insurance. Argentina, Brazil and Mexico are high
on the list of borrowers. Should loans extended or guaranteed under
these programs sour, the U.S. Treasury — meaning the U.S. taxpayer
— would be left with the loss. We have a direct interest in
avoiding this addition to Federal financing requirements.
All industrial economies, including the American economy,
will inevitably bear some of the costs of the balance of payments
adjustments LDCs must make and are already making. This adjustment would be much deeper, for both the borrowing countries and
for lending countries like the united States, if banks were to
pull back entirely from new lending this year. In 1983, for
example, a flat standstill would require borrowers to make yet
another $20 to $25 billion cut in their trade and current account
deficits, which would be considerably harder to manage if it
came right on the heels of similar cuts they have already made.
Further adjustments are needed — but again the question is one
of the size and speed of adjustment. If these countries were
somehow to make adjustments of that size for a second consecutive
year, the United States and other industrial countries would then
have to suffer large export losses once again. At the early stages
of U.S. and world economic recovery we are likely to be in this
year, a drop in export production of this size could abort the
gradual rebuilding of consumer and investor confidence we need
for a sustained recovery.
In fact, many borrowers have already taken very difficult
adjustment measures to get this far. If they were forced to contemplate a second year of further massive cutbacks in available
financing, they could be driven to consider other measures to
reduce the burden of their debts. Here potentially lies a still
greater threat to the financial system.
When interest payments are more than 90 days late, not only
are bank profits reduced by the lost interest income, but they
may also have to begin setting aside precautionary reserves to
cover potential loan losses. If the situation persisted long
enough, the capital of some banks might be reduced.
Banks are required to maintain an adequate ratio between
their underlying capital and their assets — which consist mainly
of loans. For some, shrinkage of their capital base would force
them to cut back on their assets —• meaning their outstanding
loans — or at least on the growth of their assets — meaning
their new lending. Banks would thus be forced to make fewer
loans to all borrowers, domestic and foreign, and they would
also be unable to make as many investments in securities such as
municipal bonds. Reduced access to bank financing would

- 7 thus force a cutback in the expenditures which private corporations and local governments can make — and it would also put
upward pressure on interest rates.
The usual perception of international lending is that it
involves only a few large banks in the big cities concentrated
in half a dozen states. The facts are quite different. We have
reliable information from bank regulatory agencies and Treasury
reports identifying nearly 400 banks in 35 states and Puerto
Rico that have foreign lending exposures of over $10 million —
and in all likelihood there are hundreds more banks with exposures
below that threshold but still big enough to make a significant
dent in their capital and their ability to make new loans here at
home. Banks in most states are involved, and the more abruptly
new lending to troubled borrowing countries is cut back, the more
likely it is that the fallout from their problems will feed back
back on the U.S. financial system and weaken our economy. Many
U.S. corporations also have claims on foreign countries, related
to their exports
and foreign Financial
investments.
Resolving
the International
Problem
Debt and liquidity problems did not come into being overnight,
and a lasting solution will also take some time to put into place.
We have been working on a broad-based strategy involving all the
key players — LDC governments, governments in the industrialized
countries, commercial banks, and the International Monetary Fund.
This strategy has five main parts:
First, and in the long run most important, must be effective
adjustment in borrowing countries. In other words, they must take
steps to get their economies back on a stable course, and to make
sure that imports do not grow faster than their ability to pay for
them. Each of these countries is in a different situation, and
each faces its own unique constraints. But in general, orderly
and effective adjustment will not come overnight. The adjustment
will have to come more slowly, and must involve expansion of
productive investment and exports. In many cases it will entail
multi-year efforts, usually involving measures to address some
combination of the following problems: rigid exchange rates;
subsidies and protectionism; distorted prices; inefficient state
enterprises; uncontrolled government expenditures and large
fiscal deficits; excessive and inflationary money growth; and
interest rate controls which discourage private savings and
distort investment patterns. The need for such corrective policies is recognized, and being acted on, by major borrowers —
with the support and assistance of the IMF.
The second element in our overall strategy is the continued
availability of official balance of payments financing, on a scale
sufficient to help see troubled borrowers through the adjustment
period. The key institution for this purpose is the International
Monetary Fund. The IMF not only provides temporary balance of
payments financing, but also ensures that use of its funds is tied
tightly to implementation of needed policy measures by borrowers.

- 8 It is this aspect — IMF conditionality — that makes the role of
the IMF in resolving the current debt situation and the adequacy
of its resources so important.
IMF resources are derived mainly from members' quota subscriptions, supplemented at times by borrowing from official sources.
Assessing the adequacy of these resources over any extended period
is extremely difficult and subject to wide margins of error. The
potential needs for temporary balance of payments financing depend
on a number of variables, including members' current and prospective
balance of payments positions, the availability of other sources
of financing, the strength of the conditionality associated with
the use of IMF resources, and members' willingness and ability to
implement the conditions of IMF programs. At the same time, the
amount of IMF resources that is effectively available to meet its
members' needs at any point in time depends not only on the size
of quotas and borrowing arrangements, but also on the currency
composition of those resources in relation to balance of payments
patterns, and on the amount of members' liquid claims on the IMF
which might be drawn. In view of all these variables, assessments
of the IMF's "liquidity" — its ability to meet members' requests
for drawings — can change very quickly.
Still, as difficult as it is to judge the adequacy of IMF
resources in precise terms, most factors point in the same direction
at present. The resources now effectively available to the IMF have
fallen to very low levels in absolute terms, in relation to broad
economic aggregates such as world trade, and in relation to actual
and potential use of the IMF.
"At the beginning of this year, the IMF had about SDR 28 billion
available for lending. However, SDR 19 billion of that total had
already been committed under existing IMF programs or was expected
to be committed shortly to programs already negotiated, leaving only
about SDR 9 billion available for new commitments. 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
probable that unless action is taken to increase IMF resources its
ability to commit funds to future adjustment programs will be
exhausted by late 1983 or early 1984. I will return to our
specific proposals in this area shortly.
The IMF cannot be our only buffer in financial emergencies.
It takes time for borrowers to design and negotiate lending
programs with the IMF and to develop financing arrangements with
other creditors. As we have seen in recent cases, the problems
of troubled borrowers can sometimes crystallize too quickly for
that process to reach its conclusion — in fact, the real liquidity
crunch came in the Mexican and Brazilian cases before such negotiations even started.
Thus, the third element in our strategy is the willingness
of governments and central banks in lending countries to act
quickly to respond to debt emergencies when they occur. Recent
experience has demonstrated the need to consider providing immediate
and substantial short-term financing — on a selective basis, where
system-wide
areIMF
present
— to tide with
countries
through their
negotiations dangers
with the
and discussions
other creditors.

- 9 We are undertaking this where necessary, on a case-by-case basis,
through ad hoc arrangements among finance ministries and central
banks, often in cooperation with the Bank for International
Settlements. But it must be emphasized that these lending
packages are short-term in nature, designed to last for only a
year at most and normally much less, and cannot substitute for
IMF resources which are designed to help countries through a
multi-year adjustment process.
In fact, IMF resources themselves have only a transitional
and supporting role. The overall amount of Fund resources, while
substantial, is limited and not in any event adequate to finance all
the needs of its members. While we feel that a sizeable increase
in IMF resources is essential, this increase is not a substitute
for lending by commercial banks. Private banks have been the
largest single source of international financing in the past to
both industrial and developing countries, and this will have to
be the case in the future as well — including during the crucial
period of adjustment.
Thus, the fourth essential element in resolving debt problems
is continued commercial bank lending to countries that are pursuing
sound adjustment programs. In the last months of 1982 some banks,
both in United States and abroad, sought to limit or reduce outstanding loans to troubled borrowers. But an orderly resolution
of the present situation requires not only a willingness by banks
to "roll over" or restructure existing debts, but also to increase
their net lending to developing countries, including the most
troubled borrowers, to support effective, non-disruptive adjustment.
The increase in net new commercial bank lending needed for just
three countries — Brazil, Argentina, and Mexico — will approach
$11 billion in 1983. Without this continued lending in support of
orderly and constructive economic adjustment, the programs that
have been formulated with the IMF cannot succeed — and the lenders
have a strong self-interest in helping to assure success. It
should be noted, however, that new bank lending will be at a slower
rate than that which has characterized the last few years — more
in line with the increase in 1982 than what we saw in 1980 or 1981.
The final part of our strategy is to restore sustainable
economic growth and to preserve and strengthen the free trading
system. The world economy is poised for a sustained recovery:
inflation rates in most major countries have receded; nominal
interest rates have fallen sharply; inventory rundowns are largely
complete.
Solid, observable U.S. recovery is one critical ingredient
missing for world economic expansion. We believe the U.S. recovery
is now getting underway, as evidenced by the recent drop in unemployment and upturns in orders and production. Establishing
credible growth in other industrial economies is also important
and we believe the base for recovery is being laid abroad as well.
However, both we and others must exercise caution at this
turning point. Governments must not give in to political pressures
to stimulate their economies too quickly through excessive monetary
or fiscal expansion. A major shift at this stage could place

- 10 renewed upward pressure on inflation and interest rates.
In addition, rising protectionist pressures, both in the
United States and elsewhere, pose a real threat to global recovery
and to the resolution of the debt problem. When one country takes
protectionist measures hoping to capture more than its fair share
of world trade, other countries will retaliate. The result is
that world trade shrinks, and rather than any one country gaining
additional jobs, everybody loses. More importantly for current
debt problems, we must remember that export expansion by countries
facing problems is crucial to their balance of payments adjustment
efforts. Protectionism cuts off the major channel of such expansion.
That adjustment is essential to restoring problem country debtors
to sustainable balance of payments positions and avoiding further
liquidity crises — and as we have seen, it is therefore essential
to the economic and financial health of the United States.
The only solution is a stronger effort to resist protectionism.
As the world's largest trading nation, the United States carries a
major responsibility 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. That
signal would be followed, and would reinforce, continued U.S.
efforts to encourage others to open their markets, and would in
turn be reinforced by IMF program requirements for less restrictive
The
Role
and Resources
of the IMF
trade
policies
by borrowers.
I have stressed the role of the International Monetary Fund
in dealing with the current financial situation, and now I would
like to expand on that point. The IMF ijs jthe central official
international monetary institutTonT, established to promote aj"
cooperative and stable monetary framework fo.r the world economy.
AssucTi, it performs many*'functions beyond the one we are most
concerned with today — that of providing temporary balance of
payments financing in support of adjustment. These include
monitoring the appropriateness of its members' foreign exchange
arrangements and policies, examining their economic policies,
reviewing the adequacy of international liquidity, and providing
mechanisms through which its member governments cooperate to
improve the functioning of the international monetary system.
In that context, it becomes clearer that IMF financing is
provided only as part of its ongoing systemic responsibilities.
Its loans to members are made on a temporary basis^in order to
"safeguard the functioning of_the world financial system — in
"order to provide borrowers with an extra margin of time and money
which tney" can use to bring t"EeTr""external positions Back into
feasonabTe balance in an orderly manner, without being forced into
alDrupt and more restrictive measures to limit imports. The conditionality attached to IMF lending is designed to assure that orderly
adjustment takes place, that the borrower is restored to a position
which will enable it to repay the IMF over the medium term. In

