Full text of Press Releases of the United States Department of the Treasury : Volume 250

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LiBKASY
DEC 1 5 1983

Treas.
HJ
10
.A1P34
v. 250

U. S. Dept. of the Treasury.
•f: PRESS RELEASES

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M. March 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 31, 1983.
This offering will provide $1,475 million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $ 10,933 million , including $967
million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2,099 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 30, 1982,
and to mature
June 30, 1983
(CUSIP
No. 912794 CZ 5) , currently outstanding in the amount of $ 5,813
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $ 6,200 million, to be dated
March 31, 1983,
and to mature September 29, 1983
(CUSIP
No. 912794 DS 0 ) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing March 31, 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-3000

- 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 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 .

- 3Public 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 31, 1983,
in cash or other immediately-available funds
or in Treasury bills maturing March 31, 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
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
March 22, 1983
RESULTS OF AUCTION OF 4-YEAR NOTES
The Department of the Treasury has accepted $5,502 million of
$11,796 million of tenders received from the public for the 4-year
notes, Series H-1987, auctioned today. The notes will be issued
March 31, 1983, and mature March 31, 1987.
The interest rate on the notes will be 10-1/4%. The range of
accepted competitive bids, and the corresponding prices at the 10-1/4%
interest rate are as follows:
Bids
Prices
Lowest yield
Highest yield
Average yield

10.25%
10.33%
10.30%

100.000
99.743
99.839

Tenders at the high yield were allotted 16%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Received
Accepted
Location
Boston
33,639
$
129,239
$
New York
4 ,575,927
9,776,075
Philadelphia
23,290
24,130
Cleveland
190,234
148,394
Richmond
91,682
43,322
Atlanta
54,944
43,184
Chicago
755,666
268,626
St. Louis
101,431
95,034
Minneapolis
38,164
34,664
Kansas City
80,268
78,348
Dallas
13,202
13,202
San Francisco
539,158
142,918
Treasury
1,904
1,904
Totals
$11,796,097
$5 ,502,452
The $5,502 million of accepted tenders includes $1,298 million of
noncompetitive tenders and $4,204 million of competitive tenders from
the public.
In addition to the $5,502 million of tenders accepted in the
auction process, $ 675million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $300 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-3001

TREASURY NEWS V

Department of the Treasury • Washington, D.c. • Telephone 566-20*
FOR IMMEDIATE RELEASE
Contact: Marlin Fitzwater
Thursday, March 17, 1983
(202) 566-5252
MCNAMAR TO LEAD DELEGATION TO LATIN AMERICA
Deputy Secretary of the Treasury R. T. McNamar will lead a
delegation of U.S. Congresssional representatives to discuss
international financial conditions with officials in Mexico, Peru
and Brazil, March 25-31.
Secretary Donald T. Regan, originally scheduled to head the
delegation, will remain in Washington to work on development of
the FY 1984 Budget, including the economic forecasts.
"The purpose of this trip will be to meet with top financial
officials and business leaders in each of these countries to
examine the genesis and resolution of their financial problems,"
Secretary Regan said. "The delegation will discuss the efforts
each of these countries is making individually, and in
conjunction with international institutions, to resolve these
problems and to adjust their economies to a more sustainable
basis."

TREASURY NEWS
FOR IMMEDIATE
epartment
of theRELEASE
Treasury • Washington, D.c. • Telephone
566-2041
March 23, 1983
RESULTS OF AUCTION OF 7-YEAR NOTES
D
e n n^
f P ? r t m e n t o f the Treasury has accepted $4,766 million of
J>±±,/44 million of tenders received from the public for the 7-year
notes, Series D-1990, auctioned today. The notes will
ill ]be issued
April 4, 1983, and mature April 15, 1990.

The interest rate on the notes will be 10-1/2%. The ranqe of
accepted competitive bids, and the corresponding prices at the 10-1 12'
interest rate are as follows:
Bids
Prices
Lowest yield
10.55% 1/
99.740
Highest yield
10.59%
99.546
Average yield
10.58%
99.594
Tenders at the high yield were allotted 67%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$ 122,017
$ 16,367
New York
9,567,069
4,109,165
Philadelphia
210
210
Cleveland
79,276
59,276
Richmond
68,427
30,547
Atlanta
37,968
29,638
Chicago
944,037
229,597
St. Louis
69,693
60,193
Minneapolis
24,389
21,059
Kansas City
33,557
30,557
Dallas
13,584
13,254
San Francisco
782,493
164,973
Treasury
1,008
1,008
Totals
$11,743,728
$4,765,844
The $4,766 million of accepted tenders includes $1,103 million

?rorthrpublic!e

tSnderS and $3 663 milli n

'

° °f

com etit

P

ive tenders

In addition to the $4,766 million of tenders accepted in the
auction process, $260 million of tenders was awarded at the averaue
price to Federal Reserve Banks as agents for foreign and international
y
monetary authorities.
international
1/ Excepting 1 tender of $1,000,000

R-3002

TREASURY NEWS _

department of the Treasury • Washington, D.c. • Telephone 566-204
FOR IMMEDIATE RELEASE

March 24, 1983

RESULTS OF AUCTION OF 20-YEAR 1-MONTH BONDS
The Department of the Treasury has accepted $ 3,251 million of
$7,703 million of tenders received from the public for the 20-year
1-month bonds auctioned today. The bonds will be issued April 4,
1983, and mature May 15, 2003.
The interest rate on the bonds will be 10-3/4%. The range of
accepted competitive bids, and the corresponding prices at the 10-3/4%
interest rate are as follows:
Lowest yield
Highest yield
Average yield

Bids

Prices

10.78%
10.84%
10.81%

99.694
99.207
99.450

Tenders at the high yield were allotted 28%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
Totals

Received

Accepted

$
92,853
6,514,480
7,370
8,264
35,724
22,255
601,588
38,228
10,827
7,233
3,291
360,840

$
5,853
2,969,510
2,370
6,264
15,764
17,255
138,688
35,148
10,827
7,233
2,291
39,240

74

74

$7,703,027

$3,250,517

The $3,251 million of accepted tenders includes $743
million of noncompetitive tenders and $2,508 million of competitive tenders from the public.

R-3003

TREASURY NEWS

department of the Treasury • Washington, D.c. • Telephone 566-204
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

March 28, 1983

Tenders for $6,202 million of 13-week bills and for $ 6,201 million of
26-week bills, both to be issued on
March 31, 1983,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average
a/ Excepting
b/ Excepting
Tenders
Tenders

26-week bills
maturing September 29, 1983
Discount Investment
Price
Rate
Rate 1/

13-week bills
maturing
June 30, 1983
Discount Investment
Price
Rate
Rate 1/

97.818a/ 8.632%
8.97%
95.616b/8.672%
9.22%
95.593
8.717%
9.27%
97.801
8.699%
9.04%
95.599
8.705% _
2/
9.26%
97.806
8.680%
9.02%
1 tender of $50,000.
3 tenders totaling $1,510,000.
at the low price for the 13-week bills were allotted 38%.
at the low price for the 26-week bills were allotted 60%.

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
$
113,415
$
48,415
$
124,160
12,027,290
11,251,895
4,960,295
:
38,370
38,370
18,635
94,470
78,920
355,635
75,590
69,590
118,375
47,865
47,865
119,955
983,935
357,835
811,750
58,200
56,200
42,625
21,220
17,360
17,830
37,655
37,655
:
54,935
37,640
37,640
:
20,395
1,176,875
271,955
:
1,198,760
179,895
179,895
:
225,805

Accepted
$
47,160
4,757,060
18,635
240,635
92,375
114,955
275,750
38,625
13,820
52,935
15,395
307,760
225,805

$14,117,025

$6,201,995

:

$15,136,150

$6,200,910

$11,891,030
896,905
$12,787,935

$3,976,000
896,905
$4,872,905

:
:
:

$12,873,465
796,785
$13,670,250

$3,938,225
796,785
$4,735,010

1,082,290

1,082,290

:

1,080,000

1,080,000

246,800

246,800

:

385,900

385,900

$14,117,025

$6,201,995

:

$15,136,150

$6,200,910

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

1/ Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
~~
on money market certificates is 8.418%.
R-3004

TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 6:30 P.M.
ADDRESS BY
BERYL W. SPRINKEL
UNDER SECRETARY FOR MONETARY AFFAIRS
BEFORE THE CHAMBER OF COMMERCE
SALISBURY, MARYLAND
TUESDAY, MARCH 29, 1983
From Recovery to Renewal
It is with extreme pleasure that I visit this beautiful
Eastern Shore tonight to share with you my confidence in the
healthy economic recovery that is upon us.
When President Reagan took office a little more than two
years ago, conventional wisdom had it that no chief executive
could surmount political tradition and a locust cloud of special
interests to wage an effective war against inflation. No one
man, it was said, could make good on his promises to reduce
taxes, reform the spider's web of excessive regulations, curb the
voracious hunger of Washington's big spenders, and reverse the
misguided economic policies that dulled American competitiveness
and drained off billions of dollars from productive investment
and job creation.
But I invite you to consider the latest numbers disgorged by
capital computers. Two years ago, consumer prices were rising at
an annual rate of better than 12%. Today, the CPI stands at
3.5%. And with oil prices continuing to slide, the outlook for
inflation remains favorable. Two years ago, interest rates were
topping out at 21 1/2%. Today, they're less than half that
figure, and the rewards for patience can be counted in every real
estate office in America, lumber mills, and brokerage houses.
Two years ago, the federal budget was growing at a yearly clip of
14% — and my use of the word clip is not accidental. Today,
Uncle Sam is tightening his belt just as millions of those who
support him with their taxes have had to do. Those taxpayers
will receive a windfall of $335 billion or so between now and
1985 — money they never would have seen, let alone spent, were
it not for the economic reform program adopted at the President's
urging in 1981.
None of this fits the conventional mold as sculpted by
pre-Reagan Washington. Nor have the rites of passage been
navigated painlessly. Thanks to the skyhigh interest rates we
inherited, we found ourselves in a recession far deeper and far
more prolonged than anyone expected. But as the tax cut medicine
prescribed in the spring of 1981 has taken hold, as savings have
reduced
swelled and
inflation
consumer
rose
spending
up to meet
expanded,
the reality,
as the perception
as investors
of came

-2to accept our long-range commitment to fight inflation with more
than words — well, the unconventional is in the process of
vindication.
In addition to the impressive progress against inflation and
interest rates, we can now measure month by month the rebound of
an economy primed for significant growth and sustained
prosperity. "An optimist," Winston Churchill liked to say, "sees
an opportunity in every calamity, a pessimist sees a calamity in
every opportunity." In case you haven't guessed by now, we at
the Treasury Department are optimists. And even in Washington,
that outpost of tunnel vision, it's hard to miss the
opportunities as omnipresent as press releases and cameramen.
The recession is over, by virtually any statistical
measurement at hand. January's increase in the leading economic
indicators was 3.6% — the largest spurt since Harry Truman
occupied the White House in July, 1950. Industrial production
has risen in each of the last three months. Factory utilization
has halted its decline, and durable goods orders are up strongly
compared to 1982. Housing starts have reached their highest
levels in over three years. Inventories continued to fall in
January, on the heels of the sharpest liquidation since World War
II.
Most important of all, the unemployment rate has peaked at
10.8% and retreated to 10.4. That is still too high — far too
high for any of us to claim ultimate victory in the economic
battle still being waged. But on top of so much persuasive
evidence that the worst is behind us, and with the knowledge that
employment usually trails behind other indexes of economic
performance by several months, it's fair to say that the American
economy is not only poised for recovery — it has already begun
to generate fresh opportunity.
According to the National Association of Purchasing
Management, incoming orders are rising steadily, and the
employment picture is brighter than at any time in more than a
year. Just twelve weeks ago, these same purchasing chiefs were
asked to give their assessment of the first quarter of 1983.
Twenty-eight percent predicted improvement over the same period
last year; 15% forecast a worse quarter. But according to the
latest survey, 58% of the purchasing managers replied that this
quarter would show improvement over last year. The ranks of the
pessimists had dwindled to just 11%.
If only the same ratio held true for Congress and the media.
This Chamber ought not forget, as we begin to move from
recession to recovery, that the entire Reagan Revolution, is
based on the idea that less government and more capitalism will
attack at their roots the overgrowth of crushed American dreams
and blasted opportunities that have mocked our claims to
compassion and social justice and wasted our most precious asset,

-3which is people. How can we sustain both? How can we avoid the
tragic experiences of the recent past, when two short-lived booms
were snuffed out before they got beyond the stage of infancy?
How can we raise the floor beneath those now in distress, without
lowering the ceiling on future growth and future employment?
It's been said that it is the business of the future to be
dangerous. I couldn't disagree more strongly. I look beyond the
headlines to see the horizon, and I see an economy of enormous
untapped potential. Not just in computer chips and not just in
the high tech belts of Boston's Route 128 and the Silicon Valley.
But in the lumber yards and textile mills, in Salisbury and its
metropolitan area, wherever men and women with imagination as
well as capital decide to exploit the one while investing the
other.
First things first. Millions of our people still hurt.
They deserve more than pious words and congressional hearings.
To address the problems of structural unemployment, the President
is proposing a number of steps. One is a voucher system,
permitting workers to swap unemployment benefits for job
vouchers, which would, in turn, entitle employers to tax credits.
In addition, he has called for a thousand per cent increase in
funds targeted to displaced workers under the Job Training
Partnership Act. More money than ever before would reach the
states to permit job retraining, placement and relocation
assistance. In place of CETA, which even its friends acknowledge
was flawed by administrative overhead and insufficient attention
to long-term employment, the administration is seeking three
billion dollars to train workers for jobs that will outlast a
government program, and paychecks that do not depend upon the
whim of a congressional committee.
For young people who suffer a disproportionate share of
unemployment, we propose to open the door to opportunity —
without shutting it in the face of adult workers. During the
summer months, we would permit employers to hire teenagers at
$2.50 per hour. No solution is perfect, but compared with the
nightmare of teenage unemployment we can no longer stand by and
allow the status quo to serve as an excuse for inaction.
In addition to these steps, the President has signalled his
unwavering opposition to those who would scrap either the third
year of his across the board tax cut, or tax indexing, now
scheduled to take effect in 1985. Let's be honest with ourselves
and with our children. The tax cuts adopted in 1981 did little
more than keep our heads above water. They did call a halt to
the rapidly increasing trends evident in the late 70's, and they
put us more nearly on an equal footing with tax levels applied in
the more prosperous 60's. Those with a fondness for yesterday's
policies cloak their nostalgia in the seductive language of
fairness. Of course, they never tell us what was fair about
double-digit inflation, record interest rates, or the decline in
purchasing power fostered by their own inclination to spend now

-4and send the bill to future generations. It's as if we'd created
a new beatitude: "Blessed are the young, for they shall inherit
the national debt."
The facts, of course, are simple. Those who earn between
$10,000 and $50,000 a year — what is generally defined as the
broad middle class of Americans — pay about three-quarters of
all income taxes. They receive about three-quarters of the
income tax cut. But in addition to that, they receive a
disproportionate boost in the value of their dollars when you
figure in a dramatically reduced inflation rate. To repeal the
third year of the tax cut now would impose comparatively little
hardship on the wealthy. For those with incomes of $200,000 or
more, it would mean a tax hike of less than 3%. But for those
whose adjusted gross income is less than $10,000 a year, repeal
of this July's tax cut would impose nearly 14% of additional tax
liability. For those in the twenty to thirty thousand dollar
range, the added burden would amount to 12%.
Indeed, repeal of the third year of the tax cut and indexing
would cost the typical median income ($24,300 in 1980) family of
four $1061 in higher taxes over the next three years and $3549 in
higher taxes through 1988.
Now what, may I ask, is fair about any of that?
There are congressmen who want to scuttle the tax cut for
the same reason they want to deliver indexing stillborn —
because their own appetite for spending money — taxpayer money
— is out of control. Inflation may be a public enemy to the
rest of us, but to them, it's an unwitting ally, because it
artificially raises revenue by elevating working people into
higher tax brackets. Lincoln used to tell about an Illinois
politician who was once offered transport out of town on the
nearest rail. And he replied that if it weren't for the honor of
the thing, he's just as soon walk. Well, the average worker in
this country can do just fine without the dubious honor of
bracket creep. And if we mean business in bringing genuine
reform as well as lasting recovery, then we will hold to the
policies that promise both.
We will continue to apply self-discipline in the budgetary
process, to whittle away at the growth rate of entitlement and
other pLograms that have outstripped the ability of our economy
to support them. We will scrutinize every federal expenditure
for its usefulness, weighed against the danger of mountainous
deficits. And we will not yield to special interests, whether in
pinstripes or bluejeans, who distort the truth for their own
selTich ^nds. You've all heard of bankers' hours. Well, these
days, some bankers are working over time — not to attract
customers but to frighten them. Their arguments against
withholding of interest and dividend income, I'm sorry to say,
are about as phony as a three dollar bill. This is not a new
tax, nor an unfair burden on financial institutions. It is tax

-5reform, tax compliance, and the principle of equal treatment
carried beyond the rhetoric of election years. The Perdue
employee has his taxes deducted from each week's paycheck. Why
shouldn't those with unearned income accept a similar deduction
once a year? At a time when sacrifice has been asked and given
by the many, I can see no justification for exempting the few.
In the end, however, the renewal of American industry will
come about, not because Washington wished it, but because
economic managers in the field willed it. We have come through a
recession which, ironically, has left much of American industry
in better condition to compete, to innovate, to scratch out or
expand its share of tomorrow's market. America stands poised for
renewal. Yet all our progress could vanish with hardly a trace
if American business loses its nerve or abandons its taste for
competition — if American workers forget the harsh lessons of
inflation and joblessness taught over a decade or more of
immoderate demands — if government owns up to its own
responsibilities, only to have business run away from
possibility.
Not long ago, the Department of the Treasury had a chance to
review the findings of a Cambridge-based think tank, the
Strategic Planning Institute. After surveying 200 major U.S.
firms and their strategies for future operation, SPI discovered
that American industry has yet to grasp possibilities over and
above new technologies alone. Investment even now could be
increased by 30%. For support, the authors point to Miller
Brewing Company, eighth ranking brewer when Phillip Morris
purchased it in 1970, with a market share of less than 5%. Over
the next three years, Phillip Morris doubled plant capacity,
designed new ad campaigns, and withstood one year of red ink in
pursuit of a larger goal.
Today, Miller is the second largest company in its field,
and a highly profitable Number Two at that. The implication is
clear: our preoccupation with the short run has blinded us to
the necessity for risktaking. Walter Bagehot put it bluntly yet
truthfully more than a century ago. "The buoyant rise and rule,"
he wrote, "the weak, the shrinking, and the timid fall and
serve."
Before concluding, let me switch gears for a moment and
discuss the international scene. There are two major
international issues which are affecting our own economy. The
first big issue is oil.
OPEC has finally reached an agreement on oil pricing. This
is clearly good news for the United States and the world economy.
It will mean less inflation, and will certainly hold interest
rates down.
The oil price reduction will obviously place some strains on
certain oil exporters with large external debts. However, of the

-6ten nations with the largest debts, eight are oil importers.
This action will be of great benefit to them as well as to the
other less developed countries. Those are repercussions the
Treasury is watching very closely.
The second issue is international debt and the role of the
International Monetary Fund — the IMF.
Right now the Administration is seeking Congressional
approval of an increase in quotas for the IMF — an increase
which is acutely needed for the IMF to continue its traditional
role in international lending.
If there was too much international lending in the decade of
the 70's that contributed to today's problems, too little lending
in the 80's would be disastrous. The key here is to pursue a
prudent and balanced approach.
Many have asked: What difference does international lending
make to us? The short answer is that it makes a tremendous
difference, because the ability of these countries to
successfully adjust to their 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 ovehr 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.
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

-7Mexican 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 of 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 Detroit,
housing loans in Dallas, capital expansion loans in California —
all would be affected.
Thus we must look to this period of recovery as a time of
great transition and opportunity. A good deal of restructuring
has taken place during this long and troubling world recession —
restructuring of our industrial capacity at home and
restructuring of our international relationships as well. We
approach a time of renewal.
"This is perhaps the most beautiful time in human history,"
Dr. Jonas Salk has written. "It is really pregnant with all
kinds of creative possibilities made possible by science and
technology which now constitute the slave of man — if man is not
enslaved by it."
Therein lies the ultimate challenge of change. How we meet
that challenge will be influenced by political decisions, to be
sure. But whether you choose to see calamity or potential will
also help to decide what the rest of us see a few years down the
road. The President has done much to foster a climate ripe for
innovation. But we cannot innovate for the business community.
We can only echo the sentiment of Emerson, who said, "Be an
opener of doors for such as come after thee, and do not try to
make the universe a blind alley."
The doors, ladies and gentlemen, have been opened. We
invite you to walk through them, and to join us in opening them
still wider for those who follow. We invite you to convert
recovery into renewal, for Salisbury and all across this
###
enterprising land.

FOR IMMEDIATE RELEASE MARCH 28, 19 83
The Treasury announced today that the 2-1/2 year Treasury
yield curve rate for the five business days ending March 28,
1983, averaged
points.

9.95

% rounded to the nearest five basis

Ceiling rates based on this rate will be in effect

from Tuesday, March 29, 1983 through Thursday, March 31, 1983.
Effective April 1, 1983, the maturity range for small saver
certificates will be 1-1/2 years to less than 2-1/2 years. On
March 31 the Treasury will announce a 1-1/2 year yield curve
rate to be in effect for small saver certificates issued from
April 1, 1983 to April 11, 1983.

The 1-1/2 year rate for this

purpose will then be announced on alternate Mondays beginning
April 11, 1983 and terminated when this rate is no longer required
by regulations.
Detailed rules as to the use of this rate in establishing
the ceiling rates for small saver certificates are set forth in
Title 12 of the Code of Federal Regulations, section 1204.106.
Small saver ceiling rates and related information is available from the DIDC on a recorded telephone mess&cje.

The phone

number is (202)566-3734.

-// /

Approved' C • ^ - /
\
t
Francis X. Cavanaugh, Director
Office of Government Finance
& Market Analysis

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Tuesday, March 29, 1983

Contact: Charley Powers
(202) 566-2041

NEW DIRECTOR NAMED FOR ATF
Secretary of the Treasury Donald T. Regan today named
Stephen E. Higgins Director of the Bureau of Alcohol, Tobacco and
Firearms (ATF) in Washington, D.C.
Higgins, 44, has been Acting Director of ATF since March of
1982. Higgins directs a multi-mission Bureau responsible for
carrying out regulatory and law enforcement missions relating to
alcohol, tobacco and firearms and explosives. The Bureau, which
has offices in every state of the union, is also responsible for
collecting $8 billion annually in Federal alcohol and tobacco
excise taxes.
A career Federal employee, Higgins served as ATF's Deputy
Director from 1979 to 1982 and as Assistant Director for
Regulatory Enforcement from 1975 to 1979.
He joined ATF in 1961 as an Inspector in Omaha, Nebraska,
and rapidly assumed positions of increasing responsibility,
serving in virtually every regulatory enforcement capacity within
the Bureau. His posts of duty have included Chicago, Dallas,
Philadelphia and San Francisco.
In 1973, Higgins joined the ATF headquarters staff as Deputy
Assistant Director for Regulatory Enforcement. Later that year
he transferred to Chicago as Director of the ATF Midwest Region
for Regulatory Enforcement, and, at age 36, became the youngest
Assistant Director in the Bureau's history.
Higgins is a charter recipient of the Meritorious Executive
Award, a Presidential honor granted for the first time in 1980.
The Secretary of the Treasury, in presenting the award on behalf
of the President, stated that Higgins "distinguished himself and
the Bureau" through his efforts as a senior Treasury Department
Executive.
Born in St. John, Kansas, Higgins graduated with honors from
Emporia College. He did graduate work at the University of
Washington after receiving a career education fellowship from the
National Institute of Public Affairs.
The new ATF Director is a member of the International
Association of Chiefs of Police. ATF works closely with police
departments throughout the country to curb firearms, explosives
and arson crimes.
Higgins and his wife Cheryl have three children and reside
in McLean, Virginia.
R-3U5Z

rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone
FOR RELEASE AT 4:00 P.M.
March 29, 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 April 7, 1983.
This offering will provide $ 925
million of new cash for the
Treasury, as the-maturing bills are outstanding in the amount
of $11,474 million, including $751
million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2,178 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
January 6, 1983, '
and to mature July 7, 1983
(CUSIP
No. 912794 DH 4 j , currently outstanding in the amount of $5,817
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
October 7,- 1982,
and to mature October 6, 1983
(CUSIP
No. 912794 DD 3 ) , currently outstanding in the amount of $ 7 012
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 April 7, 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-3008

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20 226, up to 1:30 p.m., Eastern Standard time, Monday,
April 4, 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 April 7, 1983,
in cash or other immediately-available funds
or in Treasury bills maturing April 7, 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.

::ederal financing bank
WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

N i\NS
March 30, 1983

FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of February 1983.
FFB holdings of obligations issued, sold, or guaranteed by other Federal agencies on Februray 28, 1983
totaled $126.6 billion, an increase of less than $0.1
billion over the level on January 31, 1983. FFB increased
holdings of agency guaranteed debt by over $0.6 billion
and holdings of agency debt issues increased by less than
$0.1 billion. Holdings of agency assets purchased
declined by $0.6 billion. A total of 213 disbursements
were made during the month.
Attached to this release are tables presenting
FFB February loan activity; new FFB commitments to lend
during February and FFB holdings as of February 28, 1983.
# 0 #

R-3009

Press inquir
202-566-26

8m

FEDERAL FINANCING BANK

Page 2 of &

FEBRUARY 1983 ACTIVITY
AMOUNT
OF ADVANCE

DATE

BORROWER

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
—
(other than
semi-annual)

ON-BUDGET AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
5,000,000.00
45,000,000.00

5/12/83
5/12/83

8.549%
8.175%

750,000.00
10,500,000.00
7,000,000.00
2,000,000.00
2,500,000.00
2,000,000.00
13,500,000.00
7,013,000.00

3/7/83
5/5/83
5/16/83
4/18/83
5/17/83
3/1/83
5/5/83
4/25/83

8.551%
8.523%
8.523%
8.636%
8.636%
8.636%
8.476%
8.341%

2/22 130,000,000.00 2/22/98 10.885% 11.181% ann.
2/22
30,000,000.00

2/22/03

11.025%

9/10/87
4/30/11
9/1/92
5/16/11
4/30/89
11/22/90
5/5/11
11/30/12
7/21/94
6/22/92
6/15/12
3/20/90
12/31/93
12/15/88
2/16/12
2/16/12
5/5/94
6/22/92
5/5/11
3/24/12
11/30/12
11/30/94
3/20/90
6/15/12
4/30/11
12/31/84
6/22/92
9/1/09
2/16/12
4/30/11
11/30/94
6/3/10
9/22/90
2/16/12
2/15/88
9/10/87
4/25/90
6/15/91
1/15/95

8.835%
10.925%
10.895%
10.912%
10.715%
9.758%
11.069%
10.995%
11.075%
11.005%
11.315%
10.935%
10.922%
9.515%
11.345%
11.349%
10.275%
11.065%
11.169%
11.075%
11.128%
10.678%
10.755%
11.155%
10.935%
9.745%
10.880%
11.255%
11.175%
10.805%
10.498%
10.989%
10.411%10.978%
9.981%
8.735%
10.585%
10.375%
10.417%

Note #282 2/11
Note #283

$
2/28

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

#154
#155
#156
#157
#158
#159
#160
#161

2/3
2/14
2/14
2/16
2/16
2/16
2/18
2/22

AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership

GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE - FOREIGN MILITARY SALES
Philippines 7
Greece 14
Somalia 1
Somalia 2
Dominican Republic 5
Jordan 8
Turkey 12
Turkey 14
Liberia 9
Turkey 9
Egypt 3
Indonesia 7
Korea 15
Peru 8
Israel 13
Israel 13
Kenya 10
Turkey 9
Turkey 12
Turkey 13
Turkey 14
El Salvador 5
Indonesia 7
Egypt 3
Greece 14
Uruguay 2
Turkey 9
Israel 8
Israel 13
Greece 14
El Salvador 5
Greece 12
Greece 13
Israel 13
Peru 7
Philippines 7
Spain 4
Spain 5
Pakistan 1
-•-rollover

2/1
2/2
2/2
2/2
2/3
2/3
2/3
2/3
2/4
2/4
2/7
2/7
2/7
2/7
2/7
2/9
2/9
2/9
2/9
2/9
2/9
2/11
2/11
2/14
2/14
2/14
2/15
2/16
2/17
2/22
2/22
2/22
2/22
2/22
2/22
2/22
2/22
2/22
2/23

409,694.52
361,692.10
194,155.78
376,324.22
108,261.93
2,426,245.84
17,480,000.00
2,246,072.00
13,500.00
1,084,946.07
765,917.13
537,964.35
15,000,000.00
82,150.00
10,253,609.72
15,396,130.35
29,140.00
246,585.90
3,106,831.00
115,892.00
10,086,594.00
1,439,816.50
573,991.60
2,791,279.14
6,305,847.52
95,386.50
1,809,581.81
2,000,000.00
8,680,262.39
391,376.00
817,145.00
2,812,854.00
1,939,956.00
17,842,079.30
73,927.45
302,195.44
102,041.29
98,257.25
150,000,000.00

11.329% ann.

Page 3 of 6

FEDERAL FINANCING BANK
FEBRUARY 1983 ACTIVITY

BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semi:annual

INTEREST
RATE
(other than
semi-annual)

DEPARTMENT OF DEFENSE - FOREIGN MILITARY SALES (Cont'd)
El Salvador 5
Egypt 3
Turkey 9
Turkey 13
Dominican Republic 5
Greece 13
Israel 13
Korea 15
Jordan 7
Jordan 7
Turkey 12
Turkey 12
Korea 15

2/23
2/24
2/24
2/24
2/25
2/25
2/25
2/25
2/25
2/25
2/25
2/28
2/28

$ 1,771,372.46
3,125,032.81
1,251,862.24
131,418.00
406.34
1,956,373.00
8,657,545.71
9,115,348.00
162,046.10
35,980.00
196,328.33
719,919.11
135,275.28

11/30/94
6/15/12
6/22/92
3/24/12
4/30/89
9/22/90
2/16/12
12/31/93
3/16/90
11/22/90
5/5/11
5/5/11
12/31/93

10.427%
10.815%
10.535%
10.525%
10.185%
10.175%10.821%
10.397%
10.235%
9.605%
10.725%
10.585%
10.265%

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

#50
#51
#52
#53

2/7

4/1/83
4/1/83
10/3/83
1/3/84

9.289%
9.299%
9.655%
9.495%

2/1/87
8/1/84
10/1/03
5/1/84
8/1/83
2/15/88
6/1/84
12/1/83
6/1/83

10.053%
9.575%
11.192%
9.395%
8.765%
10.234%
9.035%
8.735%
8.365%

52,260,160.32

11/1/0811/1/18

11.103%

11.411% ann.

9,500,000.00

10/1/92

10.434%

10.706% ann.

12/31/13
2/1/85
12/31/17
12/31/17
12/31/17
12/31/15
12/31/15
12/31/17
12/31/15
12/31/15
12/31/15
12/31/15
2/4/85
12/31/15
12/31/17
2/10/85
2/10/85
2/10/85
2/10/85
3/31/85

11.139%
9.705%
11.136%
11.136%
11.136%
11.106%
11.106%
11.105%
11.105%
11.105%
11.211%
11.211%
9.835%
11.272%
11.272%
10.015%
10.015%
10.015%
10.015%
10.055%

10.988%
9.590%
10.985%
10.985%
10.985%
10.956%
10.956%
10.955%
10.955%
10.955%
11.058%
11.058%
9.717%
11.118%
11.117%
9.893%
9.893%
9.893%
9.893%
9.932%

4,000,000.00
9,000,000.00
11,000,000.00
12,000,000.00

2/14
2/22
2/28

DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development Block Grant Guarantees
*Peoria, IL
Pomona, CA
Phila. Auth. for Ind. Dev.
Hammond, ID
Washington County, PA
•Ashland, KY
Nashville, TN
Hialeah, FL
Tempe, AZ

2/1
2/8
2/8
2/8

3,675,000.00
850,000.00
630,000.00
213,935.00
18,290.40
158,200.00
250,000.00
289,083.98
626,500.00

2/14
2/15
2/23
2/24
2/24

10.306%
9.804%
11.505%
9.616%

ann.
ann.
ann.
ann.

10.496% ann.
9.239% ann.
8.868% ann.

Public Housing Notes
Sale #30

2/4

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
Space Communications Company

2/22

RURAL ELECTRIFICATION ADMINISTRATION
•Corn Belt Power #55
Saluda River Electric #186
Arkansas Electric #142
S. Mississippi Electric #90
S. Mississippi Electric #171
*Cajun Electric #180
*Arkansas Electric #142
Kansas Electric #216
*S. Mississippi Electric #3
•S. Mississippi Electric #171
*Brazos Electric #108
•Brazos Electric #108
•Western Farmers Electric #64
*Saluda River Electric #186
Pacific Northwest Gen. #118
•Colorado Ute Electric #168
*Wabash Valley Electric #104
•Wolverine Electric #182
•Central Electric Power #131
Allegheny Electric #175
•maturity extension

2/1
2/1
2/1
2/1
2/1
2/2
2/2
2/3
2/3
2/3
2/4
2/4
2/4
2/6
2/7
2/10
2/10
2/10
2/10
2/10

2,151,000.00
2,100,000.00
6,043,000.00
713,000.00
2,004,000.00
33,000,000.00
1,748,000.00
1,020,000.00
993,000.00
17,003,000.00
20,000.00
866,000.00
6,000.00
132,087,361.41
359,000.00
3,755,000.00
3,687,000.00
858,000.00
40,000.00
51,000.00

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 6

FEBRUARY 1983 ACTIVITY

BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual )

INTEREST
RATE
(other than
semi-annual)

RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
Allegheny Electric #255
Arizona Electric #242
Wabash Valley Power #104
Wabash Valley Power #206
•N. Michigan Electric #183
•Western Illinois Power #162
•N. Michigan Electric #101
•Wolverine Electric #100
•Western Illinois Power #99
Deseret G&T #211
East Kentucky Power #188
Wabash Valley Power #252
New Hampshire Electric #192
Saluda River Electric #186
•Oglethorpe Power #74
•Oglethorpe Power #150
•East Kenkucky Power #73
Colorado Ute Electric #168
•San Miguel Electric #110
Dairyland Power #54
South Mississippi Electric #3
Seminole Electric #141
Big Rivers Electric #58
Big Rivers Electric #143
Big Rivers Electric #179
Oglethorpe Power #74
Soyland Power #226
•Big Rivers Electric #58
•Big Rivers Electric #91
•Cajun Electric #180
°Tex-La Electric #208
°Tex-La Electric #208
°Tex-La Electric #208
Corn Belt Power #55
Corn Belt Power #94
Corn Belt Power #138
Basin Electric #137
Tex-La Electric #208
•Big Rivers Electric #179
•Big Rivers Electric #143
•Big Rivers Electric #136
•Big Rivers Electric #91
•Big Rivers Electric #58
•Colorado Ute Electric #96
Colorado Ute Electric #203
Kansas Electric #216
Central Iowa Power #51
Dairyland Power #54
•Southern Illinois Power #38
•Southern Illinois Power #38
•S. Mississippi Electric #3
•S. Mississippi Electric #90
•Basin Electric #87
•Basin Electric #137
Plains Electric #158
Tex-La Electric #208
•Basin Electric #232
•Basin Electric #232
•Allegheny Electric #175

2/10
2/10
2/10
2/10
2/10
2/11
2/11
2/13
2/13
2/14
2/14
2/15
2/15
2/15
2/15
2/15
2/16
2/17
2/17
2/18
2/20
2/22
2/22
2/22
2/22
2/22
2/22
2/22
2/22
2/23
2/23
2/23
2/23
2/23
2/23
2/23
2/23
2/23
2/23
2/23
2/23
2/23
2/23
2/24
2/24
2/24
2/24
2/25
2/25
2/25
2/27
2/27
2/27
2/27
2/28
2/28
2/28
2/28
2/28

$ 16,657,000.00
4,363,000.00
3,175,000.00
602,000.00
1,101,000.00
2,016,000.00
653,000.00
983,000.00
1,624,000.00
21,527,000.00
4,800,000.00
1,106,000.00
915,000.00
1,810,000.00
17,232,000.00
4,044,000.00
8,134,000.00
5,010,000.00
4,000,000.00
1,960,000.00
4,210,000.00
35,915,000.00
3,617,000.00
538,000.00
3,292,000.00
11,643,000.00
16,105,000.00
2,224,000.00
3,071,000.00
30,000,000.00
69,768,000.00
1,018,000.00
627,000.00
191,000.00
43,000.00
1,275,000.00
20,000,000.00
4,950,000.00
5,172,000.00
41,000.00
203,000.00
1,309,000.00
10,000.00
745,000.00
1,675,000.00
880,000.00
1,286,000.00
9,655,000.00
1,825,000.00
2,700,000.00
1,886,000.00
514,000.00
435,000.00
10,000,000.00
3,691,000.00
670,000.00
2,881,000.00
1,353,000.00
2,663,000.00

3/31/85
12/31/17
2/10/85
2/10/85
2/10/85
12/31/15
2/11/85
2/13/85
12/31/13
12/31/17
12/31/17
2/15/85
2/15/85
2/15/85
12/31/15
12/31/15
12/31/13
2/21/85
2/17/85
2/18/85
12/31/10
12/31/17
12/31/17
12/31/17
12/31/17
2/15/86
2/22/85
12/31/13
12/31/13
12/31/15
12/31/16
12/31/16
12/31/16
12/31/17
12/31/17
12/31/17
2/23/85
2/23/85
12/31/15
12/31/15
12/31/15
12/31/15
12/31/15
2/24/86
2/24/85
12/31/17
12/31/17
2/25/85
12/31/12
12/31/10
12/31/13
12/31/13
12/31/15
12/31/15
12/31/17
2/28/85
2/28/85
2/28/85
2/28/86

10.055%
11.294%
10.015%
10.015%
10.015%
11.117%
9.865%
9.835%
11.100%
11.099%
11.099%
9.905%.
9.905%
9.905%
11.104%
11.104%
11.149%
9.825%
9.825%
9.775%
10.926%
10.923%
10.923%
10.923%
10.923%
9.945%
9.695%
10.926%
10.926%
10.775%
10.775%
10.775%
10.775%
10.774%
10.774%
10.774%
9.535%
9.535%
10.776%
10.776%
10.776%
10.776%
10.776%
9.865%
9.565%
10.768%
10.768%
9.535%
10.637%
10.766%
10.642%
10.642%
10.638%
10.638%
10.639%
9.405%
9.405%
9.405%
9.655%

SMALL BUSINESS ADMINISTRATION
Small Business Investment Company Debentures
CMNY Capital Company, Inc.
First Interstate Capital, Inc.
Realty Growth Capital Corp.
First Connecticut SBIC
•maturity extension
°early extension

2/28
2/28
2/28
2/28

500,000.00
3,000,000.00
300,000.00
1,500,000.00

2/1/86
2/1/88
2/1/88
2/1/93

9.775%
10.075%
10.075%
10.545%

9.932% qtr.
11.139% qtr.
9.893% qtr.
9.893% qtr.
9.893% qtr.
10.967% qtr.
9.746% qtr.
9.717% qtr.
10.950% qtr.
10.949% qtr.
10.949% qtr.
9.785% qtr.
9.785% qtr.
9.785% qtr.
10.954% qtr.
10.954% qtr.
10.998% qtr.
9.707% qtr.
9.707% qtr.
9.658% qtr.
10.784% qtr.
10.778% qtr.
10.778% qtr.
10.778% qtr.
10.778% qtr.
9.824% qtr.
9.580% qtr.
10.781% qtr.
10.781% qtr.
10.634% qtr.
10.634% qtr.
10.634% qtr.
10.634% qtr.
10.633% qtr.
10.633% qtr.
10.633% qtr.
9.424% qtr.
9.424% qtr.
10.635% qtr.
10.635% qtr.
10.635% qtr.
10.635% qtr.
10.635% qtr.
9.746% qtr.
9.453% qtr.
10.627% qtr.
10.627% qtr.
9.424% qtr.
10.499% qtr.
10..625% qtr.
10.504% qtr.
10.504% qtr.
10.500% qtr.
10.500% qtr.
10.501% qtr.
9.297% qtr.
9.297% qtr.
9.297% qtr.
9.541% qtr.

