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LIBRARY
B^OM 5030
OCT 1 6 1985
TREASURY pEPAK(MENT

Treas.
HJ
10
•A13P4
v. 264

U.S. Dept. of the Treasury
T; PRESS RELEASES

LIBRARY
ROOM 5030
OCT 1 6 1985
TREASON UtrAHIMENT

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
Statement by
Secretary of the Treasury James A. Baker, III
at the Press Briefing on the FY-1986 Budget
February 4, 1985

I will outline our budget plans in relation to our overall
economic program. My remarks will serve as an introduction.
Bill Niskanen and Dave Stockman will provide more detailed
discussion of the economic forecast and the budget -- making
remarks of their own, and responding to your questions.
These past four years have been marked by truly dramatic
improvement in the performance of the U. S. economy. Four years
ago, it was the increasingly held belief that we had lost the
ability to control our economic destiny — that inflation was out
of control, that dwindling availability of natural resources
would put a cap on growth; and, most worrisome of all, we were
told that we had lost the innovative spirit that had propelled
this economy to world leadership.
Now, confidence in our ability to meet the challenges of the
future is being restored by the implementation of an economic
program designed specifically to:
— bring ihflation under control,
free markets from the burden of unnecessary government
interference,
restore incentives for productivity and growth,
and, thereby, increase opportunity for all.
That program has been remarkably successful by almost every
measure of economic performance.
Real growth for 1984 was the highest since 1951.
During the first two years of the current expansion, at
a 6.0 percent annual rate, real growth has been the
strongest for any expansion since the economy pulled out
of the strike-depressed recession trough of late-1949
into the Korean War boom.

Growth of real business capital spending during thisexpansion has far outpaced gains during any previous
postwar recovery.
— Our economy has shown itself to be a remarkable jobcreating machine. Spurred by formation of new business
and by technological innovation, more than 7.3 million
jobs have been created during this recovery and
expansion.
— And even as the economy has shown this remarkable
growth, inflation has stayed under control. For each of
the past three years, it has not exceeded 4%. Last
year, as measured by the GNP deflator, it was the lowest
since 1967. And the trends of wages, oil prices, and
world raw material prices all remain favorable.
I have made a promise to myself that I know I may not be
able to keep. But I shall try. While I will of course
contribute to the development of economic forecasts that we use
for purposes of planning and analysis, I shall try to resist the
temptation to offer specific, detailed, numerical economic
forecasts of my own.
The economic projections underlying the budget assume
continued real economic; growth and a steady decline in
unemployment, inflation, and interest rates.
Consistent with my promise to myself, let me say only this
about the overall economic outlook. Prospects are excellent for
sustained economic growth without inflation — provided that we
act promptly and responsibly to continue what we have begun. And
by "we" I should emphasize that I mean to include both Houses of
the Congress.
There is still much unfinished business.
We must not rest with the tax rate reduction we enacted in
1981. That simply adjusted for the hyper-inflation that the
economy had been experiencing before. Now we must go on, as the
President has directed, to overhaul the whole tax system — to
increase fairness, simplicity, and economic growth. This element
of our program is, as the President has said, of equal priority
with spending control.
The printed budget document includes a number of revenuerelated measures — most of which have been submitted before.
These range from tuition tax credits to enterprize zone
incentives to technical provisions related to certain trust
funds. The budget does not include the proposals for
comprehensive overhaul of the tax system — for, as you know,
those proposals, made public on November 27, remain under
review. But we believe that — with constructive effort by all

parties — a comprehensive restructuring of the tax system could
be enacted this year. And I will be having a good deal more to
say about this in other contexts.
The focus of today's discussion is principally upon our
printed budget, however.
Immediate steps must be taken to narrow the deficit.
Just as important as closing the deficit is the manner by
which it is closed. It would be wrong to go back to our old ways
of pushing up taxes, either legislatively or by bracket creep in
a nonindexed system. In our view, the tax reductions of the past
several years have been largely responsible for the turnaround in
economic performance. This means that deficit reduction must be
accomplished from the spending side.
The President's budget proposes a combination of freezes,
reforms, user fees, program cuts and terminations that will
achieve savings for fiscal year 1986 of a little more than $50
billion. This is calculated from the "baseline" path that
spending would take if we did nothing. These reductions are
sufficient to hold total spending on government programs — that
is, everything but debt service — no higher in 1986 than in
1985. It is an ambitious target, but is achievable, without
damaging the social safety net, or our continued defense
rebuilding, or any essential government function.
Achievement of our target of $50 billion in reductions would
accomplish two things. The deficit in 1986 would be about $40
billion less than in 1985. And, even more important, the actions
taken this year will have an amplified effect in later years,
resulting in annual savings of more than $100 billion by 1988.
This will set the deficit on a declining path — both in absolute
dollars and, even more significantly, as a share of GNP. Under
our economic assumptions, the deficit would drop from over 5 1/2
percent of GNP this year to less than 3 percent by 1988 — on
down to less than 1 1/2 percent by 1990. The exact percentages
are not the issue; the important thing is the trend.
The deficit has been accommodated thus far without damaae to
the expansion, and interest rates have declined considerably".
But "real" interest rates remain too high. We need monetary
policies that will allow us to continue strong economic growth
without inflation. Such policies will help get interest rates
down further. At the same time, a firm, convincing policy of
deficit reduction will also help keep us on a course to still
lower interest rates — while insuring that the Government, in
financing the deficit, does not absorb such a large share of the
nation's savings as to impair private productive investment.
Our budget proposal represents a "freeze" in total program
spending. That is something that is easy for most to understand
— and to most, I think, it makes sense. There will, we know, be

disagreements about what we propose specifically for one program
or another. But we believe our specific proposals are thoroughly
defensible on the merits. And we look forward to working with
the Congress to develop a comprehensive package that will bring
the budget under control — by freezing overall program spending
for fiscal year 1986.
With good will, we believe this can be done. We are sure it
is what the American people want to be done.

OUTLAYS AND RECEIPTS AS
PERCENT OF GNP, 1964-1990

Percent of GNP-

-Percent of GNP

25
Average Outlays
1964-1979

20
**

Receipts

Average Receipts
1964-1979
(18.8)

0<i

l I l i
I ' l l
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
Fiscal Years
Projected

' I I I I I I I I I I L

1964 1966 1968

t£>

Note: Outlays include off budget federal entities.
January 25. 1985 A M «

FREASURY NEWS

204

.partment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE

February 4, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,016 million of 13-week bills and for $7,020 million
of 26-week bills, both to be issued on February 7, 1985, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing May 9, 1985
Discount Investment
Rate 1/
Rate

Price

26-week bills
maturing August 8, 1985
Discount Investment
Price
Rate
Rate 1/

8.15%
8.16%
8.16%

97.940
97.937
97.937

8.30%
8.30%
8.30%

8.44%
8.45%
8.45%

8.78%
8.78%
8.78%

95.804
95.804
95.804

Tenders at the high discount rate for the 13-week bills were allotted 45%.
Tenders at the high discount rate for the 26-week bills were allotted 64%.

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

Accepted

$
417,980
24,434,260
40,295
135,255
139,605
74,270
1,395,170
45,515
37,060
63,830
40,605
1,560,230
346,190

$ 140,280
5,995,625
40,295
43,305
58,630
53,655
108,150
45,515
12,060
61,130
30,605
80,230
346,190

'$
397,320
: 27,870,320
19,215
126,730
156,275
:
62,310
1,288,590
44,800
40,340
92,385
30,025
1,685,225
375,125

$
35,320
6,152,990
19,215
31,730
47,875
40,310
109,090
24,800
15,340
92,385
20,025
56,225
375,125

$28,730,265

$7,015,670

$32,188,660

$7,020,430

Type
Competitive
$25,976,675
Noncompetitive
1,211,265
Subtotal, Public $27,187,940

$4,462,080
1,211,265
$5,673,345

$29,066,290
1,030,870
$30,097,160

$4,098,060
1,030,870
$5,128,930

1,412,125

1,212,125

1,350,000

1,150,000

130,200

741,500

$28,730,265

$7,015,670

$32,188,660

$7,020,430

Federal Reserve
Foreign Official
Institutions
TOTALS

\J Equivalent coupon-issue yield.