- 11 addition, a borrower's agreement with the IMF on an economic program
is usually viewed by financial market participants as an international
"seal of approval" of the borrower's policies, and serves as a
catalyst for additional private and official financing.
The money which the IMF has available to meet its members'
temporary balance of payments financing needs comes from two
sources: quota subscriptions and IMF borrowing from its members.
The first source, quotas, represents the Fund's main resource
base and presently totals some SDR 61 billion, or about $67
billion at current exchange rates. The IMF periodically reviews
the adequacy of quotas in relation to the growth of international
transactions, the size of likely payments imbalances and financing
needs, and world economic prospects generally.
At the outset of the current quota discussions in 1981, many
IMF member countries favored a doubling or tripling of quotas,
arguing both that large payments imbalances were likely to continue and that the IMF should play a larger intermediary role in
financing them. While agreeing that quotas should be adequate
to meet prospective needs for temporary financing, the United
States felt that effective stabilization and adjustment measures
should lead to a moderation of payments imbalances, and that a
massive quota increase was not warranted. Nor did we feel that
an extremely large quota increase would be the most efficient way
to equip the IMF to deal with unpredictable and potentially major
financing problems that could threaten the stability of the system
as a whole, and for which the IMF's regular resources were
inadequate.
Accordingly, the United States proposed a dual approach to
strengthening IMF resources:
First, a quota increase which, while smaller than
many others had wanted, could be expected to position
the IMF to meet members' needs for temporary financing
in normal circumstances.
— Second, establishment of a contingency borrowing
arrangement that would be available to the IMF on a
stand-by basis for use in situations threatening the
stability of the system as a whole.
This approach has been adopted by the IMF membership, in
agreements reached by the major countries in the Group of Ten
in mid-January, and by all members at the IMF's Interim Committee
meeting early last month.
/ The agreed increase in IMF quotas is 47 percent, an increase
J from SDR 61 billion to SDR 90 billion (in current dollar terms, an
(increase from $67 billion to $99 billion). The proposed increase
/in the U.S. quota is SDR 5.3 billion ($5.8 billion at current
f exchange rates) representing 18 percent of the total increase.

- 12 The Group of Ten, working with the IMF's Executive Board,
has agreed to an expansion of the IMF's General Arrangements to
Borrow from the equivalent of about SDR 6.5 billion at present
to a new total of SDR 17 billion, and to changes in the GAB to
permit its use, under certain circumstances, to finance drawings
on the IMF by any member country. Under this agreement, the U.S.
commitment to the GAB would rise from $2 billion to SDR 4.25
billion, equivalent to an increase of roughly $2.7 billion at
current exchange rates.
We believe this expansion and revision of the GAB offers
several important attractions and, as a supplement to the IMF's
quotas, greatly strengthens the IMF's role as a backstop to the
system:
First,- since GAB credit lines are primarily with
countries that have relatively strong reserve and
balance of payments positions, they can be expected
to provide more effectively usable resources than a
quota increase of comparable size. Consequently,
expansion of the GAB is 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, since the GAB will not be drawn upon in normal
circumstances, this source of financing will be conserved
for emergency situations. By demonstrating that the IMF
is positioned to deal with severe systematic threats, an
expanded GAB can provide the confidence to private markets
that is needed to ensure that capital continues to flow,
thus reducing the risk that the problems of one country
will affect others.
And third, creditors under this arrangement will have
to concur in decisions on its activation, ensuring
that it will be used only in cases of systemic need
and in support of effective adjustment efforts by
borrowing countries.
Annex A to my statement contains the texts of the relevant
IMF report and decisions on the quota increase and GAB revisions.
In sum, the proposed increase in U.S. commitments to the IMF
totals SDR 7.7 billion — SDR 5.3 billion for the increase in
the U.S. quota and SDR 2.4 billion for the increase in the U.S.
commitment under the GAB. At current exchange rates, the dollar
equivalents are $8.5 billion in total, $5.8 billion for the
quota increase and $2.7 billion for the GAB increase.
W^ believe these steps to strengthen the IMF, if enacted,
will safeguard the IMF's ability to respond effectively to current
financial problems. Given the financing needs we foresee, we feel
it is important that the increases be implemented by the end of
this year. Without such a timely and adequate increase in IMF
resources, the ability of the monetary system to weather debt and

- 13 liquidity problems will be impaired, at substantial direct and
indirect cost to the United States.
The U.S. share in the increase in IMF resources is 18 percent,
which obviously means other countries are putting up the remaining
82 percent, the great bulk of the increase. By putting up 18
percent of the increase, we will maintain our voting share at just
over 19 percent. The principle of weighted voting on which the IMF
operates has been key to its effectiveness over the years and to
ensuring that we have a voice and vote comparable to the share of
resources we provide. Major policy decisions — such as those just
taken on the quota increase — require an 85 percent majority vote,
giving us a veto over all such decisions. Some of our allies would
claim that we aren't pulling our own weight — that our stake in
world trade and finance is bigger than the share of resources we
are proposing to put into the IMF would indicate.
While fundamentally the IMF is designed to further our economic
interests, in so doing it also benefits U.S. political and security
interests. The IMF is essentially a non-political institution, with
membership open to any country judged willing and able to meet the
obligations of membership. But it serves our interests well by
containing economic problems which could otherwise spread through
the international community; as a stabilizing element in countries
facing the social and economic dislocations which can accompany
adjustment; and supporting open, market-oriented economic systems
consistent with Western political values. Judged on this criterion,
U.S. appropriations for the IMF can be an excellent investment
if they can help to avoid political upheaval in countries of critical
interest to the United States.
Concerns about the Increase in IMF Resources
The general outline of our proposals has been known to members
of Congress for some time. Many have expressed reservations or
questions about this proposal, and I would like to discuss some of
the main concerns now.
° Is the IMF "Foreign Aid"?
Many perceive money appropriated for IMF use to be just another
form of foreign aid, and question why we should be providing U.S.
funds to foreign governments. Let me assure you that the IMF is not
a development institution. It does not finance dams, agricultural
cooperatives, or infrastructure projects. The IMF _is a monetary
institution. Only one of its functions is providing balance of
payments financing to its members in order to promote orderly functioning of the monetary system, and only then on a temporary basis,
on medium-term maturities, after obtaining agreement to the fulfillment of policy conditions. We have been working very hard with che
IMF to ensure that both the effectiveness of IMF policy conditions,
and the temporary nature of its financing, are safeguarded. in this
way, the Fund's financing facilities will continue to have a revolving
nature and to promote adjustment.
IMF conditionality has been controversial over the years, with
strong opinions on both sides. Some observers have worried that

- 14 conditionality is so weak and ineffective that conditional lending
is virtually a giveaway. Others believe that conditionality is too
tight — that it imposes unnecessary hardship on borrowers, and
stifles economic growth and development.
Such generalizations reflect a misunderstanding of IMF conditionality. When providing temporary resources to a country faced with
external financing problems, the IMF seeks to assure itself that the
country is pursuing policies that will enable it to live within its
means — that is, within its ability to obtain foreign financial
resources. It is this that determines the degree of adjustment that
is necessary. It is often the case that appropriate economic policies
will strengthen a country's borrowing capacity, and result in both
higher import growth and higher export growth. I would cite the
example of Mexico as an immediate case in point.
Mexico is our third largest trading partner, after Canada and
Japan. And, as recently as 1981, it was a partner with whom we had an
export boom and a substantial trade surplus, exporting goods to meet
the demands of its rapidly growing population and developing economy.
This situation changed dramatically in 1982, as Mexico began experiencing severe debt and liquidity problems. By late 1982, Mexico no
longer had access to financing sufficient to maintain either its
imports or its domestic economic activity. As a result, U.S. exports
to Mexico dropped by a staggering 60 percent between the fourth quarter
of 1981 and the fourth quarter of 1982. Were our exports to Mexico to
stay at their depressed end-1982 levels, this would represent a $10
billion drop in exports to our third largest market in the world.
Because the financing crunch got worse as the year wore on, totals
for the full year 1982 don't tell the story quite so dramatically
— but even they are bad enough. Our $4 billion trade surplus
with Mexico in 1981 was transformed into a trade deficit of nearly
$4 billion in 1982, due mainly to an annual-average drop in U.S.
exports of one-third. (Chart I.) This $8 billion deterioration
was our worst swing in trade performance with any country in the
world, and it was due almost entirely to the financing problem.
We believe that now this situation will start to turn around,
and we can begin to resume more normal exports to Mexico. If this
happens, it will be due in large part to the fact that, late in
December, an IMF program for Mexico went into effect; and that
program is providing the basis not only for IMF financing, but for
other official financing and for a resumption of commercial bank
lending as well. Mexico must make difficult policy adjustments if it
is to restore creditworthiness. The Mexican authorities realize this
and are embarked on a courageous program. But the existence of IMF
financing and the other financing associated with it will permit Mexico
to resume something more like a normal level of economic activity and
imports while the adjustment takes place in an orderly manner. Without
the IMF program, all we could look forward to would be ever-deepening
depression in Mexico and still further declines in our exports to
that country.
There is another aspect of the distinction between IMF financing
and foreign aid which we should be very clear on, since it goes to
the heart of U.S. relations with the Fund. All IMF members provide
financing
industrial to
andthe
developing
IMF under alike
their —quota
have subscriptions,
the right to draw
and on
all the
— IMF.