Page 5 of 6

FEDERAL FINANCING BANK
FEBRUARY 1983 ACTIVITY
AMOUNT
OF ADVANCE

DATE

BORROWER

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annua1)

Small Business Investment Company Debentures (Cont'd)
2/28
2/28
2/28
2/28
2/28
2/28
2/28
2/28

Market Capital Corp.
Massachusetts Capital Corp.
Monmouth Capital Corp.
Narragansett Venture Corp.
North Star Ventures, Inc.
RSC Financial Corporation
San Joaquin Capital Corp.
Washington Capital Corp.

2/1/93
2/1/93
2/1/93
2/1/93
2/1/93
2/1/93
2/1/93
2/1/93

10.545%
10.545%
10.545%
10.545%
10.545%
10.545%
10.545%
10.545%

26,000.00
35,000.00
47,000.00
73,000.00
79,000.00
121,000.00
194,000.00
228,000.00
252,000.00
269,000.00
285,000.00
500,000.00
26,000.00
41,000.00
62,000.00
78,000.00
79,000.00
135,000.00
145,000.00
157,000.00
185,000.00
200,000.00
210,000.00
243,000.00
419,000.00
47,000.00
78,000.00
84,000.00
91,000.00
105,000.00
130,000.00
149,000.00
158,000.00
190,000.00
210,000.00
247,000.00
270,000.00
304,000.00
440,000.00
484,000.00
500,000.00
500,000.00

2/1/98
2/1/98
2/1/98
2/1/98
2/1/98
2/1/98
2/1/98
2/1/98
2/1/98
2/1/98
2/1/98
2/1/98
2/1/03
2/1/03
2/1/03
2/1/03
2/1/03
2/1/03
2/1/03
2/1/03
2/1/03
2/1/03
2/1/03
2/1/03
2/1/03
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08
2/1/08 '
2/1/08

11.011%
11.011%
11.011%
11.011%
11.011%
11.011%
11.011%
11.011%
11.011%
11.011%
11.011%
11.011%
11.162%
11.162%
11.162%
11.162%
11.162%
11.162%
11.162%
11.162%
11.162%
11.162%
11.162%
11.162%
11.162%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%
11.253%

513,069,120.49

5/31/83

8.296%

$

350,000.00
1,500,000.00
400,000.00
5,000,000.00
3,000,000.00
1,200,000.00
250,000.00
1,120,000.00

State & Local Development Company Debentures
Iowa Bus. Growth Co.
Hudson Dev. Corp.
S. Illinois Dev. Coram.
Jacksonville LDC, Inc.
Caprock LCD
San Diego County LDC
Brockton Regional EDC
St. Louis LCD
Econ. Dev. Sacramento, Inc.
Ocean State BDA, Inc.
Ocean State BDA, Inc.
Commonwealth SDC
St. Louis LDC
Wilmington Ind. Dev. Corp, Inc.
St. Louis LDC
BEDCO Dev. Corp.
St. Louis LDC
Cincinnati LCD
San Diego County LDC
Mid-Atlantic Cert. Dev. Co.
Long Island Dev. Corp.
Bay Colony Dev. Corp.
Ocean State BDA, Inc.
Grand Rapids LDC
BEDCO Dev. Corp.
Columbus Countywide Dev. Corp.
Oshkosh Comn. Dev. Corp, Inc.
St. Louis LDC
Tucson LDC of Tucson
Central Ozarks Dev. Inc.
S. Shore Econ. Dev. Corp.
Kalamazoo SBD Corp.
Lewiston Dev. Corp.
Pecan Valley Econ. Dev. Dist.
Citywide SBD Corp.
San Diego County LDC Corp.
Evergreen Comm. Dev. Assoc.
Los Medanos Fund
Los Medanos Fund
San Diego County LDC
Worcester BDC
Bay Colony Dev. Corp.

2/9
2/9
2/9
2/9
2/9-

2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9
2/9

TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation

FEDERAL FINANCING BANK
February 1983 Commitments

BORROWER
St. Petersburg, FL
Cleveland, OH
Hammond, IN

GUARANTOR
HUD
HUD
HUD

AMOUNT
$4,350,000.00
2,000,000.00
500,000.00

COMMITMENT
EXPIRES
12/1/84
1/2/85
6/1/84

MATURITY
12/1/84
1/2/04
6/1/84

Page 6 of 6

FEDERAL FINANCING BANK HOLDINGS
(in millions)

Program

February 28, 1983

January 31, 1983

Net Change
2/1/83-2/23/83

Net Change
10/1/82-2/28/83

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank
NCUA-Central Liquidity Facility
Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
Agency Assets
Farmers Home Administration
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
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-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
DOT-Section 511
DOT-WMATA
TOTALS^
•figures may not total due to rounding

$

12,690.0
14,176.7
94.2

$

12,640.0
14,176.7
100.0

$

-5.8

405.0
222.7
-35.9

-73.0

50.0

-0-

$

-0-

1,221.0
121.9

1,221.0
121.9

-0-0-

52,431.0
118.3
148.8
18.5
3,123.7
54.8

53,056.0
118.4
148.8
18.5
3,123.7
55.4

-625.0

12,738.3
5,000.0
44.3
583.0
128.2
33.5
1,755.2
419.1
36.0
29.2
832.8
17,502.3
745.7
83.4
1,273.9
855.7
186.4
177.0

12,446.3
5,000.0
44.3
547.0
128.7
33.5
1,703.0
419.1
36.0
29.2
823.3
17,329.9
728.4
75.4
1,243.0
855.7
186.4
177.0

292.0

1,302.4

-0-0-

-07.7

36.0

243.0
11.3

$ 126,622.8

$ 126,586.6

-

-.1
-0-0-0-.7

-.5
-052.3

-0-0-09.5
172.4
17.3

8.0
30.8

$

-1,305.0
-12.8

3.0
-3.0

-0-3.3

-0131.0
-1.4

-0-.3
75.0
1,220.8
33.6
35.0
15.9

-0-0-0-

-6.6

.3

36.2

$ 2,265.5

-0-

TREASURY NEWS
apartment
of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Wednesday, March 30, 1983
STATEMENT BY SECRETARY REGAN ON LEADING INDICATORS
"Today's release of the leading indicators for February
provides further confirmation that the recovery is well underway.
Leading indicators have now been up 10 of the past 11 months.
This latest signal should provide further confidence that the
recovery will be both solid and sustained."

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
April 4, 1983
TREASURY OFFERS $3,000 MILLION OF 10-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice, invites
tenders for approximately $3,000 million of 10-day Treasury bills to
be issued April 11, 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,
April 6, 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,-3010

- 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, April 11, 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.

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

April 4, 1983

Tenders for $6,206 million of 13-week bills and for $ 6,205 million of
26-week bills, both to be issued on
April 7, 1983,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

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

26-week bills
maturing October 6, 1983
Discount Investment
Price
Rate
Rate 1/

High
97.823
8.612%
8.95%
Low
97.806
8.680%
9.02%
Average
97.810
8.664%
9.01%
a/ Excepting 2 tenders totaling $250,000.

95.610 a/ 8.684% 9.23%
95.593
8.717%
9.27%
95.599
8.705% 2/
9.26%

Tenders at the low price for the 13-week bills were allotted 66%.
Tenders at the low price for the 26-week bills were allotted 76%

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
$
140,170
$
55,170
• $
181,375
12,110,245
4,488,965
:
12,887,165
26,515
26,515
20,215
110,550
46,825
149,430
53,695
43,355
81,690
57,105
51,505
108,470
940,405
171,025
1,089,995
49,540
42,370
62,390
24,645
12,145
25,710
69,580
64,730
:
51,705
28,230
28,230
18,975
1,295,400
905,700
1,146,190
269,355
269,355
331,580

Accepted
$
76,375
4,791,040
20,215
39,190
56,690
98,270
317,615
49,090
18,200
50,135
18,975
337,190
331,580

$15,175,435

$6,205,890

. $16,154,890

$6,204,565

$12,898,535
1,046,790
$13,945,325

$3,928,990
1,046,790
$4,975,780

. $13,731,355
976,335
$14,707,690

$3,781,030
976,335
$4,757,365

1,178,010

1,178,010

52,100

52,100

$15,175,435

$6,205,890

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

:

1,100,000

1,100,000

347,200

347,200

$16,154,890.

$6,204,565

y Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
on money market certificates is 8.552%.
R-3011 .

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

f,L<?

FOR RELEASE ON DELIVERY
EXPECTED AT 9:30 A.M.
April 5, 1983

STATEMENT OF THE HONORABLE ROGER W. MEHLE
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE SUBCOMMITTEE ON FEDERAL CREDIT PROGRAMS OF THE
S2NATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS

Mr. Chairman and Members of the Subcommittee:
I welcome this opportunity to present the Administration's
views on Federal Financing Bank (FFB) operations, the FFB role
in Federal credit activities, and the budget treatment of
FFB and of the programs it finances.

My prepared statement

discusses briefly the ten specific points you asked us to address
in your letter of February 23, but I will be happy to elaborate
in response to any remaining questions you may have.

Before

addressing these specific points, I will make a general statement
of the Administration's policy regarding FFB and the budget.
The Administration has conducted an extensive review of
FFB in the broader context of overall Administration budget
and credit program policies.

That review led to the adoption

of two important principles.

First, the Administration supports

a consolidated cash budget; and, second, the Administration

R-3012

- 9 -

the Administration has concluded that, over tine, all Federal
debt operations should be consolidated v/ithin the Treasury
Departnent and FFB.

Thus, the budget should include all of

the Government's cash outlays to the public, including outlays
to the public by FFB; and all agencies should, over time,
be required to finance fully guaranteed obligations through
FFB rather than in the securities markets.
With regard to the first principle, FFB is a Federal
agency, so transactions between FFB and other Federal
agencies are intragovernmental transactions and thus should
not affect the budget totals.

But when an agency guarantees

loans made by FFB to the public those outlays should be
included in total budget outlays.

This budget principle

would not be served by including FFB outlays, as such, in the
budget totals, since most FFB outlays are to other Federal
agencies rather than to the public.
The question then is not whether FFB should be included in
the budget but whether Federal outlays should be included in
the budget, and our answer to this question is yes.

To accomplish

this it would be necessary to delete the requirement in section
11(c) of the Federal Financing Bank Act of 1973 that FFB transactions not be included in the budget totals.
The Administration has also concluded that outlays
incurred to finance programs of agencies using FFB must be
charged to the user agencies, not to FFB.

The purpose of

including all Federal outlays in the budget totals is to subject
such outlays to the discipline of the budget-appropriations
process.

This discipline can only be effective when applied

- 3 to the agencies authorized by Congress to make the commitments
that later result in Federal outlays.

Thus, agencies authorized

to make or guarantee loans which are financed by FFB should
include such proposed outlays in their budget requests in the
normal budget-appropriations process.

FFB itself should not

be duplicating this process by seeking appropriations to finance
loans for which Congress has already appropriated funds to another
Federal agency.
With regard to the second principle adopted by the Administration, any obligation which is issued, sold, or guaranteed by
a Federal agency and is backed by the full faith and credit of
the United States clearly should be financed by FFB rather than
in the securities markets.

This principle was, in fact, the

primary justification for the Federal Financing Bank Act of
1973, and it is essential to the efficient management of the
Federal debt.

I will discuss this in detail as I now turn to

the ten specific points you asked me to address.
1.

Overview of FFB operations

FFB was established by the Federal Financing Bank Act of
1973, at the request of the Treasury, to deal with severe debt
management problems resulting from years of off-budget financing
which had flooded the Government securities market with a variety
of Government-backed securities.

These securities were financed

outside the Treasury by various Federal agencies in the form

- 4 of direct agency issues, sales of loan assets, and guarantees of
obligations of private borrowers.

Although the securities were

backed by the Government they sold at relatively high interest
rates and fees, they competed v/ith Treasury securities, undermined
Treasury debt management policies, created serious marketing
problems, and placed Treasury in a position of being required
to sanction or approve agency financings on terms which Treasury
believed did not reflect the full value of the Government backing.
That proliferation of Governmert-backed securities was very costly
to the Government, in part because of higher transaction costs
and in part because the less competitive market for the securities
resulted in higher profits to investors and investment bankers.
The FFB Act was essentially a debt management reform, not a
budget reform.

That is, the FFB was authorized to purchase any

obligation issued, sold, or guaranteed by any Federal agency and
thus to consolidate the financing of both budget and off-budget
programs and reduce the costs of financing these programs.

The

FFB Act did not change, however, the budget treatment of the
programs financed by the FFB.
FFB was a response to a need to control and rationalize
financing of Federal programs, primarily credit assistance
programs.

This need arose from three basic trends: (1) the

rapid growth of Federal credit assistance programs; (2) the
shift from direct loans (on-budget) to Government guaranteed
loans (off-budget); and (3) the shift from Government guaranteed
loans financed by local lending institutions to Government guaranteed
obligations financed directly in the securities markets.

These

- 5 -

trends have continued and have contributed to the explosive
grov/th of Federal guarantee programs which has occurred in recent
years.
FFB net lending activity in FY 1982 totaled $17 billion
including $14 billion of off-budget lending and $3 billion of
loans to Federal agencies whose expenditures of funds borrowed
from FFB are included in the budget.

At the end of FY 1982, the

FFB portfolio totaled $124 billion including $98 billion of loans
to off-budget entities and $26 billion to on-budget programs.
The table attached to my statement presents FFB holdings at the
end of FY 1982.
2.

FFB's operations as originally conceived, and their
subsequent evolution

The 1973 Act authorized the FFB to borrow directly in the
market or from the Treasury.
to $15 billion.

The Act limited FFB market borrowings

FFB borrowings from Treasury were not specifically

limited; but, since Treasury is required to borrow in the market
in order to lend to the FFB and since Treasury borrowings are
subject to the statutory public debt limit, FFB borrowings from
Treasury are effectively subject to the overall public debt limit.
The FFB issued one security in the market, an 8-month bill
on July 30, 1974.
from the Treasury.

All subsequent FFB borrowings have been directly
The 1974 bill issue traded in the market

at about 3/8 of one percent above Treasury issues of comparable
maturity.

Treasury then decided that the FFB should be financed

- 6 -

directly by the Treasury, to avoid th*2 additional cost to the
Government of FFB market financing and to minimize the market
impact of Treasury/FFB financing.
As to FFB's lending activities, there is a misconception
that FFB purchases of various guaranteed obligations were not
intended by the FFB Act of 1973.

Treasury made it clear in

the legislative history of the FFB Act that FFB's primary purpose
was to finance federally-guaranteed obligations, including agency
sales of guaranteed loan assets, as well as to finance direct
Federal agency borrowing.

The FFB Act expressly authorizes such

financing of guaranteed obligations, which has comprised, since
the early days of FFB's operations, the preponderant share of
FFB lending activity.

The legislative history of the FFB Act

shows that the recognized primary need for FFB was to deal with
the then growing problem of the inefficiency of market financing
of guaranteed obligations, including sales of guaranteed agency
assets.
3.

FFB role in financing "off-budget" government spending

To put FFB activity into perspective, it is useful to compare
it with overall Federal Government financing requirements and the
"off-budget" component of the total.

The President's budget

submitted in January provides for $307 billion of net Federal and
federally-assisted borrowing from the public in FY 1984.

This

consists of $189 billion to finance budget programs, including
$3 billion financed through FFB.

The remaining $118 billion

of Federal and federally-assisted bor-owing to finance spending

- 7 outside the budget includes: (1) $10 billion of net borrowing
to finance loan guarantee programs through FFB; (2) $4 billion of
other off-budget Federal spending programs, largely the Strategic
Petroleum Reserve and Postal Service; (3) $49 billion of net
private borrowing to finance guaranteed obligations, such as
GNMA mortgage-backed securities, which are financed in the
securities market rather than through FFB; and (4) $55 billion
of net market financing for the Government-sponsored agencies,
such as the Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation, and Farm Credit System, whose obligations
are not guaranteed by the Government.

FFB thus accounts for

only a small proportion (about 9 percent in FY 1984) of Federal
and federally-assisted financing for spending outside the budget.
3a.

FFB role in removing from budget outlays the amounts
paid by the FFB to purchase Certificates of Beneficial
Ownership collateralized by agency direct loans.

FFB purchases loan assets in the form of Certificates of
Benefical Ownership (CBOs) from two Federal agencies:

(i) the

Farmers Home Administration (Farmers Home), which accounts for
over 40 percent of the FFB loan portfolio; and (ii) the Rural
Electrification Administration (REA).

These assets were sold

directly in the market in the form of fully guaranteed CBOs
prior to the existence of FFB.

Since the Farmers Home and REA

statutes provide for expenditure offsets in the event of asset
sales, the budget treatment of those asset sales is no different
if CBOs are sold to FFB or in the market.

Yet there is an

actual budget saving when assets are sold to FFB, because the
FFB interest rate is lower than rates of interest that would be
charged in the securities markets.

In the Farmers Home and REA

- 8 programs, the law provides that certain eligible borrowers
will pay a below-market rate of interest, such as 5 percent.
The agency that sells assets typically pays out of its budget
the difference between the low interest rate paid by the borrower
and the higher FFB, or market, rate of interest.

Financing

through FFB narrows the interest differential payment.
FFB also purchases whole loans from the Public Health Service
(PHS) under the Heath Maintenance Organization program, and those
loans are fully guaranteed as to timely payment of principal and
interest.

The PHS transaction with FFB, which is also treated

as an expenditure offset in the budget, results in a higher price
paid to PHS for its loans than would be the case if those assets
were sold in the private market.
3b.

FFB role in transforming an agency's loan guarantee
into a direct, FFB-financed loan off-budget

While the myth seems to persist that guaranteed loans are
substantially different from direct loans and involve less
Government intervention in traditional borrower-lender relationships, this is not so.

For both direct and guaranteed loans,

the Government assumes the credit risk and private investors
are the ultimate lenders.

Direct loans are financed by Treasury

issues of U.S. obligations to the same private investor groups
that acquire U.S. guaranteed obligations.

Therefore, every

dollar of Government guaranteed debt financed in the public
marketplace is like Treasury borrowing to finance direct loans
and has a similarly adverse impact on private sector rates.

- 9 Most loan guarantee programs are financed directly in the
private credit markets, and most of such financings are not
controlled by the Treasury.

Of the $59 billion estimated net

increase in guaranteed loans in FY 1984, programs financed by
FFB will account for $10 billion;

GNMA mortgage-backed securities

account for $31 billion; FHA and VA whole mortgages are about
$14 billion; and the remaining $4 billion net guarantees are for
smaller programs such as HUD public housing, Export-Import Bank
export financing and MarAd ship construction.
A guaranteed loan may be termed a direct Government loan
when FFB provides the financing but this characterization only
obscures the underlying issue.

FFB does not increase the amount

of financing coming to market; it only accomplishes the task more
efficiently.

Nor does FFB financing of guarantees result in any

increase in the Federal Government's contingent liability on these
guarantees.

In fact, the contingent liability is reduced since

the guarantor agency will be liable for interest at a lesser rate
than a private lender would charge, in the event of any default.
4.

FFB's role in the expansion of Federal credit activities

While the FFB's primary function is debt management, FFB
has served to facilitate the control of Federal credit programs.
By consolidating the borrowing of various agencies, FFB has made
the problem of unrestrained growth in Federal credit more visible
and has underscored the need for more effective control.

The

extraordinary growth of loan guarantee programs is attributable
to the erroneous view that meeting growing constituent demands
for Federal assistance could be accomplished without pain or

- 10 cost through the provision of off-budget loan guarantees and
agency sales of loan assets on a recourse basis.

These programs

would have grown as much or possibly even more v/ithout FFB,
because they would have been financed off-budget directly in
the Government-guaranteed securities market (at a greater
direct cost to the Government), as they were before the FFB was
established.

Also, the FFB has served to bring to the attention

of Congress the true nature and aggregate impact of these
programs and has led to many important investigations and
studies, including this hearing, which hopefully will in turn
result in greater restraints on the future growth of these
programs.
It should be recognized that a major stimulus to the growth
of loan guarantee programs is the profit incentive of investment
bankers and related private institutions to finance them in the
market.

FFB eliminates this incentive and, in this way, acts

to curb the growth of guarantees.

I know this to be an important

factor from my own previous experience as an investment banker.
Prior to the establishment of FFB, there was a very strong profit
incentive for the investment banking industry to promote the
growth of guarantee programs, and to take initiatives to establish
new programs, since such guarantees would shift the financing
from commercial banks to the securities market and provide new
sources of income for investment banking services, such as
financial advisory f*ec and underwriting profits.

While

investment bankers realize some profits from trading in

-lithe Treasury securities issued to finance FFB, such profits
are insignificant relative to the profit from marketing new
issues of obligations guaranteed by other Federal agencies.
Yet, to its credit, the investment banking industry testified
in favor of the establishment of FFB in 1973, apparently recognizing that financial markets generally would benefit more if
the Government got its financial house in order.
In fact, without FFB, the $17 billion of net FFB lending in
fiscal year 1982 would have been financed by $17 billion of
securities market financing by Federal agencies using direct
issues and various forms of guaranteed market issues, asset
sales, loan poolings, lease financing, and other devices which
the agencies used prior to the establishment of FFB.

Such

financing techniques are far more costly to the Government.
Nevertheless, FFB is sometimes a scapegoat for the Federal
credit program control problems which have arisen.

It is a

common misconception that the FFB, because of its off-budget
status, is in itself a means to avoid budget control.

The FFB

was created strictly for the purpose of reducing the costs of
Federal and federally-assisted borrowing from the public in a
manner least disruptive of private financial markets and institutions.

The FFB itself does not affect either the budget status

or the authorized program level of the agencies using FFB.
Within the Administration, the actual allocation of budget and
credit resources to various agencies and programs is determined

- 12 through the budget process. Therefore, efforts to control
off-budget credit programs should be focused on the programs
themselves, rather than on the FFB.
5.

Current FFB lending practices, including the reasons
for and desirability of the current policy of "accepting
all comers" who are authorized to seek FFB financing
of their activities
Under Section 6 of the FFB Act, FFB is authorized "to
purchase and sell on terms and conditions determined by the
Bank, any obligation which is issued, sold, or guaranteed by
a Federal agency."

To date, FFB has purchased only obligations

that are direct obligations of a Federal agency or that are fully
guaranteed by a Federal agency as to principal and interest.
FFB's operating policy is to treat all borrowers on equal footing
once the Federal guarantee is in place, unless there is a statutory
directive to do otherwise.

It should be noted, however, that FFB

charges more than its standard spread over the interest rate at
which FFB borrows from Treasury in instances where FFB is requested
to purchase obligations that include unusual (for FFB) prepayment
or other non-credit risks or loan servicing requirements.
FFB was established merely as a financing mechanism for
programs that provide Federal credit assistance.

The FFJ3 practice

of purchasing obligations ^rom any eligible borrowers demonstrates
FFB's neutrality in financing agency programs.

If FFB were to

differentiate among fully guaranteed borrowers, for example by
denying access to FFB or by charging higher interest rates to
some borrowers than to others, FFB would be in a position of
allocating credit among programs that are authorized by the
Congress and administered by other Federal agencies.

- 13 -

Currently, FFB's standard loan terms call for the FFB rate
to be set at one-eighth of one percentage point above the prevailing Treasury market rate for obligations with similar payment
terms and maturity dates.

After deduction for relatively in-

significant FFB administrative expenses, FFB's earnings are
returned to the General Fund of the Treasury.

In fact, FFB

has returned $784 million of surpluses to the Treasury since
it began operations in 1974.
Since the FFB rate is lower than rates that would be charged
on similar guaranteed obligations financed in the private market,
there has been concern that the interest cost saving afforded to
Federal programs using FFB financing provides an additional and
unwarranted incentive to borrow and may increase further the demands
for expanded and new guarantee programs.

Yet the bulk of the

interest rate saving made possible by FFB financing is now captured
by the Federal Government, in addition to the return of FFB
surpluses mentioned above.
FFB purchases direct debt issues from Federal agencies as
well as loans that these agencies have made to private borrowers.
These activities constitute the bulk of FFB lending operations.
If the agencies were required instead to sell their debt issues
or loan assets directly in the private market, they would pay higher
interest rates or realize lower sales prices which would add to
budget outlays of the agencies and to total outlays in the President's
budget.

In most asset sales, the agencies make loans at below

market rates and pay the difference between the loan rate and
the FFB rate with appropriated funds.

- 14 -

FFB also makes loans under programs in which Federal agencies
guarantee borrowings of non-Federal entities.

Yet, even in this

second group of beneficiaries of consolidated financing through
FFB, much of the saving is realized by the Government, rather
than by the guaranteed borrowers.

An extreme case is the HUD

guaranteed public housing program, where all of the saving goes
to the Government, rather than to the guaranteed borrowers since
all interest costs for public housing projects are borne by the
Government.

If, in cases where guaranteed loans financed by FFB

actually reduce costs to private borrowers somewhat below the
costs of guaranteed financing in the market, it is determined that
this added interest rate saving should not be passed on to
guaranteed borrowers, guarantee fees could be increased or other
devices could be used to offset the benefit of FFB financing,
rather than removing the program from FFB.
An alternative approach would be for FFB to raise the interest
rate it charges its borrowers.

Yet, as indicated above, in many

programs this would require an increase in budget outlays by
Federal agencies issuing, selling, or guaranteeing obligations
purchased by FFB, while the interest rate charged the private
borrowers whose loans are financed by FFB would not necessarily
increase.

In such cases, the net effect would be an increase in

total budget outlays and, when the additional FFB profits are
turned over to the Treasury, a corresponding increase in total
budget receipts.

Clearly, the better approach would be to require

each agency using FFB to charge higher interest rates or fees tc
the private sector borrowers financed by FFB.

In this way,

- 15 responsibility for program subsidies or costs would remain in the
appropriate committees of Congress.

Borrowers in Congressionally

approved guarantee programs would be assured a source of financing
at reasonable rates, and Treasury's debt management objectives
would be met without FFB involvment in program decisions and
duplication of the functions of the program agencies.
6

*

Reasons for and the desirability of leaving the FFB
l
itself off-budget

Putting the FFB in the budget simply as an aggregate limit
could place FFB in the position of allocating FFB credit among
competing Federal programs.

In the event that the FFB aggregate

credit limit was not sufficient to meet all demands, agency
program managers would revert to less efficient forms of financing.
Pressures on program managers to reduce budget outlays would be
irresistible and would.be likely to lead to pressures for a mass
exodus from the Bank into the credit markets.

We would return to

the chaotic market conditions of the early 1970's which led to the
establishment of FFB.

Today, Treasury and federally-assisted

borrowing from the public combined is nearly seven times the 1973
dollar volume, a fact that emphasizes the critical importance of
efficient Federal debt management.
A positive requirement that FFB transactions, as such, be
included in the budget, as opposed to simple repeal of statutory
language in the FFB Act that excludes FFB transactions from the
budget, could override the normal budget accounting rules, under
which transactions among Federal agencies are not reflected in
budget totals.

In that event, there would be double counting in

the budget totals.

Specifically, FFB loans to on-budget Federal

- 16 -

agencies would be counted twice in the budget, thus inducing
such agencies to resume borrowing directly in the market.

FFB

purchases of obligations of off-budget agencies, assets sold by
Federal agencies, and guarantees by Federal agencies, on the
other hand, would be counted only once.
Accordingly, legislation to include in the budget any
programs now financed off-budget by FFB should require that
the budget outlays be attributed to the program agencies rather
than to FFB.
7.

The Administration's proposal to change the budgetary
treatment of CBO sales by the Farmers Home Administration
to the FFB

As I discussed earlier, current law provides that asset
sales in the form of CBOs sold by Farmers Home and REA are
to be treated as expenditure offsets rather than as a means of
financing budget outlays.

The CBO form of asset sale permits

the selling agency to continue to hold and service the loans it
originates, while at the same time to obtain funds for further
loans.

In another form of asset sale, the agency sells but

continues to guarantee whole loans from its portfolio.

Whole

loan asset sales are conducted by the Public Health Service in
sales to FFB and by GNMA and VA in sales to the market.
These asset sales also are accorded budget treatment as
negative outlays rather than as means of financing outlays,
even though they are sold on a recourse basis and the Government
remains liable to meet the obligations under the assets
sold.

This budget treatment is the same whether the assets

are sold in the market or to FFB, and results in understatement

- 17 of expenditures and deficits in the Federal budget.

In

order to assure that the Federal budget more accurately
reflects the total size of the Government's use of the Nation's
economic resources, all agency direct lending activity should
be counted in budget outlays.

The proceeds of any asset

sales should not be treated as expenditure offsets or negative
outlays; sales in CBO form and in guaranteed whole loan form
should be counted as a means of financing the deficit.

Only

sales of whole loans that are not guaranteed should be counted
as receipts that would reduce the deficit.
8.

FFB's views on the proposal by Senator Proxmire, embodied
in S. 711 to change the budgetary treatment of certain
Federal credit activities. Alternative ways to achieve
the same goals which might be preferable.
S. 711 would further the Administration's broader goals to
provide better controls over all guarantee programs and also
minimize the costs to the Government of financing these
programs.

To do this we need to distinguish among three

major issues: (1) program control, (2) budget treatment and
(3) method of financing.
The "credit budget" submitted to Congress by the Administration
provides for control over the level of loan guarantee commitments
by the Budget and Appropriations Committees.

Under this approach

loan guarantee programs continue to be excluded from budget
outlays, but are subject to essentially the same appropriations
process that has been applied to direct loans which are included
in the budget tOwa.ls.

Since there is no difference in substance

between a direct loan and a guaranteed loan, guaranteed loans
should be subject to the same scrutiny as direcc loans.

This is

an important step forward, and I am pleased to note that this

- 18 -

approach has been adopted in the Congressional budget resolutions
and appropriations Acts.

We have clearly achieved a consensus

that all Federal programs, including off-budget programs, should
be subject to more effective controls through the appropriations
process.
S. 711 would expand the coverage of the Federal budget to
include the amount of financing provided by FFB in the outlays
of each program.

Certain types of guaranteed loans would be

required to be financed by FFB, based on certain findings by
the Secretary of the Treasury.
be financed outside of FFB.

Other guaranteed loans would

The bill explicitly addresses the

genesis of the problem of growth of credit programs by including
agency programs in the budget, rather than by limiting the
resources available to the financing mechanism, the FFB, for
those programs.

The requirement that agency programs be financed

by FFB, with exceptions to be determined by the Secretary of the
Treasury, would prevent agencies from financing in the private
market as a means to avoid budget scrutiny.

In this regard,

Treasury supports the provisions of S. 711 but with technical
amendments to clarify the budget accounting and the scope of the
Secretary of the Treasury's determinations.
S. 711 recognizes that it is npt feasible to prescribe by
statute which obligations should be financed by FFB.

Requiring

all guaranteed obligations to be sold only to an on-budget FFB
would clearly be inappropriate.

For example, FFB should not be

the initiator of small and administratively-cumbersome FHA and
VA mortgages and guaranteed student loans, business that FFB was

- 19 -

not intended, nor is it now equipped, to undertake.

A more

limited requirement that FFB purchase market-type guaranteed
securities issues, as suggested in S. 711, would be administratively feasible if the Secretary of the Treasury were provided
sufficient discretion to determine which securities were appropriate investments for the FFB.
Section 3 of the FFB Act defines "guarantee" as "any
guarantee, insurance, or other pledge with respect to the
payment of all or part of the principal or interest on any
obligation."

This definition has been broadly interpreted to

include a wide variety of obligations guaranteed or insured by
Federal agencies, including obligations secured by Federal
agency lease payments and obligations acquired directly by
Federal agencies and sold to FFB subject to an agreement
that the selling agency will assure repayment in the case of
default of the non-Federal borrower.

In addition, this definition

has been interpreted to include guaranteed obligations which
are supported by Federal agency commitments to make debt service
grants, price support agreements, commitments to make a direct
loan in the event of default on a private obligation, and
other contractual arrangements v/hich provide support equivalent
to an outright guarantee.

It is essential to preserve the

broad definition of "guarantee", especially if guaranteed
loans financed by FFB are to be included in the budget.

- 20 -

Effective Federal guarantees result when Federal agencies enter
into contracts, rentals, leasing, billing, and other arrangements
which are, in effect, pledged to secure in whole or in part the
repayment of loans made by private lenders to project sponsors.
FFB should not purchase partially guaranteed securities.
While existing law authorizes such purchases by FFB, and this
flexibility is necessary to deal with situations where the guaranteed
portion of a loan is financed separately, to date FFB has purchased
only Federal agency obligations and obligations that are fully
guaranteed as to principal and interest.

By purchasing the non-

guaranteed portions of partially guaranteed obligations, FFB would
be forced to assess the creditworthiness of borrowers guaranteed
by other Federal agencies and thus, would duplicate the functions
of the guarantor agencies.

Such purchases would also place the

Government more at risk than was intended by Congress when it
enacted provisions which limit guarantees to less than total
principal and interest.

We would be happy to work with your sub-

committee to amend S. 711 to avoid these problems.
9. Pros and cons of direct limits on either FFB's direct
lending and borrowing activities each year, or on the
total FFB debt outstanding
Limitations on Federal agencies' direct spending and borrowing
and on authorizations to guarantee loans in Congressional budget
resolutions and appropriations Acts are the most effective means
to control Federal credit programs.

With regard specifically to

FFB, all FFB borrowing is done through the Secretary of the Treasury,
and, as you know, Treasury debt is subject to the statutory debt
limit under the Second Liberty Bond Act.

Thus when the Congress

- 21 reviews the need for increases in the debt limit, it has the
opportunity to review FFB activity and financing requirements.
Subjecting FFB to direct limits either on lending or borrowing
without also limiting and setting priorities for entities that use
FFB, would in effect put FFB in the position of allocating credit
resources, a job that FFB could not appropriately perform.

Further

more, depending on restrictions placed on program agencies, an
agency conceivably could finance a portion of its program in
the market once the FFB limit was reached, thereby defeating
FFB's purpose.
10.

Suggestions, if any, to strengthen FFB's cost-saving
functions

With regard to your tenth, and final, question, Mr. Chairman,
FFB's cost-saving functions woud be strengthened by expanding
FFB to include certain fully guaranteed obligations that are now
financed directly in the securities markets.

A Federal guarantee

creates an instrument that is the credit-risk equivalent of a
Treasury security.