B-l

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

FOR RELEASE AT 4:00 P.M.

February 5, 1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $14,000 million, to be issued February 14, 1985.
This
offering will provide about $500
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount of
$13,510 million, including $1,060 million currently held by Federal Reserve Banks as agents for foreign and international monetary
authorities and $2,534 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 $7,000
million, representing an additional amount of bills dated
May 17, 1984,
and to mature May 16, 1985
(CUSIP
No. 912794 GL 2), currently outstanding in the amount of $15,038
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $7,000 million, to be dated
February 14, 1985,
and to mature August 15, 1985
(CUSIP
No. 912794 HV 9).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing February 14, 1985.
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.
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.

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20239, prior to 1:00 p.m., Eastern Standard time, Monday,
February 11, 1985.
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 stat« 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. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
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

- 3 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 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 $1,000,000
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 February 14, 1985, in cash or other immediately-available funds
or in Treasury bills maturing February 14, 1985.
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.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments" of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
February 5, 198 5
RESULTS OF AUCTION OF 3-YEAR NOTES
The Department of the Treasury has accepted $7,266 million of
$28,292 million of tenders received from the public for the 3-year
notes, Series R-1988, auctioned today. The notes will be issued
February 15, 1985, and mature February 15, 1988.
The interest rate on the notes will be 10-3/8%. The range of
accepted competitive bids, and the corresponding prices at the 10-3/8%
interest rate are as follows:
Yield Price
Low
10.38%
99.987
High
10.40%
99.937
Average
10.40%
99.937
Tenders at the high yield were allotted 40%.
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
$
402,850
24,461,595
35,350
137,075
89,120
135,800
1,544,850
159,880
71,505
112,030
18,285
1,119,235
4,510
$28,292,085

Accepted
$
67;850
6,428,370
27,350
78,140
48,120
76,800
174,550
139,380
40,505
105, 260
18,285
56,435
4,510
$7,265,555

The $7,266 million of accepted tenders includes $1,061 million
of noncompetitive tenders and $6,205 million of competitive tenders
from the public.
In addition to the $7,266 million of tenders accepted in the
auction process, $110 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $1,000 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

B-3

TREASURY NEWS

Department of the Treasury • Washington, D.c. • Telephone 5
FOR IMMEDIATE RELEASE
February 6, 1985
RESULTS OF AUCTION OF 10-YEAR NOTES
The Department of the Treasury has accepted $6,012 million of
$15,807 million of tenders received from the public for the 10-year
notes, Series A-1995, auctioned today. The notes will be issued
February 15, 1985, and mature February 15, 1995.
The interest rate on the notes will be 11-1/4%.-^ The range of
accepted competitive bids, and the corresponding prices at the 11-1/4%
interest rate are as follows:
Yield
Price
Low
11.33% a/
99-528
High
11.37%
99.294
Average
11.36%
99.352
a/ Excepting 1 tender of $7,000.
TendersTENDERS
at the high
yield
were
allotted
RECEIVED
AND
ACCEPTED
(In31%.
Thousands)
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
Totals

Received
$
241,210
13,638,816
5,950
103,576
45,443
25,469
1,015,668
90,807
9,513
33,098
9,972
585,753
1,272
$15,806,547

Accepted
$
11,210
5,325,636
5,950
100,126
13,683
20,329
189,518
87,427
8,168
32,098
8,592
207,873
1,272
$6,011,882

The $6,012 million of accepted tenders includes $479
million of noncompetitive tenders and $5,533 million of competitive
tenders from the public.
In addition to the $6,012 million of tenders accepted in
the auction process, $310 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $600 million
of tenders was also accepted at the average price from Government
accounts and Federal Reserve Banks for their own account in exchange
for maturing securities.
1/ The minimum par amount required for STRIPS is $160,000.
Larger amounts must be in multiples of that amount.

rREASURYNEWS
partment of the Treasury • Washington, D.c. • Telephone 566-204
For Release Upon Delivery
Expected at 9:30 a.m.
February 7, 1985

Testimony of the Honorable
James A. Baker, III
Secretary of the Treasury
Before the House Appropriations Committee
February 7, 1985
Mr. Chairman and Members of the Committee:
It is a pleasure to meet with you today to discuss our
fiscal affairs and the tasks that lie ahead. The economy has
done very well in the past year and the outlook for the future is
promising. But we are faced with the need to reduce what has
become an excessive rate of Federal spending. Because of that
Federal spending, the prospective budget deficits that would
develop in the absence of any offsetting action are far too large
for our long-run economic health. We must place the Federal
budget deficit on a declining path and keep it there. With your
help and a bipartisan Congressional effort, I am sure that meaningful reductions in the growth of Federal spending can be
achieved. Legislative action along the lines recommended in the
President's Budget proposals will provide a fiscal framework
within which the economy can continue to prosper.
These past four years have been marked by truly dramatic
improvement in the performance of the U. S. economy. Four years
ago, it was the increasingly held belief that we had lost the
ability to control our economic destiny — that inflation was out
of control, that dwindling availability of natural resources
would put a cap on growth; and, most worrisome of all, we were
told that we had lost the innovative spirit that had propelled
this economy to world leadership.
Now, confidence in our ability to meet the challenges of the
future is being restored by the implementation of an economic
program designed specifically to:

B-5

bring inflation under control,
— free markets from the burden of unnecessary government
interference,
— restore incentives for productivity and growth,
— and, thereby, increase opportunity for all.
That program has been remarkably successful by almost every
measure of economic performance.
— Real growth for 1984 was the highest since 1951.
During the first two years of the current expansion, at
a 6.0 percent annual rate, real growth has been the
strongest for any expansion since the economy pulled out
of the strike-depressed recession trough of late-1949
into the Korean War boom.
— Growth of real business capital spending during this
expansion has far outpaced gains during any previous
postwar recovery.
Our economy has shown itself to be a remarkable jobcreating machine. Spurred by formation of new business
and by technological innovation, more than 7.3 million
jobs have been created during this recovery and expansion.
And even as the economy has shown this remarkable
growth, inflation has stayed under control. For each of
the past three years, it has not exceeded 4%. Last
year, as measured by the GNP deflator, it was the lowest
since 1967. And the trends of wages, oil prices, and
world raw material prices all remain favorable.
I have made a promise to myself that I know I may not be
able to keep. But I shall try. While I will of course
contribute to the development of economic forecasts that we use
for purposes of planning and analysis, I shall try to resist the
temptation to offer specific, detailed, numerical economic forecasts of my own.
The economic projections underlying the budget assume continued real economic growth and a steady decline in unemployment,
inflation, and interest rates.
Consistent with my promise to myself, let me say only this
about the overall economic outlook. Prospects are excellent for

sustained economic growth without inflation — provided that we
act promptly and responsibly to continue what we have begun. And
by "we" I should emphasize that I mean to include both Houses of
the Congress, as well as the Executive Branch.
There is still much unfinished business.
We must not rest with the tax rate reduction we enacted in
1981. That simply adjusted for the hyper-inflation that the
economy had been experiencing before. Now we must go on, as the
President has directed, to overhaul the whole tax system — to
increase fairness, simplicity, and economic growth. This element
of our program is, as the President has said, of equal priority
with spending control.
The printed budget document includes a number of revenuerelated measures — most of which have been submitted before.
These range from tuition tax credits to enterprize zone incentives to technical provisions related to certain trust funds.
The budget does not include the proposals for comprehensive overhaul of the tax system — for, as you know, those proposals, made
public on November 27, remain under review. But we believe that
— with constructive effort by all parties — a comprehensive
restructuring of the tax system could be enacted this year. And
I will be having a good deal more to say about this in other
contexts.
The focus of today's discussion is principally upon our
printed budget, however.
Immediate steps must be taken to narrow the deficit.
Just as important as closing the deficit is the manner by
which it is closed. It would be wrong to go back to our old ways
of pushing up taxes, either legislatively or by bracket creep in
a nonindexed system. In our view, the tax reductions of the past
several years have been largely responsible for the turnaround in
economic performance. This means that deficit reduction must be
accomplished from the spending side.
The large deficits that we face during the remainder of the
decade are due to an excessive rate of Federal spending. The
American people do not feel they are undertaxed. They want
government spending brought under control.
Between 1964 and 1979, Federal outlays averaged 20-1/2
percent of GNP. Now they are in the 24 to 25 percent range.
Federal outlays have virtually been living a life of their own.
The President's budget proposals would restrain the rate of
growth of outlays below that of the economy and shrink the