-15Ouota subscriptions form a kind of revolving fund, to which all members
contribute and from which all are potential borrowers.
As an illustration, in practice our quota subscription has
been drawn upon many times — and repaid — over the years for
lending to other IMF members. We in turn have drawn on the IMF on
24 occasions — most recently in November 1978 — and our total
cumulative drawings, amounting to the equivalent of $6.5 billion,
are the second largest of any member (the United Kingdom has been
the largest user of IMF funds). (U.S. drawings on the IMF are
described at Annex B.)
° Do IMF Programs Hurt U.S. Exports?
There is a widespread perception that IMF programs are designed
to cut imports by countries which use IMF financing, and thus hurt
U.S. exports to those countries. Some would argue, in fact, that
far from helping to maintain world trade and U.S. exports, our
participation in the increase in IMF resources would contribute to
further reductions in our exports.
This is simply a misreading of the IMF. The whole point of an
IMF program _i_s to get a borrower's external balance back within
sustainable limits — but to judge the effects of those programs on
our exports you always have to start by asking what would have happened
without an IMF program. When a country draws on IMF financing, it
usually does so in recognition of the fact that its external deficit
is not going to be sustainable if it stays on its present course. If
the borrower didn't go to the IMF, it would likely be cut off from
further external financing from other sources and would have to cut
back drastically on imports, as we saw in the case of Mexico.
Furthermore, IMF programs are not just directed at slowing the
growth of imports. Reducing import growth is often one of the
short-run necessities, but even then IMF financing can permit a
higher level of imports than would otherwise be the case. And
equally important are steps to increase a country's export capacity,
thereby giving it the ability to pay for higher imports in the
long run.
Exchange rate devaluations are often an important part of IMF
programs — devaluations intended to ensure that the right price
signals are sent to domestic producers, importers and exporters,
and that the competitiveness of domestic industries is restored.
These devaluations have often been accompanied by the removal of
restrictions on trade and capital flows. And, to lay one total misunderstanding to rest, an IMF program never calls for the tightening
of import restrictions — in fact, new or intensified restrictions
are expressly prohibited. The IMF does not promote restrictions —
its purposes and policies go precisely in the opposite direction.
° Why Not Spend the Money at Home?
Another major concern with the proposals to increase IMF
resources is that, in this period of budgetary stringency, many
believe we would be better advised to spend the money at home.
There is also some feeling that if we were to get the U.S. economy

- 16 moving forward again, the international financial problem would
take care of itself. I think I've already been through part of
the response to these concerns when I described the large and
growing impact which foreign trade now has on American growth and
employment. We will do what is necessary domestically to strengthen
our economy. But we will leave a major threat to domestic recovery
unaddressed if we do not act to resolve the international financial
situation. The direct impact alone of international developments
on our economy is so large that, were the international situation
not to improve, there would at a minimum be a tremendous drag on
our economic recovery.
It is true that an improving U.S. economy is going to help
other nations, both through our lower interest rates and through
an expanding U.S. market for their exports — providing of course
that we don't cut them off from that market. But they also have
an immediate, short-run financing crunch to get through, and if
we don't handle that right there are substantial downside risks
for the United States.
° Budgetary Treatment
This might also be the right context in which to discuss how
U.S. participation in the increase in IMF resources would affect
the Federal budget and the Treasury's borrowing requirements.
Under budget and accounting procedures adopted in connection with
the last IMF quota increase, in consultation with the Congress,
both the increase in the U.S. quota and the increase in U.S. commitments under the GAB will require Congressional authorization and
appropriation. However, because the United States receives a
liquid, interest-earning reserve claim on the IMF in connection
with our actual transfers of cash to the IMF, such transfers do
not result in net budget outlays or an increase in the Federal
budget deficit.
Actual cash transactions with the IMF, under our quota subscription or U.S. credit lines, do affect Treasury borrowing requirements
as they occur. The amount of such transactions in any given year
depends on a variety of factors, including the rate at which IMF
resources are used; the degree to which the dollar in particular is
involved in both current IMF drawings and repayments of past drawings;
and whether the United States itself draws on the IMF.
An analysis appended to this statement at Annex C presents data
on the impact of U.S. transactions between U.S. fiscal year 1970 and
the first quarter of fiscal 1983 on Treasury borrowing requirements.
Although there have been both increases and decreases in Treasury
borrowing requirements from year to year, on average there have been
increases amounting to about Sl/2 billion annually over the entire
period, for a cumulative total of about $7 billion. The rate has
picked up in the last two years of heavy IMF activity, as would be
expected; but the total is still relatively small — the $1/2 billion
annual impact is only a small part of the $61 billion annual average
increase in Treasury borrowing over the same period, and the roughly
$7 billion cumulative impact compares with an outstanding Federal debt
of $1.1 trillion at the end of fiscal 1982. These figures also serve
to demonstrate the revolving nature of the IMF.

- 17 -

° Is the IMF a Bank "Bail-Out"?
I also know there is a widespread concern that an increase
in IMF resources will amount to a bank bail-out at the expense of
the American taxpayer. Many would contend that the whole debt and
liquidity problem is the fault of the banks — that they've dug
themselves and the rest of us into this hole though greed and incompetence, and now we intend to have the IMF take the consequences
off their hands. This line of argument is dangerously misleading,
and I would like to set the record straight.
First, the steps that are being taken to deal with the
financial problem, including the increase in IMF resources, require
continued involvement by the banks. Far from allowing them to cut
and run, orderly adjustment requires increased bank lending to
troubled LDCs that are prepared to adopt serious economic programs.
That is exactly what is happening.
And it is not a departure from past experience. I have had
Treasury staff review IMF program experience in the 20 countries
which received the largest net IMF disbursements in the last few
years, to see whether banks had been "bailed out" in the past.
Looking at the period from 1977 to mid-1982, they found that for
the countries which rely most heavily on private bank financing,
IMF programs have been followed up by new bank lending much greater
than the amount disbursed by the Fund itself. This also holds true
for the 20 countries as a group: net IMF disbursements to this
group during the period were $11.5 billion, while net bank lending
totalled $49.7 billion, resulting in a ratio of 4.3 to 1 during
this period.
Another point I would like to make is that the whole debt
and liquidity problem cannot fairly be said to be the fault of
the commercial banks. In fact, the banking system as a whole
performed admirably over the last decade, in a period when there
were widespread fears that the international monetary system would
fall apart for lack of financing in the aftermath of the oil
shocks. The banks managed almost the entire job of "recycling"
the OPEC surplus and getting oil importers through that difficult
period. Some of the innovations and decisions that banks made
in the process, which seemed rational and necessary at the time
to them and to others, may seem doubtful in retrospect, given
the way the world economic environment changed. But I think we
can agree that governments have had a great deal more to do with
shaping that environment than banks.
All of this is not to say that there aren't lessons to be
learned in •'-.he banking area. We should be asking ourselves:
What is there that banks could be doing to improve their screening
of foreign loans? What is there that bank regulators could do
to improve on their analysis of country risk, examination of
bank exposure, and consultations with senior management?

- 18 Our basic starting point in addressing these questions
is a belief that the U.S. government should not get into the
business of dictating the lending practices of private banks.
Doing so would inject a political element into what should be
business decisions, and would potentially expose the government
to liability for covering loans that were not repaid on time.
Moreover, in general it is bank managements, which have direct
experience and a responsibility to their shareholders and
depositors to motivate them, that are in the best position to
make lending decisions.
In 1979, the bank regulatory agencies (the Federal Reserve,
Comptroller of the Currency and the FDIC) instituted a new
system for evaluating country risk, which has four elements.
The first is a statistical reporting system designed to identify
country exposures at each bank, and to enable regulators to
monitor those exposures. Second is an evaluation of each
bank's internal system for managing country.risk, aimed at
encouraging more systematic review of prospective loans.
Third, where there is a judgment by regulators that a country
has interrupted its debt service payments, or is about to do
so, all loans to that country may be "classified" as substandard,
doubtful, or a total loss, and such "classification" may trigger
an obligation by the bank to set aside precautionary loan
loss reserves. Fourth, bank examiners review and comment upon
each bank's large foreign lending exposures, drawing upon the
findings of an interagency committee of country analysts.
Several possible changes in the regulatory environment
have been suggested. Both in the banking regulatory agencies,
and at the Treasury, we will be reviewing the possibilities
to see what changes might be desirable. We need to be careful
in determining how to deal with such a sensitive and central
part of our economy. The issues are complex. Some possible
steps could be harmful to our economic interests, and any
decisions in this area will have important implications both
The
Banks and for the evolution of
for Multilateral
resolving theDevelopment
present situation
the objectives
banking system
in the
future.
The
of the
multilateral
development banks (MDBs)
are markedly different from those of the IMF. They lend primarily
to finance portions of specific investment projects, both on nearmarket terms from their "hard" windows, and on concessional terms
from their "soft" windows. MDB financing is longer term — 20
years or more — and it is available only to developing countries.
The institutions included in this category include the World Bank
Group (the International Bank for Reconstruction and Development,

- 19 -

International Development Association and International Finance
Corporation), and the regional development banks (the Inter-American
Development Bank, Asian Development Bank, and African Development
Bank and Fund). These institutions have all been established in
the period since World War II and they are now an important part
of the international economic and financial system. The United
States played a leading role in the founding of all but the African
Development Bank and plays a leading role in the continuing operations
of all the MDBs.
The banks are owned by share-holding member countries including
the United States, other industrial countries, OPEC countries and
non-OPEC LDCs. The cumulative U.S. share of the MDBs ranges from
58 percent of the Inter-American Development Bank's Fund for Special
Operations to 6 percent of African Development Bank capital. The
overall United States share of MDB resources has been declining, and
currently stands at one-quarter of MDB resources.
The purpose of the MDBs is to promote sustainable economic
growth and social development in their less developed member
countries. To this end, they make loans on both near-market and
concessional terms to help finance projects and programs in all
major economic sectors. Many of these projects supply basic needs,
while others are aimed primarily at providing the infrastructure
necessary for stronger long-term economic growth and employment.
The banks also provide borrowing countries with technical assistance
in planning and implementing projects, and training and help to
improve their public and private institutions. They advise recipient
governments on appropriate economic policy choices, and coordinate
and encourage the flow of public and private capital to LDCs. By
effectively promoting developing country growth, the MDBs also
contribute to the growth and stability of the world economy.
For U.S. participation in the MDBs during FY 1984, we are
requesting $1.6 billion in budget authority. Of this amount, $193
million is for subscriptions to paid-in capital and the remaining
$1,406 million is for our contributions to the concessional windows
of the MDBs for lending to the poorest, least creditworthy countries.
The actual budgetary outlays resulting from these subscriptions
and contributions would be spread over a period of many years since
they are drawn primarily as required to meet loan disbursement needs.
The outlay pattern for the $1.6 billion requested for FY 1984
is typical. It is estimated that only 4.3 percent of the request
would result in outlays in FY 1984, 7.3 percent in FY 1985 and
10.8 percent in FY 1986. Such an outlay pattern means that in any
given year practically all MDB budget outlays result from subscriptions
and contributions made in prior years.