Yet

guaranteed obligations are sold in the

market at yield premiums over Treasury securities as a result of
their relative trading illiquidity, smaller size of issues, and
discrete terms that distinguish them from Treasury issues and each
other.

Recent market issues of securities fully guaranteed by the

Maritime Administration, for example, have been priced at 1 to
1 1/2 points in yield above Treasury securities of comparable
maturity.

Also, tax exempt notes guaranteed by HUD are now

financed in the market at a significant cost to the Government,
both from the tax losses and the higher financing costs from

- 22 this less efficient marketing technique.

Clearly, each of these

programs could be financed at less cost through FFB.

Since there

is no economic difference between a guaranteed loan and a direct
loan by FFB or another Federal agency, there is no reason to incur
higher costs for financing guarantee programs in the private markets.
Mr. Chairman, this concludes my formal statement.
be happy to respond to the Subcommittee's questions.

Attachment

OoO

I will

FEDERAL FINANCING BANK HOLDINGS
(in millions)
Program

September 30, 1982

Net Change
To7T/81-9/30/82

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank
NCUA-Central Liquidity Facility
Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association

$

12,285.0
13,953.9
130.1

$

1 ,411.,0
1 ,544,.6
28.,8

1,221.0
194.9

-67.,0
-20.,1

53,736.0
131.0
145.7
21.5
3,123.7
58.1

4 ,915.,0
14..6
-4.,7
-5.,1
528.,4
-9.,3

11,435.8
5,000.0
36.6
-0340.0
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
70.2
122.8
$ 124,357.3
177.0

2 ,288.,2
700..0
19,.6
-2.,0
340..0
42..7
-0695,.8
7..9
-0"™ *.4
120,.0
3 ,939..0
108,.1
4J..2
343..8
75..5
-0.8
-0-

Agency Assets
Farmers Home Administration
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
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loans
DOE-Hybrid Vehicles
DOE-Non-Nucleat Act (Great Plains)
DHUD-Community Dev. Block Grant
DMUD-New Communities
DHUD-Public Housing Notes
General Services Administration
DOI-Guam Power Authority
DOl-Virgin Islands
NASA-Space Communications Co.
Rural Electrification Admin.
SHA-Small Business Investment Cos.
SHA-State/Local Development Cos.
TVA-Seven States Energy Corp.
IM)T-Amtrak
OOT-Emergency Rail Svcs. Act
DOT-Titie V, RRRR Act
DOT-WMATA
TOTALS*
*f F<jYTres may not total <iuo to rounding

"™ <

$ 17,057.0

TREASURY NEWS
tepartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
April 5, 1983

CONTACT:

CHARLES POWERS
(202) 566-2041

TREASURY DEPARTMENT ANNOUNCES UPCOMING INCOME TAX TREATY
NEGOTIATIONS WITH THE PEOPLE'S REPUBLIC OF CHINA

The Treasury Department announced today that negotiation of a treaty
between the United States and the People's Republic of China to avoid double
taxation of income will take place in Beijing during the week of May 3, 1983.
The negotiations will continue discussions initiated in Washington in
September 1982.
The negotiations will be based on the U.S. model draft income tax
treaty and will also take into account the model draft income tax treaties
published by the Organization for Economic Cooperation and Development (OECD)
in 1977 and by the United Nations Ad Hoc Group of Experts on Tax Treaties
between Developed and Developing Countries.
It is intended that the proposed treaty cover the taxation of income from
business activities, personal services, and investments derived from one
country by residents of the other; that it provide for administrative
cooperation to avoid double taxation and fiscal evasion; and that it specify
the method to be used by each country to avoid double taxation.
Interested persons are invited to submit comments in writing to Leslie J.
Schreyer, Deputy International Tax Counsel, Room 4013, U.S. Treasury,
Washington, D.C. 20220.
This notice will appear in the Federal Register of April 6, 1983.

oOo

R-30.13

TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
April 6, 1983

7/?£„

Testimony of the Honorable Donald T. Regan
Secretary of the Treasury
Before the
Senate Committee on Banking, Housing and Urban Affairs

Mr. Chairman and members of this distinguished Committee:
I appreciate this opportunity to review with you the
current state of our domestic financial system and the current
issues affecting the system which this Committee must address.
Since my last discussion with the Committee on these subjects in
April 1981, the condition of our domestic financial institutions
and financial markets has greatly improved. A better economic
environment is responsible for much of the improvement, but
there is also clear evidence that the deregulatory efforts of
Congress and the Administration in the Garn-St Germain Depository
Institutions Act of 1982 and regulatory actions by the Depository
Institutions Deregulation Committee (DIDC) have strengthened
the financial system and significantly benefitted consumers.
I hope that we can build on this record in the current session
of Congress.
CONDITION
OF THE FINANCIAL MARKETS
Two years ago, when I was testifying before this Committee,
our financial markets and financial institutions were struggling
with severe inflationary pressures. The major problem area
involved thrift institutions (savings and loan associations and
mutual savings banks) and to a lesser extent small commercial
banks whose primary business was financing housing. These institutions had structural problems in the mismatch of their asset and
liability portfolios. This made it difficult for them to cope
with the very high interest rates that resulted from uncontrolled
inflation.

R-3014

- 2 At that time, I testified that the Administration
recognized that the persistently high rate of inflation was
the primary cause of the eroding net worth of thrift institutions. Thrifts were forced to use an increasing amount of
short-term deposit liabilities with interest rates that vary
with market rates to carry low-yielding, fixed-rate, long-term
mortgages made in prior years. This situation, which resulted
in the average cost of funds exceeding the average yield on
investments, was reducing the thrift industry's net worth by
5 to 10% per year.
As I am sure you are aware, the Administration's economic
policies have been successful in reducing the rate of inflation.
The Consumer Price Index gained only 3.9% last year and may
rise even less in 1983. These increases are well below the
double digit gains of 1979 and 1980 and the 9% gain in 1981.
The reduction in the rate of inflation has been reflected in
lower short-term interest rates. Three month Treasury bill
rates have averaged 8.1% in the first three months this year,
compared to average rates of 10.6% in 1982 and 14.0% in 1981
when the Administration took office. Lower interest rates and
the continued expectation of a low rate of inflation have just
begun to be reflected in the net income figures of thrift
institutions and should have a very positive influence on
income growth in 1983. If short-term interest rates remain at
present levels or decline further over the next few years, as
we anticipate, thrift institutions should be able to rebuild
their net
substantially
improved earnings. Other
RECENT
ANDworth
PROPOSED
LEGISLATIVEfrom
INITIATIVES
financial institutions continue to perform satisfactorily but
In
addition
to successfully
reducing
and interest
would
certainly
do better as the
economyinflation
gathers momentum.
rates, the Administration worked closely over the past two years
with this Committee to develop legislation that would not only
provide short-term assistance to troubled thrift institutions
but also would further the necessary restructuring of the industry so that it can adjust to future changes in the economy more
readily. This combined effort resulted in the Garn-St Germain
Act. The Act gives thrift institutions a broader range of
powers, including some commercial loan and expanded consumer
loan authority for savings and loan associations. The new
powers will help these institutions to develop shorter maturing,
variable rate assets whose rates can be adjusted to match the
cost of deposits more quickly than the return on long-term,
fixed-rate mortgages can be adjusted.

- 3 The Administration supports the goal of allowing all
depository institutions ultimately to perform the same types
of business. Over the next few years, thrift institutions
should be authorized to increase the proportion of consumer
and commercial loans in their investment portfolios. A gradual
decontrol of asset powers will enable thrift institutions
eventually to offer a full range of financial services to the
public. The problems that have faced thrift institutions over
the past two years are largely the result of prior government
attempts to structure an industry by statute in ways that are
not economically feasible. This Administration believes all
depository institutions should have equal powers and should be
free to choose whatever specialization they wish, based on
their individual competitive skills and goals. The ultimate
beneficiaries of this flexibility will be the users of depository
institutions' services whose special needs could be more readily
addressed.
Now that thrift institutions have been provided with broader
consumer and some commercial and agricultural lending authority,
this Committee and the Administration should work towards removing
the remaining usury ceilings on depository institution loans to
balance the removal of rate ceilings on deposits. In this regard,
I would like to affirm the Administration's strong support for a
removal of Federal and state usury ceilings as proposed in S. 730,
which was introduced last month by Chairman G a m and co-sponsored
by Senators Lugar and Proxmire. If this bill is passed into law
and thrift institutions can make a reasonable profit on their
expanded consumer and commercial loan authority, the institutions
will be encouraged to develop the new asset powers.
The removal of usury ceilings would also benefit borrowers
by making it easier for them to obtain credit. The Administration
believes that usury ceilings only distort financial markets and
credit flows and do not reduce the cost of credit to the economy.
Institutions are more likely to lend to all types of borrowers if
loans can be priced to reflect the risk exposure. However, as
provided for in S. 730, removal of interest rate restrictions
should not interfere with the states' authority to impose consumer
protection provisions on credit transactions, or their ability to
regulate creditors. The Administration also supports the provision
in S. 730 which follows the precedent set by the Depository Institutions Deregulation and Monetary Control Act of 1980 regarding
the preemption of state usury ceilings on mortgage loans. That
is the precedent of giving states a three year period to reject
the Federal provisions and to reimpose rate restrictions of any
amount and in any form.

- 4 Depository Institutions Deregulation Committee
In 1982, the DIDC took two major actions which have
effectively halted the outflow of funds from depository institutions. The DIDC, in the context of the Garn-St Germain Act,
authorized depository institutions to offer an account that is
"directly equivalent to and competitive with money market mutual
funds". This ceiling free account, called the Money Market
Deposit Account, was first offered by depository institutions on
December 14, 198 2. By March 16, 1983, the account had attracted
about $319 billion of deposits. The huge volume of funds drawn
by this account indicates that consumers are happy to keep their
deposits in depository institutions, or to move their funds back
into depository institutions if the funds earn market rates of
interest.
Secondly, as a result of the deregulation schedule that was
adopted in March of 1982, rate ceilings have been removed from
deposits with a maturity of 2-1/2 years and over. In addition,
a ceiling-free NOW, or transaction account, became effective on
January 5, 1983. Thus, depository institutions can offer interest
rate deregulated accounts for maturities under 31 days and
2-1/2 years and over.
The eventual removal, of ceilings on all accounts should
give depository institutions the flexibility to manage the
costs and maturities of their deposits (liabilities) to best
fit their loans and investments (assets). Thus, some members of
the Committee have indicated that at the June DIDC meeting they
might support the adoption of a proposal that would remove all
the remaining interest rate ceilings on time deposits. Then,
the Committee's only remaining deregulatory objective will be
determining the proper timing for removing the rate ceilings
on savings accounts and on NOW accounts with minimum balances
under
$2,500.
The
DIDC should probably consider removing all
NEW
ISSUES
TO BE
ADDRESSED
remaining time and savings deposit ceilings. Indeed, it may be
While
the
achievements
thework
Garn-St
Germain
time to
consider
bringingofthe
of the
DIDC toAct
an and
end.the
DIDC have been a good beginning, there is mi-ch more work to be
done to achieve competitive equality among depository institutions
and between depository institutions and other financial service
firms. This will make our financial system as efficient and
effective as possible, and ultimately benefit consumers. In
just the last year there have been several developments which
illustrate remaining distortions in the competitive powers of
depository institutions.

- 5 *

One year ago this month, a mutual savings bank
acquired a full-service broker-dealer firm; a
Federal Reserve member bank cannot do this under
the Glass-Steagall Act.
* Stock savings and loan associations have been
acquired by organizations not closely related to
the savings and loan business as is required for
banks under the Bank Holding Company Act.
Increasingly, savings and loan associations have
been converting from mutual to stock form; this
will enable them to form holding companies which
can enter any line of commerce.
* At least one state has authorized banks chartered
under its laws to engage in all aspects of the
insurance business, and other states have adopted
similar "reforms" in their banking laws. Federally
chartered banks are not permitted to engage in
insurance activities or other nonbanking financial
services, and bank holding companies have only
very limited insurance powers.
* Banks that do not make commercial loans and thus
do not come under the Bank Holding Company Act have
been established or acquired by organizations outside the banking business, and their holding companies
are seeking authorization to expand deposit taking
activities interstate. To the extent that these banks
are not member banks, the Glass-Steagall Act may not
apply to the activities of their affiliates, and to
the extent that the Bank Holding Company Act is inapplicable to such nonbank banks the Douglas Amendment
to the Bank Holding Company Act may not apply either.
While there is no consistency and pattern in these actions,
none of them is inconsistent with the language of the banking
laws as they exist today. These laws were enacted at a time
when the differences between financial institutions were almost
self-evident and there was no need to cover contingencies that
were largely hypothetical. When these laws were written neither
the computer chip nor magnetic plastic cards existed. But
under the competitive pressures of today's financial services
marketplace, the old structures are breaking down.
These new consumer attitudes provide a substantial
competitive advantage to diversified financial services firms
that are not subject to the restrictions on nonbanking
activities
applicable
to banks.
These organizations
can
offer awhich
full are
range
of services
to the consumer.

- 6 That is why the task this Committee has set for itself
is so vital, and why I urge this Committee to complete its
hearings and get on with revision of the banking laws as promptly
as possible.
As the Committee approaches this matter, I think it is
important that consideration be given to one fundamental set of
questions: What is a bank? Why is it different from other
kinds of enterprises? Do these differences justify special
restrictive treatment, and if so of what kind? I believe most
of the confusion now surrounding the regulation of depository
institutions is the result of a failure to focus on these basic
questions.
The Administration's view is that a bank or other Federally
insured depository is a special form of financial intermediary
which, as a matter of policy, should be treated differently
from other commercial enterprises. The laws and policies that
govern or relate to banking — deposit insurance, comprehensive
regulation and supervision, government liquidity assistance and
exemptions from securities laws — are designed to encourage
savers to deposit their funds in banks, in preference to other
investment media.
For their part, banks and other depository institutions
should and do use these funds for the benefit of our economy as
a whole — through loans to productive and creditworthy private
enterprises and through mortgage loans to homeowners. Permitting
banks to make other uses of these combined savings flows — to
allow them, for example, to capitalize subsidiaries engaged in
nonbanking businesses — alters and diminishes their necessary
and intended role as intermediaries between savers and productive
users of credit. In addition, because so many of our policies
favor the deposit of savers' funds in banks, there is also an
element of unfairness in allowing banks to use these funds to
capitalize businesses that compete with others who must raise
their capital without government help. Finally, it is also
true that permitting banks to engage in nonbanking activities,
either directly or through subsidiaries, might threaten their
safety and soundness by exposing them to greater risks than
are already present in the business of lending.
None of this must mean, however, that banks should be wholly
isolated from the mainstream of commerce. Developments in
recent years have demonstrated — especially in the financial
services area — that the ability of a single enterprise to
offer a broad range of services can be important in meeting
competition. For this reason, the Administration believes that
may
affiliation
banks
that take
may
should
legally
advantage
provides.
be able
offer
of to
the
aassociate
broad
access
range
to
themselves
customers
of services,
with
thatso
organizations
such
that
an banks

- 7 That is why the Administration, in the last Congress,
proposed the Bank Holding Company Deregulation Act of 1982
(S. 2490). We expect to introduce substantially the same
proposal in this Congress. / In essence, the Administration's
Deregulation Act attempts to insulate banks from the risks
associated with nonbanking enterprises but not to isolate
them from affiliation with nonbanking activities.
The sophisticated consumer today would like to include in
his savings and investments such things as a NOW account for
liquidity purposes, a money market deposit account to earn
a higher rate of interest on slightly less liquid funds and
securities or even an insurance or annuity contract for long
term savings and investment. He would like to do all these
things without having to travel to several different financial
institutions. He would like all the services offered at one
institution and would like the ability to shift his funds from
one type of investment to another.
Examples of efforts to acquire and market a broad range of
financial services can be seen in Sears' ownership of a savings
and loan association, a retail insurance firm and a broker-dealer
(Dean Witter Reynolds); in Prudential Insurance Company's
acquisition of Bache and in the acquisition by American Express
of Shearson.
In the absence of a comprehensive reform of the banking laws
at the Federal level, banks have apparently begun looking to the
states for relief. Citicorp plans to acquire a South Dakota bank
that can offer a wide range of insurance services nationwide; and
other banks and other states are likely to follow suit.
This kind of deregulation — haphazard and without consistency or an underlying concept of what is appropriate for an
insured institution — is obviously unsatisfactory. The process
by which financial institutions broaden their services must be
rationalized and facilitated. This Committee must address the
revisions needed in Federal statutes to insure competitive equality
among depository institutions, and between these institutions and
other financial service firms. Let me present the Administration's
Bank Holding
Deregulation
views
on someCompany
of the more
important statutory^changes we believe
are desirable.
Under current law, nonbank financial service- firms, which
increasingly are competing with banks for the same customers,
are less restricted than banks in the variety of products and
services they can offer. Many of these firms has been diversifying

- 8 their product bases to include a broad range of services relating
to securities, commodities, insurance, real estate and travel
services. As a result of the one-stop convenience that diversification can provide, these firms have been drawing customers
away from banks, and the banks are justifiably concerned.
The Administration submitted its Bank Holding Company
Deregulation Act as a conceptual framework for permitting
banks to compete fully in the financial services industry.
The legislation is designed to expand the powers of bank
holding companies and their subsidiaries without affecting
the safety and soundness of the banks themselves.
The Administration proposal would enable banks to offer
nonbank financial services now available only from other financial
organizations. Similarly, these organizations doing approved
business will be able to establish holding companies and own
subsidiary banks. In this manner, banks and other financial
organizations will be able to penetrate segments of the financial
services industry that are currently separated by statute. This
cross penetration should increase the total number of financial
service vendors able to provide the same services, thereby
expanding competition in the financial services industry and
benefitting the public.
The legislation would amend the Bank Holding Company
Act, and certain other banking and securities laws, to permit
bank holding companies, through subsidiaries, to engage in
any activities the Federal Reserve Board determines by regulation to be "of a financial nature." The brill provides that,
in interpreting this phrase, the Board should give primary
consideration to the public benefits that would result from
increased competition in the financial services industry.
In addition, the bill would specifically authorize bank
holding company subsidiaries to engage in insurance underwriting
and brokerage, and real estate investment, development, and
brokerage. In the securities field, the bill would permit bank
holding company subsidiaries to deal in and underwrite U.S. and
most state and municipal securities, including revenue bonds.
They also could sponsor, control, and advise mutual funds and
underwrite and distribute their securities.
In the securities area, new activities would have to be
conducted through a securities subsidiary of the bank holding
company, as would all securities brokerage, underwriting, and
dealing activities already carried on by the bank. Only if a
bank holding company did not engage in the new securities
business could it continue to conduct currently authorized
mercial
securities
bankunderwriting
subsidiary.or dealing activities within a com-

- 9 By allowing bank holding companies, rather than banks
themselves, to offer a broader range of services, the
Administration's proposal accomplishes certain legitimate
policy objectives of bank deregulation while allowing banks
to associate themselves with firms that can compete for
customers with other diversified financial service firms.
As noted earlier in my testimony, banks are unique
financial intermediaries affected with a public interest. As
such, they are Federally supervised, have access to the Federal
Reserve System as a lender of last resort and have some portion
of their deposits Federally insured. We do not believe that
they should directly engage in activities that are potentially
riskier than the banking business. This would place a supervisory
and insurance burden on the Federal government that was not
intended and is not applicable to competitors offering nonbank
financial services. In addition, the unique status of banks '
enables them to raise money in the private financial markets
at a lower cost than most other borrowers. This advantage
should not be extended to nonbank activities where banks are
competing with independent firms that do not have the same
advantage•
We also do not believe that nonbank activities should be
conducted through a subsidiary or service corporation in which
a bank has a direct equity investment. The investment would
be at risk if the subsidiary's activities were to falter, and
the funds for the investment would be raised with Federal
assistance not available to nonbank competitors and at a
cost advantage to the bank.
However, our proposal would permit banks which have assets
of less than $100 million and are not affiliated with a holding
company to conduct new and existing securities activities
through a subsidiary of the bank in lieu of forming a holding
company. This is intended to hold down the costs of smaller
banks' entering into these activities where the amount of
securities business and the risks involved are not as great.
Nonetheless, we are concerned about the potentially adverse
impact on small banks of ill advised subsidiary investments.
Under these circumstances, we would like to consider with the
Congress whether the small bank exemption is still appropriate.
While the holding company approach can insulate banks
from the risks associated with nonbanking activities, it
cannot prevent holding companies from misusing their control
over the banks. To deal with these concerns, our proposal
includes a series of provisions that regulate banks' transactions and
withits
their
holding must
company
affiliates.
The between
principle
underlying
bank
these
affiliates
provisions
is
be that
made
transactions
on substantially
thea

- 10 same terms and under substantially the same circumstances,
including credit standards, as those prevailing at the time
of the transaction for comparable transactions by the bank
with non-affiliated companies. These regulatory limitations
ensure thst not only will banks be separated legally from
the risks associated with nonbanking activities of their
holding company affiliates, but that they also will avoid
relationships with affiliates that would threaten banks'
soundness or provide their affiliates with unfair competitive
advantages through favorable financing terms or other devices.
The Administration's program contemplates that all
subsidiaries of bank holding companies would be subject to
regulatory supervision appropriate to the subsidiary's line
of business. For example, finance, insurance and real estate
activities would continue to be primarily regulated by state
agencies. Securities subsidiaries would be regulated as brokerdealers or investment advisers by the Securities and Exchange
Commission and state securities regulators, and also may be
members of securities exchanges and the National Association
of Security Dealers. The objective is to ensure equivalent
treatment of functionally equivalent activities. Thus, the
framework would permit a wide variety of financial organizations
with very different regulatory regimes to be included under
the holding company umbrella in a manner that maximizes competitive equality with independent firms.
Mr. Chairman, we believe our proposal will be fair to all
the parties concerned and beneficial to the public. We believe
we have the support of the banking and securities industries
for the bank holding company concept. We intend to resubmit our
legislation in the near future as soon as the Committee is
prepared to receive it.
"Nonbank" Banks under the Bank Holding Company Act
While on the subject of bank holding company deregulation,
I would like to say a word about the recent development of
consumer or "nonbank" banks. The Committee probably is aware
of several decisions by the bank regulators in this area that
raise significant legal and policy issues under the Bank Holding
Company Act. ^he Act's scope is determined in nart by its
definition of the word "bank". A bank is defined to mean an
entity that takes demand deposits and makes commercial loans.
The question has arisen as to whether insured depository
institutions should be able to limit their deposit taking or
commercial lending activities in a way that will permit them not
to be subject to the Bank Holding Company Act. To date several
banks
in order
havetovoluntarily
establish nonbank
foregone
holding
commercial
company
lending
structures.
activities

- 11 We are disappointed that these organizations have found
this approach to be necessary in order to compete effectively
in the marketplace. We feel there is no good reason to exempt
any Federally-insured bank 'from the application of the Bank
Holding Company Act. We believe the issue should only be decided
by Congress in the context of a full consideration of banking
regulation — specifically including the Administration's
proposal for bank holding company financial services activities.
Geographic Restrictions on Depository Institution Activities
Over a period of many years Congress has been easing the
Federal statutory restrictions on the geographic expansion of
depository institution activities, particularly interstate
activities. In the Bank Holding Company Act of 1956, no limitations were placed on the operation of nonbank activities across
state lines if they were so closely related to banking as to be
a proper incident thereto, such as consumer lending, mortgage
banking, etc. In 1981 a statutory moratorium on the interstate
operation of trust companies was allowed to lapse, permitting
trust operations interstate. And last year the Garn-St Germain
Act authorized the acquisition of failing depository institutions
across state lines by other healthier organizations.
All these legislative changes have followed an even faster
erosion of restrictions on interstate activities of depository
institutions in the marketplace. Improved transportation and
telecommunications have considerably shortened the distances .
over which business can be conducted from a single location.
Even the most sacrosanct of limitations, commercial lending and
deposit taking from retail customers, have been modified by the
use of out-of-state loan production offices and deposits received
by mail. It is rare for a large depository institution today not
to have extensive interstate operations. For example, Citicorp
and BankAmerica operate subsidiaries in almost every state.
They include branches of subsidiary finance companies, Edge
Act corporations and mortgage companies.
The Administration favors renewed Congressional efforts to
eliminate restrictions on the geographic expansion of depository
institution activities. Most such restrictions serve only
anticompetitive purposes to the detriment of consumer service
and convenience. We recognize the long and difficult process
involved in dealing with legislation on this very controversial
issue, but we are prepared to work with this Committee to further
deregulate restrictive geographic barriers on the rendering of
financialof services,
if there are reasonable prospects for the
passage
such legislation.

- 12 At the same time many states are easing or eliminating
their restrictions on the interstate activities of depository
institutions. The New England experience is particularly
interesting. Several states in that area have authorized interstate operation of institutions headquartered elsewhere in that
region. Local governments familiar with local markets should
be able to make sound decisions about their regional economy.
Moreover, the strengthening of local institutions prior to a
removal of all geographic restrictions nationwide facilitates the
potential for development of more organizations able to compete
nationally when the opportunity arises. This should enhance
the diversity and competitive vitality of the future financial
system.
Regulatory
Reform
As financial service organizations offer increasingly
similar products and services, the burden on them from the
present multiplicity of Federal regulators also increases. In
many situations a single kind of institution or transaction is
governed by several Federal agencies, each applying independent
and often duplicative or conflicting regulations. For example,
three separate agencies regulate and examine commercial banks,
five agencies (and the Department of Justice) have some
responsibility regarding mergers or acquisitions involving
depository institutions, three agencies provide deposit
insurance and one agency regulates bank holding companies,
while different agencies may regulate the subsidiaries of the
same firm.
Although each part of the current system may have been
created in response to specific problems or perceived needs,
recent trends in the financial system as a whole have highlighted
problems with the current regulatory structure. The Administration
has therefore established a Task Group on Regulation of Financial
Services to complete within a period of approximately nine months
a review of the current regulatory system and to make a report
to the President concerning any desirable areas for change.
The Vice President is Chairman of the Task Group and I am
Vice Chairman. Other members are the Attorney General; the
Director of the Office of Management and Budget; the Chairman
of the Council of Economic Advisers; the Assistant to the
President for Policy Development; the Chairmen of the Board of
Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, Federal Home Loan Bank Board, National Credit Union
Administration, Securities and Exchange Commission and Commodity
Futures Trading Commission; and the Comptroller of the Currency.

- 13 The Task Group will develop recommendations where
appropriate to improve the efficiency and effectiveness of
the present regulatory system in meeting its public policy
goals and to reduce the bur/den of regulation on financial
institutions. As part of its work the Group will consider
the recommendations of the Federal deposit insurance agencies
in their reports requested by the Garn-St Germain Act on ways
to improve the deposit insurance system. The Group has also
asked for public comments to guide it in its work and has
requested the views of all the regulatory agencies. We would
welcome the views of this Committee either collectively or
individually.
* * * * * * * *
Mr. Chairman, that concludes my testimony. I will be
pleased to answer any questions the Committee may have.

TREASURY NEWS «P

department of the Treasury • Washington, D.C. • Telephone 566-2
FOR RELEASE AT 4:00 P.M. April 5, 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 April 14, 1983.
This offering will provide $ 950
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $11,456 million, including $1,006 million currently heid by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $ 2,402 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
July 15, 1982,
and to mature July 14, 1983
(CUSIP
No. 912794 DA 9) , currently outstanding in the amount of $11,845
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $6,200 million, to be dated
April 14, 1983,
and to mature October 13, 1983
(CUSIP
No. 912794 DT 8 ) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing April 14, 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-3015

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20 226, up to 1:30 p.m., Eastern Standard time, Monday,
April 11, 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 April 14, 1983,
i n cash or other immediately-available funds
or in Treasury bills maturing April 14, 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

April 6, 1983

RESULTS OF TREASURY'S AUCTION OF 10-DAY CASH MANAGEMENT BILLS
Tenders for $3,018 million of 10-day Treasury bills to be
issued on April 11, 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:

High
Low
Average -

Price Discount Rate
99.754
8.856%
99.750
9.000%
99.751
8.964%

Investment Rate
(Equivalent Coupon-Issue Yield)
9.03%
9.17%
9.14%

Tenders at the low price were allotted 32%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:
(In Thousands)
Location
Received
Boston
120,000
$
New York
16 ,572,000
—
Philadelphia
—
Cleveland
Richmond
10,000
—
Atlanta
Chicago
1 ,428,000
St. Louis
17,000
—
Minneapolis
Kansas City
15,000
—
Dallas
San Francisco
635,000
$18 ,797,000
TOTALS

R-3016

Accepted
46,400
$
2,,432,600
—
—

1,600
—

427,720
8,600
—

8,200
--

93,200
$3 ,018,320

TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
April 5, 1983

Contact:

Rober4- E. Nipp
(202) =66-2133

Treasury Announces Prices On Olympic Cormemorative Proof Coins
The Treasury announced today that the ordering period for
Olympic Commemorative Proof Coins at current prices will be
extended until Monday, June 6, 1983. The current prices are:
* $29 for the 19 83 silver dollar.
* $58 for the two-coin set containing a 19 83 and a 19 84
silver dollar.
* $410 for the complete three-coin set containing the
two silver dollars and a 19 84 gold ten dollar coin.
A charge of $2.00 for the first set plus $1 for each
additional set is being made to help defray postage anc' handling
costs. Add this amount to the total cost of the coins.
Interested buyers are invited to send a letter order and
payment to:
The United States Mint
P.O. Box 6"?66
San Francisco; CA 94101
In the event a significant increase in bullion prices should
occur, however, the Mint reserves the right to discontinue the
acceptance of orders at any tirre. Once an order is accepted by
the Mint, it will not be cancelled due to changes in bullion
prices.
The Treasury also announced the closing of the reservation
period for the limited three-coin uncirculated sets. Those
individuals who have ordered a three-coin proof set as of April 5th
have reserved their right to purchase the very limited, three-coin
uncirculated set.
0 -

R-3017

Telephone Message for Small Saver Certificate Rates

The DIDC has determined that the 1-1/2 year small saver
certificate ceiling rates based on the Treasury's 1-1/2 year
yield curve rate will be 9.50 % for thrift institutions and
Q.ZiT % for commercial banks for the period April 12, through
April 25, 1983.
The next announcement of the 1-1/2 year small saver
certificate ceiling rates will be made on April 25, 1983.
For informational purposes only, the Treasury's 2-1/2 year
yield curve rate for the five business days ending April 11,
1983, averaged 9,7.ST %. The DIDC will continue to make the
2-1/2 year Treasury security rate available on a biweekly
basis only until such time as DIDC-mandated rate ceilings and
early withdrawal penalties on time deposits are removed.
Therefore, if depository instituitons write contracts based
on the 2-1/2 year Treasury security rate they should do so
with the understanding that this rate will not be indefinitely
available from the DIDC.

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 COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
SUBCOMMITTEE ON INTERNATIONAL TRADE,
INVESTMENT AND MONETARY POLICY
Washington, D.C.
April 7, 1983
The Increase in IMF Resources:
Protecting the Financial System,
Safeguarding U.S. Trade and Employment
Mr. Chairman and members of the Subcommittee:
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 in February on complementary measures to increase IMF
resources: an increase in quotas, the IMF's basic source of
financing; and at> 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.
President Reagan submitted the Administration's legislative
proposals to the Congress early last month. As background to
those proposals, 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
Around the middle of last year, the serious financial problems
confronting the international monetary system became front-page
news — and correctly so, since management of these problems is
critical to our economic interests. The debts of many key countries
(including Argentina, Brazil, Mexico, and a growing list of others)
became too large for them to continue to manage under present
policies and world economic circumstances. In response, 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.
RvSTTTI

- 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
and
to go
$47
to
pace
billion
Latin
— America.
about
in 1981
$37—billion
(See
with
Charts
most
in 1979,
Aof
andthe
$43
B.)
increase
billion continuing
in 1980,

- 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 As the situation developed, 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 J^s 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 Mexico's 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 mentioned, 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.)
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.
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 which
to bankprivate
financing
would thus
force
a cutback
in the
expenditures
corporations

- 7 and local governments can make —
pressure on interest rates.

and it would also put upward

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 art 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.
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, which was first outlined in my testimony before the
full Banking Committee last December, 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 thi-. 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
this
— important.
IMF current
conditionality
— that makes
the
role of
of
the is
its
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resolving
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the
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adequacy

- 8 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 present, the IMF has about SDR 28 billion available for
lending. However, SDR 16 billion of that total has already been
committed under existing IMF programs, leaving only about SDR 12
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 if necessary to respond to debt emergencies. Recent
experience has demonstrated the need to be willing to consider
providing immediate and substantial short-term financing — but
only on a selective basis, where system-wide dangers are present —
to tide countries through their negotiations with the IMF and
discussions with other creditors. We are undertaking this where
necessary,
on ministries
a case-by-case
ad hoc in
arrangements
among
finance
and basis,
centralthrough
banks, often
cooperation

- 9 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 that has been
arranged for just three countries — Brazil, Argentina, and Mexico
— amounts to nearly $11 billion. For Brazil, the banks have agreed
to provide new net lending of $4.4 billion, which would raise total
commercial bank claims on Brazil to an estimated total of $65
billion. For Argentina, net new lending of $1.5 billion would raise
claims to around $25 billion. For Mexico, net new lending of $5
billion will raise bank claims to something over $65 billion. Without such continued lending in support of orderly and constructive
economic adjustment, the programs that have been formulated with
the IMF could not succeed — and the lenders have a strong selfinterest 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
for world economic expansion. We believe the U.S. recovery is now
underway, as evidenced by the recent drop in unemployment and the
estimated 4 percent increase in U.S. GNP during the first
quarter
of economies
this
Establishing
growth
in the
other
industrial
for recovery
hasyear.
been is
laid
also
abroad
important,
as credible
well.
and we
believe
base

- 10 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.
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 — 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 attached
more
measures
to limit
imports.
condiadjustment
tionally
takes restrictive
place,
to IMF
that
lending
the -borrower
is designed
is restored
to
assuretoThe
that
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orderly

- 11 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, 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
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 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 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.
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.
We believe these steps to strengthen *-he IMF, if enacted,
will safeguard the IMF's ability to respond effectively to current
financial problems. Given the financing needs that are foreseen,
IMF members have agreed that 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
and indirect
liquiditycost
problems
be States.
impaired,
at
substantial
direct
to thewill
United

- 13 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. Financing is not provided in one lump sum
to borrowing countries, but is made available in parts only as they
implement agreed policies. 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
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
billion
stay at drop
Because
their
the financing
in
depressed
exportscrunch
end-1982
to our
got
third
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largest
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on,world.
totals
a $10

- 14 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 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 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 Promote Protectionism and Hurt U.S. Exports?
There is a perception that IMF programs are designed to cut
imports and growth in borrowing countries, and that the IMF
encourages protectionist measures as a means to reduce imports.
More generally, it is argued by some that, far from helping to
maintain world trade and U.S. exports, IMF programs actually hurt
exports by the United States and other industrial countries by
reducing overall import demand in borrowing countries.
Both of these arguments are just plain wrong. The purpose
of an IMF program ^s to restore a borrower's external position
to a sustainable basis — but that doesn't take place solely,
or in the long run even primarily, by restraining imports. i n

- 15 fact, it is frequently the case that a country's imports under an
IMF program are higher than in the period before that program went
into effect — and generally far higher than would have been possible
in the absence of the program.
The logic of this process should be clear. By the time many
countries approach the Fund, they have permitted economic and
financial conditions to deteriorate to such an extent that their
access to normal sources of credit is severely restricted, if not
cut off altogether. Without the policy reforms instituted under
an IMF program, the temporary financing the IMF makes available,
and the additional private and official financing its program
catalyzes, imports and economic activity would be curtailed
sharply adjustment would be abrupt and disorderly. We saw this
happen in Mexico last year, before its IMF program was put in
place.
In contrast, with an IMF program a borrowing country receives
additional financing which enables it to maintain higher levels of
growth and imports, even when it is putting strong adjustment
measures in place. In the longer run as well, a successful program
makes a higher level of imports and a higher economic growth rate
possible. For as I have said earlier, orderly adjustment entails
not just the cooling of overheated demand, but also a wide range
of measures to increase a borrowing country's economic efficiency
and productive capacity, and hence its ability to grow and to pay
for imports.
In fact, this conclusion is borne out vividly by the performance envisioned under 26 new IMF conditional adjustment programs
— 23 recently approved, and three proposed. In the great majority
of these, real economic growth is expected to improve in the first
year of the program as compared with the preceding two years;
growth is expected to decline in the first year in only 7 of the
26. The same is true for imports under these Fund programs:
imports are expected to be higher in the first program year than
in the two preceding years in 19 out of 26 cases.
The programs for Mexico, Argentina, and Brazil all fit this
category. In Mexico the real economic growth rate fell from 8.1
percent in 1981 to zero in 1982; and imports fell from $23 billion
in 1981 to less than $15 billion in 1982. Since the vast majority
of Mexico's imports come from the United States, Mexico's ability
to import in the future matters quite a lot to us. In the first
year of the new IMF program, Mexico's imports are projected to
rise by 2 percent, and by another 14 percent next year.
In Argentina real GNP declined for two years preceeding the
IMF program, and imports dropped from $9.4 billion in 1981 to S5.5
billion in 1982. Under the IMF program, Argentina's imports are
projected to rise by 18 percent over two years and real growth
is expected to resume. In Brazil, real GDP fell 3.5 percent in
1981 and stagnated in 1982, while imports dropped from $22 billion
in 1981 to $19.4 billion in 1982. Brazil's imports are expected
to decline significantly further this year, but to grow over the

- 16 course of their three-year IMF program as a whole? indeed, excluding oil, Brazil's imports in the third program year are
projected to be some 35 percent higher than last year. Clearly,
not all IMF programs can lead to increased imports in the short
run, especially where imports were unsustainably high beforehand.
But IMF programs do permit a higher short-run import level than
would be possible without a program, and are always designed to
lead to longer-term increases.
The suggestion that the' IMF encourages trade protectionism
as a means of balance of payments adjustment does not stand up
under scrutiny either. The entire history and philosophy of the
organization run in the opposite direction — toward a free and
open trading system — as do its practices. It aims at liberalizing
trade policies as far as possible in order to minimize economic
distortions and stimulate competition. For this purpose, the
performance criteria in IMF programs always include an injunction
against the imposition or intensification of import or payments
restrictions for balance of payments reasons. If actions are
taken which violate these prohibitions, the borrower is prevented
from using additional IMF credit until the issue can be resolved
satisfactorily to the Fund.
In fact, these performance criteria designed to avoid
increased protectionism are only half the story. The other half
is that the IMF also actively seeks the reduction and elimination
of existing import restrictions and export subsidies by providing
for the adoption of more efficient, market-oriented measures during
program periods. Among the 33 Fund programs approved between
January 1, 1982, and February 28, 1983, 30 included some positive
reform or liberalization of a country's exchange or trade system.
° 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
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,
if
we
fordon't
the United
handle
States.
that right
there are
substantial
downside and
risks

- 17 0

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 $1/2
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.
0
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
That
and run,
troubled
is exactly
LDCs
orderly
that
what
adjustment
are
isprepared
happening.
requires
to adopt
increased
serious
bank
economic
lending
programs.
to

- 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.
It is clear that IMF resources are not being used to enable
banks to pull out of lending to troubled countries. But a question
is frequently raised about how IMF financing jjs used. The correct,
if rather broad, answer is that it is used for general balance of
payments support.
One must remember that many of the countries now undertaking
IMF programs have previously reached a stage where financing was
no longer available to them to allow them to conduct normal international transactions. IMF financing is provided to member
governments to enable them to resume such transactions while
adjustment is taking place. There are a wide variety of specific
international transactions which governments themselves engage in,
including merchandise imports, purchases of services from abroad,
and various capital transactions. Some, but only a part, of these
transactions are related to interest on, and repayments of, past
borrowing from commercial banks. In addition, in most developing
countries the foreign exchange market is so small and rudimentary
that it is managed by the government or central bank. As a result,
demands for foreign exchange resources of the type provided by IMF
financing must also be met by LDC governments in facilitating a
large variety pf transactions related to imports, purchases of
services, and capital transactions by private citizens — a function
which in the United States is performed by private foreign exchange
markets. Because money is fungible it is neither possible nor
meaningful to ascribe the financing provided by the IMF to any
particular subset of a borrowing country's balance of payments
transactions.
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
and
to
others,
maythan
seem
doubtful
in deal
retrospect,
given
can
shaping
the them
way
agree
the
that
that
world
environment
governments
economic
environment
have
banks.
had a great
changed.
more
But Ito
think
do with
we

- 19 All of this is not to say that there aren't lessons to be
learned in the 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?
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.
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
country exposure could be highly arbitrary and unable to distinguish among the capabilities 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.
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
reviewing these
and
issues in
todetermining
see what changes
might
bebe
desirable.
We need
toother
be careful
how to

- 20 deal with such a sensitive and central part of our economy. Any
decisions in this area will have important implications both for
resolving the present situation, and for the evolution of the
banking system in the future.
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. I urge that you give the
proposed legislation authorizing and appropriating our participation
in the increase in IMF resources prompt and favorable consideration.