outlay-GNP ratio down to the 21 percent range by the end of the
decade. This would leave a deficit of less than $100 billion by
1990.
The President's budget proposes a combination of freezes,
reforms, user fees, program cuts and terminations that will
achieve savings for fiscal year 1986 of a little more than $50
billion. This is calculated from the "baseline" path that
spending would take if we did nothing. These reductions are
sufficient to hold total spending on government programs -- that
is, everything but debt service — no higher in 1986 than in
1985. It is an ambitious target, but is achievable, without
damaging the social safety net, or our continued defense rebuilding, or any essential government function.
Achievement of our target of $50 billion in reductions would
accomplish two things. The deficit in 1986 would be about $40
billion less than in 1985. And, even more important, the actions
taken this year will have an amplified effect in later years,
resulting in annual savings of more than $100 billion by 1988.
This will set the deficit on a declining path — both in absolute
dollars and, even more significantly, as a share of GNP. Under
our economic assumptions, the deficit would drop from over 5 1/2
percent of GNP this year to less than 3 percent by 1988 — on
down to less than 1 1/2 percent by 1990. The exact percentages
are not the issue; the important thing is the trend.
The deficit has been accommodated thus far without damage to
the expansion, and interest rates have declined considerably.
But "real" interest rates remain too high. We need monetary
policies that will allow us to continue strong economic growth
without inflation. Such policies will help get interest rates
down further. At the same time, a firm, convincing policy of
deficit reduction will also help keep us on a course to still
lower interest rates — while insuring that the Government, in
financing the deficit, does not absorb such a large share of the
nation's savings as to impair private productive investment.
Our budget proposal represents a "freeze" in total program
spending. That is something that is easy for most to understand
— and to most, I think, it makes sense. There will, we know, be
disagreements about what we propose specifically for one program
or another. But we believe our specific proposals are thoroughly
defensible on the merits. And we look forward to working with
the Congress to develop a comprehensive package that will bring
the budget under control — by freezing overall program spending
for fiscal year 1986.
With good will, we believe this can be done. We are sure it
is what the American people want to be done.

TREASURY NEWS

apartment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE February 7, 1985
RESULTS OF AUCTION OF 30-YEAR TREASURY BONDS
The Department of the Treasury has accepted $5,751 million of
$12,290 million of tenders received from the public for the 30-year
bonds auctioned today. The bonds will be issued February 15, 1985,
and mature February 15, 2015.
The interest rate on the bonds will be 11-1/4%.—' The range of
accepted competitive bids, and the corresponding prices at the 11-1/4%
interest rate are as follows:
Yield
Price
Low
11.24%
100.086
High
11.31%
99.489
Average
11.27%
99.829
Tenders at the high yield were allotted 13%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Boston
228,494
$
New York
10 ,529,577
Philadelphia
1,253
Cleveland
7,220
Richmond
34,266
Atlanta
12,379
Chicago
790,365
St. Louis
59,602
Minneapolis
1,648
Kansas City
12,420
Dallas
4,045
San Francisco
608,586
Treasury
149
Totals
$12 ,290,004

Accepted
$
1,494
5,339,227
1,253
2,220
14,156
12,379
204,828
59,597
1,648
12,420
4,045
97,366
149
$5,750,782

The $5,751 million of accepted tenders includes $375
million of noncompetitive tenders and $5,376 million of competitive tenders from the public.
In addition to the $5,751 million of tenders accepted in
the auction process, $493 million of tenders was accepted at the
average price from Government accounts and Federal Reserve Banks
for their own account in exchange for maturing securities.
1/ The minimum par amount required for STRIPS is $160,000.
—
Larger amounts must be in multiples of that amount.
B-6

rREASURY NEWS
partment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 12:00 NOON
February 8, 1985
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $8,500 million of 364-day
Treasury bills to be dated February 21, 1985, and to mature
February 20, 1986 (CUSIP No. 912794 JT 2). This issue will not
provide new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,529 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing February 21, 1985.
In addition to the
maturing 52-week bills, there are $13,463 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 $1,866 million, and Federal
Reserve Banks for their own account hold $4,321 million of the
maturing bills. These amounts represent the combined holdings of
such accounts for the three issues of maturing bills. Tenders from
Federal Reserve Banks for themselves and as agents for foreign and
international monetary authorities will be accepted at the weighted
average bank discount rate 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 $350
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.
20239, prior to 1:00 p.m., Eastern Standard time, Thursday,
February 14, 1985.
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.
B-7

- 2 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. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
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.
A noncompetitive bidder may not have entered into an agreement, nor make an agreement to purchase or sell or otherwise dispose of any noncompetitive awards of this issue being auctioned
prior to the designated closing time for receipt of tenders.
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 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

- 3the 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 $1,000,000 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. 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 February 21, 1985, in cash or other immediately-available funds
or in Treasury bills maturing February 21, 1985.
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.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must'include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained fr<m any Federal Reserve Bank or
Branch, or from the Bureau of the Pjb ic Debt.

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
February 11, 1985

FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $7,001 million of 13-week bills and for $ 7,005 million
of 26-week bills, both to be issued on February 14, 1985, were accepted today.
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing May 16, 1985
Discount Investment
Rate
Rate 1/
Price

26-week bills
maturing August 15, 1985
Discount Investment
Rate
Price
Rate 1/

Low 8.16% 8.45% 97.937
High
8.23%
8.52%
Average
8.20%
8.49%
a/ Excepting 1 tender of $550,000.

8.26% a/ 8.74%
8.30%
8.78%
8.28%
8.76%

97.920
97.927

95.824
95.804
95.814

Tenders at the high discount rate for the 13-week bills were allotted 79%.
Tenders at the high discount rate for the 26-week bills were allotted 26%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received

Accepted

$ 393,285
13,824,680
29,490
42,960
60,140
66,830
1,224,445
79,705
41,525
58,535
39,730
1,016,620
353,495
$17,231,440

$ 43,285
5,229,330
29,490
42,960
59,510
66,830
300,875
59,705
41,525
58,535
39,730
675,620
353,495
$7,000,890

$ 385,605
14,648,815
17,695
29,385
84,105
50,165
1,086,985
45,470
46,185
50,955
34,980
801,490
388,435
$17,670,270

$ 35,605
5,628,605
17,695
29,385
44,105
45,725
192,105
44,730
45,445
50,955
31,280
450,750
388,435
$7,004,820

Competitive
Noncompetitive
Subtotal, Public

$14,564,220
1,267,805
$15,832,025

$4,333,670
1,267,805
$5,601,475

$14,706,015
1,001,655
$15,707,670

$4,040,565
1,001,655
$5,042,220

Federal Reserve
Foreign Official
Institutions

1,283,615

1,250,000

115,800

712,600

TOTALS

$17,231,440

$7,000,890

$17,670,270

$7,004,820

TOTALS

IXPe

1/ Equivalent coupon-issue yield.
B-8

•<»•

::ederal financing bank

CO
CO
CO

C\J
CO
CO

WASHINGTON, DC. 20220

February 11, 1985

FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of December 1984.
FFB holdings of obligations issued, sold or guaranteed by other Federal agencies totaled $145.2 billion
on December 31, 1984, posting an increase of less than
$0.1 billion from the level on November 30, 1984. This
net change was the result of increases in holdings of
agency assets of $0.2 billion and agency debt issues
of $0.1 billion. Holdings of agency-guaranteed debt
fell by $0.2 billion. FFB made 297 disbursements during
December.
Attached to this release are tables presenting FFB
December loan activity, new FFB commitments to lend
during December and FFB holdings as of December 31, 1984,