- 20 In addition to the budget authority we are also requesting
$2.9 billion in program limitations for subscriptions to the callable
capital of the MDBs. The "callable capital" concept is one of the
attractive features of the multilateral development banks and
results in considerable budgetary savings for the U.S. government.
With callable capital as backing, the MDBs are able to borrow most
of the non-concessional funds they require in international capital
markets. The cost to the U.S. Government of subscriptions to callable
capital is solely contingent in nature, since callable capital can
only be used to meet obligations of the MDBs for funds they have
borrowed or guaranteed, in the unlikely event that their other
resources were insufficient to meet those liabilities.
The individual items of the MDB request for FY 1984 are detailed
in the table attached as Annex D. The request includes paid-in
capital subscriptions and contributions to the concessional windows
totaling $1,281 million of budget authority for which authorization
legislation has been received and $337 million of budget authority
that has yet to be authorized. The FY 1984 request also includes
$1,407 million of previously authorized program limitations for
callable capital subscriptions and $1,455 million of program limitations which have yet to be authorized.
The replenishments and capital increases for which we will be
seeking authorization reflect the implementation of the recommendations
made as a result of our assessment of U.S. participation in the MDBs.
The MDB assessment concluded that the MDBs are a cost-effective way
to contribute to LDC growth and stability; and that through them the
U.S. can and should encourage adherence to free and open markets,
emphasis on the private sector, minimal government involvement, and
assistance to countries who demonstrate the ability to make good use
of available resources. In short, the banks are proven, effective
instruments for promoting economic growth and development.
Since U.S. interests can be well served by these institutions,
we have been focusing on ways to make their programs more effective.
In specific terms, we have been working with the banks to ensure:
(1) greater selectivity and policy conditionality within projects
and sector programs to encourage sound economic policies conducive
to sustainable growth; (2) more emphasis on catalyzing private sector
flows and promoting LDC private sector development; (3) firm
implementation of graduation from hard windows to market borrowing,
and maturation from soft windows to hard, in order to distribute MDB
resources to those countries with the greatest need; and (4) reduction
The
Eximbank
in the
rates Budget
of growth of MDB programs, particularly for soft-loan
windows.
The
Administration's export credit policy continues to be
based on three precepts:
(1) We oppose export credit subsidies. Such subsidies
transfer resources from domestic taxpayers to foreign importers,
reduce the real gains from exporting, distort trade, and result
in bloated government demands on credit markets.

- 21 (2) Export credit subsidies should be reduced and eventually
eliminated through international agreement.
(3) In instances where such subsidies are applied, financing
from the Export-Import Bank of the United States should be targeted
to meet the competition where it is greatest.
Eximbank has an important role in supporting U.S. exporters
against foreign predatory financing, helping to overcome imperfections in capital markets, and maintaining pressure on other
governments to negotiate reductions in their own export credit
subsidies.
We are requesting budget authority for the Export-Import
Bank of the United States of $3.8 billion in direct credits and
$10.0 billion in guarantees and insurance for FY 1984. In addition,
we have pledged that we will request supplemental direct credit
authority of up to $2.7 billion, if foreign subsidized financing
again emerges as a serious problem.
These requests reflect both the Administration's long-run
export credit policy and the emerging financial environment.
Increased support for U.S. exports through guarantees and insurance
is designed to encourage the continued availability of credit
for U.S. exports at a time when LDC debt problems make commercial
lenders more cautious. The level direct credit authority we are
requesting reflects expected economic trends, as well as an effort
to increase the use of long-term guarantees. Our pledge to seek
supplemental authority, if needed, shows the U.S. commitment to
offer competitive support in the face of heavily subsidized foreign
financing, should this again become a problem.
The Administration's budget requests for Eximbank respond to
fundamental changes in the export financing environment which have
occurred during the past year. Some analyses of export finance
are warped by the experience of the last five years, which have
been characterized by heavily subsidized export credits. During
this period, the primary objective of Eximbank has been to nuetralize
the effects of predatory export credit financing by other countries.
Eximbank's direct credit program remained competitive with foreign
officially-supported export credits, as is shown by its relatively
high "win" ratio. Few cases were lost because of financing.
Eximbank remained competitive, however, at a very high price,
since its cost of money exceeded its lending rate from the fourth
quarter of 1978 until the fourth quarter of 1982. As a result,
Eximbank's net income dropped until the Bank realized its first
losses during FY 1982. This negative net income is projected to
continue for at least four more years.
The export credit picture has changed dramatically in the past
year. Our two-year quest to eliminate export credit subsidies has
largely been achieved due to the recent convergence of commercial
interest rates and officially-supported interest rates. The U.S.
Treasury has successfully negotiated improvements in the OECD

- 22 Arrangement on Export Credits, which have significantly raised the
minimum interest rates offered by foreign export credit agencies.
At the same time, commercial interest rates have declined as a result
of our success in bringing down inflation. As a result, the Eximbank
Board has recently been able to reduce the interest rates the Bank
charges on its loans to the lowest levels permitted under the
International Arrangement on Export Credits.
Fundamentally lower interest rates in all SDR currencies except
the French franc coupled with much higher interest rate minima under
the Arrangement than a year ago present an opportunity for Eximbank
to make increasing use of guarantee and insurance authority in the
provision of competitive financing offers. Moreover, current trends
in U.S. market rates and the expected financial status of many
developing country borrowers may well enhance the shift of demand
from credits to guarantees, since commercial lenders may require this
additional inducement to increase trade credit to some countries.
Thus, the critical issues for trade finance are shifting in
this new environment. Export credit subsidies will fade and perhaps
disappear as key elements in export credit competition., Instead,
the availability of export finance will take center stage in a world
in which commercial export credits may become more difficult to
obtain.
Conclusion
The IMF plays a crucial role in the solution to current debt
and liquidity problems, and in providing the environment for world
recovery. It is absolutely essential that the proposed increase
in IMF resources become effective by the end of this year, to
enable the IMF to meet these responsibilities. Prompt U.S.
approval is important not only because the financing is needed,
but also because it would be a sign of confidence to other governments and to the public, and would help lay to rest concerns
about the risks to global recovery posed by the international debt
problem.
But most importantly, timely approval of these proposals is
essential to our own economic interests — to the prospects for
American businesses and American jobs. As I have indicated, we
are making a substantial effort to support U.S. exports through
Eximbank financing next year; but keeping the debt problem from
mushrooming into a financial crisis would do much more to safeguard
prospects for the expansion of world trade and U.S. exports. I urge
that you give the proposed legislation authorizing and appropriating
our participation in the increase in IMF resources prompt and
favorable consideration.
Both the IMF and the multilateral development banks also serve
broader U.S. political and security interests. To the rest of the
world they are a sign that the bulwark of democracy is also a responsible partner in international economic affairs. To the poorer
nations of the world the multilateral development banks are also
tangible evidence of the support by Western nations for sustainable

- 23 economic development. And of direct benefit to the United States,
they help to foster political stability and democratic values in
the developing world.
I have tried to lay out a number of reasons for the United
States to support the IMF, the MDBs, and the Eximbank. Most of
these reasons relate significantly to our own interests. I urge
your strong support for the proposed U.S. appropriations for these
institutions.

Chart A

OUTSTANDING FOREIGN DEBT OF NON-OPEC LDCs

* Series break.
U.S. Treasury Dept.
2-11-83

Chart B

NET NEW LENDING BY COMMERCIAL BANKS TO NON-OPEC LDCs
$ Billion

$47
$43
40
$37

30
$20-$25
I
1

$22
20

$18

1976

1977

1978

1979

1980

1981

1982
U.S. Treasury Dept.
2-11-83

Chart C

,ndex, GROWTH OF U.S. AND WORLD EXPORT VOLUME
1970=100

1970

Chart D

SHARE OF U.S. EXPORTS
IN TOTAL U.S. GOODS OUTPUT

Exports 1 9 %
Exports 9 %

Total U.S. Goods
Output $460 billion
1970

Total U.S. Goods
Output $1,142 billion
1980

U.S. Treasury Dept.
2-11-83

Chart E

U.S. AGRICULTURAL EXPORTS

Agricultural 1 9 %
Agricultural 1 7 %

Share in
Total U.S.
Exports:

1970
1980
Net U.S.
Agricultural
Trade
Balance:

Surplus of $1.6 billion

Surplus of $24.3 billion

U.S. Treasury Dept.
2-11-83

Chart F

U.S. TRADE BALANCE IN SERVICES
$ Billion

1970

82 (est)

U.S. Treasury Dept.
2-11-83

Chart G

U.S. EXPORT-RELATED JOBS

5.1 Million

2.9 Million
(3.7% of Total
Civilian
Employment)

(5.1% of Total
Civilian
Employment)

1970

1980

As of 1980, each $1 billion of U.S. exports was
estimated to result in 24,000 jobs.

Source: Commerce Department (ITA) estimates.

U.S. Treasury Dept.
2-11 83

Chart H

U.S. EXPORTS TO NON-OPEC
LESS DEVELOPED COUNTRIES
Exports to Non-OPEC
LDCs 2 9 %
Exports to Non-OPEC
LDCs 2 5 %

Share in
Total U.S.
Exports

1970
1980

U.S. Treasury Dept.
2-11-83

Chart I

U.S. TRADE WITH MEXICO
$ Billion
18U.S. Exports to Mexico

16
14
12
10

U.S. Imports
from Mexico

8
6
4

U.S. Trade Balance
with Mexico

2
0

1970 71

U.S. Treasury Dept.
2-11 83

APPENDIX A

RNATJONAL MONETARY PUMI
PRESS RELEASE NO. 83/17

FOR IMMEDIATE RELEASE
March 1, 1983

The Executive Board of the International Monetary Fund has taken two
actions which, when they become effective, will substantially increase the
Fund's ability to extend balance of payments assistance to its member
countries.
Under the first action, the Executive Board has submitted a resolution to the Board of Governors containing proposals for increases in
members' quotas under the Eighth General Review of Quotas in the Fund. If
all members accept the increases in their quotas to the proposed amounts,
total quotas in the Fund would rise to approximately SDR 90 billion from
SDR 61 billion.
Under the second action, the Executive Board has adopted a decision
approving a revision and an enlargement of the General Arrangements to
Borrow (GAB), which, when it becomes effective, will, inter alia, increase
the amount of resources available to the Fund under the GAB from approximately SDR 6.4 billion to SDR 17 billion, and make GAB resources available
to finance purchases by any Fund member.
Attached are two separate press releases (Nos. 83/18 and 83/19) containing additional information on the proposals for the Eighth General
Review of Quotas and the decision on the General Arrangements to Borrow.

Attachments

Washington, D.C. 20431 • Telephone 202-477-3011

INTERNATIONAL MONETARY FUND
PRESS RELEASE NO. 83/18

FOR IMMEDIATE RELEASE
March 1> 1983

The Executive Board of the International Monetary Fund has submitted a Resolution to the Board of Governors proposing an increase in
Fund quotas to approximately SDR 90 billion from SDR 61 billion.
The Governors are to vote on the proposed Resolution, without meeting,
by March 31, 1983. The adoption of the Resolution requires a majority
of 85 per cent of the total voting power of the Fund's membership.
The Resolution is accompanied by a report of the Executive Board on
matters relating to the Eighth General Review of Quotas, and follows
agreements reached by the Interim Committee at its meeting on February
10-11, 1983 in Washington, D.C. Annexed to the Resolution are the
quotas proposed for each member which were arrived at in the following
way:
Forty per cent of the overall increase was distributed to all members in proportion to their present individual quotas, and the balance
of 60 per cent was distributed in the form of selective adjustments in
proportion to each member's share in the total of the calculated quotas,
i.e., the quotas that broadly reflect members' relative positions in the
world economy.
Twenty-five per cent of the increase in each member's quota will be
paid in SDRs, or din currencies of other members prescribed by the Fund,
subject to their concurrence.
The Executive Board also considered the position of the 17 members
with very small quotas, i.e., those quotas that are currently less than
SDR 10 million. As noted in its report to the Board of Governors, the
Executive Board recommends that the quotas of these 17 members shall,
after being increased by the method applicable uniformly to all members,
be further adjusted to the next higher multiple of SDR 0.5 million. All
other quotas would be rounded to the next higher multiple of SDR 0.1
million.
Under the Resolution, members would have until November 30, 1983
to consent to the proposed increases. In order to meet this date
members will need to expedite whatever action may be necessary under
their laws to enable them to give their consent to the quotas proposed
for them. A member's q^ota cannot be increased until it has coriented
to the increase and paid the subscription in full. No increase in
quota becomes effective before the date of the Fund's determination that
members having not less than 70 per cent of present quotas have consented
to the increases proposed for them.