Chart A

OUTSTANDING FOREIGN DEBT OF NON-OPEC LDCs
$Biilion

500

400

Total Debt

300

**
*n*

200
•»%'**

**

*ar
*

100

0

1973
Series break.

74

75

76

•

%••
f *•

Debt to Commercial Banks

...•*•

i
77

**
**r
<*»

•••

78

79

i

J

80

81

L
82 (est.)

U.S. Treasury Dept.
21183

Chart B

NET NEW LENDING BY COMMERCIAL BANKS TO NON-OPEC LDCs
$Billion

$47
$43
40

30

20

10

0
1976

1977

1978

1979

1980

1981

1982
U.S„ Treasury Dept.
2-1183

Chart C

Index,

GROWTH OF U.S. AND WORLD EXPORT VOLUME

1970=100

1970

71

72

73

74

75

76

77

78

79

80

81

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 Oepi.
21183

Chart F

U.S. TRADE BALANCE IN SERVICES
$ Billion

1970

71

73

74

J

L

75

76

77

78

79

J

L

80

81

82

U.S. Treasury Dept.
4-4-83

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 1080, 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.
21183

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
$BUlion
18
U.S. Exports to Mexico

16
14
1210
8 -

1970 71
U.S. Treasury Dept.
21183

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

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

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:
(1) "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;
(ill) "participant" means a participating member or a
participating institution;
(lv) "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;
(vll) "call" means a notice by the Fund to a participant to
make a transfer under its credit arrangement to the Fund's account;

- 2 -

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 ia 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 tha 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

- 3 -

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"

4 -

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 1 K 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 participant 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 fall 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
own shall be guided, to
and prospective balance
whose currencies are to

participant in a currency other than its
the maximum extent practicable, by the present
of payments and reserve position of the members
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.
(1) 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 vhlch 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 terms 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 terms 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

- 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
•hall be made in terms 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 terms 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"c 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
•hall 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

- 9

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 under 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 (1) transactions In the upper credit
tranches, (11) transactions under stand-by arrangements extending beyond
the first credit tranche, ( H i ) 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.

Psragraph 22.

Participation of the Swiss National Bank

(a) Notwithstanding any other provision of this Decision, the

- 10 -

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(e), 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
aeeordance with Paragraphs 6 and 7 for exchange transactions with that
•ember, 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.

- 11 -

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
in Units of
Participant's currency

-Participant

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

United States of America
Deutsche Bundesbank
United Kingdom
France
Italy
Japan
Canada
Netherlands
Belgium
Sverlges Riksbank

US$
DM
B

P
Lit
Ten
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

II. From the Effective Date of Decision No. 7337-(83/37)
Participant

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
Sverlges Riksbank
Swiss National Bank*

Amount
in special drawing rights
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

*Uith effect from the date on which the Swiss National Bank adheres
to this Decision in accordance with Paragraph k2.

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:

Amount

Feb
June
Sept

Dae
Total
1965

1966

March
July
Sept
Total

Jan
March
April

May
July

Aug
Sept

Oct
Nov
Dec
Total

Date

Amount

125
125
150
125
525

1968s March 200
Total 200

75
300
€0

1971: Jan 250
June
250
A«Q
§62
Total 1,3*2
1972: April 200
TotalTuTT

435
100
60
30
30
71
282
35
31
12
30
681

1970: May ISO
Total 150

1978: Nov
Total

2,275
2,275

Grand Total

5#628

1/

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 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 is not possible to project the effect on Treasury borrowing requirements or the net cost of U.S. transactions with the IMF
because
ing; the of
portion
uncertainties
of such regarding
financing that
the future
would be
level
in dollars;
of IMF financand

-2movements in market interest and exchange rates. However, the
figures in the attached table indicate that for the period from
July 1, 1969, to the end of 1982s
— Net increases in Treasury borrowing requirements
attributable to transactions with the IMF averaged
$498 million annually, compared to average annual
increases in Treasury borrowing of $61 billion.
— Treasury debt outstanding attributable to transactions
with the IMF averaged $1.9 billlion 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. During fiscal 1982, the average outstanding
Treasury borrowing attributable to such transactions
amounted to $5.3 billion, about 1/2 of 1 percent of the
total outstanding Treasury debt of $1.1 trillion at the
end of the fiscal year.
— Net interest costs to the Treasury associated with all
U.S. transactions with the IMF averaged $45 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 $62 million.
— The overall net annual cost to the U.S., taking account
of interest and valuation, thus averaged $107 million.

Revised to U.S.
Fiscal Year Basis
March 4, 1983

Estimated Public Debt, Servicing Costs and Budgetary Effects Associated With U.S. Transactions
Under U.S. Quota and U.S. Loans to IMF, FY 1970-19831
(millions of dollars)

TABLE 1

Average Outstanding Net Est.Treasury Valuation Interest
Treasury Debt(-) or Cash(+)
Borrowing
Interest
Gains(+) or
Earned on
Total
Position Arising From;
Cost(-) or
Received Remuneration Losses(-)
Holdings of
Estimated Net
Transactions U. S.
Reduction^) by U.S.
Received
on U.S.
Foreign CurBudgetary
nci
awn
uringU.S.
Under U.S. Loans to
frcm
on Loans
by U.S.
Reserve
^
efJ*
, J ? S ? l p t ? i ?>
iscal Year
Quota
1/ IMF
2/ Total 3/ Column(3) 4/ to IMF 5/ from IMF 6/ Position 7/ from IMF
8/ Outlays(-) 9/

TIT"

"HT"

"TIT

nr~

(5)

(6)

(7)

• (9)

(8)

1970 -860 - -860 -66 - +13 - - ~53
1971 -571 - -571 -28 - +12 - - "16
-

*

+34

1974 +627 - +627+104
+50

-

-

+54

1975 -481 - -481+16
-32

-

*

+48

1972

+631

-

+631

+26

1973 +801 - +801+42
+42

1976

-1,131 - -1,131 -63 - +9 -168 - -222

-

+9

-168

TO

-2,467 - -2,467 -32 - - +39 - +7

-

-

+39

1977

-2,973 -379 -3,352 -164 +14 +79 +27 - -44

+14

+79

+27

1978

-2,314 -663 -2,977 -196 +31 +80 +369 - +284

+31

+80

+369

+12

+27

+212

*

-

-13

1981 -2,183 -559 -2,742 -376 +46 +22 -1,295 +69 -1,534

+46

+22

-1,295

1982 -4,?33 -1,036 -5,269 -619 +122 +216 -323 +76 -528

+122

+216

-323

+222 10/

+173

+225

+680

-843

+17

+50

-62

1979 -834 -64 -898 -83 +12 +27 +212 +48 +216
1980 -609 -94 -703 -78 * - -13 +40 -51

19831 -5,464 -1,308 -6,772 ^134 - +222 10/ _+173 _+15 _+276

7/lA9^2/n)82 "1,753 +225 +680 -843 +248 -1,443
Annual Average -1,634 -304 -1,938 -130 +17 +50 -62 +18 -107

—

-

+60

Footnotes to Table 1
^Indicates less than $500,000.
Estimate of average outstanding Treasury
from U.S. transfers of dollars to the IMF
dollar balances received by the U.S. from
by the U.S. from the IMF (i.e., an inflow

debt or cash position during period arising
(i.e., an outflow of dollars from Treasury) and
the IMF and from sales of foreign currency drawn
of dollars to the Treasury).
•

Estimate of average outstanding Treasury debt during period arising from U.S. loans and
repayments under the IMF's General Arrangements to Borrow and Supplementary Financing
Facility.
Sum of columns 1 and 2. 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.
Estimate of interest paid or borrowing reduced during period as result of cumulative debt
or cash position arising from U.S. transactions with IMF; 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.
Enters the U.S. budget as a receipt.
Remuneration on U.S. creditor position; prior to 1975, remuneration was 1.5 percent,
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.
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.
Remuneration accrued May-December 1982, following receipt of remuneration for IMF fiscal year
ending April 1982.

TABLE 2
Estimated Annual Treasury Public Borrowing Reguirements
and Financing Costs Related to U.S. Transactions Under U.S. Quota
and U.S. Loans to IMF, FY 1970-19831
(millions of dollars)
Dollar Funds Supplied(-) or Estimated
Received(+) by Treasury
During
During Period, Arising From:
U.S.
Transactions
Fiscal
Under U.S. U.S. Loans
Year
Quota
1/ to IMF 2/ Total 3/
1970 -802 - -802 -66

Treasury Borrowing
Cost(-) or Reduction(+)
Arising from Debt or
Cash Position Related
to IMF Transactions 4/

1971 +908 - +908 -28
1972 +986 - +986 +26
1973 -50 - -50 +42
.1974 -471 - -471 +50
1975 -1,073 - -1,073 -32
1976 -1,205 - -1,205 -63
TQ -702 - -702 -32
1977 -105 -662 -767 -164
1978 +963 +39 +1,002 -196
1979 +1,333 +633 +1,966 -83
1980 -412 -303 -715 -78
1981 -2,359 -537 -2,896 -376
1982 -1,826 -345 -2,171 -619
19831 -572 -160 -732 '134
Total Net Change;
7/1/69-12/31/82
-5,387
Annual Average ,._
Change»

-399

-1,335

-6,722

-1,753

-99

-498

-130

Footnotes to Table 2

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).
U.S. loans and repayments under the IMF's General Arrangements to
Borrow and Supplementary Financing Facility; includes interest received
in dollars by the U.S.
Total net dollar funds supplied or received by Treasury annually?
indicates impact on Treasury public borrowing requirements.
Estimated cost of servicing annual average of outstanding public debt
associated with transactions under U.S. quota and on U.S. loans to IMF?
from Table 1.

APPENDIX A

INTERNATIONAL MONETARY FUND
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 (Mos. 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

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

INTERNATIONAL MONETARY FUND
PRESS RELEASE MO. 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 in 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 quota cannot be increased until it has consented
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

- 2 -

The report of the Executive Board to the Board of Governors pn
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:
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 oa the Eighth General Review, the Executive
Board has considered, Inter alia, (1) the method of calculating quotas;
(11) the size of the overall increase in quotas; (ill) 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 MM 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.
9. 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
chall 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.

6-

ANNEX

Proposed Quota
(in millions of SDRs)

1.
2.
3.
4.
5.

Afghanistan
Algeria
Antigua and Barbuda
Argentina
Australia

86.7
WVi /
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
r # we w
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

- F1^ 36.5
42. Finland
43. France
44. Gabon
45. Gambia, The

46. Germany 5,403.7
47. Ghana
48. Greece
49. Grenada
50. Guatemala
51. Guinea 57.9
52. Guinea-Bissau
53. Guyana
54. Haiti
55. Honduras
56.
57.
58.
59.
*A
oO.

Hungary
Iceland
India
Indonesia
T
, ,
Iran, Islamic Republic of

61.
62.
63.

Iraq
Ireland
Israel

204e5
399#9
6#

Q

108# * 0

y*$
^2
44e j
67^8
4

5 3 0 7

59.6
2,207.7
1,009.7
1 117.4
504.0
343.4

65. Ivory Coast
66.

574.9
4,482ls
y^,1
jy'j

165>5

Jamaica

223

145.5

11' fT *» -3
68. Jordan
69. Kampuchea, Democratic
70. Kenya
71. Korea 4g2 8
72. Kuwait
73. Lao People's Democratic Republic
74. Lebanon
75. Lesotho
76. Liberia
77. Libya
78. Luxembourg
79. Madagascar
80. Malawi

«
9**n
^

73

lllll
?Q\
'*"*
78.7
15.1
,, ,
(]•*
*£;•'
"*°
•«•*

- 8 -

ANNEX

Proposed Quota
(in millions of SDRs)

81.
82.
83.
84.
85.

Malaysia
Maldives
Mall
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.
97.
98.
99.
100.

Oman
Pakistan
Panama
Papua New Guinea
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

550.6

2.0
50.8
45.1
33.9

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

9 -

ANNEX

Proposed Quota
(In millions o£ SDRs)
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. Uganda
132. United Arab Emirates
133. United Kingdom
134. United States
135. Upper Volta
136. Uruguay
137. Vanuatu
138. Venezuela
139. Viet Nam
140. Western Samoa
141.
142.
143.
144.
145.

Yemen Arab Republic
Yemen, People's Democratic Republic of
Yugoslavia
Zaire
Zambia

146. Zimbabwe

49.3
24.7
1,064.3
139.1
107.0
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
43.3
77.2
613.0
291.0
270.3
191.0

FOR IMMEDIATE RELEASE
April 8, 1983

CONTACT:

Charles Powers
(202)566-5252

Treasury Announces Citibank Settlement
Citibank has received $125 million in payment on its
non-syndicated loan claims against Iran.
This 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, following the
release of the U.S. nationals held hostage in Iran. Citibank in
turn paid $132 million to Markazi in settlement of Iran's claims
against Citibank for interest on blocked Iranian accounts.
This was the sixth settlement reached by a U.S. bank having
outstanding loan claims against Dollar Account No. 2. Other
banks which have settled their claims are Chemical Bank, Allied
Bank International of New York, First Wisconsin National Bank of
Milwaukee, the Fidelity Bank of Philadelphia, Pennsylvania, and
American Security Bank of Washington, D.C.
Additional U.S. banks are presently meeting with Bank
Markazi in London and are in the process of negotiating their
respective claims with Bank Markazi. Further bank settlements
are expected to follow over the next several months.
John M. Walker, Jr., Assistant Secretary of the Treasury
for Enforcement and Operations said, "The Citibank settlement is
a significant milestone in the implementation of the Algier
Accords and in the Iran claims settlement process. This is the
largest and most complex bank settlement to date. It is a clear
indication that the claims settlement process is working and that
U.S. banks having claims against Account No. 2 can expect to have
their claim settled within a reasonable period of time."

rREASURYNEWS
ipartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
April 8, 1983

CONTACT:

Charles Powers
(202)566-2041

Treasury Announces Meeting with Japanese
to Discuss Import Entry Procedures
Assistant Secretary of the Treasury John M. Walker, Jr.
today announced that Treasury will be conducting a review
of Japanese import entry procedures now applied to American
goods to determine the extent to which they vary from U.S.
import entry procedures currently being applied to Japanese
goods.
"The U.S. Customs Service is vitally concerned with how
import entry procedures affect international trade and the world
economy. This is particularly true with regard to Japan, a major
trading partner," Mr. Walker said.
Assistant Secretary Walker will be heading the U.S. Delegation
at a meeting of the U.S.-Japanese Customs Liaison Committee in
Tokyo this month. He will meet various officials of the Japanese
Government with policy responsibilities for Japanese Customs and
other ministries involved in the entry of imports. Mr. Walker
wi:ir~aTso~vIsTiffvarious Japanese~"Custorns faci 1 ities.
The U*&*-Jap^anes^ Gu^stoms-L4a4s^n-^oinm.Lttee,- established in
early 1982, was formed to facilitate trade and promote better
relations through exchanges of information and discussions of
mutual problems and concerns. In addition to import entry
procedures, the Committee will take up a permanent assistance
agreement between the services, and the establishment of working
groups on passenger processing, cargo processing and enforcement.
Assistant Secretary Walker said: "We expect that through
these meetings progress can be made toward reducing or eliminating
unnecessary barriers to U.S. exports resulting from cumbersome and
restrictive import entry procedures."

TREASURY NEWS
>epartment of the Treasury • Washington, D.C. • Telephone 566-2041
HOLD FOR RELEASE
EXPECTED AT 9:30 A.M., EST
FRIDAY, APRIL 8, 1983
STATEMENT OF THE HONORABLE MARC E. LELAND
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE SUBCOMMITTEE ON INTERNATIONAL TRADE, INVESTMENT
AND MONETARY POLICY
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
I am pleased to appear before this Subcommittee to support
the Administration's proposed legislation to extend the. ExportImport Bank Act until September 30, 1988. The Administration
strongly supports a simple extension of the Eximbank Charter,
with no amendments to the other provisions of the Act. Eximbank
has done a good job of facilitating U.S. exports by countering
foreign financing subsidies and overcoming deficiencies in private
capital markets. We see no need to amend the existing Eximbank
Charter. First, the existing Act has worked well. Secondly,
the Charter contains the flexibility which enables the Administration and Eximbank to develop different approaches toward negotiating improved export credit arrangements. Finally, the Charter '
allows the Administration sufficient latitude to adapt policies
to changing needs.
Reviewing and renewing the Eximbank Charter requires that we
all step back from our experiences of the last five years and
objectively determine the kind of Eximbank we want in the future.
Much analysis of Eximbank has been distorted by our experiences
in recent years, which have been characterized by heavily subsidized export credits. During this period, the primary objective
of Eximbank has been to neutralize the effects of foreign export
credit subsidies. The environment for trade finance, however,
has been rapidly and dramatically changing in the last six months.
Export credit subsidies are fading in importance, whereas ongoing
developing country indebtedness has raised questions about the
availability of adequate export finance.
None of us wants an Eximbank Charter armed with the weapons
and strategy to fight the last war but totally inadequate to
meet new challenges. For this reason, I would first like to
outline the Administration's export credit policy. Secondly,

R-1019

- 2 I want to summarize our assessment of the export credit environment we will face during the next five years. In particular, my
testimony will focus on our international efforts to eliminate
export credit subsidies, the impact of lower commercial interest
rates on officially supported finance, and the consequences of
developing country indebtedness for trade finance. Thirdly, I
would like to explain how the existing Eximbank Charter best
enables the United States to position itself for the future.
Revision of the Charter, in particular strengthening the Bank's
competitiveness mandate, could severely handicap these efforts.
Finally, I would like to make some comments on proposals to
(1) amend Section 1912 of the Export-Import Bank Amendments
of 1978, and (2) establish a Competitive Tied Aid Fund.
Administration Export Credit Policy
The Economic Report of the President, transmitted to the
Congress in February 1983, provides an excellent summary of the
international economic foundations on which we have built U.S.
export credit policy. I would like to highlight some of those
conclusions today.
During the 1970's the world's market economies became more
integrated with each other than ever before. Underlying the
growth in world trade and investment was a progressive reduction
of barriers to trade. In spite of its huge benefits, however,
this liberalized trading system is now in serious danger. Within
the United States, deman'ds for protection against imports and for
export subsidies have grown; a combination of structural changes,
sectoral problems and short-run macroeconomic developments has
led to a perception that we are becoming uncompetitive in world
markets. It has further been argued that the position of U.S.
business is steadily eroding in the international marketplace,
primarily because of the support given to foreign businesses by
their home governments.
The practices of foreign governments raise extremely difficult issues for U.S. trade policy. The United States has customarily sought to preserve and extend the benefits of free trade.
To do this requires resisting protectionist pressures at home
while continuing to work for the elimination of the more objectionable trade-distorting policies of all countries. Moreover,
trade distorting policies such as export subsidies are equivalent
to the multiple currency practices of the 1930's. They are
precisely the same ',u>eggar-thy-neighbor" competitive devaluation
policies which contributed to the great international tensions
of that time and which were only resolved by the Bretton Woods
Agreement of 1945.

- 3 Export subsidies are a form of protectionism which the
United States has pledged to avoid. Reintroduction of subsidies
into the international trading system will only aggravate tensions
arising from the global recession.
Trade-distorting measures, such as subsidizing exports,
injure not only the competing countries, but the initiating
country, even when they are a response to foreign trade-distorting
practices. Obviously, export subsidies result in significant
direct budgetary costs for the initiating country. In addition,
the subsidy fails to improve the trade balance or generate
economic growth even in the short run. Such subsidies benefit
one industry at the expense of non-subsidized industries and
other taxpayers. Moreover, at least part of an export subsidy
is transferred abroad, as opposed to domestic subsidy programs.
If foreign governments subsidize exports on a large scale,
world prices for U.S. products are depressed as a result. Large
countersubsidies by the United States would depress prices still
further. With floating exchange rates, an artificial increase
in exports — brought about by export subsidies — increases
demand for dollars, thus raising the exchange rate. This leads
co a further loss of competitiveness in those sectors which are
not promoted. Thus, departures from free trade are not called
for, and if other countries do not play by the rules, we should
target our responses and not try to launch large countersubsidy
programs.
Intervention in international trade by the U.S. Government,
even though costly to the U.S. economy in the short run, may be
justified if it serves the strategic purpose of increasing the
cost of interventionist policies by foreign governments. Thus,
there is a potential role for carefully targeted measures —
explicitly temporary — aimed at convincing other countries to
reduce their trade distorting activities.
Consistent with the basic thrust of the President's Report,
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.
(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 should be targeted to assist U.S.
exporters to meet the competition where it is greatest.

- 4 Within this context, Eximbank has an important role to play
in supporting U.S. exports against official 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.
Export Credit Arrangement
We have made significant progress in our quest to eliminate
export credit subsidies, an objective vigorously sought by both
this and the previous Administrations. The U.S. Government has
successfully negotiated improvements in the OECD Arrangement on
Export Credits which have significantly raised the minimum interest
rates offered by foreign export credit agencies over the past
year and a half. For example, the minimum permissible rates for
the most important credit recipients where most predatory financing has occurred were raised from 7.5 percent to 11.35 percent,
an increase of 46 percent for those countries where most of the
predatory financing has occurred. At the same time, commercial
rates have declined as a result of our success in bringing down
inflation. For a complete summary of these negotiations, I
would like to refer the Subcommittee members to the September 16,
1982 report of the Department of the Treasury to the Congress
entitled, "International Export Credit Negotiations (1981-1982)."
These two developments have dramatically changed the export
credit picture in the past year. This recent convergence of
officially supported interest rates and commercial interest
rates has largely eliminated direct interest rate subsidies for
most borrowers. Of the major trade financing currencies, only
French franc interest rates are substantially higher than the
current Arrangement rates, resulting in subsidies. Since a great
deal of trade is financed in U.S. dollars (perhaps 40 percent or
more), we have come a long way towards our goal of eliminating
subsidies in areas covered by the Arrangement.
Given the present economic difficulties facing the European
Economic Community, it will take a great willpower and a firm
commitment to free trade to hold this position. At upcoming
negotiations we will concentrate our efforts on achieving a more
flexible interest rate adjustment system that responds to market
interest rate movements. This will not only be a more accurate
system, it will remove the need for painstaking semiannual negotiations on interest rate levels. In addition, we have proposed
measures to reduce government involvement ?n credits to the
relatively rich countries. There was a preliminary negotiating
session on March 1-2, and the Participants will meet again on
April 25-27.
Clearcut evidence of the success of our efforts is the
recent Eximbank decision to revise the interest rates it charges

- 5on its loans. The Board reduced interest rates to the lowest
levels permitted under the International Arrangement, without
jeopardizing its financial position whatsoever. Thus, a major
goal of this Administration and previous Administrations has been
achieved.
Developing Country Indebtedness
Since about the middle of last year, the international
financial system has been confronted with serious problems
which have arisen as a result of the size of the debt of several
key countries, the turn in the world economic environment, and
inadequacy of adjustment policies. In response, lenders began
to retrench sharply, and the borrowing countries have since been
finding it increasingly difficult to raise money to pay for
essential imports. Last year, net new bank lending to non-OPEC
LDCs dropped by roughly half, to about $20-25 billion for the
year as a whole, and came to a virtual standstill for a time at
midyear.
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 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. 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 adjustment and liquidity problems already faced by
major borrowers, and even push other countries which are now in
reasonably decent shape into financial problems 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. Hightechnology 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. Our trading relations with 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

- 6 about 29 percent in 1980. 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 indicate is that the export sector of our economy is
vulnerable to any sharp cutback in imports by non-OPEC developing
countries.
An 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 the 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 the willingness
by banks to restructure existing debts, but also to increase
their net lending to developing countries, in conjunction with
efforts by those countries to balance their economies, to support
effective, nondisruptive adjustment.
The Administration is launching a major effort to respond to
the increased indebtedness and balance of payments problems in
many developing countries. The primary focus of this effort has
been the International Monetary Fund, for which we are seeking an
increase in resources. Commercial lenders are increasing their
lending at a slower pace than previously, and there is an important
role for government guarantees during this transition period.
Consequently, the support of Eximbank will be an important element
in the total U.S. Government effort to provide a "credit bridge"
across which trade can flow until recovery begins.
Eximbank in the New Economic and Financial Environment
Much lower interest rates in all SDR currencies, coupled
with much higher interest rate minima under the Arrangement than
a year ago, present an opportunity for Eximbank to make increasing
use of guarantees 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.

- 7 The existing Eximbank Charter will enable the United States
to respond effectively to this rapidly evolving economic and
financial environment. The primary legislative objective of the
Bank is to aid in financing and to facilitate U.S. exports. The
Bank will continue to support U.S. exports. On account of the
success of Arrangement negotiations and falling commercial rates,
an increasing share of Eximbank support over the next five years
will take the form of guarantees and insurance. Most importantly,
the Charter ensures that Eximbank's excellent guarantee and
insurance programs are poised to do their part in providing a
"credit bridge" to a number of developing countries. No amendment
to the Charter is necessary to implement our basic policy to
place increased emphasis on guarantees and insurance.
The current Charter enumerates a number of objectives, goals,
and policies for Eximbank. In terms of Eximbank's actual operations, the Administration believes that the following have been
and should continue to be the primary operational policies of
the Bank:
i
— to offer rates and terms competitive with foreign rates
and terms;
— to seek to minimize competition in government-supported
export credits;
— to supplement and encourage, and not compete with,
private capital;
to offer rates taking into consideration the average
cost of money to the Bank as well as the need to be
competitive;
— to offer loans for specific purposes with a reasonable
assurance of repayment; and
to deny credit applications for nonfinancial noncommercial
considerations only if the President determines that such
action would be in the national interest.
Eximbank is competitive. Eximbank offers interest rates for
direct credits fully competitive with foreign officially supported
interest rates and even offers foreign currency guarantees to
replicate the low market interest rates associated with such
currencies as the Japanese yen and German deutsche mark. In
addition, Eximbank's guarantee and insurance programs are ready
to respond effectively in the new competitive arena for trade
finance, namely the increased importance of credit availability
in keeping exports flowing.

- 8 The Bank will have ample budget authority to meet its objectives. For FY 1984, the Administration is requesting $3.8 billion
in direct credits and $10.0 billion in guarantees and insurance.
These requests reflect the Administration's view that credit
availability rather than subsidized financing will emerge as the
key trade credit issue. If subsidized foreign export credits
again become a major problem, the Administration has pledged to
seek up to an additional $2.7 billion in direct credit authority.
In short, we are poised to use Eximbank as leverage against
foreign export credit subsidies; no additional legislative mandate
is required.
The genesis of recent proposals to strengthen further the
competitiveness mandate was the Eximbank decision in July, 1981,
to raise interest rates above Arrangement rates and to charge an
application fee in order to offset its deteriorating financial
position. The new rates were 1.5-2.0 percentage points above
Arrangement rates, but still as much as 5.0 percentage points
below Eximbank's own cost of money, and as much as 10 percentage
points below commercial rates. A few cases were lost because of
financing. But the new rates helped protect Eximbank's accounts
from a hemorrhage of its capital and reserves. The Bank did
suffer losses, but those losses were contained within reasonable
limits.
The Administration believes that efforts to strengthen the
competitiveness mandate are unnecessary. In formulating Eximbank
policy, we recognize that it is very important for Eximbank to
be competitive. Eximbank already provides financing on terms
and conditions which enable U.S. suppliers to compete for export
sales. Revising the present mandate could imply that the Bank
must exactly match foreign subsidies (including foreign aid) in
all cases. This would be potentially costly and undermine the
Administration's flexibility. First, it would make it more
difficult for the Administration to limit the cost of export
subsidies during periods of inflation, thereby sheltering exports
relative to other sectors of the economy. Secondly, it would
permanently lock Eximbank into providing subsidized financing.
U.S. Government export credit subsidies are costly and are only
justified if they are carefully targeted, explicitly temporary,
and aimed at the strategic purpose of convincing other countries
to reduce trade distortions. Finally, it would undermine our
flexibility to develop different approaches toward negotiating
improvements in export credit arrangements.
The other legislated policies of Eximbank allow plenty of
latitude for the Bank and the Administration to deal with the
emerging economic and financial environment. We can not afford
to lose sight of the Bank's cost of funds in setting interest
rates, particularly in the context of our efforts to control the

- 9 Federal deficit. Eximbank's response to the credit availability
problem is fully in line with the requirement to supplement,
not compete with, private capital markets. Balancing this, the
legislative requirement that there is a "reasonable assurance of
repayment" for each transaction ensures that the Bank does not
assume overwhelming commercial and political risks. Our ongoing
efforts to improve the Export Credit Arrangement and the increased
Eximbank use of guarantees and insurance are consistent with
the mandate to minimize export credit subsidies. In our view,
none of these objectives should be de-emphasized in the course
of charter renewal. They all represent statements of important
policy goals which, taken as a group, allow us to respond to the
financial environment we expect.
Section 1912, Export-Import Bank Act Amendments of 1978
One trade finance issue which has become particularly acute
in the past year is the question of how the United States should
respond to offers of subsidized foreign financing for imports
into our market. This issue received substantial attention in
connection with the sale of Canadian subway cars to New York's
Metropolitan Transportation Authority.
The Administration pursued a number of remedies in the MTA
case. Consultations under Article 12:1 of the Subsidies Code
were held immediately. A precedent-setting countervailing duty
finding was made by the Commerce Department and the Treasury
conducted an investigation under Section 1912 of the Export-Import
Bank Act Amendments of 1978.
The latter section empowers the Secretary of the Treasury,
under certain conditions, to authorize matching financing from
Eximbank for U.S. producers if "noncompetitive" financing by a
foreign government is "likely to be a determining factor" in a
sale in the United States. The law defines "noncompetitive" as
any financing which exceeds limits prescribed by international
understandings on export credits. Thus, the statute wisely
requires policy judgments, first as to whether Eximbank financing
could be offered, and then as to whether it should be offered.
Context and Goals. Section 1912 was designed, of course,
(a) to help U.S. industry cope with subsidized competition, and
(b) to backstop U.S. efforts to negotiate an end to subsidized
trade finance. Unlike the countervailing duty law, Section 1912
does not deal with injurious import competition since it requires
no injury test.
But Section 1912 adds a useful new weapon to the U.S.
arsenal at a time when we are trying to persuade other major
exporting nations not to subsidize trade finance. At this time,

- 10 OECD countries have pledged not to derogate from major provisions
of the Arrangement. If the ban on derogations remains in force,
there will be no need to invoke Section 1912. If such discipline
falls apart, however, the current statute reinforces U.S. efforts
to eliminate export credit subsidies by focusing on derogations
in the U.S. market. The statute also conserves Eximbank resources
for use when foreign subsidies are most objectionable. It applies
directly to subsidies that are prima facie violations of the
Subsidies Code. Finally, Section 1912 complements our countervailing duty law, which targets a broader range of practices not
necessarily violative of international agreements but possibly
harmful to U.S. industry.
Should Section 1912 be Amended? This review of Section
1912's place in our trade strategy suggests that it serves our
purposes well just as it is. The high visibility given Section
1912 proceedings by the requirements for (a) a direct approach to
the subsidizing government, and (b) the involvement of the Secretary of the Treasury is in itself a significant contribution to
the attainment of U.S. policy objectives. We believe that the
use of matching Eximbank financing can, in the right circumstances,
be a similarly useful option under the statute as now drafted.
Proposed amendments to Section 1912 fall into two, broad
categories: (1) proposals to make the provision of Eximbank
financing to U.S. entities more automatic; and (2) proposals to
create a special countervail procedure for credit subsidies.
We see a danger in amending Section 1912 to make the provision of Eximbank financing to U.S. entities more automatic.
This danger is that the statute, instead of being a tool for
enforcement of U.S. trade policy, could become an entitlement
program for any U.S. purchaser who can point to an offer of
subsidized foreign competition. Indeed, some of the amendments
which have been suggested could have the effect of encouraging
U.S. purchasers to seek foreign competition in order to trigger
an offer of Eximbank funding. The paradoxical result could be
to institutionalize, rather than discourage, subsidized credit
competition. We strongly believe that the statute must continue
to permit discretion in its application if it is to fulfill its
purpose of helping to keep U.S. industry competitive while discouraging wasteful credit subsidies. In this context, the Secretary
of the Treasury has agreed to consult with other interested
agencies before a final determination on Section 1912 is made.
With regard to your proposed amendment to amend Section 1912,
Mr. Chairman, we can appreciate your intent of shifting the burden
of responding to foreign subsidized export finance from the Eximbank
budget (and ultimately the U.S. taxpayer) to the foreign subsidizer

- 11 or the U.S. interest receiving the benefit of the subsidy.
is commendable from a budget perspective.