# 0 #

B-9

• ^

<n Ifi

FOR IMMEDIATE RELEASE

o
C\J

FEDERAL FINANCING BANK
DECEMBER 1984 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

12/10/84
12/17/84
12/17/84
12/20/84
i 12/24/84
12/31/84
1/1/85
1/2/85
1/7/85

8.865%
8.825%
8.765%
8.765%
8.515%
8.095%
8.155%
8.155%
8.125%

INTEREST
RATE
(other than
semi-annual)

ON-BUDGET AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Advance #415
Advance #416
Advance #417
Advance #418
Advance #419
Advance #420
Advance #421
Advance #422
Advance #423

12/3 $ 410,000,000.00
370,000,000.00
12/4
80,000,000.00
12/10
355,000,000.00
12/10
430,000,000.00
12/17
365,000,000.06
12/20
40,000,000.00
12/24
370,000,000.00
12/24
500,000,000.00
12/31

EXPORT-IMPORT BANK
Note #61
Note #62

11.705%
11.448%

413,000,000.00
162,000,000.00

12/1/94
12/1/94

12/5
12/10
12/13
12/13
12/20
12/31
12/31

5,000,000.00
15,000,000.00
8,000,000.00
9,850,000.00
20,000,000.00
25,000,000.00
20,000,000.00

3/5/85
1/9/85
ll/H/85
3/13/85
3/20/85
4/1/85
4/1/85

8.925%
8.765%
8.685%
8.685%
8.095%
8.135%
8.135%

12/31

77,822,066.50

1/3/85

8.125%

12/3
12/3

11.539% qt.i
11.289% qtr

NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
Nate #281
+Note #282
Note #283
Note #284
+Note #285
+Note #286
+Note #287
OFF-BUDGET AGENCY DEBT
UNITED STATES RAILWAY ASSOCIATION
+Note #33
AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership
12/28
12/31
12/31

80,000,000.00
80,000,000.00
110,000,000.00

12/1/99
12/1/04
12/1/99

11.675%
11.735%
11.685%

12/3
12/3
12/4
12/5
12/5
12/11
12/11
12/12
12/12
12/12
12/13
12/14
12/17

217,328.77
2,102,072.00
1,698,0^6.90
5,660,""'4.68
1,099,9311.50
1,278,359.72
798,795.00
97,447.13
194,266.96
3,539,051.00
229,309.48
627,388.00
15,110,909.23

5/15/95
11/15/92
3/24/12
4/15/14
6/10/96
4/15/14
2/5/95
9/10/95
5/31/96
9/10/94
7/15/92
4/10/96
4/15/14

11.705%
10.061%
11.797%
11.725%
11.617%
11.864%
11.365%
11.705%
11.275%
11.304%
10.845%
11.665%
11.760%

GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Liberia 10
Jordan 11
Turkey 13
Egypt 6
El Salvador 7
Egypt 6
Jordan 12
Morocco 11
Morocco 13
Portugal 1
Philippines 10
Peru 10
Egypt 6
+rollover

12.016% an-.-,
12.079% arii;
12.026% anr

Page 3 of 8
FEDERAL FINANCING BANK
DECEMBER 1984 ACTIVITY

BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual )

INTEREST
RATE
(other than
semi-annual)

Foreign Military Sales (Cont'd)
Thailand 9 12/17
Thailand 10
Thailand 11
Thailand 12
Ecuador 6
Greece 14
Kenya 10
Oman 6
Thailand 11
Thailand 12
Egypt 6
Korea 19
Korea 18
Turkey 13
Philippines 10
Botswana 3

12/17
12/17
12/17
12/18
12/18
12/18
12/18
12/18
12/18
12/21
12/24
12/26
12/26
12/26
12/28

5 1,433 ,875.00
210 ,862.00
1,579 ,652.00
2,411 ,766.00
1 ,950.30
370 ,000.00
1,575 ,091.22
8,712 ,000.00
140 ,854.24
4,954 ,187.00
1,663 ,516.60
6,159 ,571.14
25,570 ,766.21
843 ,593.30
185 ,762.16
56 ,962.61

9/15/93
7/10/94
9/10/95
3/20/96
6/20/89
4/30/11
5/5/94
5/25/91
9/10/95
3/20/96
4/15/14
6/30/96
12/31/95
3/24/12
7/15/92
3/10/91

11.665%
11.675%
11.306%
11.365%
11.085%
11.735%
11.584%
11.281%
11.295%
11.390%
11.597%
10.965%
11.448%
11.575%
10.435%
11.319%

DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
*Hialeah, FL
St. Petersburg, FL
Kansas City, MO
St. Louis, MO
St. Louis, MO
Dade County, FL
Hanmond, IN
Louisville, KY
Santa Ana, CA
Detroit, MI
St. Louis, MO
St. Louis, MO
Indianapolis, IN
Ponce, PR

11.494%
11.415%
9.009%
12.064%
10.003%
8.734%
9.720%

ann
ann
ann
ann
ann,
ann
ann,

9.993%
9.046%
11.878%
11.878%

ann
ann
ann
ann

12/3
12/3
12/13
12/13
12/13
12/19
12/19
12/19
12/19
12/21
12/21
12/21
12/26
12/26

4,258,620.55
3,550,000.00
1,000,000.00
220,000.00
500,000.00
197,470.00
200,000.00
400,000.00
238,030.00
1,270,945.00
90,000.00
55,000.00
200,000.00
156,024.00

12/1/89
12/1/89
6/15/85
1/15/04
2/15/86
7/15/85
5/1/86
2/1/85
8/15/86
9/1/85
1A5/04
1/15/04
2/1/85
8/1/85

11.181%
11.107%
9.005%
11.721%
9.765%
8.685%
9.495%
8.205%
9.755%
8.935%
11.545%
11.545%
8.025%
8.645%

12/3

36,000,000.00

9/15/04

11.731%

256,957.07

10/1/92

11.255*

11.101% qtr.

12/31/86
12/3/86
12/3/86
12/31/86
12/3/86
12/3/86
12/3/86
9-30/87
12/31/86
12/5/86
12/5/86
12/31/86
1/2/18
12/31/16

10.654%
10.625%
10.625%
10.675%
10.625%
10.625%
10.625%
10.935%
10.665*
10.575%
10.575%
10.596%
11.692%
11.693?

10.516% qtr.
10.488% qtr
10.488% qtr.
10.536% qtr.
10.488% qtr.
10.488% qtr.
10.488% qtr.
10.789% qtr.
10.526% qtr.
10.439% qtr.
10.439% qtr.
10.459% qtr.
11.526% qtr.
11.527% qtr.

8.708% ann

DEPARTMENT OF INTERIOR
+Guam Power Authority

DEPARTMENT OF THE NAVY
Defense Production Act
Gila River Indian Community

12/18

RURAL ELECTRIFICATION ADMINISTRATION
*South Mississippi Electric #90
•South Mississippi Electric #171
Tex-La Electric #208
Saluda River Electric #271
*Sugar Land Telephone #69
*Brazos Electric #108
•Brazos Electric #230
*Big Rivers Electric #91
Vermont Electric #259
Basin Electric #137
Basin Electric #232
Basin Electric #272
Western Illinois Power #294
Vermont Electric #290
•maturity extension
+refinaneing

12/3
12/3
12/3
12/3
12/3
12/3
12/3
12/3
12/4
12/5
12/5
12/5
12/5
12/6

150,000.00
4,688,000.00
1,027,000.00
3,080,000.00
1,771,000.00
958,000.00
5,795,000.00
600,000.00
1,500,000.00
20,000,000.00
55,000.00
55,000.00
4,953,000.00
480,380.00

FEDERAL FINANCING BANK
DECEMBER 1984 ACTIVITY
—

AMOUNT FINAL INTEREST INTEREST
BORROWER
~"