- over -

External Relations Department • Washington, D.C. 20431 • Telephone 202-477-3011

The report of the Executive Board to the Board of Governors on
the increase in quotas of Fund members under the Eighth General Review,
and the Resolution as sent to the Board of Governors with the Annex
showing the proposed quotas for all members, are attached.

Attachments

ATTACHMENT I

INTERNATIONAL MONETARY FUND
Report of the Executive Directors to the Board of Governors J
Increase in Quotas of Fund Members - Eighth General Review

1. Article III, Section 2(a) of the Articles of Agreement provides
that "The Board of Governors shall at intervals of not more than five
years conduct a general review, and if it deems it appropriate, propose
an adjustment of the quotas of the members. It may also, if it thinks
fit, consider at any other time the adjustment of any particular quota
at the request of the member concerned." This report and the attached
Resolution on increases in quotas under the current, i.e., Eighth,
General Review are submitted to the Board of Governors in accordance
with Article III, Section 2.
2. The Seventh General Review of Quotas was completed by Board of
Governors Resolution No. 34-2, adopted December 11, 1978. To comply
with the five-year interval prescribed by Article III, Section 2(a),
the Eighth General Review has to be completed not later than December 11,
1983. In the Report of the Executive Board to the Board of Governors on
Increases in Quotas of Fund Members—Seventh General Review, it was
stated that:
"The Executive Board will review the customary method of
calculating quotas after the Seventh Review of Quotas has been
completed. In the context of the next general review of quotas,
the Executive Board will examine the quota shares of members in
relation to their positions in the world economy with a view to
adjusting those shares better to reflect members' relative
economic positions while having regard to the desirability of an
appropriate balance in the composition of the Executive Board."
3. At its meeting in Helsinki, Finland, in May 1982, the Interim
Committee urged the Executive Board to pursue its work on the Eighth
General Review as a matter of high priority. At that meeting the
Committee also "... noting that the present quotas of a significant
number of members do not reflect their relative positions in the
world economy, ... reaffirmed its view that the occasion of an
enlargement of the Fund under the Eighth General Review should be
used to bring the quotas of these members more in line with their
relative positions, taking account of the case for maintaining a
proper balance between the different groups of countries." At its
meeting in Toronto, Canada, in September 1982, the Committee noted
that "there was widespread support in the Committee on the urgent
need for a substantial increase in quotas under the Eighth General
Review" and "urged the Executive Board to pursue its work on the issues
of the Review as a matter of high priority, so that the remaining
issues on the size and distribution of the quota increase could be
resolved by the time of the Committee's next meeting in April 1983."

- 2 -

ATTACHMENT I

4.
In its discussions on the Eighth General Review, the Executive
Board has considered, inter alia, (i) the method of calculating quotas;
(ii) the size of the overall increase in quotas; (iii) the distribution
of the overall increase; (iv) the position of countries with very small
quotas in the Fund; and (v) the mode of payment for the increase in
quotas.
5. As regards the Executive Board's review of the method of calculating
quotas, the Executive Board agreed to certain changes regarding the quota
formulas used for calculating quotas in connection with the Eighth
General Review. The Executive Board accepted the quota calculations
based on the revised quota formulas as reasonable indicators of the
relative positions of countries in the world economy, though some
Directors felt that they do not provide a wholly satisfactory measure of
relative economic positions. It is understood that the changes that
have been made do not preclude further appropriate changes in connection
with future reviews.
6. At the meeting of the Interim Committee held in Washington in
February 1983, which had been advanced from April 1983, agreement was
reached on all major issues of the Eighth Review, as reflected in the
relevant passages from the Committee's communique of February 11, 1983,
as follows:
"(a) The total of Fund quotas should be increased under the
Eighth General Review from approximately SDR 61.03 billion to
SDR 90 billion (equivalent to about US$98.5 billion).
(b) Forty per cent of the overall increase should be distributed to all members in proportion to their present individual
quotas, and the balance of sixty per cent should be distributed in
the form of selective adjustments in proportion to each member's
share in the total of the calculated quotas, i.e., the quotas
that broadly reflect members' relative positions in the world
economy.
(c) Twenty-five per cent of the increase in each member's
quota should be paid in SDRs or in usable currencies of other
members."
The Committee also considered the possibility of a special
adjustment of very small quotas, i.e., those quotas that are currently
less than SDR 10 million, and agreed to refer this matter to the
Executive Board for urgent consideration in connection with the implementation of the main decision.
7. As requested by the Interim Committee at its meeting on February 11,
1983, the Executive Board has considered the position of the 17 members
with very small quotas—i.e., those with quotas that at present are less
than SDR 10 million. The Executive Board proposes that the quotas of
these members should, after being increased in accordance with (b) quoted

- 3 -

in
of
be
to
to

ATTACHMENT I

paragraph 6 above, be further adjusted to the next higher multiple
SDR 0.5 million. The Executive Board proposes that all other quotas
rounded to the next higher multiple of SDR 0.1 million. The rounding
SDR 0.5 million would provide for larger quota increases relative
present quotas for most of the members with very small quotas.

8. In accordance with the agreement reached by the Interim Committee
at its meeting on February 11, 1983, on items (a) and (b) quoted in
paragraph 6 above and with rounding adjustments indicated in paragraph 7
above, the Executive Board proposes to the Board of Governors that the
new quotas of members be as set out in the Annex to the proposed
Resolution. These increases would raise Fund quotas from approximately
SDR 61 billion to approximately SDR 90 billion.
96 Article III, Section 3(a) provides that 25 per cent of any increase
shall be paid in special drawing rights, but permits the Board of
Governors to prescribe, inter alia, that this payment may be made on
the same basis for all members, in whole or in part in the currencies
of other members specified by the Fund, subject to their concurrence.
Paragraph 5 of the Resolution provides that 25 per cent of the increase
in quotas proposed as a result of the current review should be paid in
SDRs or in currencies of other members selected by the Fund, subject
to their concurrence, or in any combination of SDRs and such currencies.
The balance of the increase shall be paid in a member's own currency.
A reserve asset payment will help strengthen the liquidity of the Fund
and will not impose an undue burden on members because under the existing
decisions of the Fund a reserve asset payment will either enlarge or
create a reserve tranche position of an equivalent amount. In addition,
the Fund stands ready to assist members that do not hold sufficient
reserves to make their reserve asset payments to the Fund to borrow SDRs
from other members willing to cooperate; these loans would be made on
the condition that such members would repay on the same day the loans
from the SDR proceeds of drawings of reserve tranches which had been
established by the payment of SDRs.
10. Under the proposed Resolution, a member will be able to consent
only to the amount of quota proposed for it in the Annex. A member
will be able to consent to the increase in its quota at any time before
6:00 p.m., Washington time, November 30, 1983. In order to meet this
time, members will have until the end of November 1983 to complete
whatever action may be necessary under their laws to enable them to
give their consents.
11. A member's quota cannot be increased until it has consented to the
increase and paid the subscription. Under the proposed Resolution, the
increase in a member's quota will take effect only after the Fund has
received the member's consent to the increase in quota and a member has
paid the increase in subscription, provided that the quota cannot become
effective before the date on which the Fund determines that the participation requirement in paragraph 2 of the proposed Resolution has been
satisfied. The Executive Board is authorized by paragraph 3 of the
proposed Resolution to extend the period of consent.

- 4 -

ATTACHMENT I

12. The participation requirement in paragraph 2 will be reached when
the Fund determines that members having not less than seventy per cent
of the total of quotas on February 28, 1983 have consented to the
increases in their respective quotas as set out in the Annex.
13. The proposed Resolution provides that a member must pay the increase
in its subscription within 30 days after (a) the date on which the
member notifies the Fund of its consent, or (b) the date on which the
participation requirement is met, whichever is the later.
14. The Executive Board recommends that the Board of Governors adopt
the attached Resolution that covers all the matters on which the
Governors are requested to act. The adoption of the Resolution requires
positive responses from Governors having an 85 per cent majority of
the total voting power.

Attachment

- 5 -

ATTACHMENT II

Proposed Resolution of the Board of Governors:
Increase in Quotas of Fund Members—Eighth General Review

WHEREAS the Executive Board has submitted to the Board of Governors
a report entitled "Increases in Quotas of Fund Members—Eighth General
Review" containing recommendations on increases in the quotas of individual members of the Fund; and
WHEREAS the Executive Board has recommended the adoption of the
following Resolution of the Board of Governors, which Resolution proposes
increases in the quotas of members of the Fund as a result of the Eighth
General Review of Quotas and deals with certain related matters, by
vote without meeting pursuant to Section 13 of the By-Laws of the Fund;
NOW, THEREFORE, the Board of Governors hereby RESOLVES that:
1. The International Monetary Fund proposes that, subject to the
provisions of this Resolution, the quotas of members of the Fund
shall be increased to the amounts shown against their names in the
Annex to this Resolution.
2. A member's increase in quota as proposed by this Resolution
shall not become effective unless the member has notified the Fund
of its consent to the increase not later than the date prescribed
by or under paragraph 3 below and has paid the increase in quota
in full, provided that no increase in quota shall become effective
before the date of the Fund's determination that members having
not less than 70 per cent of the total of quotas on February 28,
1983 have consented to the increases in their quotas.
3. Notices in accordance with paragraph 2 above shall be executed
by a duly authorized official of the member and must be received
in the Fund before 6:00 p.m., Washington time, November 30, 1983,
provided that the Executive Board may extend this period as it
may determine.
4. Each member shall pay to the Fund the increase in its quota
within 30 days after the later of (a) the date on which it notifies
the Fund of its consent, or (b) the date of the Fund's determination under paragraph 2 above.
5. Each member shall pay twenty-five per cent of its increase
either in special drawing rights or in the currencies of other
members specified, with their concurrence, by the Fund, or in any
combination of special drawing rights and such currencies. The
balance of the increase shall be paid by the member in Its own
currency.

ANNEX

Proposed Quota
(In millions of SDRs)

1.
2.
3.
4.
5.

Afghanistan
Algeria
Antigua and Barbuda
Argentina
Australia

86.7
623.1

5.0
1,113.0
1,619.2

6.
7.
8.
9.
10.