This

However, the proposed amendment would bypass existing U.S.
laws designed to deal with foreign export subsidies in a more
comprehensive fashion.
Our countervailing duty laws, administered
by the Department of Commerce, are specifically designed to provide
for the assessment of import duties against subsidized imports which
injure or threaten to injure U.S. industries. In the recent
subway car case, this Administration made it clear that it will
enforce these laws to offset fully any subsidies on imports which
are injuring U.S. businesses or workers. This case establishes a
clear precedent that warns anyone comtemplating such credit
subsidies that they face potential countervailing duties.
Under current laws, the subsidy determination in an export
credit case depends on the amount of benefit received by the exporting
firm and could be substantially more than just the difference between
the interest rate granted and the cost of money to governments.
Thus, a finding under the current countervailing duty laws could
be more onerous than an assessment levied under the proposed new
law. It is not clear whether action taken under the proposed
legislation would preclude subsequent supplementary action by
the Commerce Department.
We do not think it is necessary to adopt parallel legislation
to the current countervailing duty laws solely for export credit
subsidies. The current laws are sufficient — and, indeed,
preferable to separate, conflicting laws administered by two
different Departments.
Mixed Credits
Mr. Chairman, this Subcommittee is considering the advisability of creating a "Competitive Tied Aid Fund" on which Eximbank
would draw to match foreign mixed credits. The purpose would be
to ensure that U.S. exporters remain competitive with mixed
credit financing, while bringing pressure on our competitors
abroad to stop offering this form of financing.
The Administration opposes initiation by the United States (or
others) of mixed credits with a low degree of concessionality.
The use of mixed credits in export competition is expensive and
wasteful. We cannot expect to eliminate the unfair initiation
of mixed credits by engaging in this practice ourselves. Further,
current resources do not allow either Eximbank or AID to engage
in an extensive program of mixed credits.
Our concern with mixed credits centers on those credits
with low concessionality. Low concessionality mixed credits are

- 12 -

an attempt to circumvent the Arrangement ground rules, while
conferring limited aid benefit to developing nations. Highly
concessional mixed credits are a different matter, since they
are the functional equivalent of tied foreign aid.
Discipline on mixed credits is already tight in the Arrangement on Export Credits, and we want to make it even tighter.
Currently, mixed credits with a grant element of less than 20
percent are prohibited. Prior notification — and thus the
threat of matching — is required for mixed credits with a
grant element less than 25 percent. Anything over 25 percent
is foreign aid. Under this system, it is already expensive to
promote exports with mixed credits.
To further tighten the discipline, the Treasury has proposed
in the OECD that countries participating in the Arrangement
agree not to offer mixed credit financing with a grant element
of less than twenty-five percent. In other words, this forces
those who wish to give mixed credits to give it as foreign aid,
if they give it at all. Moreover, we have proposed that credits
with a grant element of 25 to 30 percent would be subject to
prior notification, giving competitors an opportunity to match,
if they chose. Mixed credits with a grant element between 30
and 50 percent would be subject to prompt notification.
We believe our proposal would discourage the use of this
wasteful practice and avoid any need for the United States to
consider mixed credits.
Conclusion
In light of the rapidly evolving economic and financial
environment, the Administration and Eximbank require the latitude
to respond to changing needs. The current provisions of the
Export-Import Bank Act provide the needed flexibility.
The Charter has worked well, even during a difficult period
when heavily subsidized export credits were the central trade
finance issue. With the virtual elimination of export credit
subsidies, we see no need to strengthen further the Bank's competitiveness mandate, particularly since competitiveness has been
a primary goal of the Bank's operations over the last five years.
The Administration urges Congress to extend the Act for
five years, but not to amend the existing provisions.

TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 12:00 NOON

April 8, 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 April 21, 1983, and to mature April 19, 1984
(CUSIP No. 912794 EF 7). This issue will provide about $2,480
million new cash for the Treasury, as the maturing 52-week bill
was originally issued in the amount of $5,269 million. The additional issues of 45-day and 10-day cash management bills totaling
$12,022 million issued on March 7, 1983, and April 11, 1983, and
maturing April 21, 1983, will be redeemed at maturity.
The bills will be issued for cash and in exchange for Treasury bills maturing April 21, 1983.. In addition to the maturing
52-week and cash management bills, there are $11,638 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 $1,549 million, and
Federal Reserve Banks for their own account hold $2,542 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 $450 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, April 14,
R-3020
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.

- 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 April 21, 1983,
in cash or other immediately-available funds
or in Treasury bills maturing April 21, 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
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

April 11, 1983

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,205 million of 13-veek bills and for $6,202 million of
26-week bills, both to be issued on
April 14, 1983,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

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

26-week bills
maturing October 13, 1983
Discount Investment
Price
Rate 1/
Rate

97.947 8.122%
8.43%
8.177%
97.933
8.49%
8.165%
97.936
8.48%

95.841
95.822
95.830

8.227%
8.264%
8.248%2/

8.73%
8.77%
8.75%

Tenders at the low price for the 13-week bills were allotted 82%.
Tenders at the low price for the 26-week bills were allotted 63%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Received
Accepted
$
142,505
$
49,955
$
142,645
12,172,390
4,635,470
12,510,570
33,440
33,440
23,545
39,550
39,050
33,280
45,300
45,300
67,945
53,595
50,115
38,315
1,085,460
346,260
1,029,025
47,770
34,970
31,910
10,755
9,755
24,180
55,135
55,135
52,310
34,050
24,050
27,630
1,176,010
543,210
1,056,885
338,730
338,730
294,080

Accepted
$ 55,045
4,926,060
23,545
33,280
43,945
38,315
331,025
21,910
12,170
51,460
22,630
348,885
294,080

TOTALS

$15,234,690

$6,205,440

$15,332,320

$6,202,350

Type
Competitive
Noncompeti tive
Subtotal, Public

$12,871,390
1,099,365
$13,970,755

$3,842,140
1,099,365
4,941,505

$12,692,940
913,480
$13,606,420

$3,562,970
913,480
$4,476,450

1,200,000

1,200,000

Federal Reserve
Foreign Official
Institutions
TOTALS

1,202,335%

1,202,335

61,600

61,600

$15,234,690

$6,205,440

525,900
$15,332,320

525,900
$6,202,350

1/ Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum interest rate payable
~~
on money market certificates is 8.548%.

R-3021

FOR IMMEDIATE RELEASE APRIL 11, 19 83
The Treasury announced today that the 1-1/2 year Treasury
yield curve rate for the five business days ending April 11,
1983, averaged ntfO % rounded to the nearest five basis
points. Ceiling rates based on this rate will be in effect
from Tuesday, April 12, 1983 through Monday, April 25, 1983.
Detailed rules as to the use of this rate in establishing
the ceiling rates for small saver certificates are set forth in
Title 12 of the Code of Federal Regulations, section 1204.106.
For informational purposes only, the Treasury's 2-1/2 year
rate for the five business days ending April 11, 1983 was 9» 7$^ %.
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 C ^t:~c- W J. y- J? ^••- --.-- ^
,-•_.,/— Francis X. Cavanaugh, Director
''
Office of Government Finance
& Market Analysis

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

FOR RELEASE UPON DELIVERY
Expected at 9:00 a.m.
April 12, 1983

STATEMENT OF
THE HONORABLE BERYL W. SPRINKEL
UNDER SECRETARY FOR MONETARY AFFAIRS
U.S. TREASURY DEPARTMENT
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
Mr. Chairman and members of this distinguished Committee,
I appreciate this opportunity to review with you S. 730, the
"Credit Deregulation and Availability Act of 1983", a bill to
remove state and Federal usury ceilings on credit transactions.
This legislation is important to consumers and important to the
efficient and equitable operation of our financial markets.
S. 730 would broadly preempt state and Federal usury ceilings
on business, agriculture and consumer loans but would include
a provision which would retain state consumer protection laws
and lender licensing requirements. Such laws and regulations
insure that consumers receive credit terms that are fair and
fully disclosed.
In his April 6 testimony before this Committee on the
current economic and competitive conditions in our financial
markets, the Secretary of the Treasury testified in favor of
preempting usury ceilings on all types of credit. He stated
that the Administration believes that usury ceilings only distort
financial markets and credit flows and do not reduce the cost of
credit to the economy.

R-3022

- 2 Thus the Administration strongly supports the fundamental
principles underlying S. 730. It favors the broad approach
of this bill which would further the deregulation of the cost of
credit begun by the Depository Institutions Deregulation and
Monetary Control Act of 1980. In addition, the Administration
strongly supports the provision in S. 730 which would give
states the ability to override any usury ceiling preemption
for a three year period after the effective date of the Act
and which would continue to exempt from coverage state usury
laws enacted under the similar override provision of the
Deregulation Act of 1980.
IMPACT OF USURY CEILINGS
I would like to take this opportunity to address in a
general way the adverse impact usury ceilings have on our
economy.
Although usury laws are intended to protect small and
low-income borrowers from unscrupulous lenders who might
otherwise charge excessive interest rates, they have unintended
and adverse effects on borrowers, financial institutions, and
the public at large, particularly during periods of inflation
and contracted credit availability. When market interest rates
are above usury ceilings, many borrowers are unable to obtain
loans from commercial banks or other financial institutions.
Those first denied credit are generally the high-risk and
low-income borrowers. When lenders are unable to charge
rates sufficient to yield a reasonable rate of return, they
generally stop or substantially curtail lending to such marginal
borrowers. Should a lender's cost of funds exceed the prevailing
usury ceilings, all consumer lending may be expected to cease.
Borrowers are then forced to rely on unprincipled lenders for
loans made above usury rate limits or seek nonmarket sources of
credit such as family or friends. Alternatively, where state
ceilings are too restrictive, borrowers may resort to out-of-state
sources
for necessary
credit.
Equally
important,
usury ceilings and other arbitrary
restrictions that limit credit availability tend to affect
employment adversely and dampen economic growth. For example,
in states with constitutionally mandated interest rate limits
the economy almost always grows more slowly than the national
economy when market interest rates rise above the state usury
ceilings. In high interest rate periods many automobile dealers,
appliance stores and other businesses that rely on consumer
credit go out of business or have to move across the state's
borders. Clearly, more than just inefficiency and inconvenience
result from such locational patterns.

- 3 PAST DEREGULATION EFFORTS
Usury ceilings are also inconsistent with Congressional
efforts to restructure our financial institutions which began
with the passage of the Depository Institutions Deregulation
and Monetary Control Act of 1980. This Act, along with providing
for the phaseout of Federally administered interest rate ceilings
on deposits, expanded the asset powers of thrift institutions to
include consumer lending. For example, one of the reasons Congress authorized consumer lending activities at savings and loan
associations was to help alleviate the severe profit volatility
problems of these institutions due to the maturity imbalance
between their assets and liabilities. It was believed that the
shorter maturity of consumer loans (compared with the maturity
of mortgage loans) would provide more asset yield flexibility
at these institutions and thus reduce profit squeezes during
high interest rate periods. The Garn-St Germain Depository
Institutions Act of 1982 built upon this concept when it expanded
the consumer lending authority of savings and loan associations
and gave them limited commercial lending powers. However, these
institutions are discouraged from taking advantage of their
newly acquired powers when usury ceilings require them to make
loans at interest rates that are below the cost of their deposits.
With the eventual elimination of all deposit interest rate limitations, changes in the average cost of funds to all depository
institutions will reflect more closely changes in market rates
of interest. If banks and other financial institutions are to
maintain their longterm viability, they must be able to adjust
their interest charges and fees in response to changes in their
cost of funds and operating expenses. The ability of depository
institutions
pay market
rates toare
depositors
is necessarily
Finally, to
state
usury ceilings
quickly becoming
dependent
upon
similar
flexibility
in
their
authority
charge
ineffective in a financial system which is increasinglyto national
such
rates on
their loans.
in scope.
Individuals
in any state may use bank credit cards
issued by banks in another state and therefore be subject to
the less restrictive usury ceilings. Similarly, lenders in
a state subject to low usury limits may purchase out-of-state
loans or may sell their loanable funds in unregulated national
markets, such as the interbank Federal funds market. These
examples indicate that some individuals and institutions are
able to circumvent or adapt to usury ceilings, while others
(usually the poor or less sophisticated borrowers) suffer from
their impact. Since changes in the financial markets have made
state control of the cost of credit ineffective, the Administration supports a Federal preemption of all usury ceilings as long
as the preemption includes a provision which gives states an
opportunity to reinstate the usury ceiling anytime within the
next three years.

- 4 CONSUMER PROTECTION
Usury laws historically have been designed to protect
borrowers from unfair lending practices. The Administration
feels, however, that current state and Federal consumer
protection laws satisfy this important social goal more
effectively and are less disruptive to the financial markets
than usury ceilings. This Committee will hear evidence of
unscrupulous lending practices in states which have enacted
broad credit deregulation laws. Increased consumer sophistication
and competition among financial institutions in the consumer
loan market provide sufficient protection to consumers against
unfair interest rates in most parts of the country. However,
in those areas of the country where credit markets are not yet
reasonably competitive, a need remains for specific safeguards
to protect the unwary borrower.
Therefore, legislation preempting state usury ceilings
should include specific provisions retaining the consumer
safeguards developed by states. The area of proper consumer
safeguards involves very technical and complex issues and
we would hope that Congress would consult with experts on
this subject in the Federal regulatory agencies.
A FEDERAL USURY CEILING
The Administration supports the proposal in S. 730 to repeal
the statutory provision maintaining Federal rate ceilings on
Federal credit union loans. Since Federal credit unions must pay
market rates to attract deposits, they should not be limited
as to the rates they can charge on loans.
Current Federal law states that Federally insured depository
institutions when setting loan rates may charge the greater of
the rate of interest allowed by a state where the institutions
are located or a rate not more than one percent in excess of the
discount rate on ninety-day commercial paper in effect at the
Federal Reserve bank in the Federal Reserve district where such
bank is located. While this alternative Federal ceiling is an
advantage where state usury ceilings require lower rates,
in general the Administration believes that any Federal ceiling
is as inappropriate as any state ceiling.

- 5 RECOMMENDATION
In the current environment of low inflation and declining
interest rates, fixed-rate usury laws are usually of little
significance. However, in high inflation/high interest rate
periods they tend to hurt borrowers by restricting the availability
of credit or by encouraging abuses by unregulated lenders. In
addition, they are inconsistent in any environment with recent
legislation providing for the phase out of interest rate ceilings
on deposits which will result in savers earning market rates on
their deposits. If institutions are to pay market rates to
savers, they must be able to charge market rates to borrowers
or they will not be able to remain viable.
In conclusion, since the Administration supports the removal
of all usury ceilings, we are supportive of S. 730, including
those provisions that contain the three year state override and
the retention of state laws concerning consumer safeguards.
********

Mr. Chairman, that concludes my testimony. I will be
pleased to answer any questions the Committee may have.

rREASURY NEWS

.partment of the Treasury • Washington, o.e. • Telephone 566-2
FOR RELEASE AT 4:00 P.M
April 12, 1983
TREASURY ANNOUNCES WEEKLY BILL OFFERING
AND CHANGE IN COMPETITIVE BIDDING PROCEDURE
The Department of the Treasury, by this public notice
^telvSS12n400Smniion° ;er£ea.of Treasu^ bills totaling approximately $12,400 million, to be issued April 21 TQft^
T H L X£^V,will provide $750 million of new cash for'the^Treasury^as3 lit*'1"*
regular 13-week and 26-week bill maturities were issued in the
amount of $11,638 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 January 20,
1983, and to mature July 21, 1983 (CUSIP No. 912794 DJ 0 ) , currently
outstanding in the amount of $5,988 million, the additional and
original bills to be freely interchangeable.
182-day bills for approximately $6,200 million, to be dated
April 21, 1983, and to mature October 20, 1983 (CUSIP No. 912794 DU 5 ) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing April 21, 1983. In addition to the
maturing 13-week and 26-week bills, there are $5,269 million of
maturing 52-week bills and $12,022 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 $1,561 million, and
Federal Reserve Banks for their own account hold $2,542 million of
the maturing bills. These amounts represent the combined holdings
of such accounts for the three regular issues of maturing bills.
As previously announced, these will be the first regular weekly
auctions in which competitive bidding will be required to be on a
bank discount rate basis rather than on a price basis. Competitive
bidders must state the percentage rate (on a bank discount basis)
that they will accept to two decimal places, for example, 7.15%.
Tenders from Federal Reserve Banks for themselves and as agents
for foreign and international monetary authorities will be accepted
at the weighted average bank discount rates 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 $1,111 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-3023

- 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, April 18,
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 state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. 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 yield 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 yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923, and
the determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch on
April 21, 1983, in cash or other immediately-available funds or in
Treasury bills maturing April 21, 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
Department of the Treasury • Washington, ox. • Telephone

REMARKS BY THE HONORABLE JOHM M. WALKER, JR.
ASSISTANT SECRETARY (ENFORCEMENT AND OPERATIONS)
DEPARTMENT OF THE TREASURY
BEFORE THE AMERICAN CHAMRER OF COMMERCE
TOKYO, JAPAM
APRIL 12, 1983
Good morning, ladies and gentlemen. It is a pleasure to
be here today representing the U.S. Department of the Treasury
As you know, I am here this week to lead the n.s. Customs Service delegation in its continuing consultations with its
Japanese counterparts in the Third U.S.-Japan Customs Liaison
Committee Meeting.
In January 1982, the United States and Japan established
the U.S.-Japan Customs Liaison Committee (JLC) during a visit
to Japan by the Commissioner of Customs. The purpose of the
Committee is to foster a wide exchange of information, to
promote better relations between the United States and the
Japanese Customs Services, and to reduce or eliminate restrictions to trade by discussing mutual problems and concerns.
The Second U.S.-Japan Customs Liaison Committee Meeting,
held in Washington in April of 1982, was a most successful
and productive one. The positive results included a presentation of how U.S. Customs had modernized and improved its
operational procedures, and Japan's announcement of five
changes in Japanese Customs procedures designed to facilitate
trade. The other beneficial results v/ere an expanded exchange
of information on enforcement matters, and meaningful discussions on the Harmonized System, the Customs Cooperation
Council, and the Kyoto Convention. we hope the Third JLC
Meeting will be equally productive.
I would indeed be remiss if I Hid not recognize the vital
role that the American Chamber of Commerce is performing in
trying to facilitate trade between the United States and
Japan. The Chamber has done an excellent job in bringing to
the forefront the issue of fair access to Japanese markets as
the key to the successful resolution of U.S.-Japan trade problems. Your role in educating n.s. businesses on methods to
improve their marketing in Japan, and in reminding Japanese
businesses
of the importance of a fair access to Japanese
R-3024

2041

- 2 markets is a productive and vital one. The Administration is
in total agreement with your contention that more U.S. products would be competitive in Japan if non-tariff trade barriers
were removed. We encourage you to be steadfast in your pursuit
of this issue.
We believe your efforts are beginning to pay dividends,
but there is still much to do. Doing business in Japan, more
than in other industrial nations, requires thorough planning
and market research. The American Chamber of Commerce has
contributed significantly in both of these areas in supporting
American business. Although we acknowledge that Japan has
taken steps to remove some of the barriers to trade, such as
reducing tariffs and quotas, the U.S. government wants Japan
to continue to simplify procedures for importing goods into
Japan. We must continue to press for a more open attitude
toward imports among Japanese businesses, the bureaucracy,
and consumers.
The recent steps announced March 26, 1983, by the
Japanese government to seek legislative changes in Japanese
laws affecting trade is an important opportunity. We must,
however, continue to work together to see that the legislative
proposals are far-reaching and effective in reducing and eliminating trade barriers and that the legislation is passed
expeditiously. We must help the Japanese Diet understand that
reasonable and fair access to Japanese markets is essential
to the U.S. If the perception persists, particularly by
Congress, that Japanese markets are less open and more restrictive than ours, then tension over trade between our
countries will continue.
Besides pushing for the expeditious changes in the numerous
pre-entry laws inhibiting trade, we believe that enforcement
of these laws by Japanese Customs, instead of by the Ministries
administering the laws, would further help to facilitate the
entry of U.S. goods. In contrast with Japanese procedures,
approximately 95% of all merchandise imported into the United
States is released to importers within a few hours, after a
minimal number of documents are presented to Customs. In some
instances, merchandise is conditionally released to importers
although final determination is dependent on laboratory analysis
by another agency. This system is possible because of our
system of bonds and other regulatory controls over importers.
The guiding principle of U.S. Customs procedures is to give
importers the use of their merchandise as soon as possible.
We took the step of transferring enforcement authority to
Customs for the laws of other agencies many years ago, and no
threat to the U.S. public has resulted. My primary mission

- 3 during this visit will be visiting with various Ministries,
to convince my Japanese counterparts that trade tensions
will be reduced if the responsibility of the enforcement of
other Ministries' laws is transferred over to the Japanese
Customs Service, and that the public will not be harmed.
v
ou can help us by continuing to deliver that message to
Japanese businesses and consumers after we leave. I urge
you to make them understand that we are serious about this
request.
There is a definite and growing sentiment within the
U.S., particularly felt in Congress, that the U.S. Government
should place the same restrictions on imports from other
countries that these countries place on imports from the U.S.
Although this Administration is firmly committed to the philosophy of free trade, we will, however, continue to insist
that — and indeed, we will not rest until — American companies
have the same opportunities to compete in Japan as Japanese
companies have in the U.S.
In closing, I would like to thank you for affording me the
opportunity to share with you some of the goals of this Administration. Again, I salute your efforts in support of our
objectives and urge you to persevere in your pursuit of free
and open trade between Japan and the United States.

TREASURY NEWS .
Department of the Treasury • Washington, o.c. • Telephone 566-2041

STATEMENT OF THE HONORABLE
DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON FOREIGN OPERATIONS
COMMITTEE ON APPROPRIATIONS
U.S. HOUSE OF REPRESENTATIVES
APRIL 13, 1983
Mr. Chairman, Members of the Committee, I appreciate the
opportunity to appear before you today to discuss the
Administration's funding request for the multilateral development
banks (MDBs) and to ask for your prompt and favorable consideration
of this request. I understand that the Appropriations Committee
will be considering separately legislation providing for U.S.
participation in an increase in IMF resources. I also urge your
prompt approval of this vital legislation.
The present strains on the international financial and
economic system are without precedent in the postwar era and
pose a very serious threat to the efforts being made, both
domestically and internationally, to restore growth and vitality
to the world economy. Both the IMF and the multilateral
development banks can play a crucial role in support of the
international economic system: the IMF through its expanded
and strengthened financing facilities to help members through
their near-term problems and the MDBs through their investment
programs to support sound long-term growth in developing countries.
The distinct but complementary operations of these
institutions help to protect U.S. interests worldwide. The
uncertain world economic and political environment makes it
all the more important for the United States to assure that
the IMF and the MDBs can respond effectively to their member
countries. In the economic arena, as in the international
political and military spheres, the United States cannot
maintain an effective leadership role and assure our national
security unless we are willing to provide the necessary
resources to meet the challenges that lie before us. Our
contributions to the MDBs reflect the commitment of the United
States to work with other nations to improve the quality of
life in developing countries while encouraging adoption of sound
economic policies. The MDBs reflect a cost-effective approach
to economic development and our budget request this year is
R-3025
consistent
with this approach.

- 2 THE APPROPRIATION REQUEST
For the multilateral development banks the Administration's
FY 1984 request calls for approximately $1,625 billion in
budget authority and $2,890 billion in callable capital under
program limitations. I am submitting for the record a detailed
description of this request. I again want to emphasize my
conviction that it is absolutely essential for the United
States to continue its strong and active support for these
institutions.
At the same time, I am mindful of the need for budget
restraint. The three replenishment agreements negotiated by
this Administration, reflected in this request, provide for
substantial reductions in budgetary requirements but still
preserve -- indeed, strengthen -- the contribution of these
programs to our overall foreign policy objectives in Africa,
Asia and the Western Hemisphere. These three agreements
call for appropriations of $323.7 million annually, while
the preceding agreements for the same institutions required
$399.9 million -- a reduction of 19.1 percent.
The MDBs are among the most successful examples of
international cooperation. More importantly, they are
directly supportive of vital U.S. long-term foreign policy
interests. Now is not the time to undermine our influence
in these institutions or to jeopardize the beneficial role
they can play in global economic development. The stakes
are too high.
When we look at the list of the largest MDB borrowers —
Mexico, Brazil, Argentina, Indonesia, Korea, Pakistan, Thailand,
the Philippines, Turkey, and Egypt — we see that the MDBs are
lending and providing both technical assistance and policy
guidance to countries of great importance to us. The InterAmerican Development Bank (IDB) is especially important for
our relations with Latin America and the Caribbean. The
MDBs can make a valuable contribution to our national security
and other foreign policy objectives in these countries. Our
bilateral program is simply not enough.
Bilateral aid is particularly effective in responding
rapidly to the urgent needs of specific countries, but
multilateral assistance, which serves long-term U.S. interests,
can be very cost-effective, and can promote a stable international economic environment. The fact is that by providing
assistance through the MDBs we are in a much better position
to encourage economic policy reforms in developing countries
than we are capable of doing in the bilateral context.
While it is true that the MDBs provide assistance to some
countries which we would not assist bilaterally or with
which we do not maintain cordial relations, the amounts
involved are relatively small compared to the assistance
provi ?d those countries of political and economic importance

- 3 -

to us. Even countries we would not assist bilaterally borrow
from the MDBs according to the same economic and financial standards
as other borrowers. Finally, it should be noted that the MDBs
are not providing assistance to Vietnam, Cuba, or Poland.
Conversely, in FY 1982 the MDBs provided about $5 billion
in assistance to the 34 countries which received funds from
our Economic Support Fund (excluding Spain and Israel) —
about the same amount as we provided bilaterally. Thus, multilateral assistance is, on balance, an effective complement to
our bilateral assistance programs, offering additional financial
assistance (leveraged with other nations' contributions) which
we realistically could not provide bilaterally, and more effective
guidance to improve economic policies than we can provide on a
bilateral basis.
Last year, MDB loan commitments totalled $16.8 billion.
This made the MDBs by far the largest official source of
external capital for the developing world. With such a
large volume of loans the MDBs can foster economic growth and
stability in developing countries and thereby enhance our own
security and well-being. The MDBs have the access to government
leaders to encourage sound and open economic policies which
can spur the expansion of trade between the developing and the
industrialized nations.
The MDBs must continue to insist on sound economic criteria
for their loans such as adequate financial and economic rates
of return. They also must encourage developing countries to
adopt and implement development policies on rational economic
grounds rather than political ones. Their policy advice and
preparation of development projects based upon sound economic
criteria can continue to be an important source of strength
for expanding the international economy -- one which promotes
the open, competitive, market-oriented economic system.
One of the most important roles played by the MDBs in
the development process is the mobilization of additional
resources for development projects. The Administration
has been particularly keen to enhance not only the level of
private sector participation but also the quality of
individual investments. This has led us to seek expansion
of MDB co-financing with private investors, partly because
they can provide an offset for scarce public resources,
but, of equal importance, they inject a greater degree of
market discipline into the development process. For the
private investor, cofinancing with the MDB provides assurance
of a sound investment project. Overall, MDB cofinancing
has helped to maintain private flows from increasingly
tight capital markets.

- 4 -

During the fiscal year ending June 30, 1982, the World
Bank obtained over $7 billion in co-financing from all sources;
of this figure, over $3 billion was from commercial banks.
The IFC syndicated with commercial banks $188 million of its
$612 million lending program. Total World Bank co-financing
and the amount obtained from private sources in 1982 were
approximately 80 percent greater than the comparable figures
for the previous year, thus continuing the substantial annual
growth of recent years.
Progress in the co-financing arena was also noted in the
other MDBs. In the ADB, the cumulative total of all private
sector co-financing was only $38 million through December 31,
1980; in calendar year 1981 alone, $87 million of new private
sector co-financings were achieved, and in 1982 the amount
jumped to $261 million. In calendar year 1982, the IDB
raised $99 million for Latin America's development through
complementary loans secured in the world's private capital
markets. As of December 31, 1982, the total of complementary
loans amounted to $612 million. All of the MDBs are working
to expand their co-financing programs further, and are actively
investigating the development of new financial instruments
that would strengthen the private sector role in financial
flows to the LDCs.
Direct U.S. Economic Benefits
As the Administration's chief fiscal officer, I am
committed to budget restraint. At the same time, I believe
the United States must maintain a reasonable program of
foreign assistance. The cost-effectiveness of the multilateral
development banks reconciles these needs.
First, other members contribute 3 dollars for every
1 dollar contributed by the United States. Second, supported
by callable capital, the MDBs finance the bulk of their
lending programs through borrowings in the capital markets.
The result is that it is possible for the MDBs to provide
significant resources at a relatively small direct cost to
U.S. taxpayers. For every dollar the United States pays
into the World Bank, for example, the Bank lends over $60.
Our development assistance dollar gets maximum leverage
when channeled through the MDRs.
In addition, U.S. paid-in subscriptions and contributions
to the soft windows can result in significant expenditures
on U.S. goods and services. Procurement of American goods
and services for projects assisted by the MDBs have been
running at approximately $1.2 billion per year, benefiting
virtually all regions of the United States. For purposes of
comparison, U.S. budgetary outlays for U.S. paid-in subscriptions
and contributions to the soft windows are running at approximately
the same rate.

- 5 International Development Association (IDA) Supplemental
In addition to the fiscal year 1984 MDB request, the
Administration is requesting a $245 million fiscal year
1983 supplemental for IDA, the soft loan affiliate of the
World Bank. This $245 million together with the fiscal year
1984 request of $1,095 million will complete the U.S.
contribution to IDA VI.
As you know this Administration inherited a very
difficult situation with regard to IDA, and I would like
today to restate and stress how important we believe it is
for the United States to deliver on this commitment. The
previous Administration negotiated a $12 billion funding
arrangement under which the U.S. was expected to provide
$3.24 billion over three years ending in fiscal year 1983.
However, as you well know, U.S. contributions have been
far short of this expectation. We provided only $500 million
in FY 1981 and $700 million a year in FY 1982 and $700 million
so far in FY 1983. The Administration is firmly committed
to completing the U.S. contribution to IDA-VI within the
FY 1981-1984 period. Other donors have agreed to release
their second and third installments to IDA VI, and to provide
an additional $2 billion to sustain the lending in fiscal
year 1984. Even with these measures, however, FY 1981-1983
IDA commitments to Sub-Suharan Africa are now projected to
be about 20 percent lower than was envisioned at the time
IDA VI was negotiated. Full funding of IDA VI is therefore
essential both to maintain U.S. credibility and to avoid
further disruption in IDA lending.
We know there is room for improvement in IDA operations
and the Administration is moving vigorously to make those
improvements. We need to improve the quality of projects
and to have a more forceful policy dialogue with recipient
countries. We need a much better allocation of resources
towards the poorer and less creditworthy countries. We need
lending terms which more closely correspond to the present
day cost of capital. However, if the United States is to
continue to exercise the leadership needed to bring about
these necessary changes, we must be prepared to honor our
commitments by providing the necessary financial support.
IDA is a significant element of cooperation with our
allies, and the largest single source of concessional assistance.
IDA lends to many countries such as Kenya, Sri Lanka, Pakistan,
and Sudan, which are of strategic and economic importance to
the United States.
We also know that IDA is extremely important to other
nations. Our participation in IDA contributes significantly
to the substance as well as the atmosphere of our ties with
developing countries. For example, representatives of the
African diplomatic corps in Washington recently emphasized

- 6 to me the importance their governments place on U.S. completion
of IDA VI in FY 1984. U.S. participation in IDA also reflects
a successful partnership with Europe, Japan, Canada and
other donors. But strains are showing in this partnership.
The governments of the European Communities have continually
urged us to complete our IDA VI contribution expeditiously.
Continued failure to meet our negotiated share of IDA VI
seriously jeopardizes our relations with the developing
world and weakens the confidence of our allies in U.S. ability
to play a cooperative role across a broad range of international
activities. I strongly urge that maximum effort be made to
appropriate the supplemental request and fulfill our commitment
to IDA VI in the FY 1984 budget. This will strengthen our
hand in achieving the policy lending reforms you and I are
seeking in the IDA VII negotiations and in achieving consensus
on a realistic level of funding for the next replenishment.
This Administration will continue to work with the Congress
to assure that the next IDA replenishment reflects reforms
and improvements encouraged by the Congress. But we must,
in turn, be able to demonstrate Congressional willingness to
support the U.S. position once agreement is reached.
Let me turn now to the Regional Development Banks.
Throughout recent replenishment negotiations, we have carefully
considered the views expressed by the Congress and have
tried to achieve the major recommendations of our Assessment.
The new replenishments represent important further steps
toward implementing those recommendations.
Specifically, the new replenishments are consistent with
the Assessment's recommendations to reduce overall contributions
to the soft loan windows and the proportion of capital subscriptions paid-in while still providing assistance to the
poorest developing countries. For example, since Latin America
has the highest per capita GNP of the developing regions of the
world, the replenishment for the IDB's Fund for Special Operations
will be about $1 billion less than the previous replenishment.
By contrast, the replenishments for the Asian Development Fund
and African Development Fund will be about $1 billion and $200
million larger, respectively.
We are also urging that the MDBs use their resources more
effectively, so that the poorest countries receive the benefits
of these programs. We have been working with the Banks to
ensure: (1) greater selectivity and policy conditionality
within projects and sector programs; (2) more emphasis on
catalyzing private sector flows; and (3) firm implementation
of graduation from hard loan windows and maturation from
soft windows. Effective use of these policies should permit
lower funding levels and at the same time ensure that scarce
resources are concentrated on those countries which can best
employ them and which are in the greatest need.

- 7 ^-

The Administration's study entitled U.S. Participation
in the Multilateral Development Banks in the 1980s recommended
that the U.S. phase-down and eventually phase-out paid-in
capital in future MDB replenishments. The proposed levels in
the new replenishments represent a declining reliance on paid-in
capital as the institutions have matured financially. It is a
balanced compromise that reflects our budgetary situation and
the views of both the Congress and the capital markets. By
reducing the proportion of paid-in capital, we reduce the
budgetary cost to U.S. taxpayers while maintaining the financial
soundness of these institutions.
in the case of the IDB, the new level of 4.5 percent
paid-in will result in annual budgetary savings of almost $40
million per year, or $160 million over the four-year period of
the replenishment, compared with the 7.5 percent paid-in level
of the last replenishment. The reduced level of paid-in was
accompanied by an increase in the convertible currency subscriptions of the borrowing member countries. The borrowing
member countries will now provide 100 percent of their paid-in
capital in convertible currencies as compared to 66 percent in
the last replenishment.
in the Asian Development Bank, the General Capital Increase
(GCI) calls for five percent paid-in compared to ten percent in
the previous replenishment. This will result in savings of
about $7 million annually, or about $35 million over five years,
for the United States.
BUDGETARY IMPLICATIONS
The FY 1984 request for the MDBs represents an increase of
approximately $88 million in budget authority, and $529 million
under program limitations over the FY 1983 request.
THE WORLD BANK GROUP
-- For the International Bank for Reconstruction and
Development (IBRD), we propose $109.7 million in budget authority
and $1.35 billion in callable capital under program limitations
for the third of six installments of the U.S. share of the 1981
General Capital Increase.
-- For the International Development Association, the
Administration is requesting $1,095 billion in fiscal year
1984, which together with the $245 million being requested in
the supplemental appropriation for fiscal year 1983 will complete
the U.S. contribution to IDA VI.

- 8 -

THE INTER-AMERICAN DEVELOPMENT BANK (IDB)
-- For subscription to IDB capital, the Administration has
submitted and seeks Congressional approval of authorization
legislation for an increase in the U.S. subscript ion to the
capital of the Bank. Included in the FY 1984 appropriation
request is the first of four equal annual subscriptions consisting
of $58 million in budget authority for paid-in capital and
$1,231 million under program limitations for callable capital.
— For the Fund for Special Operations (FSO), the
Administration is submitting and seeking Congressional approval
of authorization legislation for a $290 million U.S. contribution
to the FSO. The first tranche of $72.5 million is being sought
in the FY 1984 appropriation request. Together with prior
unfunded requests amounting to $41.1 million, the total FY 1984
request for the FSO is $113.6 million.
-- 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 Caribbean. The member
countries of the Inter-American Development Bank have discussed
formation of such a Corporation for a number of years and we
remain hopeful that an agreement on the capitalization of the
IIC can be achieved shortly. After the agreement is completed,
the Administration will seek authorization from the Congress.
The $20 million requested for FY 1984 is what we envision to
be the first of four annual installments.
THE ASIAN DEVELOPMENT BANK
-- The ADB Board of Directors agreed on a proposal for a
General Capital Increase (GCI) in the Asian Development Bank
(ADB) on March 17, 1983. Our proposed share of the GCI calls
for a U.S. paid-in capital subscription of $66.2 million and
$1,257 billion for callable capital over five years. This
overall amount translates into an annual request level of
$13.2 million for budget authority and $251.4 million under
program limitations — a modest increase over the levels in
the January budget estimates, ($6.9 million paid-in and $224.6
million under program limitations). The amount of paid-in
capital represents a significant reduction from the $20.4
million annual amount for the last general capital increase.
-- For the Asian Development Fund (ADF), we are requesting
$147 million which includes $130 million for the first tranche
of the third replenishment (ADF IV), $3 million for the remaining
portion of our share of the second replenishment (ADF III),
and $14 million for an unfunded portion of the first replenishment (ADF II). We have submitted and seek Congressional
approval of authorizing legislation for U.S. contributions to
the new replenishment (ADF IV).

- 9 THE AFRICAN DEVELOPMENT BANK
-- U.S. membership in the African Development Bank (AFDB)
was authorized in 1981 as was a U.S. subscription of $359.7
million of AFDB capital. The Congress appropriated the first
installment of the U.S. subscription to the AFDB in 1981. This
installment included $17.99 million for subscription to paid-in
capital and $53.96 million, under program limitations, for
subscription to AFDB callable capital. A second installment
with identical amounts for paid-in and callable capital subscriptions is being sought in FY 1984.
— In 1982, negotiations for a third replenishment of
African Development Fund (AFDF III) resources were completed.
Legislation authorizing a $150 million U.S. contribution to
this replenishment was submitted to, but was not enacted by
the 97th Congress. The Senate passed this legislation last
year, and the debate on the House floor last December demonstrated broad bipartisan support for this element of the U.S.
foreign assistance program. This legislation has been resubmitted to the 98th Congress. Upon enactment of this legislation
the United States will provide its first $50 million installment
under authority of the 1983 Continuing Resolution. The FY 1984
request is for the second installment of $50 million to AFDF III.
While not the direct responsibility of this Committee,
I should stress that further delay in the authorization of
the AFDF replenishment would impair economic growth in the
borrowing countries at a critical time. About $170 million
in project loans have been approved but are awaiting financing.
Other donors provided their first installment for the current
replenishment totalling $200 million last year to finance the
lending program. Under the replenishment agreement, they
need not provide additional funds until the United States
contributes its first $50 million installment. The delay is
denying the borrowing countries the benefit of the output of
projects that would otherwise come on stream at a time when
they are needed. I urge your support for the authorization
legislation when it is brought to the floor.
CONCLUSION
In conclusion, Mr. Chairman, I would like to re-emphasize
my strong conviction that the multilateral develoment banks are
essential to U.S. interests. They can be effective instruments
for promoting economic growth and political stability in the
developing world. They can encourage sound national economic
policies and provide an effective framework for bringing the
developing countries into the open market system we espouse.
Moreover, the banks give us good value for our money with U.S.
budgetary expenditures multiplied many times over in actual
bank lending. They benefit borrowers and lenders, developing
and developed countries alike.