DATE

OF ADVANCE
"

12/6
12/10
12/10
12/10
12/10
12/10
12/10
12/10
12/11
12/11
12/11
12/12
12/13
12/14
12/14
12/14
12/17
12/17
12/17
12/17
12/17
12/17
12/19
12/20
12/20
12/21
12/24
12/27
12/27
12/27
12/27
12/28
12/28
12/28
12/28
12/28
12/28
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31

$ 550,000.00
1,338,000.00
3,852,000.00
4,899,000.00
2,000,000.00
699,000.00
6,991,000.00
230,000.00
1,540,000.00
1,095,000.00
1,020,000.00
513,000.00
840,000.00
1,840,000.00
1,045,000.00
460,000.00
31,781,000.00
10,000,000.00
1,805,000.00
7,229,000.00
3,176,000.00
192,000.00
351,000.00
9,512,000.00
13,800,000.00
85,000.00
37,015,000.00
585,000.00
58,062,000.00
40,000.00
8,228,000.00
2,371,000.00
34,996,000.00
587,000.00
402,000.00
64,598,000.00
111,000.00
3,595,000.00
738,000.00
9,328,000.00
432,000.00
i,600,000.00
5,467,000.00
5,668,000.00
3,366,000.00
1,516,000.00
1,997,000.00
2,692,000.00
1,280,000.00
2,446,000.00
14,946,000.00
21,772,000.00
13,834,000.00
17,482,000.00
25,000,000.00
1,670,000.00
19,843,000.00
1,540,000.00
3,436,000.00
5,419,000.00
48,000,000.00
1,265,000.00
18,173,000.00

MATURITY

RATE
(semiannual)

RATE
(other than
semi-annual)

Community Development (Cont'd)
•Central Electric #131
•Wolverine Power #101
•Wolverine Power #233
•Wolverine Power #234
•East River Electric #117
•Dairyland Power #54
•Wabash Valley Power #104
•Wabash Valley Power #206
•Colorado Ute Electric #96
Vermont Electric #259
Wolverine Power #100
Central Iowa Power #169
Kansas Electric #216
Mid-Georgia Telephone #229
All Tele. Carolina, Inc #223
Washington Electric #269
Dsseret G&T #211
•Dairyland Power #173
•New Hampshire Electric #192
•Colorado Ute Electric #96
•Colorado Ute Electric #96
•Upper Missouri G&T #172
N.E. Texas Electric #280
•Basin Electric #232
•Soyland Power #226
•South Mississippi Electric #3
•Wabash Valley Power #252
Chugach Electric #257
Oglethorpe Power #246
Brazos Electric #108
Brazos Electric #230
Kamo Electric #266
North Carolina Electric #268
Basin Electric #272
Plains Electric G&T #158
Plains Electric G&T #300
•Wabash valley Power #206
Tex-La Electric #208
New Hampshire Electric #270
•Wabash Valley Power #104
•Wabash valley Power #206
•Cooperative Power Assoc. #70
•Allegheny Electric #93
•Allegheny Electric #175
•Allegheny Electric #175
•Wolverine Power #100
•Wolverine Power #100
•Basin Electric #232
•New Hampshire Electric #192
•Wolverine Power #101
•Wolverine Power #182
•Wolverine Power #183
•Wolverine Power #233
•Wolverine Power #234
Basin Electric #137
Associated Electric #132
Wolverine Power #274
Kamo Electric #209
•Kansas Electric #208
Kansas Electric #216
•Kansas Electric #216
Kansas Electric #282
•Big Rivers Electric #179

•maturity extension

12/6/86
12/10/86
12/10/86
12/10/86
12/10/87
12/9/87
12/10/86
12/10/86
12/11/86
12/31/86
12/31/86
12/31/18
12/31/86
12/31/18
12/31/18
12/31/86
12/17/86
12/15/87
12/31/86
12/17/86
12/17/86
12/17/86
3/31/87
12/22/86
1/3/17
12/31/86
12/24/86
9/30/88
12/29/86
12/27/87
12/14/87
12/31/86
12/31/86
12/31/86
12/31/86
12/31/86
12/28/86
12/31/86
12/31/86
12/31/86
12/31/86
12/31/86
12/31/86
12/10/87
12/10/87
12/31/86
12/31/86
12/31/86
12/31/86
12/31/86
12/31/87
12/31/87
12/31/86
12/31/86
12/31/86
12/31/86
12/31/86
12/31/86
12/31/86
12/31/18
12/31/86
12/31/15
12/31/15

10.535%
10.645%
10.645%
10.645%
10.985%
10.985%
10.645%
10.645%
10.595%
10.635%
10.631%
11.752%
10.505%
11.834%
11.834%
10.547%
10.325%
10.695%
10.355%
10.325%
10.325%
10.325%
9.990%
10.015%
11.539%
10.062%
10.075%
10.795%
10.085%
10.495%
10.485%
10.091%
10.095%
10.084%
10.095%
10.078%
10.095%
10.155%
10.155%
10.155%
10.155%
10.155%
10.136%
10.595%
10.595%
10.151%
10.151%
10.155%
10.155%
10.155%
10.615%
10.615%
10.155%
10.155%
10.155%
10.155%
10.149%
10.155%
10.155%
10.651%
10.155%
11.660%
11.665%

10.400% qtr.
10.507% qtr.
10.507% qtr.
10.507% qtr.
10.838% qtr.
10.838% qtr.
10.507% qtr.
10.507% qtr.
10.458% qtr.
10.497% qtr.
10.493% qtr.
10.584% qtr.
10.371% qtr.
11.664% qtr.
11.664% qtr.
10.412% qtr.
10.195% qtr.
10.556% qtr.
10.224% qtr.
10.195% qtr.
10.195% qtr.
10.195% qtr.
9.868% qtr.
9.893% qtr.
11.377% qtr.
9.939% qtr.
9.951% qtr.
10.653% qtr.
9.961% qtr.
10.361% qtr.
10.351% qtr.
9.967% qtr.
9.971% qtr.
9.960% qtr.
9.971% qtr.
9.954% qtr.
9.971% qtr.
10.029% qtr.
10.029% qtr.
10.029% qtr.
10.029% qtr.
10.029% qtr.
10.011% qtr.
10.458% qtr.
10.458% qtr.
10.025% qtr.
10.025% qtr.
10.029% qtr.
10.029% qtr.
10.029% qtr.
10.478% qtr.
10.478% qtr.
10.029% qtr.
10.029% qtr.
10.029% qtr.
10.029% qtr.
10.023% qtr.
10.029% qtr.
10.029% qtr.
10.486% qtr.
10.029% qtr.
11.495% qtr.
11.500% qtr.

Page 5 ot 8
FEDERAL FINANCING BANK
DECEMBER 1984 ACTTvTTY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual )

INTEREST
RATE
(other than
semi-annual)

RURAL ELECTRIFICATION ADMINISTRATION (Confc*)
*Big
•Big
•Big
•Big
•Big
•Big
•Big
•Big
•Big
•Big
•Big
•Big
•Big
•Big
•Big
•Big

Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers
Rivers

Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric

#179
#179
#179
#179
#179
#179
#179
#179
#179
#179
#179
#179
#179
#179
#179
#179

12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31

$ 4,736,000.00
5,653,000.00
2,050,000.00
7,926,000.00
608,000.00
9,083,000.00
9,763,000.00
12,918,000.00
6,739,000.00
22,779,000.00
26,163,000.00
18,442,000.00
9,862,000.00
17,600,000.00
27,336,000.00
5,500,000.00

12/31/15
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
V3/17
1/3/17
1/3/17
1/3/17

11.665%
11.659%
11.659%
11.659%
11.659%
11.659%
11.660%
11.660%
11.660%
11.660%
11.660%
11.660%
11.660%
11.660%
11.660%
11.660%

12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/99
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04

11.653%
11.653%
11.653%
11.653%
11.653%
11.653%
11.653%
11.653%
11.653%
11.653%
11.653%
11.653%
11.653%
11.653%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%