Austria
Bahamas
Bahrain
Bangladesh
Barbados

11.
12.
13.
14.
15.

Belgium
Belize
Benin
Bhutan
Bolivia

2,080.4

16.
17.
18.
19.
20.

Botswana
Brazil
Burma
Burundi
Cameroon

22.1
1,461.3
137.0
42.7
92.7

21.
22.
23.
24.
25.

Canada
Cape Verde
Central African Republic
Chad
Chile

2,941.0

26.
27.
28.
29.
30.

China
Colombia
Comoros
Congo, People's Republic
Costa Rica

2,390.9
394.2

31.
32.
33.
34.
35.

Cyprus
Denmark
Djibouti
Dominica
Dominican Republic

112.1

36.
37.
38.
39.
40.

Ecuador
Egypt
El Salvador
Equatorial Guinea
Ethiopia

150.7
463.4
89.0
18.4
70.6

775.6
66.4
48.9
287.5
34.1

9.5
31.3

2.5
90.7

4.5
30.4
30.6
440.5

4.5
37.3
84.1
69.7
711.0

8.0
4.0

- 7 -

ANNEX

Proposed Quota
(In millions of SDRs)

41. Fiji
42. Finland
43. France
44. Gabon
45. Gambia, The

36.5
574.9
4,482.8
73.1
17.1

46.
47.
48.
49.
50.

Germany
Ghana
Greece
Grenada
Guatemala

5,403.7
204.5
399.9

51.
52.
53.
54.
55.

Guinea
Guinea-Bissau
Guyana
Haiti
Honduras

6.0
108.0
57.9

7.5
49.2
44.1
67.8

56. Hungary
57. Iceland
58. India
59. Indonesia
60. Iran, Islamic Republic of

530.7
59.6
2,207.7
1,009.7
1,117.4

61.
62.
63.
64.
65.

504.0
343.4
446.6
2,909.1
165.5

Iraq
Ireland
Israel
Italy
Ivory Coast

66. Jamaica
67. Japan
68. Jordan
69. Kampuchea, Democratic
70. Kenya

145.5
4,223.3
73.9
25.0
142.0

71. Korea
72. Kuwait
73. Lao People's Democratic Republic
74. Lebanon
75. Lesotho

462.8
635.3
29.3
78.7
15.1

76. Liberia
77. Libya
78. Luxembourg
79. Madagascar
80. Malawi

71.3
515.7
77.0
66.4
37-2

ANNEX

Proposed Quota
(In millions of SDRs)

81.
82.
83.
84.
85.

Malaysia
Maldives
Mali
Malta
Mauritania

86.
87.
88.
89.
90.

Mauritius
Mexico
Morocco
Nepal
Netherlands

53.6
1,165.5
306.6
37.3
2,264.8

91.
92.
93.
94.
95.

New Zealand
Nicaragua
Niger
Nigeria
Norway

461.6
68.2
33.7
849.5
699.0

96. Oman
97. Pakistan
98. Panama
99. Papua New Guinea

550.6

2.0
50.8
45.1
33.9

100.

Paraguay

63.1
546.3
102.2
65.9
48.4

101.
102.
103.
104.
105.

Peru
Philippines
Portugal
Qatar
Romania

330.9
440.4
376.6
114.9
523.4

106.
107.
108.
109.
110.

Rwanda
St. Lucia
St. Vincent
Sao Tome & Principe
Saudi Arabia

111.
112.
113.
114.
115.

Senegal
Seychelles
Sierra Leone
Singapore
Solomon Islands

116.
117.
118.
119.
120.

Somalia
South Africa
Spain
Sri Lanka
Sudan

43.8

7.5
4.0
4.0
3,202.4
85.1

3.0
57.9
250.2

5.0
44.2
915.7
1,286.0
223.1
169.7

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ANNEX

Proposed Quota
(In millions of SDRs)
49.3
24.7
1,064.3
139.1
107.0

121.
122.
123.
124.
125.

Suriname
Swaziland
Sweden
Syrian Arab Republic
Tanzania

126.
127.
128.
129.
130.

Thailand
Togo
Trinidad and Tobago
Tunisia
Turkey

131.
132.
133.
134.
135.

Uganda
United Arab Emirates
United Kingdom
United States
Upper Volta

136.
137.
138.
139.
140.

Uruguay
Vanuatu
Venezuela
Viet Nam
Western Samoa

141.
142.
143.
144.
145.

Yemen Arab Republic
Yemen, People's Democratic Republic of
Yugoslavia
Zaire
Zambia

43.3
77.2
613.0
291.0
270.3

146.

Zimbabwe

191.0

386.6
38.4
170.1
138.2
429.1
99.6
385.9
6,194.0
17,918.3
31.6
163.8

9.0
1,371.5
176.8

6.0

INTERNATIONAL MONETARY FUND
PRESS RELEASE NO. 83/19

FOR IMMEDIATE RELEASE
March 1, 1983

The Executive Board of the International Monetary Fund has completed the work necessary to enable a revision and enlargement of the
General Arrangements to Borrow (GAB), which had recently been agreed in
principle by the Group of Ten and the Fund. The main change is a substantial increase to SDR 17 billion in the credit arrangements available
to the Fund from the present size of approximately SDR 6.4 billion.
Other amendments to the existing GAB provisions will (i) permit the
Fund to borrow under the enlarged credit arrangements to finance exchange
transactions with members that are not GAB participants, (ii) authorize
Swiss participation and (iii) permit certain borrowing arrangements
between the Fund and non-participating members to be associated with the
GAB, with the possibility that the Fund could activate the GAB as if the
associated lenders were GAB participants.
The changes will become effective when all ten participants—Belgium,
Canada, Deutsche Bundesbank, France, Italy, Japan, Netherlands, Sveriges
Riksbank, United Kingdom and the United States—have notified the Fund
in writing that they concur in the amendments and in the increased credit
commitments. Participants are asked to do so by December 31, 1983. Swiss
participation will become effective when the amended decision has become
effective.
Under the GAB, which became effective on October 24, 1962, ten
industrial members extended credit lines to the Fund. The arrangements
have been periodically renewed, with some modifications, and in one
case, that of Japan, the original amount of the credit line has been
increased.
The Fund will continue to be able to call on GAB resources for any
drawings by participants when supplementary resources are needed to forestall or cope with an impairment of the international monetary system.
As soon as the revision to the GAB becomes effective, the Fund may also
call on GAB resources to finance drawings by Fund members that are not
partipants provided those transactions are made under policies of the
Fund requiring adjustment programs. Calls on the GAB will be made, in
respect of non-participants, if the Fund faces an inadequacy of resources
to meet actual and expected requests for financing that reflect the existence of an exceptional situation associated with balance of payments
problems of members that would threaten the stability of the international
monetary system.
The revised decision on the GAB and an annex showing the participants and amounts of credit arrangements under both the existing and the
future GAB are attached.

Attachment

ATTACHMENT

GENERAL ARRANGEMENTS TO BORROW

Preamble
In order to enable the International Monetary Fund to fulfill
more effectively its role in the international monetary system,
the main industrial countries have agreed that they will, in a spirit
of broad and willing cooperation, strengthen the Fund by general
arrangements under which they will stand ready to make loans to the
Fund up to specified amounts under Article VII, Section 1 of the
Articles of Agreement when supplementary resources are needed to
forestall or cope with an impairment of the international monetary
system. In order to give effect to these intentions, the following
terms and conditions are adopted under Article VII, Section 1 of the
Articles of Agreement.

Paragraph 1.

Definitions

As used in this Decision the term:
(i) "Articles" means the Articles of Agreement of the
International Monetary Fund;
(ii) "credit arrangement" means an undertaking to lend to
the Fund on the terms and conditions of this Decision;
(iii) "participant" means a participating member or a
participating institution;
(iv) "participating institution" means an official institution
of a member that has entered into a credit arrangement with the Fund
with the consent of the member;
(v) "participating member" means a member of the Fund that
has entered into a credit arrangement with the Fund;
(vi) "amount of a credit arrangement" means the maximum amount
expressed in special drawing rights that a participant undertakes to
lend to the Fund under a credit arrangement;
(vii) "call" means a notice by the Fund to a participant to
make a transfer under its credit arrangement to the Fund's account;

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ATTACHMENT

(viii) "borrowed currency" means currency transferred to the
Fund's account under a credit arrangement;
(ix) "drawer" means a member that purchases borrowed currency
from the Fund in an exchange transaction or in an exchange transaction
under a stand-by or extended arrangement;
(x) "indebtedness" of the Fund means the amount it is committed to repay under a credit arrangement.

Paragraph 2. Credit Arrangements
A member or institution that adheres to this Decision undertakes
to lend its currency to the Fund on the terms and conditions of this
Decision up to the amount in special drawing rights set forth in the
Annex to this Decision or established in accordance with Paragraph 3(b).

Paragraph 3. Adherence
(a) Any member or institution specified in the Annex may adhere
to this Decision in accordance with Paragraph 3(c).
(b) Any member or institution not specified in the Annex that
wishes to become a participant may at any time, after consultation with
the Fund, give notice of its willingness to adhere to this Decision,
and, if the Fund shall so agree and no participant object, the member or
Institution may adhere in accordance with Paragraph 3(c). When giving
notice of its willingness to adhere under this Paragraph 3(b) a member
or institution shall specify the amount, expressed in terms of the
special drawing right, of the credit arrangement which it is willing
to enter into, provided that the amount shall not be less than the
amount of the credit arrangement of the participant with the smallest
credit arrangement.
(c) A member or institution shall adhere to this Decision by
depositing with the Fund an instrument setting forth that it has adhered
in accordance with its law and has taken all steps necessary to enable it
to carry out the terms and conditions of this Decision. On the deposit
of the instrument the member or institution shall be a participant as of
the date of the deposit or of the effective date of this Decision,
whichever shall be later.

Paragraph 4.

Entry into Force

This Decision shall become effective when it has been adhered to by
at least seven of the members or institutions included in the Annex with

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ATTACHMENT

credit arrangements amounting in all to not less than the equivalent of
five and one-half billion United States dollars of the weight and fineness in effect on July 1, 1944.

Paragraph 5.

Changes in Amounts of Credit Arrangements

The amounts of participants' credit arrangements may be reviewed
from time to time in the light of developing circumstances and changed
with the agreement of the Fund and all participants.

Paragraph 6. Initial Procedure
When a participating member or a member whose institution is a
participant approaches the Fund on an exchange transaction or stand-by
or extended arrangement and the Managing Director, after consultation,
considers that the exchange transaction or stand-by or extended arrangement is necessary in order to forestall or cope with an impairment of
the international monetary system, and that the Fund's resources need
to be supplemented for this purpose, he shall initiate the procedure
for making calls under Paragraph 7.