- 10 -

The global/economic problems we face have a direct
bearing on our national security interests. Healthy and
growing economies in developing countries can strengthen the
foundation of our international economic system, and maintain
a stable environment conducive to our well-being and the
well-being of other nations.
The seriousness of the current world situation leaves
little doubt about the importance of sustained economic growth.
Now is clearly the time to work constructively with our allies
to enhance the effectiveness of these important institutions
and to maximize their impact on global economic development.
I urge you to provide the necessary funding to sustain the
operations of the multilateral development banks and thus
encourage their important role in building a cohesive and
stable world.

TREASURY NEWS
jepartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
April 13, 1983
STATEMENT OF
THE HONORABLE JOHN E. CHAPOTON
ASSISTANT SECRETARY OF THE TREASURY (TAX POLICY)
BEFORE THE COMMERCE, CONSUMER AND MONETARY AFFAIRS
SUBCOMMITTEE OF THE
HOUSE COMMITTEE ON GOVERNMENT OPERATIONS
APRIL 13, 1983
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to appear before your
Subcommittee this morning to discuss the ways in which U.S. tax
treaties with tax haven countries are used for the avoidance and
evasion of taxes, and to explain to the Subcommittee U.S. tax
treaty policy in this regard.
•

U.S. Tax Treaty Policy
Tax treaties are mechanisms for dividing taxes on
international transactions between two countries that have
authority to tax: the country of the source of the income and
the country of residence of the recipient. As the official
titles of our tax treaties state, treaties are intended (a) to
prevent double taxation and (b) to prevent avoidance and evasion
of the tax of the two countries.
We believe that *n income tax treaty is a contract between
two countries designed to benefit directly the residents of the
two countries and net indirectly residents of third countries.
In the discussion that follows, I will attempt to show how this
basic purpose is being implemented in the tax treaty policy of
the United States by the use of provisions to combat treaty
shopping.
R-3026

-2Treaty shopping, in essence, is the ability of residents of
countries other than the countries that are parties to the treaty
to derive treaty benefits (such as rate reductions on passive
income) by channeling investments through entities organized in
or resident in a treaty jurisdiction.
It is the policy of this Administration not to enter into new
treaties which permit the unwarranted granting of benefits to
residents of third countries and, as appropriate, to renegotiate,
or, if necessary, to terminate, existing treaties to accomplish
this objective.
Limitation of benefits provisions (which define
the permissible classes of treaty beneficiaries) will be employed
wherever necessary, and in the form appropriate to the
circumstances, to ensure 'that U.S. policy goals are met by the
extension of benefits in our tax treaties.
We recognize that this policy cannot be applied inflexibly.
For this reason, we have no one model limitation of benefits
provision and indeed do not believe that a single model would be
appropriate. In view of the wide range of international economic
relationships and the diversity of foreign tax systems, we
approach each treaty relationship separately.
The limitation of benefits policy has several objectives.
First, treaty shopping results in tax avoidance because treaty
benefits are obtained by unintended beneficiaries who do not
reside in a treaty country, but channel their investments through
entities formed in such a country. In this manner, the purposes
of a tax treaty are frustrated. Instead of a treaty preventing
double taxation by dividing the right to tax between the country
of the source of the income and the country of the investor's
residence, so as to result in the collection in the aggregate of
one full tax, treaty shopping enables the investor to reduce the
tax of his residence country, the tax of the source country (in
this case, the United States), or both.
For example, assume that the treaties between the United
States and each of country A and country B provide for a 15
percent U.S. tax on dividends. Under our treaty with country A
and country A internal law, dividends that a country A investor
receives from a U.S. company are taxed at the full country A rate
of over 50 percent, except that country A allows a foreign tax
credit for the 15 percent U.S. tax. The result is an overall tax
at the full country A rate, i.e. neither double taxation nor tax
avoidance. In contrast, if the country A investor interposes a
country B company, country B would tax the dividend at a much
lower effective rate, and country A would receive no tax, at
least while profits remain undistributed to the country A
investor. Depending on country A law, tnere may be no tax or a
low country A tax if the investor sells the shares of

-3the country B company instead of having it pay dividends.
Accordingly, instead of dividing one full tax between the U.S.
fisc and that of the country of residence (country A ) , both the
United States and the country of residence have transferred
revenue to the investor.
Second, use of our treaties by third-country residents makes
it more difficult for the United States to conclude treaties
directly with those third countries. If residents of these
countries can enjoy U.S. treaty benefits by the simple and
inexpensive expedient of establishing an entity in an appropriate
U.S. treaty country, their countries of residence are under
little incentive to enter into treaties with the United States.
Since such treaties would reduce foreign taxes, the result is
higher taxes abroad for U.S. businesses. The same issue arises
with respect to our existing treaty partners. If, for example,
there is a 15 percent withholding tax on interest in an existing
treaty, which we would like to reduce, reciprocally, to zero,
that country is under little pressure to agr<*e to such a change
if its residents can receive a zero U.S. tax rate by investing in
the United States through an entity formed in another U.S. treaty
jurisdiction.
We see increasing evidence that this analysis is accurate.
For example, we have recently been advised that both the
government and the private sector of an important non-treaty
country have expressed, for the first time, an interest in
commencing negotiations on a tax treaty with the United States.
This interest reportedly arose as a result of concern that the
current U.S. policy of limiting treaty shopping would seriously
curtail alternative tax-free or low-tax routes for investment in
the United States.
Third, use of tax treaties by third-country residents
violates the coherence of the Internal Revenue Code. The Code
provides for a 30 percent tax to be imposed on payments of U.S.source passive income to foreign persons, except where a tax
treaty provides for a reduced rate on a reciprocal basis. If any
foreign investor can avoid that tax by interposing a treatyprotected entity, then that treaty has, in effect, replaced our
internal law. Such a process can serve only to erode confidence
in the integrity of the U.S. tax system. I: Congress wishes
unilaterally to repeal or modify the present statutory tax, that
should be done explicitly, by both houses of Congress, and not by
inadvertence.
Our policy of limiting treaty shopping has been supported by
the tax-writing committees of Congress and by the Senate Foreign
Relations Committee. In 1981 the Administration was encouraged
by the Senate Foreign Relations Committee and the chairmen of

-4both the House Ways and Means and Senate Finance Committees to
renegotiate the then recently signed and pending treaty with the
British Virgin Islands so as to reduce the opportunities for
third country use. Because we were unable to agree with the
British Virgin Islands on a sufficiently restrictive limitation
of benefits provision, the: existing treaty was terminated
effective January 1 of this year and a new treaty was not
concluded. The Permanent Subcommittee on Investigations of the
Senate Committee on Governmental Affairs and this Subcommittee
have shown a strong and constructive interest in the problems
presented by tax haven treaties and their use.
Tax Treaties with Tax Havens
The potential for abuse of tax treaties is a matter of
concern in many tax treaties; however, the degree of concern
varies significantly from treaty to treaty. The precise scope of
the limitation of benefits article that we negotiate in a treaty
is specifically tailored to the needs of the particular bilateral
relationship in question. In negotiating a treaty with a country
that has a high effective rate of tax on the income of its
residents and that has withholding taxes on payments to nonresidents, we have considerably less concern than we would have
in a treaty with a country that imposes a low effective tax
burden on its residents (or on certain classes of residents, such
as resident entities that do business offshore) and that has no
withholding taxes on payments of income to nonresidents. The
latter case exemplifies a tax haven treaty partner.
We have, at the present time, tax treaties with several
jurisdictions that are generally acknowledged to be tax havens.
This results largely from historical accident; during the 1950's
our tax treaties with several European partners were extended to
a number of their overseas dependencies. Some of these have
become tax havens and have been exploiting their tax treaties
with the United States. The most prominent of these is the
Netherlands Antilles.
As I indicated above, it is our firm policy to include
limitation of benefits provisions in any new tax treaty, in
whatever form is necessary to deal with the potential abuse in
that particular bilateral relationship. Since the basic purpose
of a tax treaty is to eliminate double taxation, treaties with
tax havens cannot be justified on that basis. Thus, it is our
general policy not to enter into any new tax treaty relationship
with a tax haven, unless, in addition to the typical "tax haven"
business, substantial real economic relations exist between the
United States and that country. With respect to our existing tax
haven treaties, we are examining these relationships to determine
whether they should be terminated, or modified in such a way as

-5to eliminate the potential for abuse. Presently, we are actively
taking the latter course with the Netherlands Antilles, seeking a
treaty which would foster increased real trade and investment
between the Antilles and the United States while, at the same
time, protecting broader U.S. interests by obtaining improved
exchanges of information and by foreclosing the opportunities for
inappropriate use by third-country residents.
Netherlands Antilles Treaty
The present tax treaty with the Netherlands Antilles is a
1955 extension of our treaty with the Netherlands. It is subject
to widespread abuse. Residents of third countries who are not
themselves entitled to U.S. treaty benefits are claiming, by
routing their U.S. investments through an Antilles entity, U.S.
tax benefits provided under that treaty. Because of a relatively
low and flexible tax in the Netherlands Antilles, and because no
taxes are levied under Antilles law on income payments to
nonresidents of the Antilles, a substantial reduction of U.S. tax
liability flows through to the third-country investor. This
treaty has often been referred to as "a one-way tax treaty with
the world." For this reason, and to obtain better exchanges of
information, we are renegotiating the treaty.
I would like to illustrate through simple examples the way in
which third-country persons claim that the existing treaty and
Antilles tax law interact to provide these benefits.
Investment Companies
The following is a simple illustration of the way in which
interposition of an Antilles company may reduce the U.S. tax
burden to a third-country investor. Assume an individual
resident of a country with which we have no bilateral income tax
treaty wishes to invest in stock of a U.S. corporation. If such
investor were to purchase such stock directly, he generally would
be subject to a statutory U.S. tax imposed at the rate of 30
percent on the gross amount of his dividend income. In addition,
there also would be a potential U.S. estate tax exposure if the
investor were to own the stock upon his death. This U.S. tax
exposure could make the proposed investment unattractive.
However, by utilizing an Antilles corporation to make the
proposed investment, the ultimate individual investor may be able
to minimize his U.S. tax exposure at a small cost. More
specifically, an investor would cause an Antilles corporation to
be formed and managed in the Antilles, generally by an Antilles
trust company. The fee for such services is low. The
corporation would then purchase the U.S. stock. To maximize the
investor's after-tax return with respect to the foregoing
investment, the investor would have leveraged the Antilles

-6corporation to the maximum extent possible, i.e., lent the
corporation a major portion of the funds that it uses to make the
investment at an interest rate slightly below the corporation's
anticipated yield from the investment.
Under the treaty, dividend payments to the Antilles corporation may flow out of the United States with the imposition of a
15 percent tax and are subject to taxation in the Antilles at a
rate of 15 percent. However, since the net income of the
Antilles corporation is reduced by the interest payments, the tax
liability to the Antilles is minimal. Moreover, since the
Antilles does not impose a local withholding tax on interest and
dividends paid to non-Antilles persons, there is no other
Antilles tax cost in paying the after-tax proceeds to the
ultimate investor. In addition, the investor is not subject to a
U.S. estate tax exposure. (The Antilles does not impose estate,
inheritance or gift taxes on nonresidents of the Antilles.)
Thus, since the combined United States and Antilles effective tax
rate can be as low as approximately 16 percent of the gross
dividend income, the after-tax savings of utilizing an Antilles
vehicle are apparent.
Such a transaction highlights our three causes of concern
expressed above: (1) U.S. tax benefits flow to an unintended
beneficiary; (2) the investor's country of residence has less
incentive to negotiate a treaty with the United States, thus
depriving U.S. businesses of the reductions in foreign tax that
we would obtain in a tax treaty; and (3) use of the Antilles
treaty results in a de facto reduction of the U.S. statutory tax.
International Finance Subsidiaries
In theory, any treaty partner having a low or zero tax rate
on U.S.-source interest income as a result of a bilateral income
tax treaty with the United States and having no local withholding
tax on interest paid to nonresidents of that jurisdiction could
be a situs for the creation of an international finance
subsidiary. However, the most frequently used structure for
borrowing funds in the Eurodollar -market has involved use of a
corporation incorporated in the Netherlands Antilles.
Typically, the ultimate U.S. corporate borrower forms a
corporation in the Netherlands Antilles as its direct ^r indirect
wholly-owned subsidiary and contributes to it an amount cf
capital in the range of about one-half to one-third ot the amount
of debt to be issued by the subsidiary. The subsidiary borrows
funds from, and issues debt instruments to, foreign lenders. The
U.S. parent or affiliate of the international finance subsidiary
guarantees the obligations of the international finance
subsidiary to its foreign lenders. The terms of such borrowings

-7provide that the lender will receive the stated interest payments
net of United States and Netherlands Antilles tax. Thus, if a
U.S. tax were to be imposed on the interest paid by an
international finance subsidiary, the international finance
subsidiary, or the guarantor in the case of non-performance by
the international finance subsidiary, would be liable to pay the
amount of such tax as additional interest to its bondholders. It
is also common for the international finance subsidiary bonds to
provide for optional redemption by the international finance
subsidiary in cases in which a U.S. tax is actually, or is likely
to be, imposed on the interest payments.
The international finance subsidiary relends the proceeds of
its borrowings to' its U.S. parent or to a U.S. affiliate on
substantially similar terms and conditions to those contained in
the international finance subsidiary borrowing, except that the
international finance subsidiary charges a slightly higher
interest rate than it pays on its own bonds. The U.S. parent or
affiliate issues its own note to the international finance
subsidiary to evidence the borrowing.
The bonds issued by the international finance subsidiary are
typically sold either in a public underwriting or in a private
placement. As they initially are sold only to foreign lenders,
the bonds do not have to be registered with the U.S. Securities
and Exchange Commission, even if issued in a public
underwriting. The bonds are normally issued in bearer form and
are frequently listed and traded on foreign exchanges.
The following beneficial United States and Netherlands
Antilles tax consequences may result from use of such a
stiucture if it is respected for U.S. tax purposes:
(1) The U.S. borrower receives a deduction for interest paid
or accrued to the international finance subsidiary.
(2) Under the terms of the treaty, U.S. tax is not imposed
on interest payments made by the U.S. parent or affiliate to the
international finance subsidiary if the international finance
subsidiary elects to be taxed in the Netherlands Antilles at the
normal corporate rate of 24 to 30 percent of its net income,
rather than at the special 2.4 to 3 percent rate otherwise
available to investment companies. Under the terms of the
treaty, a failure on the part of the international finance
subsidiary to make this election would generally preclude a
reduction of the 30 percent U.S. tax on U.S.-source interest
payments.
(3) Although the international finance subsidiary elects to
pay tax to the Netherlands Antilles at the normal 24 to 30
percent corporate rate, the Netherlands Antilles tax is imposed

-8only on the amount of the net income of the international finance
subsidiary (i.e., on the spread between the interest received
from its U.S. parent or affiliate and the interest paid to the
foreign bondholders).
(4) No Netherlands Antilles income tax and, in accordance
with the terms of the treaty, no U.S. income tax is imposed on
interest paid by the international finance subsidiary to its
foreign bondholders.
(5) No U.S. or Netherlands Antilles income tax is imposed on
the sale, redemption or other disposition of the international
finance subsidiary bonds by the foreign bondholders.
(6) The net income of the international finance subsidiary
is treated as the income of its U.S. parent under the Subpart F
rules of the Internal Revenue Code. Consequently, the U.S.
parent claims a foreign tax credit for the Netherlands Antilles
tax paid by the international finance subsidiary. In addition,
the U.S. parent is treated as having received foreign source
income for purposes of calculating its foreign tax credit
limitation, which may enable the parent to utilize otherwise
"excess" credits for taxes it has paid to high-tax jurisdictions.
(7) The bonds of the international finance subsidiary are
not subject to U.S. estate tax or to the Netherlands Antilles
estate (or inheritance) tax if owned by a nonresident alien
individual.
International finance subsidiaries are generally established
by U.S. corporations as an access route to the Eurodollar market
on a tax-free basis, which may be the only way such bonds are
marketable. It is a widely held view, which we share, that the
U.S. economy benefits from such access.
Today, the principal route of access for U.S. companies to
the Eurodollar market is through the Netherlands Antilles. There
are, however, other possibilities. For example, legislation was
introduced in the last Congress, by Representatives Conable and
Gibbons, which would exempt from the 30 percent U.S. tax certain
forms of U.S.-source interest paid to foreign persons, including
Eurodollar interest, but excluding interest paid on bank loans
and interest paid to shareholders other than portfolio investors.
The legislation also contained a provision permitting the
withdrawal of the exemption with respect to residents of a
foreign country if it does not exchange information necessary to
prevent evasion of U.S. tax by U.S. persons. The Administration
supported that legislation, and continues to believe that
legislation of that type represents the most efficient and
effective way of assuring access to the Eurobond market for U.S.
companies.

-9In addition, I would also like to mention that under current
law the U.S. tax consequences of the type of Eurodollar
transaction described above are not entirely settled. Several
Internal Revenue Service audits have raised the question whether
the interest exemption under the Antilles treaty is properly
applicable to such transactions. These issues have not been
resolved.
Exchange of Information
There is one other issue relating to the present Netherlands
Antilles treaty that I would like to touch upon. Like all tax
treaties, the present Antilles treaty provides for exchange of
information. However, because of strict bank secrecy rules in
the Antilles and the widespread use there of bearer shares, we
are not able to obtain from the Antilles much information that
the Internal Revenue Service believes is necessary for proper
enforcement of our tax laws. This is a deficiency which, along
with treaty shopping, we would seek to correct in a new treaty.
Current Treaty Negotiations
As the Subcommittee is aware, negotiation of a new treaty is
currently under way, having progressed through eight rounds of
discussions since 1980. We are now at a very sensitive stage in
these negotiations, and I believe that it would not be in our
best interests to discuss the negotiating positions of the two
sides publicly. I am hopeful that we will be able to reach
agreement shortly with the Antilles on a new treaty.
Section 342 of TEFRA
There is one other area on which you requested our comments.
Section 342 of the Tax Equity and Fiscal Responsibility Act of
1982 was enacted in response to the concerns raised at earlier
hearings of this Subcommittee. Section 342 directs that
procedures be designed which will prevent the kind of abuse that
occurs through the improper use of nominees and other conduits
that pass U.S.-source income through to a person who is not a
bona fide resident of the treaty country.
A number of alternatives to the present enforcement system
exist, including the adoption of a refund system of withholding
tax on passive income. A refund system would require withholding
agents to withhold U.S. tax at the statutory 30 percent rate on
all U.S.-source passive income paid to foreign persons, regardless of potential application of a treaty provision reducing the
30 percent rate or eliminating the tax altogether. The foreign
recepient who claims treaty benefits would then be required to
file a claim for a refund on an annual tax return. Supportive

-10documentation would be required . Another approach, the
''certification system," would require the foreign recipient to
file a certificate of residence from the competent authority of
the country whose treaty benefits are being sought. Pursuant to
the mandate of section 342, we are presently considering such
stricter procedures. In this regard, we have requested
information from our treaty partners as to their systems of
enforcing reduced tax rates and their ability to cooperate with
different alternative we may adopt. We have begun to receive
responses to our inquiries, and are in the process of analyzing
them.
0O0

TREASURY NEWS

epartment of the Treasury • Washington, D.c. • Telephone 566-2041
TKLAS
For Release Upon Delivery
Expected at 10:00 a.m. EST
Wednesday, April 13, 1983
STATEMENT CF
THE HONORABLE JOHN E. CHAPOTON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON FINANCE
Mr. Chairman and Members of the Committee:
I am pleased to have the opportunity to appear before
your Committee in support of the Caribbean Basin Economic
Recovery Act, introduced as S. 544. S. 544 contains the
trade and tax portions of the President's Caribbean Basin
Initiative (CBI). The CBI represents an important
commitment by the United States to the economic development
of the countries of the Caribbean Basin, which include
Guyana, Surinam, the countries of Central America and the
island nations of the Caribbean.
I will address my remarks only to the tax provisions in
Title II of the bill. The tax component of the legislation
provides favorable tax treatment for business expenses
incurred in attending a convention, seminar or similar
meeting in a Caribbean Easin country, including Eermuda, if
the country satisfies certain conditions that I will
describe below. The bill also contains a provision to
ensure that the proposed tariff reductions on rum will not
adversely affect the revenue sources of Puerto Rico and the
Virgin Islands.
Mr. Chairman, this Committee previously considered the
tax provisions of this bill-in December of last year. On
December 20, 1982, this Committee ordered H.R. ~^29~! reported
to the full Senate. The tax provisions of H.R. 7397 were
substantially identical to those in S. 544, except that the
effective dates for these provisions have been changed from
December 31, 19S2 to June 30, 1983.
R-3027

-2Deductions for Business Expenses Incurred Attending
Conventions in Qualifying Countries
The bill would cause Caribbean Basin countries
designated by the President as eligible for the benefits of
the Act, and Bermuda, to be treated as part of the "North
American area" for the purpose of allowing deductions for
ordinary and necessary business expenses of attending
conventions and similar meetings held in these countries
if the country where the meeting is held has entered into an
executive agreement to exchange tax information with the
United States and does not discriminate under its tax laws
against conventions held in the United States (a "qualifying
country"). While I have previously testified against a
series of proposals which would further relax the rules for
deducting expenses related to foreign conventions, there are
two reasons why the Treasury Department supports S. 544.
First, this legislation is a carefully crafted package
which addresses a problem of overriding national interest.
As Secretary Shultz pointed out in his testimony before this
Committee last August, there is an economic crisis in the
Caribbean region that threatens our well-being. The world
economic slowdown of the last few years has severely
affected these countries, reducing demand for and prices of
the exports they must sell to purchase imports such as oil
and other essential products. Tourism, an important source
of foreign exchange, has also suffered. The foreign
convention provisions of this bill directly address this
problem. A strong tourism industry will not only help
alleviate the current economic crisis but will also finance
the investment that is crucial for stable, long run economic
grov/th.
The second reason for Treasury's support is that the
bill's provisions requiring agreements for reciprocal
exchange of tax information as a condition of the foreign
convention deduction ensure that the U.S. tax system will be
strengthened, not weakened, by passage of this legislation.
It is in this context that Treasury supports this
legislation.
The Exchange of Information Agreements
S. 544 authorizes the Secretary of the Treasury to
negotiate and conclude the exchange of information
agreements. While the Secretary is accorded discretion
regarding what kinds of information will be included within
the scope of the exchange of information provisions, the Act
imposes certain minimum standards for such agreements.

-3The exchange of information provisions in the
agreements must include within their scope tax information
pertaining to "third-country persons," that is, nationals or
residents of countries other than the United States or the
qualifying country that is a party to the agreement. The
agreement would of course also apply to information
pertaining to citizens, residents and corporations from the
United States and the country that is party to the
agreement. Under this bill a jurisdiction with restrictions
on disclosure of information regarding such third country
persons would be required to modify such restrictions. The
bill would also require that the same principle apply with
respect to disclosure of information regarding bank account
information or share ownership.
The exchange of information agreements will be
terminable on reasonable notice by either party. Deductions
would not be allowed for business conventions or similar
meetings begun after the termination of an exchange of
information agreement.
The Secretary may incorporate by reference in an
exchange of information agreement the exchange of
information provisions of an existing income tax treaty with
a country, provided such treaty provisions otherwise satisfy
the requirements of the statute. The recently ratified
treaty with Jamaica, for instance, will satisfy such
standards, based on assurances given the United States in
the negotiation of a 1981 Protocol to the treaty regarding
Jamaican tax authorities' power to obtain bank account
information under the treaty. However, it should be clearly
understood that exchange of information agreements may be
entered into with a country whether or not the country has a
tax treaty with the United States.
It is expected that the exchange of information
agreements will generally become effective on signature.
The text of the agreements will be transmitted to Congress
not later than sixty days after the agreement has been
signed in accordance with the prescriptions of the Case Act
(1 U.S.C. section 112b).
Exchange of tax information assists the administration
of the tax laws of both the United States and the qualifying
country. The tax administrators of qualifying countries
will have access to information from the Internal Revenue
Service regarding their taxpayers who engage in economic

-4activities in the United States and thereby should
strengthen their own tax administration. This self-help
aspect of the measure is consistent with the overall concept
of the Caribbean Basin Initiative.
Our concerns are not, limited to tax havens. As
international economic transactions increase so does
the importance of international cooperation in tax
administration and cooperation.
The Need for International Exchange of Tax Information
As you are aware, the United States uses a selfassessment system in its collection of taxes. Each taxpayer
files a return and pays the amount due on the return without
governmental assessment. This is unlike the procedure in
many foreign countries where the government sends each
taxpayer an assessment of tax due.
Our self-assessment system relies in significant part
on the perception by taxpayers that the tax system is
equitable and that each person is paying his fair share.
This Committee recognized that noncompliance undermines the
perceived and actual equity of our tax system in its work on
the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA").
The enforcement of our self-assessment system relies on
a carefully targeted audit and examination program and, in
appropriate cases, on application of criminal enforcement
sanctions. A key to an effective examination program is
access to information. Information allows our examiners to
confirm the information reported on a return and to ferret
out those who would evade paying their share of taxes. This
is as true for international transactions as it is for
purely domestic transactions.
The United States' tax interest under the Internal
Revenue Code (the "Code") extends beyond its borders. Under
the subpart F, foreign personal holding company and foreign
investment company provisions of the Code, a U.S. shareholder in a foreign corporation that is more than fifty
percent owned by U.S. persons may be subject to tax on
income measured by the earnings of the foreign corporation,
even though it may not conduct any business in the United
States. In addition, the Internal Revenue Service has broad
powers under section 482 of the Code to reallocate income,
deductions or credits of two or more businesses owned or
controlled directly or indirectly by the same interests in
international as well as domestic transactions. Administration

-5of these provisions requires that the United States be able
to obtain information with respect to international
transactions.
The need for international exchange of tax information
also extends to information which may be used in criminal
tax cases. The Permanent Subcommittee On Investigations,
under the chairmanship of Senator Roth, has recently held
hearings on the use of offshore banks and companies to evade
tax on legally earned income as well as to launder profits
from illegal activities. In most international transactions
it would be impossible to uncover unreported income v/ithout
the assistance of the foreign country in obtaining
information which permits tracing funds earned in the
transaction.
The ability of the United States to obtain documents or
testimony for tax purposes from foreign countries is limited
by the jurisdictional reach of U.S. laws. However,
information may be obtained under our bilateral income tax
treaties. The United States enters into tax treaties with
countries which impose income taxes. These countries are
generally cooperative in exchanging tax information of all
kinds with the United States. In the case of exceptions, we
carefully evaluate whether the benefits obtained by the
United States under the treaty outweigh our concerns
regarding cooperation in matters of tax administration and
enforcement. It is appropriate to consider the importance
of exchange of information in light of overall U.S. policy
goals.
The exchange of information agreements provided for in
S. 544 would require that we obtain more information than we
presently receive under the exchange of information
provisions of some of our tax treaties. One reason for this
is that the foreign convention deduction provided by S. 544
represents the unilateral extension of a tax incentive by
the United States. In that regard, countries that receive
the benefit of U.S. tax incentives should generally be asked
to cooperate in matters of tax administration and
enforcement. This is necessary to preserve the integrity of
the U.S. tax system.
The exchange of information provisions required by this
legislation are broad. We do not, however, ask other
countries to do more for us than we would do for them.
Puerto Rico and the U.S. Virgin Islands
As an essential counterpart to the proposals to assist
Caribbean Basin countries, the Act includes an important
revenue measure for Puerto Rico and the U.S. Virgin Islands.

-6This measure will ensure that the development of the rum
industry in the Caribbean Basin induced by the Initiative
does not reduce a major source of revenues to Puerto Rico
and the Virgin Islands.
Under present lav;, the Internal Revenue Code imposes an
excise tax on rum. All U.S. excise taxes collected on rum
produced in Puerto Rico or the Virgin Islands and
transported to the United States (less the estimated amount
necessary for payment of refunds and drawbacks) are paid to
Puerto Rico and the Virgin Islands, respectively. These
U.S. excise taxes supply about 10 percent of Puerto Rico's
annual government budget, and about 20 percent of the annual
budget of the Virgin Islands.
In order to maintain this revenue source for Puerto
Rico and the Virgin Islands, the legislation provides that
all excise taxes collected on rum imported into the United
States from any country (less the estimated amount necessary
for payment of refunds and drawbacks) will be paid over to
the treasuries of Puerto Rico and the Virgin Islands. The
legislation further provides that the Secretary of the
Treasury will prescribe by regulation a formula for the
division of these tax collections between Puerto Rico and
the Virgin Islands.
It is the Treasury Department's view that the formula
to be prescribed should protect the revenues of Puerto Rico
and the Virgin Islands without regard to future levels of
rum production. The formula for division would therefore be
based on Puerto Rico's and the Virgin Islands' 1982 share of
the U.S. rum market.
The estimated revenue cost of the transfer to Puerto
Rico and the Virgin Islands of the tax collections on
imported rum is about $10 million in fiscal year 1984.
Conclusion
I thank you, Mr. Chairman and Members of the Committee
for the opportunity to testify in support of this important
legislation.
I would be pleased to entertain any questions you might
have at this time.
oOo

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AFTER 6:00 P.M.
Wednesday, April 13, 1983
DEPUTY SECRETARY MCNAMAR
URGES CLOSER LINKS BETWEEN INTERNATIONAL TRADE AND FINANCE
"The interrelationship of trade and finance issues has been
ignored for too long. It is unfortunate that the severe debt
servicing problems of many developing countries has had to serve
as a catalyst to remind us of the importance of this linkage,"
said R. T. McNamar, Deputy Secretary of the Treasury.
Speaking tonight before the Council of Foreign Relations in
Washington, D . C , Mr. McNamar stressed the importance of
developing closer links between international trade and finance.
In discussing the past lack of coordination between trade
and financial policies, Mr. McNamar said that in most countries,
"completely separate bureaucracies exist for trade and finance.
Each has its own separate constituency and each pursues its own
independent agenda."
Following on Secretary Regan's earlier call for a review of
the international financial system the Secretary last week
announced a joint meeting of trade and finance ministers, to give
ministers a chance to discuss the current international economic
situation from both a trade and a finance perspective. The joint
meeting, the first of this sort, will take place in Paris
directly after the OECD Ministerial May 9-10. The Secretary and
USTR William Brock have invited the trade and finance ministers
from the Summit countries as well as heads of several major
multilateral institutions.
Mr. McNamar said tonight, "At the May meeting, the ministers
will begin exploring the implications some of the problems I've
discussed tonight. We will suggest some solutions — avoidance
of protectionism, encouragement of liberalization of LDC trade
measures, and stable economic policies. Other proposals which
should be explored are greater GATT/IMF/World Bank cooperation,
and ways of encouraging North-South trade."
"I'm optimistic about this meeting. At the very least,
Secretary Regan will have accomplished a great deal just by
getting the trade and finance ministers from seven countries to
sit down in the same room together. They have a lot in common
that they may not be aware of."
Commenting on the LDC debt situation that heightened the
awareness of the trade-finance linkage, McNamar said, "LDC debt
— a financial issue — has major implications for all nations'
exports, and the growth of all economies — and these are clearly
trade issues."
R-3028

-2"Unless the debtors are able to adjust their economies
smoothly, exports will be cut back drastically, with trade being
reduced to a cash-and-carry basis, or worse yet, bilateral
barter. If private banks were to cut back on loans too fast to
allow for orderly adjustment, LDCs would be placed under strong
pressure to relieve their debt burden through other means,
including the imposition of import restraints or self-defeating
export subsidies which must themselves be directly or indirectly
financed through additional external borrowing. Such inefficient
economic policies would hamper the long-run development and
growth of these countries."
"The importance of exports to LDCs simply isn't adequately
understood in the U.S. or among European and Japanese
policymakers," McNamar said. "Fully 8.4 percent of U.S. GNP is
devoted to exports and 27 percent of that goes to LDCs. Putting
those together, 2.7 percent of our total GNP is on the line here.
How many jobs is that?"
"Europe and Japan are even more dependent on such exports.
Where we have primarily Latin American debtors, they have Asian,
African, Eastern European and Latin American debtors. Over 3
percent of Europe's GDP and 4 percent of Japan's GDP depend on
exports to LDCs. And their portions of the $500 billion of LDC
debts are larger in relationship to their economies than our part
is to our economy."
Mr. McNamar indicated that we are "entering Phase II of the
adjustment to the Less Developed Country debt problem" — a phase
where obtaining and sustaining non-inflationary growth will be of
key importance.
He added, "It is not just the developing countries which
face the debt problem. No country can problem isolate itself
from the and no trade minister can afford to assume that the
finance minister can handle it alone. We are all in this
together and we all have responsibilities to ourselves and
obligations to each other in working through the problem."
"I'm not talking just about obligations in a legal sense; I
am talking about the kinds of obligations that countries,
developed and developing alike, should follow for their own self
interest :— because in the long-run they will profit from
adhering to them. They should also accept to these obligations
because they help to strengthen the international economic
system".
McNamar concluded by saying, — "Let us profit from this
experience to set the ground for greater coordination of policies
in the future."
"There are reasons to be optimistic about the future of the
international economic system jjf_ countries follow policies
designed to foster their long-term economic self interests not

-3short-term political expedients."
"There is a need for continued financing (IMF, private
banks, and, in selected cases, government/central bank bridge) in
support of LDC adjustment."
"There is a need for the developed countries to keep their
markets open to the exports of the developing countries, and for
the developing countries to avoid protectionist measures in the
adjustment process."

TREASURY NEWS
Department
of AT
the4:00
Treasury
• Washington, D.C. •April
Telephone
566-2041
FOR RELEASE
P.M.
13, 1983
TREASURY TO AUCTION $7,750 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $7,750 million
of 2-year notes to refund $4,244 million of 2-year notes maturing
April 30, 1983, and to raise $3,506 million new cash. The
$4,244 million of maturing 2-year notes are those held by the
public, including $460 million currently held by Federal Reserve
Banks as agents for foreign and international monetary authorities.
The $7,750 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 $460 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 $342 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-3029

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED MAY 2, 1983
April 13, 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

$7,750 million
2-year notes
Series T-1985
(CUSIP No. 912827 PK 2)
April 30 , 1985
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
October 31 and April 30
$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, April 20, 1983,
by 1:30 p.m., EST

Monday, May 2, 1983
Thursday, April 28, 1983

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
ADDRESS BY
R. T. MCNAMAR
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
COUNCIL ON FOREIGN RELATIONS
WASHINGTON, D.C.
APRIL TRADE
13, 1983
INTERNATIONAL
AND FINANCE:
THE OVERLOOKED LINK
Good evening. I appreciate this opportunity to appear
before the Council. There are a variety of pressing
economic problems now facing the world and therefore the United
States. And, with the Economic Summit at Williamsburg only a few
weeks off, many of these are now front page news. But I would
like to go behind the headlines for a few minutes this evening to
discuss an issue that is at the same time both obvious and
ignored. That issue is the link between international trade and
finance: a link that is simple, dull, and indispensible.
From the days of the Dutch merchant sailors to the captains
of today's supertankers and international bankers, the men who
have advanced the horizons of world commerce have understood the
bond between finance and trade. Trade and finance are but two
points on the economic circle. They are as connected in the
total scheme of economic growth as points on the supertanker's
compass.
Tonight I would like to explore the relationship of trade
and finance, its importance, and the mutual economic obligations
it creates for the developing countries and industrialized
countries alike — obligations which, frankly, a number of
countries are not adequately meeting. Let's consider the
linkages — or if you will, interdependencies — created by the
world's open trading system and integrated international
financial markets.
In an ideal world, trade and finance officials would develop
common and mutually reinforcing policies that reflected the
impact of monetary and fiscal policies on trade flows, or the
impact of trade policy on economic growth, inflation and
government fiscal policy. Unfortunately, I'm not optimistic
enough to believe we can even hope for such sophisticated
coordination in the near future.^ But the international debt
problem has required trade and finance officials to recognize
that their individual policies will either work together to solve
the problem or work against each other to exacerbate it.
In this case the interrelationship of trade and finance is
simple: debtors can't pay off their debts unless they can earn
R-3030 exchange by exporting. Thus the industrialized
foreign

-2countries* trade ministers must keep markets open so debts to
their banks can be repaid. Of course, the linkage goes in the
other direction as well. Trade ministers cannnot keep markets
open unless sufficient financing is provided to cover essential
imports into and exports out of their countries.
How strange then that so many of today's government
ministers have trouble coordinating their policies; that so many
trade and finance bureaucracies fail to work in concert; or that
it has taken 1982*s international debt problems to heighten our
awareness of this economic nexus.