SMALL BUSINESS ADMINISTRATION
State & local Development Company Debentures
Pioneer County Dev., Inc.
12/5
Lower Chattahoochee Dev. Corp. 12/5
Opportunities Minnesota, Inc. 12/5
Urban Business Development Corp.12/5
N. Texas Reg. Development Corp. 12/5
Long Island Development Corp. 12/5
Catawa Reg. Development Corp. 12/5
Oakland County Local Dev. Co. 12/5
Texas Panhandle Iteg. Dev. Corp. 12/5
Lynn Capital Investment Corp. 12/5
Fargo-Cass Cnty. Ind. Dev. Corp.12/5
Evergreen Community Dev. Corp. 12/5
St. Louis County L.D.C.
12/5
East Central Michigan Dev. Corp.12/5
Nine County Development, Inc. 12/5
Centralina Development Corp, Incl2/5
Areawide Development Corp.
12/5
Cleveland Citywide Dev. Corp. 12/5
St. Louis Local Development Co. 12/5
Provo Metro Cert. Dev. Corp.
12/5
Cleveland Area Dev. Fin. Corp. 12/5
Jacksonville Local Dev. Co, Inc.12/5
S. Dakota Development Corp.
12/5
Verd-Ark-Ca Development Gorp.
12/5
Dev. Corp. of Middle Georgia
12/5
Lake County Econ. Dev. Corp.
12/5
Alabama Com. Development Corp. 12/5
S. Dakota Development Corp.
12/5
Coastal Area Dis Dev Auth, Inc 12/5
Jacksonville Loc. Dev. Co., Inc.12/5
Enterprise Development Corp.
12/5
Cleveland Area Dev. Fin. Corp. 12/5
Lynn Capital Investment Corp.
12/5
Iowa Business Growth Co.
12/5
Alabama Com. Development Corp. 12/5
Ohio Statewide Development Corp.12/5
St. Louis County L.D.C.
12/5
Verd-Ark-Ca Development Corp.
12/5
Brockton Reg. Econ. Dev. Corp. 12/5
Wisconsin Bus. Dev. Fin. Corp. 12/5
Tulare County Econ. Dev. Corp. 12/5
Cert. Dev. Co. of Mississippi
12/5

•maturity extension

53,000.00
53,000.00
76,000.00
97,000.00
102,000.00
104,000.00
109,000.00
147,000.00
158,000.00
165,000.00
355,000.00
498,000.00
500,000.00
500,000.00
11,000.00
20,000.00
40,000.00
43,000.00
42,000.00
44,000.00
47,000.00
49,000.00
53,000.00
57,000.00
58,000.00
63,000.00
64,000.00
68,000.00
76,000.00
82,000.00
84,000.00
88,000.00
94,000.00
100,000.00
100,000.00
105,000.00
110,000.00
112,000.00
116,000.00
116,000.00
118,000.00
122,000.00

11.500%
11.494%
11.494%
11.494%
11.494%
11.494%
11.495%
11.495%
11.495%
11.495%
11.495%
11.495%
11.495%
11.495%
11.495%
11.495%

qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr

Page 6 of 8
FEDERAL FINANCING BANK
DECEMBER 1984 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

State & Local Development Company Debentures (Cont'd)
Long Island Development Corp.
12/5
Sm. Bus. Dev. Corp. for Wycming 12/5
Opportunities Minnesota, Inc.
12/5
Rural Missouri, Inc.
12/5
Advancement, Inc.
12/5
W. Central Arkansas C.D.C.
12/5
Massachusetts Cert. Dev. Corp. 12/5
Charlotte Certified Dev. Corp. 12/5
Appalachian Development Corp.
12/5
Ashtabula County 503 Corp.
12/5
E. Cen. Michigan Dev. Corp.
12/5
Rural Missouri, Inc.
12/5
Quaker State C.D.C, Inc.
12/5
Androscoggin Valley Cn of Govts 12/5
Allentown Econ. Dev. Corp.
12/5
Neuse River Dev. Auth., Inc.
12/5
Gr. N. Pulaski Local Dev. Co.
12/5
River East Progress, Inc.
12/5
Wisconsin Bus. Dev. Fin. Corp. 12/5
E.C.I.A. Bus. Growth, Inc.
12/5
Columbus Countywide Development 12/5
Downtown Improvement Corp.
12/5
Cen. Vermont Econ. Dev. Corp.
12/5
Long Island Development Corp.
12/5
Arizona Enterprise Dev. Corp.
12/5
N. Texas Certified Dev. Corp.
12/5
Bay Area Employment Dev. Oo.
12/5
Granite State Econ. Dev. Corp. 12/5
W. Massachusetts S.B.A., Inc.
12/5
Long Island Development Corp.
12/5
La Habra Local Dev. Co., Inc.
12/5
South Shore Econ. Dev. Corp.
12/5
Metro Growth & Dev. Corp.
12/5
San Diego County Loc. Dev. Corp.12/5
Worcester Business Dev. Corp.
12/5
Econ. Dev. Fnd. of Sacramento
12/5
Indiana Statewide C.D.C.
12/5
Nine County Development, Inc.
12/5
Texas Panhandle Reg. Dev. Corp. 12/5
Region Nine Development Gorp.
12/5
Centralina Dev. Corp., Inc.
12/5
Wilmington Industrial Dev., Inc.12/5
Louisville Economic Dev. Corp. 12/5
Opportunities Minnesota, Inc.
12/5
Columbus Countywide Dev. Corp. 12/5
Columbus Countywide Dev. Corp. 12/5
Orig. Aurora & Colorado Dev. Co. 12/5
Toledo Econ. Plan. Council, Inc. 12/5
Mentor Econ. Assistance Corp.
12/5
Evergreen Community Dev. Assoc. 12/5
Columbus Countywide Dev. Corp. 12/5
River East Progress", "Inc. - — 1 2 / 5
Old Colorado City Dev. Co.
12/5
Treasure Valley Cert. Dev. Corp.12/5
The Jacksonville L.D.C, Inc.
12/5
Opportunities Minnesota, Inc.
12/5
N. Virginia Local Dev. Co., Inc.12/5
Long Island Development Corp.
12/5
tolunbus Local Development Corp.12/5
Evergreen Community Dev. Assoc. 12/5
Orig. Aurora & Colorado Dev. Co. 12/5
Wisconsin Bus. Dev. Fin. Corp. 12/5
Opportunities Minnesota, Inc.
12/5
St. Louis Local Development Co. 12/5
San Diego County Loc. Dev. Corp.12/5

130,000.00
137,000.00
137,000.00
147,000.00
153,000.00
156,000.00
168,000.00
168,000.00
173,000.00
181,000.00
185,000.00
193,000.00
197,000.00
210,000.00
211,000.00
214,000.00
222,000.00
226,000.00
236,000.00
250,000.00
252,000.00
254,000.00
271,000.00
300,000.00
316,000.00
318,000.00
330,000.00
331,000.00
336,000.00
370,000.00
500,000.00
500,000.00
500,000.00
500,000.00
500,000.00
500,000.00
500,000.00
47,000.00
48,000.00
56,000.00
56,000.00
59,000.00
64,000.00
68,000.00
69,000.00
84,000.00
84,000.00
85,000.00
93,000.00
93,000.00
114,000.00
121,000.00
124,000.00
128,000.00
129,000.00
132,000.00
137,000.00
140,000.00
145,000.00
147,000.00
157,000.00
158,000.00
168,000.00
168,000.00
172,000.00

12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12A / 0 4
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/04
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12 A / 0 9
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09

11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.737%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11-.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%

INTEREST"
RATE
(other than
semi-annual)

Page 7 of 8
FEDERAL FINANCING BANK
DECEMBER 1984 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
INTEREST
RATE
RATE
(other than
(semisemi-annual)
annual)

State & Local Development Canpany Debentures (Cont'd)
12/1/09
12/1/09
12/1/09
12 A/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12A/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09
12/1/09

11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%

300 ,000.00
1,000 ,000.00
1,000 ,000.00
1,000 ,000.00
1,000 ,000.00
4,000 ,000.00
800 ,000.00
2,000 ,000.00