Paragraph 7. Calls
(a) The Managing Director shall make a proposal for calls for
an exchange transaction or for future calls for exchange transactions
under a stand-by or extended arrangement only after consultation with
Executive Directors and participants. A proposal shall become effective
only if it is accepted by participants and the proposal is then approved
by the Executive Board. Each participant shall notify the Fund of the
acceptance of a proposal involving a call under its credit arrangement.
(b) The currencies and amounts to be called under one or more of
the credit arrangements shall be based on the present and prospective
balance of payments and reserve position of participating members or
members whose institutions are participants and on the Fund's holdings
of currencies.
(c) Unless otherwise provided in a proposal for future calls
approved under Paragraph 7(a), purchases of borrowed currency under a
stand-by or extended arrangement shall be made in the currencies of
participants in proportion to the amounts in the proposal.
(d) If a participant on which calls may be made pursuant to
Paragraph 7(a) for a drawer's purchases under a stand-by or extended
arrangement gives notice to the Fund that in the participant's opinion,
based on the present and prospective balance of payments and reserve
position, calls should no longer be made on the participant or that
calls should be for a smaller amount, the Managing Director may propose

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ATTACHMENT

to other participants that substitute amounts be made available under
their credit arrangements, and this proposal shall be subject to the
procedure of Paragraph 7(a). The proposal as originally approved
under Paragraph 7(a) shall remain effective unless and until a proposal
for substitute amounts is approved in accordance with Paragraph 7(a).
(e) When the Fund makes a call pursuant to this Paragraph 7,
the participant shall promptly make the transfer in accordance with
the call.

Paragraph 8.

Evidence of Indebtedness

(a) The Fund shall issue to a participant, on its request, nonnegotiable instruments evidencing the Fund's indebtedness to the
participant. The form of the instruments shall be agreed between the
Fund and the participant.
(b) Upon repayment of the amount of any instrument issued under
Paragraph 8(a) and all accrued interest, the instrument shall be
returned to the Fund for cancellation. If less than the amount of
any such instrument is repaid, the instrument shall be returned to the
Fund and a new instrument for the remainder of the amount shall be
substituted with the same maturity date as in the old instrument.

Paragraph 9.

Interest

(a) The Fund shall pay interest on its indebtedness at a rate
equal to the combined market interest rate computed by the Fund from
time to time for the purpose of determining the rate at which it pays
interest on holdings of special drawing rights. A change in the
method of calculating the combined market interest rate shall apply
only if the Fund and at least two thirds of the participants having
three fifths of the total amount of the credit arrangements so agree;
provided that if a participant so requests at the time this agreement
is reached, the change shall not apply to the Fund's indebtedness to
that participant outstanding at the date the change becomes effective.
(b) Interest shall accrue daily and shall be paid as soon as
possible after each July 31, October 31, January 31, and April 30.
(c) Interest due to a participant shall be paid, as determined
by the Fund, in special drawing rights, or in the participant's currency,
or in other currencies that are actually convertible.

- 5 -

Paragraph 10.

ATTACHMENT

Use of Borrowed Currency

The Fund's policies and practices under Article V, Sections 3
and 7 on the use of its general resources and stand-by and extended
arrangements, including those relating to the period of use, shall
apply to purchases of currency borrowed by the Fund.
Nothing in
this Decision shall affect the authority of the Fund with respect to
requests for the use of its resources by individual members, and
access to these resources by members shall be determined by the Fund s
policies and practices, and shall not depend on whether the Fund can
borrow under this Decision.

Paragraph 11.

Repayment by the Fund

(a) Subject to the other provisions of this Paragraph 11, the
Fund, five years after a transfer by a participant, shall repay the
participant an amount equivalent to the transfer calculated in accordance
with Paragraph 12. If the drawer for whose purchase participants make
transfers is committed to repurchase at a fixed date earlier than five
years after its purchase, the Fund shall repay the participants at that
date. Repayment under this Paragraph 11(a) or under Paragraph 11(c)
shall be, as determined by the Fund, in the participant's currency
whenever feasible, or in special drawing rights, or, after consultation
with the participant, in other currencies that are actually convertible.
Repayments to a participant under Paragraph 11(b) and (e) shall be
credited against transfers by the participant for a drawer's purchases
in the order in which repayment must be made under this Paragraph 11(a).
(b) Before the date prescribed in Paragraph 11(a), the Fund, after
consultation with a participant, may make repayment to the participant
in part or in full. The Fund shall have the option to make repayment
under this Paragraph 11(b) in the participant's currency, or in special
drawing rights in an amount that does not increase the participant's
holdings of special drawing rights above the limit under Article XIX,
Section 4, of the Articles of Agreement unless the participant agrees
to accept special drawing rights above that limit in such repayment,
or, with the agreement of the participant, in other currencies that
are actually convertible.
(c) Whenever a reduction in the Fund's holdings of a drawer's
currency is attributed to a purchase of borrowed currency, the Fund
shall promptly repay an equivalent amount. If the Fund is indebted
to a oarticipant as a result of transfers to finance a reserve
tranche purchase by a drawer and the Fund's holdings of the drawer's
currency that are not subject to repurchase are reduced as a result
of net sales of that currency during a quarterly period covered by
an operational budget, the Fund shall repay at the beginning of the

- 6 -

ATTACHMENT

next quarterly period an amount equivalent to that reduction, up to
the amount of the indebtedness to the participant.
(d) Repayment under Paragraph 11(c) shall be made in proportion
to the Fund's indebtedness to the participants that made transfers in
respect of which repayment is being made.
(e) Before the date prescribed in Paragraph 11(a) a participant
may give notice representing that there is a balance of payments need
for repayment of part or all of the Fund's indebtedness and requesting
such repayment. The Fund shall give the overwhelming benefit of any
doubt to the participant's representation. Repayment shall be made
after consultation with the participant in the currencies of other members that are actually convertible, or made in special drawing rights,
as determined by the Fund. If the Fund's holdings of currencies in
which repayment should be made are not wholly adequate, individual
participants shall be requested, and will be expected, to provide the
necessary balance under their credit arrangements. If, notwithstanding
the expectation that the participants will provide the necessary balance,
they fail to do so, repayment shall be made to the extent necessary in
the currency of the drawer for whose purchases the participant requesting
repayment made transfers. For all of the purposes of this Paragraph 11
transfers under this Paragraph 11(e) shall be deemed to have been made
at the same time and for the same purchases as the transfers by the
participant obtaining repayment under this Paragraph 11(e).
(f) All repayments to a participant in a currency other than its
own shall be guided, to the maximum extent practicable, by the present
and prospective balance of payments and reserve position of the members
whose currencies are to be used in repayment.
(g) The Fund shall at no time reduce its holdings of a drawer's
currency below an amount equal to the Fund's indebtedness to the participants resulting from transfers for the drawer's purchases.
(h) When any repayment is made to a participant, the amount that
can be called for under its credit arrangement in accordance with this
Decision shall be restored pro tanto.
(i) The Fund shall be deemed to have discharged its obligations
to a participating institution to make repayment in accordance with the
provisions of this Paragraph or to pay interest in accordance with the
provisions of Paragraph 9 if the Fund transfers an equivalent amount
in special drawing rights to the member in which the institution is
established.

- 7 -

Paragraph 12.

ATTACHMENT

Rates of Exchange

(a) The value of any transfer shall be calculated as of the date
of the dispatch of the instructions for the transfer. The calculation
shall be made in terras of the special drawing right in accordance with
Article XIX, Section 7(a) of the Articles, and the Fund shall be obliged
to repay an equivalent value.
(b) For all of the purposes of this Decision, the value of a
currency in terms of the special drawing right shall be calculated by
the Fund in accordance with Rule 0-2 of the Fund's Rules and Regulations.

Paragraph 13.

Transferability

A participant may not transfer all or part of its claim to repayment under a credit arrangement except with the prior consent of the
Fund and on such terras and conditions as the Fund may approve.

Paragraph 14.

Notices

Notice to or by a participating member under this Decision shall
be in writing or by rapid means of communication and shall be given
to or by the fiscal agency of the participating member designated in
accordance with Article V, Section 1 of the Articles and Rule G-l of
the Rules and Regulations of the Fund. Notice to or by a participating
institution shall be in writing or by rapid means of communication
and shall be given to or by the participating institution.

Paragraph 15.

Amendment

This Decision may be amended during the period prescribed in
Paragraph 19(a) only by a decision of the Fund and with the concurrence
of all participants. Such concurrence shall not be necessary for the
modification of the Decision on its renewal pursuant to Paragraph 19(b).

Paragraph 16.

Withdrawal of Adherence

A participant may withdraw its adherence to this Decision in
accordance with Paragraph 19(b) but may not withdraw within the period
prescribed in Paragraph 19(a) except with the agreement of the Fund and
all participants.

Paragraph 17.

Withdrawal from Membership

If a participating member or a member whose institution is a
participant withdraws from membership in the Fund, the participant's

- 8 -

ATTACHMENT

credit arrangement shall cease at the same time as the withdrawal takes
effect. The Fund's indebtedness under the credit arrangement shall be
treated as an amount due from the Fund for the purpose of Article XXVI,
Section 3, and Schedule J of the Articles.

Paragraph 18.

Suspension of Exchange Transactions and Liquidation

(a) The right of the Fund to make calls under Paragraph 7 and
the obligation to make repayments under Paragraph 11 shall be suspended
during any suspension of exchange transactions under Article XXVII of
the Articles.
(b) In the event of liquidation of the Fund, credit arrangements
shall cease and the Fund's indebtedness shall constitute liabilities
under Schedule K of the Articles. For the purpose of Paragraph 1(a)
of Schedule K, the currency in which the liability of the Fund shall
be payable shall be first the participant's currency and then the
currency of the drawer for whose purchases transfers were made by the
participants.

Paragraph 19.

Period and Renewal

(a) This Decision shall continue in existence for four years from
its effective date. A new period of five years shall begin on the
effective date of Decision No. 7337-(83/37), adopted February 24, 1983.
References in Paragraph 19(b) to the period prescribed in Paragraph 19(a)
shall refer to this new period and to any subsequent renewal periods
that may be decided pursuant to Paragraph 19(b). When considering a
renewal of this Decision for the period following the five-year period
referred to in this Paragraph 19(a), the Fund and the participants shall
review the functioning of this Decision, including the provisions of
Paragraph 21.
(b) This Decision may be renewed for such period or periods and
with such modifications, subject to Paragraph 5, as the Fund may decide.
The Fund shall adopt a decision on renewal and modification, if any, not
later than twelve months before the end of the period prescribed in
Paragraph 19(a). Any participant may advise the Fund not less than
six months before the end of the period prescribed in Paragraph 19(a)
that it will withdraw its adherence to the Decision as renewed. In the
absence of such notice, a participant shall be deemed to continue to
adhere to the Decision as renewed. Withdrawal of adherence in accordance with this Paragraph 19(b) by a participant, whether or not included
in the Annex, shall not preclude its subsequent adherence in accordance
with Paragraph 3(b).
(c) If this Decision is terminated or not renewed, Paragraph 8
through 14, 17 and 18(b) shall nevertheless continue to apply in

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ATTACHMENT

connection with any indebtedness of the Fund under credit arrangements
in existence at the date of the termination or expiration of the
Decision until repayment is completed. If a participant withdraws its
adherence to this Decision in accordance with Paragraph 16 or
Paragraph 19(b), it shall cease to be a participant wide*: the Decision,
but Paragraphs 8 through 14, 17 and 18(b) of the Decision as of the date
of the withdrawal shall nevertheless continue to apply to any indebtedness of the Fund under the former credit arrangement until repayment has
been completed.