•egard for the impa<
one another. The bifurcation can partially be explained by the
basic organization of governments and the structure of
international institutions.
Governmental Organization
First is the basic organization of governments. In all of
the OECD countries but one (Germany), and in most governments in
the world, completely separate bureaucracies exist for trade and
finance. Each has its own separate constituency and each pursues
its own independent agenda. Many countries handle trade as a
function of the foreign ministry.
In Europe, the trade ministries have developed a more common
approach through the EC competence mechanism, while the finance
ministries have each followed far more individualistic policies.
And, some countries even appear to be following internally
inconsistent policies.
Recent events in the EMS suggest that the French export
subsidy and import restriction practices are not only
inconsistent with promoting an open trading system so LDCs can
repay their French debts, they don't even lead to the stronger
Franc they were designed to support. And, if the policies are
internally inconsistent, how are they in harmony with the world's
needs at large? Fortunately, very recently, French policies
have begun to change towards more consistency.
Even where international trade and finance policies are
coordinated, well-known "turf battles" occur. Rivalry in some
countries is legendary.
Here in the U.S., we split trade and finance at least three
ways — between USTR, Commerce and Treasury (with intermittent
involvement by OMB, State, DOE, etc.). However, we have a
coordinating mechanism — the Cabinet Council system, where we
attempt to work out common policies. Around the world, it is
surprising just how rare coordinating mechanisms are — in some
countries it seems the trade and finance ministers don't even
regularly speak to each other.

-3International Organizations
The international institutions that developed after World
War II mirrored the governmental division of trade and finance.
The Bretton Woods Agreement created the International Monetary
Fund (IMF) and the World Bank (International Bank for
Reconstruction and Development) that concentrate on financial
issues. They are both strong institutions with able,
well-trained professional staffs that have accomplished much in
their fields.
The hoped for parallel institution to promote international
trade liberalization never came into existence. Instead we have
made do with a legal framework — the GATT (General Agreement on
Tariffs and Trade). The GATT has evolved over the years into an
international institution with a small staff of its own, and
while it has accomplished much in way of trade liberalization, it
is still a consensual organization.
However, just as the bifurcation of institutions mirrors
that of the governments, so does the propensity of institutions
not to work together. When they do speak, it is only in the form
of "intervening" at each others' formal meetings.
The IMF comes to-the GATT about twice a year to give its
judgment on the balance of payments situations of countries which
have imposed trade restrictions for balance of payments reasons.
For the rest of the year, they rarely speak on an official basis.
There is no mechanism, for example, for the GATT to provide input
to IMF consultations and negotiations with its members, even
though IMF discussions routinely include analysis of a country's
trade policies, and often lead to commitments to liberalized
trade.
A similar situation exists between the GATT and the World
Bank. They don't talk to each other, despite the fact that the
World Bank has also taken an interest in the liberalization of
the trade sector of its members, and has sometimes made trade
liberalization an important component of its structural
adjustment lending programs.
Last year, I was appalled by the fact that I was one of only
two ministerial level government officials who attended both the
IMF meeting in Toronto in September and the GATT Ministerial in
Geneva two months later. The IMF meeting was dominated by a mood
of anxiety over fear of a financial collapse that would lead to
an implosion of trade and worldwide depression. The latter was
obsessed with concepts of protectionism to preserve existing
jobs — unmindful that these protectionist policies could lead to
a constriction in trade that would undermine the ability of the
debtor countries to service their debt, which in turn could
weaken the financial system and contribute to the world
depression that the finance ministers were seeking to avoid.
Truly, the old shibboleth of ships passing in the night was never
more true.

-4I think this is wrong. It is not just wrong for academic
reasons, or for some noble notion of harmony and cooperation. It
is wrong because both trade and finance ministries jointly face
some major problems that neither can work out independently.
Singularly, the world's trade and financial systems are
unsupportable; together they are sustainable and mutually
reinforcing. Over the last decade, the massive changes forced by
sharp increases in OPEC oil prices, disparate domestic policies,
internationalization of the banking sector, and interconnected
capital markets, have made the linkages of finance and trade
tighter, and more critical.
Some of the problems of the future will also call for better
coordination of trade and finance policymakers: the need for
international rules to promote the free flow of international
services and the free flow of investment require a fusion of
ideas not a fission of historical bureaucracies.
The current debt problem of many of the developing countries
and the impact of these problems on the international economic
system as a whole make it crucial that policymakers recognize and
reflect this linkage in developing trade, finance and general
economic policy responses. Indeed, the linkage has become a
bond or chain that binds the developed to the developing world,
the poor to the rich, and the North to the South. The so-called
new international economic order was defined by the marketplace
and the merging of the world's economies, not by a resolution of
the United Nations' General Assembly.
Think about the problem. Estimates of the total foreign
debt of the non-OPEC LDCs range from $500 to $600 billion,
depending on the definition — five times the 1973 level. About
$300 billion of this is owed to private Western banks —
one-third (or about $100 billion) to U.S. banks, and two-thirds
(or about $200 billion) to European banks and Japanese banks.
Individual countries face enormous debt burdens — Brazil and
Mexico owe between $80 and $90 billion each. Argentina had
outstanding debts of about $40 billion. There were 20 debt
reschedulings in 1982 alone.
But the trade ministries ask: what does this have to do
with me? Isn't this just a finance or banking issue?
The answer is that LDC debt — a financial issue — has
major implications for all nations' exports, and the growth of
all economies — and these are clearly trade issues.
Unless the debtors are able to adjust their economies
smoothly, exports will be cut back drastically, with trade being
reduced to a cash-and-carry basis, or worse yet, bilateral
barter. If private banks were to cut back on loans too fast to

-5allow for orderly adjustment, LDCs would be placed under strong
pressure to relieve their debt burden through other means,
including the imposition of import restraints or self-defeating
export subsidies which rust themselves be directly or indirectly
financed through additional external borrowing. Such inefficient
economic policies would hamper the long-run development and
growth of these countries.
These trade effects are very real. Look at the imports of
one country that was forced to adjust suddently — a country that
refused to adjust until it was almost too late — Mexico.
Mexico's merchandise imports fell from $23 billion in 1981 to $15
billion in 1982, a decline of 35 percent. The U.S. absorbed
most of the cutback as its exports to Mexico declined by $6
billion. That rapid adjustment was absorbed by the United
States. It can't be absorbed by many countries.
Or look around the world, where total export growth to
non-oil LDCs last year slowed to $30 billion in 1981 from over
$100 billion the prior year. In 1982, world trade actually
declined by 6 percent.
The importance of exports to LDCs simply isn't adequately
understood in the U.S. or among European and Japanese
policymakers. Fully 8.4 percent of U.S. GNP is devoted to
exports and 27 percent of that goes to LDCs. Putting those
figures together, 2.7 percent of our total GNP is on the line
here. That is equivalent to the economies of Greece and Portugal
combined. How many jobs is that?
Europe and Japan are even more dependent on such exports.
Where we have primarily Latin American debtors, they have Asian,
African, Eastern European and Latin American debtors. 3.3
percent of Europe's GDP and 4 percent of Japan's GDP depend on
exports to LDCs. And their portions of the $500 billion of LDC
debts are larger in relationship to their economies thar. our part
is to our economy.
Economic Obligations
Thus, it is not just the LDCs who face the cebz problem.
The whole world does/ No country can isolate itself from the
problem, and no trade minister can afford tc assume that the
finance minister can handle it alone. We are all in this
together and we all have responsibilities to ourselves anc
obligations to each other in working through the problem. I'm
not talking just about obligations in a legal sense; I am talking
about the kinds of policy obligations that countries, developed
and developing alike, should follow in their own self interest -because in the long-run they will profit from adhering to them.
They should also accept these obligations because they help to
strengthen the international economic system.

-6LDC Debtor Obligations
First, let's look at the developing nations obligations.
It is a fact of life that these countries will not be able to tap
unlimited amounts of financing to help them adjust; even if such
financing were now available, it certainly would not be feasible
to keep adding to LDC debt as was done in the early 1980s.
Therefore, they need to develop sustainable economic policies
that will create the economic conditions to foster stable growth
and development. External financing is not a substitute for such
adjustment policies.
It is the LDCs obligation to begin the adjustment process
before the crisis stage, before their reserves have fallen to
zero. It is in their own best interests to do so. The
adjustment process is much smoother if it is not conducted on an
emergency basis. Of course, not everyone has lived up to its
obligation.
For well-known political reasons Mexico didn't adjust in
time. But as a result, the inevitable crisis only deepened their
problems.
— Real economic growth, which had averaged over 8 percent
between 1978-1981 fell near zero last year.
Inflation doubled from 28 percent in 1981 to 57 percent
in 1982 (100 percent on a December/December basis).
Capital flight in 1982 was more than $6 billion,
following on the heels of an $8 billion outflow in 1981
(most of it toward the end of the year).
Further examples of countries not adjusting in a timely fashion
exist today. Venezuela has only just now announced plans to
begin its austerity program. Indonesia isn't adjusting as it
should. Neither is Nigeria. Brazil, even after a crisis,
persists in export subsidies that increase their deficits which
must be financed externally.
What are the adjustment policies I'm talking about? On the
domestic side, they include eliminating politically popular
subsidies, setting and sticking to realistic expenditure goals.
On the international side, these countries should avoid
protectionist trade solutions, including the use of export
subsidies. They need a set of structural adjustment policies
that will allow them to shift further away from closed economies
based on import subsitution toward more open economies based on
export growth, comparative advantage, and diversification.
In today's world, economic isolation is no more feasible than
military isolation.
A second obligation of the LDCs is to take up their
responsibility to uphold the international economic system, in
particular the international trade system embodied in the GATT.

-7-

This includes the development of new international rules and
principles where appropriate.
For example, more liberal rules
in foreign investment are needed. Governments in both developing
and developed countries recognize the important contribution that
foreign private capital flows can make to their economies. They
bring technology, education, and create domestic jobs. However,
in many instances too many LDCs' policies toward foreign
investment don't reflect this fact. Many countries do offer
incentives to promote investment, both foreign and domestic.
However, many of these same governments also impose significant
restrictions and conditions on foreign investment in their
countries. The measures employed range from outright
prohibitions to protect selected non-security related sectors to
onerous performance and other requirements aimed at forcing
domestic control, local content, or exports. Again, Mexico
provides an example of questionable past policies. Does anyone
doubt that if Mexico had had more modern rules inviting foreign
investment that its economy today would be more diverse, less
dependent on oil, and that both unemployment and underemployment
would be lower?
Markets that should be very appealing to investors because
of their location, high growth potential, or their relative costs
are much less appealing because of short-sighted, politically
motivated, internally focused policies.
And less investment is
forthcoming than might be the case if these measures were not
imposed.
Enlightened investment policies are in the LDCs own
best interests as well. The foreign investment provides another
source of foreign exchange in the short run, and provides the
scarce capital and technical expertise needed to develop
industrialized exports in the longer run.
This Administration believes that international rules or
guidelines relating to foreign investment, akin to those for
trade, need to be developed. We have attempted to focus
attention of various institutions, on egregious investment
practices with some success.
Obligations of Industrialized Countries
The OECD countries also have obligations — and those
obligations are again in their own long-run best interests.
For their own part, the OECD countries must:
Adopt policies that support sustainable
non-inflationary growth. This is essential for world
economic recovery, if coupled with policies to allow
for expansion of markets for LDC exports. It is
vitally important that the potential presented by the
prospect of OECD recovery not be thwarted by an
increase in protectionist pressures within the OECD.
The ability of industrial nations to maintain open

-8markets will directly affect LDC ability to repay debts
and resume domestic economic growth.
Ensure that adequate official financing is in place, in
particular from the IMF.
Make available necessary bridge financing, such as that
provided bilaterally and multilaterally under the
auspices of the Bank for International Settlements
(BIS).
Continue to encourage appropriate private bank
financing in support of LDC adjustment programs. Such
lending is important for the developing countries, as
well as for the banks themselves, who will not profit
from a weakening of the international monetary system.

Just as there are examples of LDCs not living up to their
obligations, there are examples of OECD countries not living up
to their obligations —
for example, Japan. The Japanese are
not meeting their obligations as a world economic leader. They
have benefited, perhaps more than any other nation, from the
world trading and finance system — yet they are the most
reluctant to accept the associated responsibility. The Japanese
have the most closed trade system and are the most reluctant to
support the financing needs of the LDCs. Their trade and finance
policies are linked, but linked in a way to abrogate their
obligations and confine them to a self-imposed secondary role in
world economic leadership.
I might point out though that we in the U.S. are not perfect
either. We have gone further to meet our financial obligations
to the LDCs than our trading partners. Yet, we have placed
quotas on textiles, apparel and sugar. Our average tariff on
dutiable goods exported by developing countries (excluding oil)
is in most cases larger than the average tariff on goods exported
to us by the developed countries!
To date, most protectionist measures in the U.S. have been
defeated, perhaps because most of the trade impact has been on
the export side, and exporters are less prone to call for
protection than import-competing sectors of an economy. As
debtor LDCs shift from import reduction to export expansion,
however, protectionist pressures will be more likely.
Secretary Regan's Trade-Finance Link Initiative
Several months ago Secretary Regan called for the major
nations to begin taking a hard look at the existing international
financial and monetary systems. He indicated that they should
focus on the development of more streamlined and improved
approaches to future international economic and financial

-9challenges. As a follow-on to that initiative, Treasury
Secretary Regan has proposed a joint meeting of trade and finance
ministers, to give ministers a chance to discuss the current
international economic situation from both a trade and a finance
perspective. The joint meeting, the first of its sort, is
scheduled to take place directly after the OECD Ministerial May
J
9-10.
As a first step, the Secretary, along with U.S. Trade
Representative Bill Brock, has invited the trade and finance
ministers- from the Summit countries, as well as the heads of
several major multilateral institutions. The meeting was
purposely kept small in order to keep discussions informal and
constructive. If this first meeting is fruitful, the United
States will suggest that it be expanded to include more of the
developed countries. We will also want to invite key developing
countries to some future meetings as soon as possible.
At the May meeting, the trade and finance ministers will
begin exploring the implications of some of the problems I've
discussed tonight. We will suggest some solutions along the
lines I have discussed — avoidance of protectionism,
encouragement of liberalization of LDC trade measures, and stable
economic policies. Other proposals which should be explored are
greater GATT/IMF/World Bank cooperation, and ways of encouraging
North-South trade.
I'm optimistic about this meeting. At the very least,
Secretary Regan will have accomplished a great deal just by
getting the trade and finance ministers from seven countries to
sit down in the same room together. They have a lot in common
that they may not be aware of. And, they have more in common
with their peers in the developing world than many would expect.
Interdependent Obligations
Earlier I mentioned the mutual or interdependent obligations
of developing, advanced, and industrialized economies. Through
their banking system and private investment capital, the
industrialized economies provide the external financing needed to
foster economic growth in the developing economies. Conversely,
the developing countries have an obligation to provide a
hospitable environment so that the financing can create jobs and
exports from their own economies.
That these types of obligations are interdependent is
nowhere better seen than in the case of industrial economies
protectionist policies and developing countries' export subsidy
policies. With 30 million unemployed workers in the OECD
countries today, the political pressures to restrict imports from
the developing countries are enormous. Yet, developing countries
make it more difficult for OECD trade ministers to resist these
pressures when the developing country subsidizes its own exports
to the industrialized countries and finance the additional budget

-10deficit created by export subsidies with additional bank debt
borrowed from the industrialized countries. The recent history
of several Latin American countries provides illustrations of how
their domestically oriented export promotion policies serve to
undermine the political commitment of the industrialized
countries to provide open markets.
Failure of the trade and finance ministers to come to grips
with these anomalies weaken the international economic system
that is the only hope for sustained joint real growth for all the
economies of the world.
Future Outlook
I'm also fairly optimistic about the future of the world
economy. Provided the developed and developing countries keep in
mind their obligations to themselves and to the international
economic system, there are indications we are entering Phase II
of the adjustment to the LDC debt problem. In the short-term,
the effect of stabilization programs and debt repayment schedules
will keep growth rates and trade flows of developing countries
low. However, several factors will lead to higher growth and the
recovery of trade flows by 1984-85:
1. Longer-term effect of LDC adjustment efforts;
— For example, Brazil posted an increase in its
trade surplus of $514 million in March, up from
$175 million in February. This is Brazil's
largest monthly surplus in recent years although
results for the first quarter are below its
targets.
2. Projected pick-up in OECD growth rates;
— We expect an average real growth of 2-1/2 percent
in 1983; while the recovery will be low by historic
standards, it should be better balanced and less
likely to rekindle inflation than previous
recoveries.
The aggregate OECD current account should shift
into surplus, the first since 1978.
— Growth in the OECD will lead to an increase in the
demand for LDC export products.
3. The increase in demand should boost commodity prices,
improving the LDCs' terms of trade; prices of copper,
tin, and rubber are most likely to experience
increases.

-114.

Lower oil prices;

Lower prices should have a direct effect on LDC
import bills; for example, it is projected that a
hypothetical 20 percent reduction in oil prices
could reduce the projected oil bill of non-oil
LDCs from $76 billion in 1983 to $61 billion.
This would amount to a direct savings equal to 1
percent of their aggregate GDP. Obviously, there
will be differences in the effects amoung
countries;;* with Mexico and Venezuela being
affected adversely.
Lower oil prices will also reduce the inflation
rate in most countries.
5. Lower interest rates.
LIBOR has dropped about 25 percent on average
since last year (from 13.5 percent to about 10
percent).
— The developing countries as a whole (including
OPEC, but excluding European countries such as
Turkey and Yugoslavia) experience a savings in
interest payments of roughly $2 billion per 1
percent drop in interest rates. Thus the recent
decrease in the LIBOR rate has saved the LDCs $6-7
billion.
Concrete signs which bear out my optimism have already begun
to appear. We expect a reduction of the combined current account
deficit of the LDCs in 1983, although there will be individual
problem countries. The debt service ratio of the non-OPEC
countries should be 23 percent in 1983, down from 25 percent in
1982.
***

How does the future look if LDC and OECD countries do not
live up to their obligations? I could see a downward spiral
where protectionism leads to decreased trade, which leads to
greater financial difficulties, which leads to greater
protectionism, and so on. In the 1930s a protectionist spiral
caused international trade to fall by some 60 percent.
Economists don't know how much the Depression made the spiral
deeper versus how much the spiral made the Depression deeper.
Frankly, I don't want the 1980s to provide the chance to find
out.

-12Conclusion
To conclude, I would like to reiterate:
The interrelationship of trade and finance issues has
been ignored for too long; it is unfortunate that the
severe debt servicing problems of many LDCs has had to
serve as a catalyst to remind us of the importance of
this linkage, but let us profit from this experience^to
set the ground for greater coordination of policies in
the future.
There are reasons to be optimistic about the future of
the international economic system if_ countries follow
policies designed to foster their long-term economic
self interests not short-term political expedients.
There is a need for continued financing (IMF, private
banks, and, in selected cases, government/central bank
bridge) in support of LDC adjustment.
f

—• There is a need for the developed countries to keep
their markets open to the exports of the developing
countries, and for the developing countries to avoid
protectionist measures in the adjustment process.

***

Some people have described this whole issue in terms of a
triangle; with trade, finance and economic growth being the three
points. But I suggest that the relationship is actually more
complex than that. Perhaps the more appropriate analogy is a
circular form consisting of so many connections that one can
hardly discern a break point.
In the physical world scientists are learning that DNA, the
base of all genetic information in the world, is patterned on a
complex double helix arrangement with genetic strands coursing
through the microscopic system.
In economics we also see a tightly woven series of
interrelationships where all elements of the trade-finance cycle
affect one another. Yet in the world of economics, where the
threads of trade, finance, growth and security are woven just as
tightly, the governments of the world persist in dividing these
functions like so many amino acids. If we don't successfully
recombine as in the DNA molecule, life won't come to an end. But
it could sure be a lot worse for a large portion of the four
billion human beings on this planet. It is now high time that
our institutional and public policy arrangements operated more in
accordance with the reality of these interrelationships.

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

FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
FRIDAY, APRIL 15, 1983

STATEMENT OF MANUEL H. JOHNSON
ASSISTANT SECRETARY FOR ECONOMIC POLICY
BEFORE THE
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
WASHINGTON, D. C.
Mr. Chairman and Members of the Committee
Thank you very much for this opportunity to be with you
today to present the views of the Treasury Department on S. 42,
the American Gold Eagle Coin Act of 1983.
The bill before us today is similar to one I was asked to
testify on during the last Congress before the House Sub-Committee
on Consumer Affairs and Coinage. Both bills are related to the
work of the Gold Commission, whose report was transmitted to the
Congress on March 31, 1982. The Gold Commission was directed
by the Congress to assess the role of gold in the domestic and
international monetary systems, and to study U. S. policies
related to gold.
Essentially, the bill provides for the minting of gold coins,
which would recreate the opportunity for Americans to acquire and
use gold coins minted by the United States Treasury. Recreating
that opportunity is a logical follow-up to the rights restored
by P.L. 93-373 to American citizens in 1974 to buy, sell, and
own gold ir any form and by P.L. 95-147 in 1977 allowing them to
enter contracts specifying payment in gold. The U. S. Treasury

R-3031

- 2 did,not have the authority to mint and issue gold coins for
almost 50 years. The authority was re-established in 1982 with
the passage of the Olympic Commemorative Coin Act, P. L. 97-220,
which provided for limited issue of a specific gold coin. The
bill we are considering this morning would authorize a general
issue of gold coins which would satisfy public demand, both
present and future, for an American gold coin.
The Treasury supports the basic elements of the American
Gold Eagle Act even though it still contains some provisions which
concern us. We agree the coins should be specified solely by
weight, without any dollar face value, and the coins should be sold
at the market value of their gold content plus a margin to cover
the costs of minting and distribution. There is a demonstrated
worldwide demand for coins sold under these conditions. These
coins could be used by private citizens as a store of value and,
where mutually acceptable, as a medium of exchange. The absence
of Treasury obligation to buy and sell the coin at a specified
price, however, avoids any implication that what is being attempted
is the re-establishment of an official price of gold.
We also concur with issuing the coin without legal tender
status. If the coins have legal tender status, private creditors
would be compelled to accept them as payment for debts, and the
Treasury as payment for tax liabilities. The fluctuating market
value of gold would necessitate creation of a complex system for
setting and announcing a fluctuating legal tender value on a
continuous basis, with attendant formidable problems of operation.
Instead the intent of the bill, as we interpret it, is to provide
the private sector with an alternative and not to impose a dual
money system on the economy.
The 1908 twenty dollar gold coin was among the most attractive and widely distributed gold coins ever minted by the
United States. The use of the figure of Liberty from this coin,
along with the great seal of the United States, is expected to
enhance the popularity of the American Gold Eagle. The minting
of two sizes containing one ounce and about one-half ounce of
gold, equivalent to the old $20 and $10 gold coins, is also
appropriate. For technical reasons, however, we would like
to recommend slight changes in the language of section 402,
(a), (b) and (c), specifying physical characteristics of the
coin.
The proposed legislation calls for the American Eagle to
be distributed not later than Julv 1 of next year. Members of
the Committee are, no doubt, aware that under present legislation (P.L. 97-220 and P.L. 95-630), the Mint will be minting
three different gold pieces in 1984 — a $10 coin containing

- 3 approximately one-half ounce of gold and commemorating the
Olympics, and one ounce and one-half ounce gold medallions —
involving up to two million ounces of gold. Minting and distributing an additional 500,000 ounces or more in American gold
"Eagles" and "Half Eagles" next year, as required in S. 42,
would add to competition among these different gold pieces and
strain the Mint's productive capacity. This can be avoided
by delaying the issuance of the Eagles for at least six months
until January 1, 1985, when the authority to produce the other
U. S. gold pieces is due to expire. We would not wish to see
either of the existing gold programs terminated prematurely,
since that would needlessly disturb public expectations, as
well as minting and distribution commitments.
Our preferred method of distributing the American Eagle
coins is through dealers and through auctions. Provisions
in the bill appear broad enough to provide Treasury with
sufficient flexibility to utilize those channels as well as
alternative distribution systems if that is deemed preferable.
The method of distributing the coins is likely to influence
the precise method of establishing their price when sold by the
Treasury. We believe that the pricing provisions, as proposed
in Section 404, are unnecessarily restrictive. For example,
selling through auctions will not be possible if prices must be
based on a published formula and the previous day's 4:00 p.m.
COMEX gold price. More important, though, the provisions could
be costly to the Treasury if on a given day the market price
were significantly in excess of the previous day's closing COMEX
price, as has frequently been the case, creating opportunities
for risk-free profits to those who purchase gold coins that day.
We feel, therefore, that greater flexibility in pricing is needed
to deal with rapid changes in gold prices. Accordingly, we
propose that the price be determined by the Secretary of the
Treasury,.based on the current market price, with the frequency
dictated by circumstances and the system of distributing the
coins.
The most controversial issue associated with proposals for
the issuance of American Eagles relates to their tax treatment.
The issue was among the most complex confronted by the Gold
Commission. In part, resolution of the tax issue was rendered
more difficult by the diversity of reasons behind the large
majority of the Commission in favor of providing a gold bullion
coin. Several Commission members felt a gold coin should have
the opportunity to develop as a circulating means of payment,
some favored a coin to compete with foreign coins, like the
krugerrand, some favored a greater role for gold in the monetary
system, and some held no strong view of the function of the
gold bullion coin.

- 4 Because of the lack of agreement over function, there was
no agreement over the specific characteristics of such a coin;
specifically, whether it should have legal tender status, should
be minted in unlimited amounts, should be redeemable by the
Treasury for dollars, or should be exempt from capital gains and
sales taxation. The Commission finally adopted recommendations
that the coin not have legal tender status, that the Treasury
should mint the coins from existing gold stocks, subject to
certain limits, *nd that they should be exempted from capital
gains and sales taxes.
The arguments behind the legal tender and tax recommendation have two facets. One was a general view that the
government should not be in a position of legally obligating
people to accept payment in assets with fluctuating market
value, which would be the case if the gold coins were given
legal tender status. At the same time, however, it was argued
that impediments to the use of the coins as a medium of exchange
on a voluntary basis should be eliminated, and this led to the
recommendation for tax exemption.
In his position as Chairman of the Commission, the Secretary
of the Treasury supported these recommendations and the gold coin
proposal in general. Still, some of the issues were not studied
exhaustively by the Commission, and the ambivalance of its own
recommendations indicates there remain a number of serious considerations which need to be explored more fully by the Congress.
The tax area, in particular, raises several difficult
issues which may require further examination, and we welcome
these hearings as a vital opportunity to provide the Congress
with further information and analysis. If we are to provide
gold coins which could be used as a medium of exchange by the
American people, an argument in favor of exemption from taxation
logically follows. The bill provides that gains or losses from
the sale, exchange or other disposition of the coins authorized
by the bill shall not be recognized as a capital gain or loss
under any Federal, state or local income tax, and that any
ownership, purchase or sale of such coins shall be exempted from
Federal, state and local sales, personal property, and excise
taxes. Thus, the bill incorporates the basic recommendation of
the Gold Commission making transactions in such coins free from
taxes and the Treasury Department strongly endorses the tax
exemption for the American Eagle.
There are many sound economic arguments which could be made
in favor of the Gold Commission's recommendation as reflected in
the tax provisions of the bill before us. However, the policy on
taxation raises a number of ancillary tax issues which remain
unresolved and which need to be considered more explicitly.

- 5 Tax exemption of transactions in the American Eagle Gold Coins
implies that all non-interest bearing claims on these coins —
certificates of deposit, warehouse receipts, and promissory notes —
should be accorded the same tax treatment as the coins themselves.
If not, it would necessitate having the owners of such claims go
through the totally meaningless motions of redeeming their claims
in gold coins and proceeding with a tax-free exchange. There is
no difficulty in interpreting what the bill implies for treatment
of an exchange of gold coins for forms of property other than paper
currency. Acquisition of such property would be subject to state
and local taxes as if the payment were made in paper money. If a
capital asset is acquired in an exchange for gold coins, the
applicable tax basis would be the market value of the coins at
the time of the acquisition. The initial dollar price at which
the coins were purchased would be irrelevant for the determination
of the tax basis for the asset. Interest received in gold coins
would be taxed on a dollar value at the time of receipt and for
tax purposes would, therefore, be treated analogously to income
received in foreign currencies.
Although the bill does not explicitly provide for these
results, we believe they are an accurate reading of the implications of the basic policy choice contained in the bill. However,
the bill leaves unanswered questions about the appropriate tax
treatment of interest bearing claims on gold coins (such as bonds
or futures contracts payable in gold coins), the taxation of
dealers in these coins, the determination of the appropriate tax
bases for gold coins in estates and deferred gifts, or the tax
treatment of exchanges of American Eagles for other gold coins
or gold bullion.
The bill also sidesteps the question of tax treatment of
bullion for coin swaps with the Treasury. We believe the bill
should be explicit in denying tax exemptions for such swaps.
Bullion tendered to the Treasury in exchange for coins should be
considered for tax purposes as sold for dollars at the daily
price used for pricing the coins, and the resulting capital gain
or loss should enjoy no escape from taxation. If this is not
done, the bill would have the effect of retroactively exempting
from taxation all heretofore unrealized capital gains that have
accrued to gold bullion owners. Apart from the revenue losses
this would involve for the Treasury, we feel very strongly that
such an outcome would be undesirable from the point of view of
public policy.
The bill provides for purchasing American Eagles from the
Treasury by payment in dollars as well as through an exchange
of gold bullion and U. S. or foreign gold coins and medallions,
which in turn could be used for the production of additional
coins. On a technical level, we offer no objections to the

- 6 latter method (Section 405), if the provision is desired by the
Congress. We want to state, however, that we would wish to
pass on to the purchaser additional expenses, such as melting,
assaying, transportation, etc., depending on the specific form
of gold tendered in exchange for American Eagles. We would
plan to designate only a small number of Mint facilities to
handle such exchanges.
The Treasury, of course, regards the U. S. gold stock as
part of our national patrimony and of value as a precautionary
asset. However, the proper size of the gold stock is the
subject of a wide variety of views on which there was little
agreement on the part of the Gold Commission. The members agreed
that a "zero stock" is not the appropriate size, but that no
particular level for the gold stock is necessarily "right." The
Commission opposed auction sales which were intended to dispose
of the Treasury holdings over some stated period of years but
supported the view that the Treasury should retain the right to
conduct transactions in gold bullion at its discretion, provided
adequate levels are maintained for contingencies. It is in this
spirit that we accept the need to specify some limit on the total
amount of gold which shall be minted into coins.
The provision in the bill being considered by this Committee
calling for the striking of at least five hundred thousand troy
ounces of fine gold of coins in each of the weights authorized by
the bill raises another issue. While we appreciate the intent
of Congress to encourage the provision of adequate supplies during
the first year of issue (an objective which we share), it is felt
decisions concerning specific production rates should be left to
the discretion of the Treasury, to be made with due consideration
of the initial public demand and production constraints.
Turning to other aspects of the bill, we recognize the main
thrust behind proposals for the introduction of a U. S. Gold
Coin is to provide a form of money which people can hold and use
as an alternative to money expressed in dollars. Undoubtedly, the
experience with inflation in the United States and public dissatisfaction with the performance of fiat money as a reliable store
of value have contributed to the feeling of a need for such a
monetary asset. The government's monetary monopoly can be justified
only if it is exercised prudently. In a sense, such a new
form of money asset would provide a kind of thermometer to
signal monetary authorities concerning the collective public
judgment on how responsibly the government's monetary monopoly
is being used. The Treasury would not look unfavorably upon
a mechanism to perform this function.

- 7 o*
The proposal to mint gold coins is not a move toward adoption
Zfs ^ 9 ° x
standard. There would be no official price of goldT nor
would the Treasury assume any commitment to convert privately or
n f ^ C l a l i y h S i d d o l l a r s i n t ° gold bullion. There would be no con™ Ti°^ b e J w e e n U - s ' 9 ° l d reserves and monetary policy. There
could be, however, useful pressure on monetary discipline related
to the amount of U. S. held bullion used for minting coins if the
public were to treat these coins as an alternative medium of exchange in the event the government should ever reverse the current
policy of restoring price stability. Establishing the pressure
of such an indicator is, I believe, the intent and expectation
of the proponents of this legislation.
The main point to be made is that the public's appraisal
of the management and performance of the U. S. economy would
largely determine the demand for gold coins. The effect of
this demand on the U. S. gold stock is not predictable since
the Secretary of the Treasury could, under existing authority,
determine that the stock should be replenished through Treasury
purchases. Moreover, even though there is an upper limit
specified in the bill on the amount of United States gold to
be minted, there is no assurance public demand will be as great
as the supply allowed by the bill. It must be kept in mind that
our stock presently totals 264 million fine troy ounces, equivalent in value at current market prices to around 113 billion
dollars. By comparison, annual U. S. imports of gold coins
currently average about three million ounces.
In conclusion, the proposed legislation calling for tax
exempt U. S. Treasury minted gold bullion coins warrants our
qualified support. There remain some issues which need further
exploration in the tax area, and we would be pleased to provide
the Committee with our written suggestions for a number of
technical modifications in the bill. These hearings provide
an excellent forum for full consideration of the basic thrust
of the bill as well as the related technical issues, and the
Treasury would be pleased to work closely with the Committee
in resolving any remaining problems.

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

For Release Upon Delivery
Expected at 10:00 A.M.
April 15, 1983
Statement of the Honorable Manuel H. Johnson
Assistant Secretary of the Treasury for Economic Policy
Before the
Joint Economic Committee
Washington, D.C.
April 15, 1983
Economics of The Natural Gas Market
Mr. Chairman and members of the Committee;
It is a pleasure for me to be here today to discuss with you
the natural gas deregulation question.
Background
Public policy has had a major impact on the structure and
evolution of the natural gas industry. The Federal Power Commission
(FPC) was originally given the authority to regulate interstate
natural gas transportation and sales for resale in 1938. The
FPC was required at that time to review rates and charges to
determine whether they were "just and reasonable." The FPC did not
interpret this authority as requiring oversight of wellhead pricing.
In 1954, in response to a Supreme Court decision (The Phillips
Case), the Federal Power Commission assumed the authority to regulate the wellhead prices of natural gas which was sold across
state lines. This action divided the natural gas market into
two distinct structures: (1) an interstate market in which wellhead price ceilings were imposed, and (2) an intrastate market
in which the price was primarily determined by market forces.
The implication of this decision was becoming evident during
the early 1970's when the unregulated price of intrastate gas rose

R-3032

- 2 above the regulated price of interstate gas. As a result, gas producers tended to shift their output increasingly to the intrastate
market. However, it was not until the mid-1970's, the oil embargo,
and the dramatic increase in the price of oil, that the full
implications of this dual market structure became clear. Since
natural gas is a close substitute for oil in many uses, especially
when used as a fuel for boilers by industry and utilities, the
price of natural gas in the intrastate market rose substantially
as users shifted out of high-priced oil into natural gas. As
the price difference between the two markets increased, the
amount of new gas dedicated to the interstate market declined
and, by the mid-1970's, shortages developed.
In the late 1970*s, the President and the Congress realized
that the existing institutional arrangement regarding the interstate market was leading to increasingly serious shortages of
crisis proportions. Thus, the Natural Gas Policy Act (NGPA) was
enacted into law. This Act had two primary elements. First, it
imposed Federal price regulation on the intrastate market, thereby
integrating the interstate and the intrastate markets and, second
it provided for a scheduled phasing in of price increases in
order to avoid an abrupt increase in prices, yet achieve ultimate
decontrol of prices for certain categories of natural gas. This
legislation represented a compromise between groups who wanted
to alleviate the shortage in the interstate market by simply
expanding public jurisdiction over the total market and groups
who wished to solve the problem by removing price controls from
the interstate market.
Unfortunately, the NGPA has several flaws. Perhaps the most
serious flaw is the linkage of natural gas prices to a target
market price of oil based on a forecast for 1985. This provision
thwarted the intent of the legislation if the price of oil behaved
differently than forecast. And indeed that is exactly what has
happened.
Changing world energy conditions quickly made the plan
obsolete. When the legislation was passed in 1978, the price of
oil was about $15 per barrel. The increases in new gas ceilings
scheduled by the legislation were designed to bring the prices
of new gas close to the BTU-equivalent price of oil by the time
wellhead prices were to be completely decontrolled in 1985. The
dramatic increase in the price of oil during the Iranian crisis
in 1979, and further subsequent increases, made the prospect of
a smooth transition less likely, and in fact there has been considerable concern in the past few years that these developments
would result in a dramatic jump in the price of gas when it is
partially deregulated in 1985.
Since 1980, the United States and other world economies have
been in recession, although the U.S. economy is now on the road

- 3 toward recovery. The supply of oil has exceeded demand, which
has fallen from previous highs. As a result, crude oil prices
have declined in both nominal and real terms since the first
quarter of 1981. There is considerable agreement that a market
clearing price for natural gas upon decontrol would be much
lower than had been anticipated just two years ago. Thus, there
are now mixed opinions on whether or not and by how much, if
any, gas prices would increase when partial decontrol takes place.
Indeed, the weight of the evidence indicates that market clearing
prices for natural gas are now below current regulated prices in
many areas and that current prices would actually decline in real
terms if existing contracts between producers and pipelines are
renegotiated and oil prices remain at current levels in real terms.
The Department of Energy has estimated, for example, that
the Administration's natural gas proposal would achieve a nearly
4 percent decline in the real average wellhead price of natural
gas in its first year of operation. Indeed, this estimate assumes
oil prices that could easily prove to be too high. A more plausible oil price forecast utilized by DOE yields a real average
wellhead price decline of over 11 percent in the first year of
decontrol.
Market Characteristics
Unlike the oil market in which contracts are short-term and
whose analysis can be usefully approximated by a spot market,
the natural gas market is characterized by long-term contracts.
Many of these contracts include various types of escalator clauses
and requirements that pipelines pay for a high percentage of the
deliverable gas, whether or not that gas is actually taken in subsequent years. The necessity of these "take-or-pay" contract
clauses stems from several factors: pipelines are required to
contract for certain gas reserve levels in order to meet anticipated future demand, and their large fixed costs have encouraged
the pipelines to be highly concerned about the continuity of
supply. Producers are also interested in long-term contracts,
in order to protect their investment by ensuring that pipelines
cannot arbitrarily walk away from contracts to buy gas.
Gas prices have escalated sharply in recent years in part
because they had been held so far below market clearing levels,
but also in part because of the interaction of provisions of
both the NGPA and private contracts. Contract clauses that
stipulate wellhead prices as a function of government controlled
prices have caused NGPA price ceilings to function, in many
cases, as price floors. Thus, as those ceilings are gradually
lifted according to NGPA formulas — often at rates in excess of
the general rate of inflation -- wellhead gas prices are driven
upwards, regardless of the current state of demand or the current
trend in substitute oil prices.