12/1/87
12/1/89
12/1/91
12/1/94
12/1/94
12/1/94
12/1/94
12/1/94

10.535%
11.135%
11.555%
11.615%
11.615%
11.615%
11.615%
11.615%

12/31

532,580,459.89

3/29/85

8.065%

Missouri-Kansas-Texas #511-6 12/3
Milwaukee Road #511-2
12/13

600,000.00
65,731.79

9/14/99
6/30/06

11.300%
11.734%

Bay Colony Development Corp. 12/5 $ 189,000.00
Bay Colony Development Corp.
12/5
202,000.00
San Diego County Loc. Dev. Corp.12/5
218,000.00
C.D.C. of Mississippi, Inc.
12/5
239,000.00
Toledo Econ. Plan. Council, Inc.12/5
242,000.00
Arizona Enterprise Dev. Corp.
12/5
253,000.00
Minneapolis 503 Econ. Dev. Co. 12/5
255,000.00
San Diego County Loc. Dev. Corp.12/5
256,000.00
N. Dakota State Dev. Credit Corpl2/5
273,000.00
Wilmington Ind. Dev. Inc.
12/5
314,000.00
Quaker State Cert. Dev. Co., Incl2/5
320,000.00
Union County Econ. Dev. Corp.
12/5
320,000.00
MSP 503 Development Corp.
12/5
325,000.00
Wilmington Industrial Dev. Inc. 12/5
339,000.00
Altoona Enterprises, Inc
12/5
360,000.00
Bay Area Business Dev. Co.
12/5
367,000.00
The C.E.D. in Des Moines
12/5
389,000.00
Region Nine Development Corp.
12/5
407,000.00
Wisconsin Bus. Dev. Fin. Corp. 12/5
473,000.00
Union County Economic Dev. Corp.12/5
499,000.00
Evergreen Community Dev. Assoc. 12/5
500,000.00
Small Business Investment Company Debentures
N.E. Small Bus. Investment Co. 12/19
Key Venture Capital Corporation 12/19
American Commercial Capital Corpl2/19
Charter Venture Group, Inc.
12/19
Interstate Capital Co., Inc.
12/19
MVenture Corp.
12A9
Retailers Growth Fund, Inc.
12/19
Texas Capital Corporation
12/19
TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
Note A-85-03
DEPARTMENT OF TRANSPORTATION
Section 511—4R Act

11.145% qtr.

FEDERAL FINANCING BANK
December 1984 Comnitments
BORROWER"
Baldwin Park, CA
Lawrence, MA
Syracuse, NY
Allegheny Electric
Washington Electric

GUARANTOR

HUD
HUD
HUD
REA
REA

AMOUNT
$ 150,000.00
1,401,600.00
22,500.00
41,500,000.00
3,200,000.00

EXPIRES

MATURITY

7/1/85
1/2/85
7/1/85
12/31/90
12/31/90

7/1/85
1/2/90
7/1/03
12/31/18
12/31/18

Page 8 of 8

FINANCING BANK HOLDINGS
(in millions)
Program

Net Change
12/1/84-12/31/84

Net Change—FY 1985
10/1/84-12/31/84

December 31, 1984

November 30, 1984

$ 13,,710.0
15,,852.2
290.4

$ 13,795.0
15,689.8
290.5

$ -85.0
162.3
-0.1

$ 275.0
162.3
21.5

1,,087.0
51.3

1,087.0
51.3

-0-0-

58,,971.,0
115.,7
132.,0
8,,8
3,,536.,7
38,.3

58,801.0
116.1
132.0
11.0
3,536.7
38.7

170.0
-0.4

-540.0
-0.4

-0-

-0.4

-1.8

17,365,.1
5,000,.0
11,.2
1 ,338 .0
230,.9
33 .5
2,146 .2
411.3
36.0
28 .7
902.3
3.8
20,693 .0
885.0
426 .8
1 ,577 .9
157.0
177.0

17,413.9
5,000.0
11.2
1,338.0
227.5
33.5
2,146.2
412.7
36.0
28.7
902.3

-48.8

254.2

-0-0-03.5
-0-0-

-04.9

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank
NCUA-Central Liquidity Facility
utt-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
Agency Assets
Farmers Hare Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration

-0-

-2.2

Government-Guaranteed Lending
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
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.
CON-Defense Production Act
Rural Electrification Admin.
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
TOTALS* $ 145,216.9
•figures may not total due to rounding

3.6

-1.5

-0-0-00.3

20,887.1
886.3
402.8
1,561.4
156.4
177.0

-194.9
-1.3
23.9
16.5

$ 145,174.4

$ 42.6

0.7
-0-

48.0
22.6

-0-32.3
-2.0

-0-0-52.3

0.7
105.9
24.7
72.2
22.3
-2.6

-0$ 380.8

TREASURY NEWS

epartment of the Treasury • Washington, D.c. • Telephone 566-20

REMARKS BY THE HONORABLE R. T. MCNAMAR
DEPUTY SECRETARY OF THE U.S. TREASURY
BEFORE THE
DAVOS SYMPOSIUM
DAVOS, SWITZERLAND
February 2, 1985

THE USA AND THE WORLD ECONOMY
Good morning. It's a pleasure to be in such distinguished
company and in such a beautiful setting.
Discussing both the strides we have made during the last
four years and the challenges ahead is not unlike a situation
faced by Winston Churchill. He was once accosted by a woman at a
formal meeting in a grand ballroom. Looking him straight in the
eye, she said "I've been told that if all the liquor you have
consumed was poured into this room it would come up to about
here" — motioning to approximately her neckline. Churchill,
looking around the great room, retorted: "Ah — so much
accomplished, yet so much left remaining to do."
Indeed, that's our philosophy. We have made significant
progress but still look with anticipation at the economic
opportunities ahead.
I think this opportunity to discuss with you the plans and
goals of the second Reagan Administration is particularly
important in this day and age. Although the lesson has come
slowly to some, we must realize that in today's world the
political and economic decisions made in one capital of the world
affect not only that country, but all the other countries of the
world as well.
B-10

- 2 -

During the past four years, we have not only enjoyed^ one of
the strongest economic recoveries of our times, but also nave
laid the foundation for continued economic growth and expansion.
Just two weeks ago, President Ronald Reagan assumed the^
presidency of my country for his second term. The weatner may
have been bitterly cold, but his words, I believe, warmed the
hearts of free men and women everywhere.
In his inaugural address, President Reagan defined his goals
for "a new American Emancipation." He said, "We go forward
today, a nation still mighty in its youth and powerful in its
purpose. With our alliances strengthened, with our economy
leading the world to a new age of economic expansion, we look to
a future rich in possibilities."
You'll notice that the President spoke of new economic
opportunities from both a domestic and an international
perspective.
Indeed, let me build on the President's words and suggest
that for major industrialized nations the historical distinction
between domestic economic policy and international economic
policy simply no longer exists. They are one and the same.
Today, U.S. domestic economic policy decisions affect the
rest of the world and obviously vice versa. Our fiscal and
monetay policy influences yours. Your trade and investment
policies influence ours. The economic destinies of our countries
are inexorably linked.
And, the accelerating integration of the industrialized and
developing economies of the world promises an even closer
dependence tomorrow. This reality is well understood by the
Reagan Administration.
TRIAD OF INTERDEPENDENCE
Our interdependence and mutual economic prospects are based
on three integrated global systems I call our "triad of
interdependence." They are: (1) our mutual security
arrangements; (2) our international trading system; and (3) our
international financial system. Each of these individual systems
is dependent on both of the others if we are to achieve our
mutual objective of sustained non-inflationary economic growth
and prosperity for the future.
A brief overview of the importance of each of these three
elements in the triad illustrates this new interdependence and
demonstrates the inherent obligations and responsibilities