Paragraph 20.

Interpretation

Any question of interpretation raised in connection with this
Decision which does not fall within the purview of Article XXIX of the
Articles shall be settled to the mutual satisfaction of the Fund, the
participant raising the question, and all other participants. For the
purpose of this Paragraph 20 participants shall be deemed to include
those former participants to which Paragraphs 8 through 14, 17 and
18(b) continue to apply pursuant to Paragraph 19(c) to the extent that
any such former participant is affected by a question of interpretation
that is raised.

Paragraph 21.

Use of Credit Arrangements for Nonparticipants

(a) The Fund may make calls in accordance with Paragraphs 6 and 7
for exchange transactions requested by members that are not participants
if the exchange transactions are (i) transactions in the upper credit
tranches, (ii) transactions under stand-by arrangements extending beyond
the first credit tranche, (iii) transactions under extended arrangements,
or (iv) transactions in the first credit tranche in conjunction with a
stand-by or an extended arrangement. All the provisions of this Decision
relating to calls shall apply, except as otherwise provided in Paragraph 2 K b ) .
(b) The Managing Director may initiate the procedure for making
calls under Paragraph 7 in connection with requests referred to in
Paragraph 21(a) if, after consultation, he considers that the Fund
faces an inadequacy of resources to meet actual and expected requests
for financing that reflect the existence of an exceptional situation
associated with balance of payments problems of members of a character
or aggregate size that could threaten the stability of the international
monetary system. In making proposals for calls pursuant to Paragraph
21(a) and (b), the Managing Director shall pay due regard to potential
calls pursuant to other provisions of this Decision.

Paragraph 22.

Participation of the Swiss National Bank

(a) Notwithstanding any other provision of this Decision, the

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ATTACHMENT

Swiss National Bank (hereinafter called the Bank) may become a participant by adhering to this Decision in accordance with Paragraph 3(c) and
accepting, by its adherence, a credit arrangement in an amount equivalent
to one thousand and twenty million special drawing rights. Upon adherence, the Bank shall be deemed to be a participating institution,
and all the provisions of this Decision relating to participating institutions shall apply In respect of the Bank, subject to, and as supplemented by, Paragraph 22(b), (c), (d), (e), and (f).
(b) Under its credit arrangement, the Bank undertakes to lend
any currency, specified by the Managing Director after consultation
with the Bank at the time of a call, that the Fund has determined to
be a freely usable currency pursuant to Article XXX(f) of the Articles.
(c) In relation to the Bank, the references to the balance of payments and reserve position in Paragraph 7(b) and (d), and Paragraph 11(e),
shall be understood to refer to the position of the Swiss Confederation.
(d) In relation to the Bank, the references to a participant's
currency in Paragraph 9(c), Paragraph 11(a) and (b), and Paragraph 18(b)
shall be understood to refer to any currency, specified by the Managing
Director after consultation with the Bank at the time of payment by the
Fund, that the Fund has determined to be a freely usable currency pursuant to Article XXX(f) of the Articles.
(e) Payment of special drawing rights to the Bank pursuant to
Paragraph 9(c) and Paragraph 11 shall be made only while the Bank is a
prescribed holder pursuant to Article XVII of the Articles.
(f) The Bank shall accept as binding a decision of the Fund on
any question of interpretation raised in connection with this Decision
which falls within the purview of Article XXIX of the Articles, to the
same extent as that decision is binding on other participants.

Paragraph 23.

Associated Borrowing Arrangements

(a) A borrowing arrangement between the Fund and a member that
is not a participant, or an official institution of such a member, under
which the member or the official institution undertakes to make loans
to the Fund for the same purposes as, and on terms comparable to, those
made by participants under this Decision, may, with the concurrence of
all participants, authorize the Fund to make calls on participants in
accordance with Paragraphs 6 and 7 for exchange transactions with that
member, or to make requests under Paragraph 11(e) in connection with an
early repayment of a claim under the borrowing arrangement, or both.
For the purposes of this Decision such calls or requests shall be treated
as if they were calls or requests in respect of a participant.

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ATTACHMENT

(b) Nothing in this Decision shall preclude the Fund from entering
into any other types of borrowing arrangements, including an arrangement
between the Fund and a lender, involving an association with participants,
that does not contain the authorizations referred to in Paragraph 23(a).

ATTACHMENT

- 12 -

ANNEX

Participants and Amounts of Credit Arrangements
I. Prior to the Effective Date of Decision No. 7337-(83/37)
Amount
Participant

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
II.

United States of America
Deutsche Bundesbank
United Kingdom
France
Italy
Japan
Canada
Netherlands
Belgium
Sveriges Riksbank

in Units of
Participant's currency

US$
DM
h
F
Lit
Yen
Can$

f.
BF
SKr

2,000,000,000
4,000,000,000
357,142,857
2,715,381,428
343,750,000,000
340,000,000,000
216,216,000
724,000,000
7,500,000,000
517,320,000

From the Effective Date of Decision No. 7337-(83/37)

Participant Amount
in special drawing rights

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

United States of America
Deutsche Bundesbank
Japan
France
United Kingdom
Italy
Canada
Netherlands
Belgium
Sveriges Riksbank
Swiss National Bank*

4,250,000,000
2,380,000,000
2,125,000,000
1,700,000,000
1,700,000,000
1,105,000,000
892,500,000
850,000,000
595,000,000
382,500,000
1,020,000,000
17,000,000,000

*With effect from the date on which the Swiss National Bank adheres
to this Decision in accordance with Paragraph 22.

APPENDIX B
IMF Drawings by the United States
The United states has drawn on the International Monetary
Fund (IMF) on twenty-four occasions over the past 19 years
for a total of about SDR 5.8 billion (equivalent to about
$6.5 billion at the exchange rates prevailing at the time of
each drawing), the second largest amount of cumulative drawings
of any IMF member. None of these drawings was subject to
IMF policy conditionality, as they all involved drawings on the
U.S. reserve position in the IMF. Drawings on the reserve
position are available automatically upon representation of
balance of payments need; do not bear interest and are not
subject to repurchase obligations; and do not involve policy
conditionality.
The U.S. drawings were for the following purposes:
during the 1960s and early 1970s they were designed to
limit foreign purchases of U.S. gold reserves? subsequently,
they were designed to provide the United States with foreign
currencies for the purpose of exchange market operations.
These purposes are explained below. A table listing all
U.S. drawings is attached.
Drawings During the 1960s and 1970s
Under the international monetary arrangements in operation
following World War II, each member of the IMF was required
to establish and maintain a "par value" for its currency in
terms of gold. The United states undertook to fulfill its
par value obligations by standing ready to convert dollars
held by foreign monetary authorities into gold at the official
price of $35 per ounce — i.e., the par value of the dollar.
Other countries met their par value obligations by maintaining
exchange rates for their currencies — directly or indirectly
— in terms of the dollar within narrow margins. In this
manner, a strucuture of currency exchange rates linked to
gold was established and maintained.
During the 1950s and 1960s, large payments imbalances,
substantial losses of U.S. gold and foreign accumulations of
dollar holdings, representing further potential strains on
U.S. gold, put increasing strain on this system. Beginning
in the early 1960s the United States, in cooperation with
foreign monetary authorities, initiated a variety of measures
designed to limit pressures on U.S. gold holdings. U.S.
drawings on the IMF were an integral part of this program.
In general, IMF drawings provided the United States
with foreign currencies that could be used to purchase dollars
from foreign monetary authorities and thus reduce demands
for conversion of official dollar holdings to gold. The
foreign currencies obtained from the IMF were used most
often in the following types of transactions:

- 2 to facilitate repayment of IMF drawings by other
countries without necessitating the use of U.S. gold;
repayment of U.S. short-term currency swaps with
foreign central banks; and
direct purchases by the United States of foreign
official dollar holdings that would otherwise be
used to purchase U.S. gold.
Drawings Since the Early 1970s
With the end of the par value/gold convertibility
arrangements in the early 1970s, the basic purpose of U.S.
drawings from the IMF was to finance U.S. intervention in
the exchange markets in support of the dollar. During the
1970s, the U.S. intervened directly in the foreign exchange
market, buying and selling foreign currencies for dollars,
in order to deal with exchange market pressures on the
dollar. The foreign currencies obtained from U.S. drawings
in the IMF provided an important source of funds for such
intervention. In November 1978, a U.S. drawing of $3 billion
of German marks and Japanese yen was a component of a major
program of U.S. and foreign intervention in the exchange
market to support the dollar.

IMF Drawings by the United States
( SDR Millions )

Date
1964:

1965

1966

Feb
June^
Sept
Dec
Total
March
July
Sept
Total
Jan
March
April
May
July
Aug
Sept
Oct
Nov
Dec
Total

Amount
125
125
150
125
525
75
300
60

TIT
100
60
30
30
71
282
35
31
12
30

Date

Amount

1968: March 200
Total 200
1970: May
150
Total 150
1971: Jan
250
June
250
Aug
862
Total 1,362
1972: April 200
Total 200
1978: Nov
Total

2,275
2,275

Grand Total

5,828

T7Equivalent to about $6.5 billion at exchange rates
prevailing at the time of each drawing.

APPENDIX C

Budgetary and Financing Impact
of Transactions with the IMF under
the U.S. Quota in the IMF
and U.S. Loans to the IMF
Under budget and accounting procedures established in consultation with the Congress at the time of the 1980 increase in
the U.S. IMF quota, an increase in the U.S. quota or line of
credit to the IMF requires budget authorization and appropriation
for the full amount of increases in the quota or U.S. lending
arrangements. The sum is included in the budget authority totals
for the fiscal year requested. Payment to the IMF of the increased
quota subscription is made partly (25 percent) in reserve assets
(SDRs or foreign currencies) and partly in non-interest bearing
letters of credit, which are a contingent liability. Under the
credit lines established pursuant to IMF borrowing arrangements
with the United States, the Treasury is committed to provide funds
upon call by the IMF.
A budget expenditure occurs only as cash is actually transferred to the IMF, through the 25 percent reserve asset payment,
through encashment of the quota letter of credit, or against the
borrowing arrangements. Simultaneous with such transfers, the U.S.
receives an equal offsetting receipt, representing an increase in
the U.S. reserve position in the IMF — an interest-bearing, liquid
international monetary asset that is available unconditionally to
the United States in case of balance of payments need. As a consequence of these offsetting transac

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