- 4 Past controls may also have encouraged the writing of very
high percentage take-or-pay clauses. With" effective price ceilings resulting in a situation of excess demand for gas, pipelines
were precluded from competing on the basis of price and had to
resort entirely to offering producers higher levels of guaranteed
demand — that is, higher percentages in take-or-pay contracts -in order to obtain secure sources of gas supplies.
Pipelines and consumers are now bearing the burden of these
various contractual arrangements which, as events would have it,
have not turned out to be in their best interests. As gas prices
have escalated sharply, even in the face of declining demand, some
users are starting to switch from gas to oil. Because of high
take-or-pay contractual obligations, however, some pipelines have
found it necessary to take the most expensive gas supplies and
shut in the less expensive supplies that are available. They
must pay for the contracted percentages of both types of gas but
can only pass on directly the cost of gas actually taken. Obviously, most producers of this expensive gas are reluctant to let
the pipelines disregard this take-or-pay contractual obligation.
Regulation, therefore, has had the perverse effect of driving
gas prices higher at a time when falling oil prices and competition should be leading to lower gas prices.
In the oil market it was expected that once the price of
oil was deregulated, domestic market prices would adjust to the
world market price and, in fact, that is what happened. In contrast, in the natural gas market, even if complete deregulation
were implemented without renegotiation of contracts, many differ-0
ent prices could coexist because of contracts that were negotiated
at different points in time with different price provisions.
The incremental pricing provisions of the NGPA have also
been counterproductive. Designed to shield residential customers
from price increases by shifting the costs of expensive gas to
industrial users, these provisions have induced industrial users
— the natural gas consumers who may most easily substitute
alternative fuels for gas — to turn away from gas. As a result,
residential customers have been forced to bear a greater percentage
of the fixed costs of producing and delivering natural gas than
they would have otherwise.
Long-term contracts may, by themselves, lead to situations
where average gas prices differ from those prices being paid on
new contracts. The existence of price controls exaggerates
this effect by limiting the extent to which automatic contract
provisions may allow prices for gas being sold under existing
contracts to adjust to current market conditions. Also, where
the prices of some types of gas -- deep gas in the case of the
NGPA — are not controlled, the legislation causes producers to
search for and develop these high cost sources of supply, rather

D

than more easily obtainable supplies that, because of controls,
yield a lower return. Pipelines with access to significant supplies of cheap, price controlled gas, on the other hand, are
able to bid up the price of new, high-cost, uncontrolled gas to
levels significantly above the average price of gas. This is
because they are able to "roll in" or average the high-priced
gas with the cushion of controlled or old low-priced gas and
still market their product at competitive prices.
Implications of Regulation and Deregulation of Natural Gas
The primary consequence of the regulation of natural gas is
an inefficient use of economic resources. In prior years, when
the price of gas was kept below its opportunity value, i.e., its
free market price, there were two effects. First, present consumers of natural gas, who for historic or other accidental
reasons had access to comparatively cheap energy, tended to use
it in an economically inefficient manner. Other potential users,
because of the price controls, were unable to secure access to
the resource due to the lack of adequate supplies of controlled
prices. Second, regulation has resulted in less supplies than
would be optimal because of reduced profit opportunities. In
addition, under NGPA, regulation has resulted in a mix of supplies
that is more costly than necessary. For example, controls encouraged producers to search for deep gas which was completely deregulated under NGPA and to neglect other types of gas. Price
controls made it uneconomical in many instances to develop and
market regulated gas; thus, producers have concentrated on highcost gas development even though there may be plentiful reserves
of lower-cost gas to be developed.
Administration Proposal
Although the NGPA was well intended, it was flawed and has
produced distortions and inefficiencies. The perpetuation of
this situation does not serve the best interests of the nation
and must be corrected — by moving toward an environment where
market forces determine demand, supply and prices. Because weak
gas demand and price inflexibilities arising from the NGPA have
resulted in excess supplies of natural gas while oil prices are
declining, there may never be a better time to start this transition.
In the years before NGPA, wellhead controls only on gas destined for interstate commerce resulted in artificially low prices
and produced depressing effects on exploration and drilling
activity for the interstate market. This regulatory environment,
along with greater demand for gas due to OPEC oil price increases
and harsh winter weather, created a situation where the demand
for gas exceeded the supply that producers were willing to make
available. In effect, the controlled or administered price of
gas was below the equilibrium or market clearing price. The
resulting supply shortages led to passage of the VTGPA.

- 6 After the NGPA was enacted certain conditions changed dramatically, leading to the situation that exists today. Natural gas
prices have been rising as a result of scheduled price escalation
under the NGPA and various contractual arrangements between producers and pipelines in spite of the fact that the demand for
gas has been falling. This result is partly because of depressed
economic activity and partly because the price of oil has declined
in both nominal and real terms since 1981. In addition, as the
price of gas rises, the demand for gas is reduced. Thus, gas
price escalation has occurred in spite of declining demand, due
to the workings of the NGPA. At present, the price of natural
gas is most likely being held above its equilibrium or market
clearing price, a situation that is consistent with current excess
supply conditions. If there were excess demand, and we know
there is not, one would expect the price of gas to be below the
market clearing price, as it was prior to the enactment of NGPA.
Under the Administration's proposal, wellhead prices of
natural gas in any new or renegotiated contracts between producers and pipelines would be allowed to function under their own
terms. There are incentives for producers and pipelines to
renegotiate existing contracts to reflect current market conditions. For contracts that are not renegotiated, there would be a
gas cap determined by the average price for gas in newly negotiated
and renegotiated contracts. After January 1, 1985, but before
January 1, 1986, any contract not renegotiated could be broken
by either party. If a pipeline is a party to an abrogated contract, it would be obligated to facilitate transportation of
gas to another purchaser. Take or pay requirements in contracts
could immediately be reduced to 70 percent, releasing any.gas so
affected to be sold to another party. Escalator clauses in contracts that provide for automatic increases in the gas purchase
price of controlled gas would be limited so that prices could
not rise higher than the gas cap. This limitation would begin
four months after the bill is enacted and expire on January 1, 1986.
Consumers would be aided by a provision that would prohibit
pipelines from automatically passing through to consumers the
cost of gas purchased if the increase is greater than the rate of
inflation. Larger increases would have to be reviewed by the
Federal Energy Regulatory Commission in a public hearing.
The proposal also would establish a "contract carriage" provision whereby FERC could order an interstate pipeline to transport gas on behalf of any producer and purchaser. This provision
would alleviate some of the price inflexibility problems inherent
in the current institutional arrangements that rely on long-term
contracting.
Finally, the incremental pricing provision under current law
would be eliminated, as would the restrictions on gas use under
the Fuel Use Act of 1978.

- 7 If the Administration's proposal is enacted into law, controls are removed, and contracts are renegotiated or eventually
voided, I would expect that natural gas prices would decline to
the market clearing price. This assumes the continuation of relatively low oil prices, which I think is a reasonable assumption.
The fall in natural gas prices would reduce the rate of
inflation modestly and increase somewhat real economic growth and
employment. Also, lower natural gas prices, consistent with
lower costs of supply, would result in greater efficiency in the
use of energy throughout the economy. Total factor productivity
could increase somewhat, and the shift of users from oil to
lower priced gas would result in reduced oil imports. Secretary
Hodel has testified that oil imports could fall below current
projections by 100,000 to 200,000 barrels per day in the first
year following enactment of the proposal. At about $30 per
barrel, and taking the midpoint of this estimate, the savings in
our oil import bill could be as much as $1.5 billion per year.
As economic recovery takes hold, it is possible that natural
gas prices could rise in real terms as the demand for gas rises.
The magnitude would depend to some extent on what happens to oil
prices. If oil prices escalate little or not at all or even
decline over the next few years, the demand for gas would not
rise as rapidly as otherwise would be the case and natural gas
prices, therefore, would not increase significantly. In other
words, continued low oil prices would tend to temper natural gas
price increases by offering a price-competitive alternative to
gas and thereby hold down the demand for gas. It is important
to realize that even if economic recovery substantially increases
gas demand, and gas prices rise, this situation would also occur
under the continuation of the NGPA. Any reimposition of controls
in this situation would cause severe shortages.
Implications of Continued Controls
Under current law, i.e., NGPA, I think we can expect natural
gas price increases until and probably even after partial deregulation takes place in 1985. The price increases should not be
dramatic so long as oil prices do not escalate sharply. Underlying these gas price increases are certain provisions in existing
contracts, i.e., escalator clauses, that cause the price ceilings
under the NGPA to act as floors that rise with the rate of inflation.
After 1985 and partial deregulation under NGPA, one would
expect gas prices to continue rising although not very rapidly.
Pipelines would continue to pay high prices for decontrolled gas
but they would have continuing supplies of old gas, which would
remain regulated and cheap, that they could roll in with this
higher priced gas so that average gas prices remain competitive
with oil prices. This means, in effect, that NGPA price controls

- 8 on old gas after 1985 would continue to subsidize the uneconomic
purchase of more expensive decontrolled gas as is now and has been
the case since the enactment of NGPA. As supplies of old gas
are exhausted, however, there would be less of a cushion to offset this higher price gas.
Windfall Profits Tax
At a time of large budget deficits the imposition of a windfall profit tax (WPT) on decontrolled natural gas will be tempting.
Even though Treasury supports a smaller budget deficit, we cannot
support a WPT on decontrolled natural gas.
A WPT rests on the notion that, once a well is drilled, all
costs have been sunk, and the production rate and production
life of the well are fixed. Therefore, according to this notion,
any increase in price for the gas being produced from an existing
well is pure surplus or windfall and can be taxed without negative
supply implications. This, however, is not entirely accurate.
First, while there may be some windfall profits involved, it
is impossible to determine the precise amount of these profits.
Thus, a WPT would probably take more than the windfall gain, thus
providing a supply disincentive. At the other extreme, a WPT
probably would not take into account "windfall losses" incurred
by some producers — in some cases, the very same firms earning
windfall profits.
As production continues from a gas well over an extended
period of time, many things can happen to a well which may cause
it either to reduce or even cease its production of natural gas.
Water or sand intrusion are examples, as are changing reservoir
pressures. Nevertheless, there are a number of actions which can
be taken to increase recoverable reserves. These actions, of
course, require further capital expenditures. If the price of
gas is subject to a WPT the incentive to increase production
from decontrol is lessened.
In addition, if a natural gas WPT were to take a form
similar to the oil WPT in which even new supplies of gas on the
market would be subject to additional tax, the disincentive
supply effects would be even more apparent. It follows that the
WPT would lower gas supplies along several different production
margins, implying higher energy imports and higher gas prices
for consumers. The benefits of decontrol on supply would be
greatly mitigated.
Another reason for not supporting a WPT is that the revenues
may not be significant enough under currently accepted oil price
assumptions to justify the expense needed to administer the tax.
For example, administering the tax would be complicated by the

- 9 large number of contracts between gas producers, processors and
buyers. Further regulations would be needed to define, identify
and collect the revenue obligations. This, too, would be counter
to an important objective of decontrol, i.e., reducing government
regulation and market intervention.
Effect on Financial Institutions
Finally, I would like to comment on the effect of gas deregulation on financial institutions. The natural gas decontrol
bill should have little, if any, effect upon the banking sector.
The only comment we have heard from the banking community concerns the bill's override of existent contract provisions, such
as the maximum level on take-or-pay percentages. Companies that
specialize in producing deep and other categories of high-priced
gas may experience declining gas revenues due to decontrol. As
a consequence, such producers could have trouble servicing their
loans. However, those incidents would cause significant problems
for individual banks only if such banks had concentrations of
loans to those specialized gas producers in their portfolios. We
anticipate that if such cases exist, they will be rare. We note,
too, that the expected deterioration of income of such producers
is already occurring. Pipelines have stopped contracting for new
supplies at high prices, have negotiated down and walked away
from high-priced contracts, and have even reduced take-or-pay
purchases across the board on all contracts.
Mr. Chairman, this concludes my prepared statement. I would
be happy to answer any questions that you or the Committee may
have.

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

DEPARTMENT OF THE TREASURY
STATEMENT OF THE HONORABLE
ANGELA M. BUCHANAN
TREASURER OF THE UNITED STATES
BEFORE THE
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
APRIL 15, 1983

Mr. Chairman and Members of the Committee, I am pleased to appear
before you to present the views of the Department of the Treasury on
S.269, a bill which provides for the disposal of silver from the
National Defense Stockpile through the issuance of silver coins. With
me today is Kenneth Gubin, the Chief Counsel for the Bureau of the
Mint.

If enacted, this bill provides for the issuance of silver coins
in two separate series, utilizing 105 million troy ounces of silver
from the National Defense Stockpile over a three-year period,
commencing in 1984. One coin series would have a face value of one
dollar and bear the design of the old "Morgan" silver dollar which was
minted between the years 1878 to 1921. These silver dollars would be
sold by the Secretary of the Treasury directly to the public and to
numismatic coin dealers and retailers for resale to the public. The
second coin series would bear a Liberty design and be sold in bulk on
a negotiated basis by the Secretary to primary dealers in bullion
coins.
R-3033

- 2 -

The use of a silver coin program, as a method to gradually draw
down the GSA stockpile of silver, may have merit; but the success of
any coinage program is contingent upon public demand and the ability
of the new program to compete with other Bureau of the Mint programs
as well as public sector programs.

The bill would certainly meet the requirements of Section 6 of
the Strategic and Critical Materials Stockpiling Act, as amended,
which requires that stockpiled materials be dispensed in such a manner
and form that would:
—

permit no undue disruption of the usual markets of producers,
processors, and consumers of such materials;

—

protect the United States against avoidable loss;

—

ensure disposal is used for domestic consumption; and

—

be affordable to most American families.

The Department of the Treasury recognizes that there are valid
concerns that prompted the introduction of this bill; however, we have
reservations concerning the magnitude of the silver coin legislation
and its impact on current Mint programs.

In order to meet the intent

of S.269 and its genesis, the Omnibus Budget Reconciliation Act of
1981, which authorized the disposal of 105.1 million ounces of silver
over a three-year period, the Mint would have to sell, on average, 35
million ounces of silver coins each year in addition to meeting its
other mandated requirements.

This is a serious undertaking that

- 3 -

requires careful consideration of a number of elements not the least
of which are:

market demand; pricing factors; the bullion market

trends; timing; impact from coins already issued or soon to be issued
by the U.S. Government; as well as competition from other nations and
the private sector.

The Department of Treasury has several major concerns with S.269
as currently drafted.

Competition with Existing Treasury Coinage Programs
The legislation specifies that the two silver coins will be sold
during a three-year period commencing in 1984.

This implementation

date would place the "Morgan" silver dollar in direct competition with
the silver commemorative coins authorized by the Olympic Commemorative
Coin Act of 1982.

Since the "Morgan" silver dollar would not carry

the mandated surcharge associated with the Olympic Coin Program, the
lower price for the "Morgan" dollar could undermine our market for
silver Olympic Coins.

Therefore, the Department of Treasury

recommends that, if enacted, this legislation designate 1985 as the
year of implementation.

- 4 -

Size of the Coin Program
The proposed legislation sets aside 15 million ounces of silver
for the "Morgan" silver dollar, an amount which will provide
approximately 19.5 million silver dollars.

If an extensive marketing

effort is undertaken, our experience indicates that the sale of this
number of coins may be feasible.

However, the range of 12 to 16

million coins is far more realistic.
A similar program in which the Bureau of the Mint is presently
involved —

the George Washington Commemorative Half-Dollar —

realized sales of 6.2 million coins in the first year.

has

However, only

ten million silver half-dollars are authorized to be minted, and our
sales expectations for the remaining coins are that they will move at
a much slower rate than we have experienced so far.

Having three

different dates appear on the "Morgan" silver dollars will help to
alleviate a fall off in sales over the three-year period, but we would
expect that the second year sales will not be as successful as the
first.

As for the 90 million ounces designated for the "Liberty" bullion
coin, this is a major undertaking that is unprecedented in Mint
history.

There is no comparable coin on the market, therefore, demand

is difficult to predict without careful research.

In order to

establish a level of demand, it is important that research be done by
an independent marketing organization to determine if a demand exists
in this country for this product, what the size of the demand is, and
what an acceptable price would be.

The Department recommends that

such a study be undertaken prior to implementing this part of the
legislation.

- 5 -

Pricing
It is the opinion of the Department that the pricing provisions
in the bill are unnecessarily restrictive and that the Secretary of
the Treasury should determine the price. If, for instance, a
competing coin is on the market when the coins proposed in this
legislation are minted, the pricing structure proposed may thwart the
Department's efforts to successfully market these products. This is
especially the case with the "Liberty" bullion coin.

If this legislation were to become law, it may be necessary to
undertake a major marketing effort to inform the public, as well as
create a secondary market. This effort would be extremely expensive
and the 10% restriction imposed in Section 2(4)(b)(1) may exclude it
from consideration. It should be noted that the fact that an
expensive marketing plan would be necessary to succeed may in itself
cause the program to fail. Bullion coins are generally sold at a very
small premium. In fact, dealers often disrupt the market by simply
dropping their premium by a fraction of a percentage point. In order
for the Department to cover all its costs, including marketing, it may
be necessary to price the coin out of the market. It is for this
reason, as well as those described above, that the Department highly
recommends a marketing study be undertaken.

- 6 -

In addition to the major concerns expressed above, the Department
has a number of suggested technical modifications that we would like
to submit to the Committee for their review.

In conclusion, the Department feels that the issuance of silver
coins is one means of disposing of silver from the National Defense
Stockpile which deserves additional attention.

We strongly recommend

that a study be undertaken to determine the demand, the price, and the
general feasibility of the proposal.

Again, thank you for the opportunity to testify on this bill.
This concludes my formal remarks; I would be pleased to answer any
questions you may have.

**********

TREASURY NEWS

Department of the Treasury • Washington, D.c. • Telephon
FOR IMMEDIATE RELEASE April 14,"1983
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $7,751 million of 52-week bills to be issued April 21, 1983,
and to mature
April 19, 1984,
were accepted today. The details are
as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Investment Rate
Price Discount Rate (Equivalent Coupon-issue Yield)
High
Low
Average -

91.639
91.6.23
91.633

8.,269%
8.,285%
8.,275%

8.97%
8.99%
8.98%

Tenders at the low price were allotted 6%.
TENDERS! RECEIVED AND ACCEPTED
(In Thousands)

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

Accepted

Received

Location
$

172,370
16,628,550
5,690
32,285
91,805
62,930
891,895
74,390
19,175
29,850
10,725
1,563,275
94,910

$

32,370
7,161,350
5,690
13,285
22,805
19,930
239,795
45,690
13,175
22,150
4,725
75,275
94,910

$19,677,850

$7,751,150

$18,024,425
503,425
$18,527,850

$6,097,725
503,425
$6,601,150

1,100,000

1,100,000

50,000

50,000

S19,677,850

$7,751,150

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

R-3024

TREASURY NEWS

epartment of the Treasury • Washington, D.c. • Telephone 566-204'

FOR IMMEDIATE RELEASE
April 15, 1983

Contact:

Charley Powers
(202) 566-2041

MEETING OF U.S./JAPANESE CUSTOMS LIAISON COMMITTEE
The third meeting of the U.S./Japanese Customs Liaison Committee
was held in Tokyo from April 11 - April 13, 1983. The U.S.- Delegation
was headed by John M. Walker, Jr., Assistant Secretary of the
Treasury, and the Japanese side was headed by Mr. Naoyoshi Matsuo,
Director-General of the Customs Tariff Bureau.
The U.S. and Japanese Delegations exchanged views on a broad
range of subjects, including the organization and management of their
respective customs services, improvement in import entry^ procedures,
a system to resolve questions or complaints from the trade community
and matters being considered by the Customs Cooperation Council. The
Japanese delegation took the occasion of the meeting to announce a
new system of binding classifications, implemented on April 1,
1983, which, as Mr. Walker said, "will facilitate trade into Japan by
allowing importers to know in advance the tariff consequences they
will be facing upon importing goods. And, it will provide for
uniform treatment of goods by Japanese Customs, regardless of Japanese
port of entry". During the meeting, Mr. Walker and Mr. Matsuo
agreed to set up study groups at the working level to exchange
information on current operation programs of the respective Customs
Service"; of the two countries. In addition, they agreed to form a
working group to study the desirability of entering into a permanent
bilateral Customs Agreement.
R-3035

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

STATEMENT BY
THE HONORABLE
R,T. MCNAMAR, JR.
THE DEPUTY SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON INTERNATIONAL
DEVELOPMENT INSTITUTIONS AND FINANCE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
APRIL 18, 1983
Mr. Chairman, Members of the Committee, I appreciate
the opportunity to come before you to explain the
Administration's proposals to replenish the resources of
the Inter-American Development Bank, the Asian Development
Bank and the African Development Fund.
These proposals are based on the first three negotiations
conducted by this Administration to replenish multilateral
development bank resources and reflect in large measure the
goals set in our review of these programs which was completed
about a year ago.
Before describing the main features of these negotiations, I would like to reflect on a point which sometimes
receives scant attention: after careful consideration, this
Administration elected to continue a strong U.S. leadership
role in the banks. Differences over choices in policy
emphasis, funding levels or tactical approach in negotiations
should not obscure the broad, bipartisan support that these
programs have had over the years. In that spirit, I hope for
your support and urge early action to enact the proposed
legislation.

R-3036

-2The Administration approached these replenishment
negotiations with several objectives in mind. First, we
felt strongly the need to balance our stringent budgetary
situation against the value of these programs to U.S.
interests. While we did not expect broad support for our
initial negotiating positions, I believe we have concluded
agreements which provide for substantial reductions in
budgetary requirements but still preserve — indeed,
strengthen — the contribution of these programs to our
overall foreign policy objectives in Africa, the Western
Hemisphere and Asia. These agreements will call for
appropriation of $323.7 million annually, while the
preceding agreements for the same institutions required
annual appropriations of $399.9 million over a comparable
period. The reduction of $76.2 million, or 19.1 percent,
fulfills our obligation to the American taxpayer to ensure
that continuing federal programs do not spend more than is
necessary to achieve their objectives.
Second, these agreements strengthen the financial
policies of these institutions. In each of these programs,
there are clear, definite improvements in the management
of financial resources. The heightened caution in capital
markets and the stringent budgetary situation in almost all
member countries compelled attention to improved resource
utilization and more precisely focused lending programs.
Third, the banks are adopting more systematic policies
to encourage improved economic policies in borrowing countries.
I hope that economic policymakers in borrowing governments
will heed their own experience in managing their economies
through this difficult period and the forceful persuasion of
the banks to adopt policies contributing toward more rational,
productive allocation of resources.
Fourth, these replenishment agreements continue international support for greater integration of the developing
countries into the international trading and financial system.
The lending programs based on these replenishments will provide
a significant portion of the financial resources required
to allow the developing countries — particularly the poorest
countries — to gain a fair part of the benefit from the global
economic recovery in the coming years — directly by financing
economically sound projects and indirectly by expanding opportunities for trade and investment in borrowing countries.
Finally, I would like to address an important objective
in these negotiations which stems directly from an initiative
of this Committee. In 1981, the Congress enacted a requirement which called for seeking specific guidelines in each
institution to guide a portion of the lending program to benefit
needy people.

-3The Asian Development Bank is taking steps to guide
more precisely its lending operation to benefit directly
the poorest groups. The ADB has cited "poverty reduction"
as the key element of its development approach. The ADB
also estimates that 60 percent of its lending activities
provided significant benefits to the poor. A central
objective emphasized by many donor countries, including
the United States, during the Asian Development Fund
negotiations was the need to direct ADF resources to the
neediest groups in borrowing countries. As a step toward
that objective, the ADB has initiated and expanded its
project benefit monitoring and evaluation effort, with
strong support from the United States. This program will
provide a basis for measuring the actual impact of ADB
loans on the poorest groups in borrowing countries and for
assisting ADB staff to design future projects.
U.S. representatives raised this issue in each of
the negotiations. The results have not been completely
satisfactory. In the first of the negotiations — for
the African Development Fund — I should frankly explain
that our proposal was greeted with bemusement. The
widespread poverty in Africa and the fact that the AFDF
program provides 80 percent of its loans to countries with
per capita GNPs under $400 led others to suggest that our
proposal called for the equivalent of demonstrating that
circles are round. While other donor countries agreed with
the desirability of focusing AFDF lending on poorer groups
within borrowing countries, we were unable to obtain a
consensus that specific guidelines were a priority at this
t ime.
The Inter-American Development Bank established
guidelines in 1978 to provide 50 percent of the lending
program to benefit directly the poorest groups in borrowing countries. As a result, the average during the 19791981 period was 54 percent. Other donors joined us in
urging that the 50 percent guideline be retained, and we
were able to achieve this objective in the IDB.
African Development Fund
Before discussing the two recent replenishment negotiations, I want to stress the serious situation facing
the African Development Fund. This is the second year of
the $1.1 billion replenishment. Other donors provided
first installments for the current replenishment totalling
$200 million last year to finance the lending program.
Under the replenishment agreement, they need not provide
additional funds until the United States contributes its
first $50 million installment.
The Continuing Resolution enacted in December would
allow the first $50 million contribution in fiscal year
1983, if

-4Further delay would impair economic growth in the
borrowing countries at a critical time. About $170 million in project loans have been approved but are awaiting
financing. The projects that have been and will be delayed
would normally come into production in three or four years.
The delay is denying the borrowing countries the benefit of
the output of projects that would otherwise come on stream
in the middle of a strong global economic recovery, and is
therefore particularly unfortunate.
The Senate passed this legislation last year, and the
debate on the House floor last December demonstrated broad
bipartisan support for this element of the U.S. foreign
assistance program.
I hope that the Committee will be able to support and
obtain passage for this especially critical $150 million
authorization bill as soon as possible.
Inter-American Development Bank
The proposed replenishment for the Inter-American
Development Bank would provide an increase in capital of
$14.8 billion for a total capitalization of $34.4 billion,
if members subscribe to all authorized capital shares. The
replenishment also would provide an additional $703 million
for the concessional Fund for Special Operations (FSO),
bringing total contributions to this program since its
inception in 1960 to almost $8.4 billion.
These resource increases, together with several improvements in financial policies, are designed to provide financial
support for a $13.0 billion lending program for the 1983-86
period. Using the 1982 lending program as a baseline, the
proposed replenishment would permit an overall annual increase
of 13.8 percent in IDB lending during the four year period, a
slight decline from the 15 percent annual increase during the
previous replenishment.
The United States would retain its traditional share of
these proposed resource replenishments: 34.5 percent of the
capital increase and about 41 percent of the FSO replenishment.
The total U.S. subscription to the four year capital increase
would be $5.2 billion, including $232 million paid-in. The
total U.S. contribution to the FSO during this period would
be $290 million.
Annual appropriation requirements beginning in fiscal
year 1984 would be $130.5 million — $58 million for paid-in
capital and $72.5 million for the FSO. In addition, authorization would have to be provided under program limitations
in appropriations acts for $1,231 billion annually to subscribe
to callable capital.

- 5 The replenishment negotiations included agreement on
two points which I should mention and which reflect the
growing maturity and financial strength of the institution
and its borrowers. First, a revised interpretation of the
limits on commitment authority will make available an additional $2.5 billion for the lending program without requiring
additional resources from member countries.
Second, this replenishment initiates an Intermediate
Financing Facility (IFF) designed to diminish the interest
cost of hard window loans by up to five percentage points.
IFF supported loans will be for those countries whose level
of economic development is too high to justify continued
concessional lending but not high enough to borrow entirely
on the terms of ordinary capital loans. Since the IFF will
be funded by FSO net income and general reserves, no new
resources are required to finance the IFF. Voting power
will be based on FSO contributions. The United States will
therefore have a veto over IFF operations, while not being
required to put up additional resources.
Having recited the financial bare bones of the IDB
replenishment, I would like to stress two important points:
-- this agreement is vital to U.S.
interests in Latin America, and
— it substantially strengthens the
effectiveness of the IDB, as an
institution.
Within the last year, we have seen developments in
Latin America and the Caribbean grab the center stage of
our foreign policy.
— A year ago, a long simmering
territorial dispute between
Argentina and the United Kingdom
exploded into war.
-- The republics of Central America
and the Caribbean have been a
constant concern.
— The economic and financial prospects
for some of our largest neighbors in
the region are receiving wide attention.
Sound, strong economic growth in the region is part and
parcel of favorable solutions to problems facing these nations.
The IDB and its lending program are important instruments to
achieve such growth.

-6Argentina has received more long-term economic assistance from the IDB — $2.6 billion since 1960 — than from
any other single source. In all candor, I can not vouch
that the IDB has historically pressed Argentina to pursue
sound economic policies in connection with development
projects. But I can assure you that the U.S. Executive
Director in the IDB and the Treasury Department are working
hard to strengthen IDB policy conditionality in its lending
program. When fully implemented, stronger conditionality
should contribute to better performance in the industrial
sector — the beneficiary of a substantial portion of IDB
lending to Argentina.
The Caribbean Basin countries will receive increasing
support from the IDB in this replenishment. Since the IDB
was founded in 1960, the eight IDB member countries in the
Caribbean region that are of special concern to the United
States have received $791.3 million from the hard window
and $2.5 billion from the soft window, or 6.2 percent and
29.5 percent, respectively, of total lending from these two
sources.
While it is not possible to identify the precise amount
which will be provided to countries in the Caribbean Basin,
we can safely presume that the average annual growth in
lending to this group of countries will exceed the overall
13.8 percent planned for the IDB lending program.
Under the proposed replenishment, for example, FSO
resources will be provided only to Group D countries — the
poorest countries and, with the exception of Bolivia and
Ecuador, all in the Caribbean Basin. The proportion of hard
resources for Caribbean Basin countries should expand substantially.
For the larger economies of Latin America — Mexico,
Brazil, Argentina and Venezuela — the IDB is not expected
to be a major source of funds. The private capital markets
will remain the primary sources of external financing.
The IDB, however, can play a critical role in strengthening sectoral policies and in catalyzing financial resources
for projects which can serve to integrate these countries
into the international trading system more fully.
These considerations lead me to the second major point
which I want to stress: this Administration has worked hard
to strengthen IDB policies in the financial area and in project preparation and implementation.

- 7 Many IDB borrowers have traditionally operated their
public-owned utilities with pricing policies which do not
provide for fully covering operating and capital costs.
The net result has been that governments have had to provide
subsidies in the form of budgetary transfers or to take over
outstanding loans obligations to prevent decapitalization or
illiquidity. Since the IDB has been a significant lender to
these utilities, the Bank's permissive approach to the financial soundness of utility tariff structures has not contributed
the positive influence it might otherwise have had in this
sector.
Last year, the U.S. Executive Director negotiated a major
change in the Bank's policy in this area. In the future,
the IDB will require borrowers to maintain a tariff structure
adequate to cover operational costs and to make some contribution toward capital costs.
In a similar fashion, the Administration has negotiated
a substantial strengthening of IDB on-lending interest rate
policies. In the future, intermediate credit institutions
that borrow from the IDB will have to on-lend the funds at
positive real interest rates, as a general rule. Exceptions
will be allowed only temporarily in the context of a program
that is demonstrating progress toward this objective.
Agreement on this new IDB policy on interest rates was an
integral U.S. objective in the replenishment negotiations.
IDB financial structure and policies were also strengthened in these negotiations. For the first time, all IDB
members will subscribe to paid-in capital and contribute to
the FSO in convertible currency. In the previous replenishment,
borrowing countries provided only two-thirds of their paid-in
capital in convertible currencies. FSO contributions from the
larger countries were 75 percent in convertible currencies,
but the smaller countries provided only national currencies.
The replenishment agreement calls for paying in 4.5
percent of capital subscriptions, compared to 7.5 percent
in the previous replenishment. Based on the strong financial
standing of the institution in capital markets, the United
States originally proposed no paid-in capital. The outcome
represents a compromise with the views of other members and
reflects some Congressional concern with elimination of
paid-in capital.
Finally, the relatively high per capita GNP in several
of the countries which have been borrowing from the FSO
indicated the need to review the eligibility of borrowers for
these highly concessional resources. This replenishment substantially tightens maturation policies. Such relatively high
income countries as Chile, Colombia and Peru will borrow from
only the hard window in the future, while others, such as the
Bahamas, Uruguay and Barbados, will borrow hard window and IFF
resources.

- 8 In summary, the IDB replenishment reflects several solid
achievements in our efforts to strengthen the institution.
More importantly, the institution remains a vital part of
our relationship with our neighbors in the Western Hemisphere.
Asian Development Bank
The proposed capital increase for the Asian Development
Bank (ADB) would provide about $8.1 billion to bring total
capitalization to about $15.8 billion in fiscal year 1988.
The replenishment for the Asian Development Fund (ADF) would
provide $3.2 billion to support its concessional lending program from 1983 to 1986 and would raise the total resources of
the ADF since its inception in 1973 to $6.7 billion.
These resources will support lending programs of about
$12.4 billion from 1983 through 1987. The annual growth rate
of the total lending program during this period is expected
to be about 15 percent compared to 17 percent during the
previous replenishment.
The U.S. share of the proposed capital increase would
continue to be 16.3 percent, remaining at parity with Japan.
By contrast, the U.S. share of the ADF replenishment would
decline to 16.2 percent, compared to 20.7 percent in the
previous replenishment, while Japan's share will increase
to 37.8 percent from 36.8 percent. The total U.S. subscription to the five year capital increase would be about $1.3
billion, ^ith $66.1 million paid-in. The total U.S. contribution to the ADF replenishment would be $520 million.
Annual appropriation requirements for these replenishments beginning in fiscal year 1984 are $13.2 million for
paid-in capital and $130 million for the ADF. In addition,
authority to subscribe to $251.4 million under progra
m limitations will be required annually for five years in
appropriations acts.
These financial provisions are the result of the replenishment negotiations, but do not, in themselves, reflect the
critical reasons which argue for U.S. participation. Again,
as in the IDB, we see the ADB providing solid contributions
to economic progress in a region of strategic importance to
U.S. foreign policy.
Major ADB borrowers -- Korea, the Philippines and Thailand
— have been reliable partners in security relationships with
the United States for many years. Another major borrower —
Indonesia -- has made remarkable political and economic progress in recent years with solid, growing support from the
ADB.

-9Economic progress in the region since the ADB was
established in 1966 — not a pure coincidence — has been
spectacular. Hong Kong, Korea, Singapore and Taiwan have
been justly celebrated as the "Gang of Four" economic success stories. Of even more recent vintage — and therefore
less frequently noticed — are the significant achievements
in Sri Lanka and Malaysia.
The ADB role in these positive developments, while not
especially large in financial terms, has nonetheless been
significant. ADB supported projects have funded some key
elements of the development programs of these countries.
More recently, the ADB has been at the forefront of
innovative development techniques. Within the last year,
the ADB has put together a unit to syndicate appropriate
project financing among commercial banks. Such cofinancing has increased from a 1970-to-1980 total of $38 million
to $87 million in 1981 and about $261 million in 1982. In
this context, I might mention — with some admiration -that none of the ADB borrowers has yet encountered major
financing difficulties despite the severity of the global
recession — a tribute to the generally sound economic
policies being pursued in the region with the support of
the ADB.
To further its role as a catalyst of private capital
flows, the ADB also has recently established a small $10
million equity fund to invest in promising private companies
in borrowing countries.
The proposed replenishment will provide resources to
support the activities of this sound, well-run institution
for the next several years. The replenishment also would
achieve several specific U.S. objectives.
The ADB lending program will continue to focus on the
medium and small member countries of the reg.ion:
-- More creditworthy countries, such as Thailand,
Indonesia and the Philippines, no longer borrow
concessional ADF resources, so that soft lending
can concentrate on the poorer countries: Pakistan,
Sri Lanka, Bangladesh, Nepal and Burma.
The strategically located Pacific islands, such
as Tonga, Kiribati and Vanuatu, which in some cases
are too small to justify organizing World Bank or
bilateral lending programs, are receiving special
attention from the ADB through regular technical
assistance and financing.

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