- 3-

Security System
The first element of our interdependence, and the one that
provides a positive environment for the growth of international
trade and financial transactions, is our mutual security system.
President Reagan demonstrated our resolve to ensure mutual
security when, at the United Nations General Assembly, he stated:
"The starting point and the cornerstone of our
foreign policy is our alliance and partnership
with our fellow democracies .... Indeed, the
bulwark of security that the democratic alliance
provides is essential and remains essential to
the maintenance of world peace. Every alliance
involves burdens and obligations, but these are
far less than the risks and sacrifices that will
result if the peace-loving nations were divided •
and neglectful of their common security."
This security system provides the crucial political
underpinning for our mutual efforts to manage and build economic
opportunities.
Trading System
The second key system in the triad of interdependence is the
world trading system. The growth of international trade that we
have witnessed over the last decade has clearly served to
better integrate the world into a more homogeneous marketplace.
From 1975 to 1983, trade of the industrialized countries with all
trading partners combined, doubled from $1.2 trillion to nearly
$2.4 trillion. During this period, trade among industrialized
countries alone grew from $765 billion to $1.6 trillion.
The Reagan Administration clearly recognizes international
trade as a major and growing component of our economy. Our
merchandise trade now totals 15 percent of GNP, compared with
only 3 percent in 1970. In most of Europe, the percentages are
even higher: for example, in France today trade is 37 percent of
GDP vs. 24 percent in 1970. Such statistics only amplify the
importance of international trade which each of you works with on
a daily basis.
Long term, the growth of any economy and perhaps especially
the U.S. is dependent on the economic prospects in the rest of
the world. We are clearly aware of our dominant role in the
world economy, producing 40 percent of OECD GNP. The growth of

- 4 -

the United States economy and the manner in which it has helped
to bolster the economic prospects of other industrialized
countries and LDCs during the last two years is a perfect example
of this point.
The most direct and obvious effect of our recovery is the
stimulus to European growth via higher U.S. imports. U.S.
imports from Europe are up 32 percent for the first 11 months of
1984. This $16 billion rise has been a welcome and important
stimulus to European recovery. Our current trade deficit is the
reciprocal of the export surge from Europe, Japan and the LDCs in
1983 and 1984.
Financial System
The third element of the triad of interdependence is the
accelerating integration of worldwide capital markets. There has
now evolved one worldwide market for a wide spectrum of financial
transactions. As a result of computerized telecommunications, we
now transmit billions of dollars across the world in less time
than it takes to physically present a check or to make a savings
deposit.
The growth and development of international financial
markets has fundamentally altered the relationship between trade
and capital flows. And, although not widely understood, for the
foreseeable future capital flows will determine exchange rates,
which in turn will influence trade flows, not vice versa.
Currently, international trade in goods and services totals
approximately $2 trillion per year. By comparison, capital flows
are estimated to be in the $20-30 trillion range or 10 to 15
times that of goods and services.
With such large financial flows, no nation can ignore its
financial ties with other nations. The interbank market is
international in character and is virtually homogeneous.
Disintermediation is no longer a domestic policy issue — it is
an international phenomenon in which we are all participating.
OBLIGATIONS OF INTERDEPENDENCE
As one reviews these three components of the triad of
economic interdependence, it is important to realize that this
interdependence carries significant opportunities and important
obligations and responsibilities for all nations.

- 5-

Security System
To ensure our mutual security, a real commitment of
resources, both monetary and other, is needed. Currently, the
United States commitment to ensuring the security of Europe is
significant. We believe that those who benefit should pay more.
It is important for Europe and the world to realize that
part of the reason for projected United States budget deficits
comes from this Administration's commitment to ensuring mutual
security. As in the other areas of interdependence, we must
identify the coefficients that link the system. For example,
many Europeans would like the U.S. to increase our military
contributions to NATO. Other Europeans are heard to demand the
U.S. budget deficit, particularly defense spending, be reduced.
Allegedly, this will reduce U.S. nominal interest rates and
weaken the U.S. dollar, which in turn will surely lower the
European Communities' exports to the U.S. and make U.S. exports
more competitive in third markets; which will slow EC exports
diminishing European real growth; and eventually lead to calls
within the Alliance for reduced European defense expenditures to
achieve their budget austerity due to a weakening economy led
down by a fall in European exports to the U.S. Obviously,
interdependence has many facets.
Trading System
In the area of trade policies, we must all work to avoid
protectionism. As we all know, protectionism in the long term
will constrain worldwide growth and preclude efficient allocation
of the world's resources.
While the United States' record isn't perfect, during the
last four years, the United States has undertaken numerous
efforts to reduce protectionism and open its border to
international trade. As a measurement of the United States'
leadership against protectionism, total U.S. imports have risen
34 percent in 1984 with imports of textiles up 55 percent and
steel up 70 percent.
Unfortunately, the picture on the international trade front
is not all progress. In particular, there are a number of
stubborn, long-standing issues in the trade area between the U.S.
and the EC. Among these are:
o Problems with the Common Agricultural Policy
(CAP) that have led to continual threats to
U.S. access to the EC markets.

- 6 -

EC insistence on changes in GATT rules to
allow it to apply quantitative import
restrictions on a "selective" U ; e «
discriminatory) basis has blocked attempts to
negotiate a new Safeguard Code in the GATT.
This EC position dates from 1976.
o European restrictions on imports of Japanese
products has led to increased Japanese market
penetration in the U.S., which has increased
domestic political pressures in the U.S.
The very fact that these issues have been unresolved
suggests to me that appropriate action is long overdue. We feel
that an improving economic environment such as we are
experiencing both in the United States and Europe is the best
time to address some of these trade issues.
Financial System
In the area of international finance, the unification of
capital markets necessitates consistent and cooperative policies
by all major countries. In 1982 and 1983, cooperative
international efforts prevented the international debt problems
of the developing countries from becoming an international
financial crisis that could have converted a worldwide recession
into a worldwide depression. None of us could have done it
alone. We were dependent on each other because of the worldwide
interbank deposit and bank syndicate market.
REAGAN ECONOMIC POLICIES
This new order of interdependence places significant
importance on and interest in the Reagan Administration's
economic priorities for the next four years. The economic game
plan outlined by the Reagan Administration when it first took
office was specifically designed to be one which would not have
to be altered with every shift of the economic winds.
The Achievements of the Past Four Years
We feel that our program has been a stunning success and I
would like to take a moment to summarize for you some of our most
important economic achievements:
o Real GNP growth since the recession trough
in late 1982 has averaged 6.0 percent
annually — stronger than for any expansion
period since the Korean War era.

- 7 -

The unemployment rate has fallen from 10.7
percent at the end of 1982 to 7.2 percent at
the end of 1984. During that period 7.2
million jobs have been created. When
compared to the performance of the rest of
the world, this achievement is even more
dramatic.
o The inflation that plagued the late '60's
and '70's and capped the past decade with
double-digit rates averaging close to 13
percent has been curbed. This cutting of
inflation to the 3.4 percent level has been
achieved far faster than even we anticipated
and occurred in an environment of strong
real GNP growth and rapid job formation —
something thought to be impossible in the
traditional Keynesian view of economics.
The reduction in inflation has been the key
to the drop in interest rates that we have
witnessed over the past few years. The
prime rate has fallen by 11 full percentage
points from a peak of 21 1/2 percent in late
1980. Three-month Treasury bill rates have
fallen from 17 percent in early 1981 to
about 7 3/4 percent currently.
o Productivity in the private nonfarm economy,
which had been essentially unchanged from
late 1977 to the end of 1982 is now back on
the positive growth path of approximately 3
percent a year.
o Finally, there has been a spectacular
turnaround in the investment climate in the
United States. During the current
expansion, real business capital spending
has surged at a 15.4 percent annual rate —
faster than in any comparable post-World War
II expansion period and more than double the
average.
We are not suggesting by any means that our job is
completed. But we feel that the figures cited above represent
clear evidence that our prescription was the correct one for what
ailed the U.S. economy.

- 8 -

This progress that we have made during the last four years
suggests that the fundamentals are sound for sustainable
long-term non-inflationary growth in the United States. To
achieve this objective, you can look for the President to again
focus on the four key elements of the program first introduced in
1981.
Looking Forward:
Federal Government Spending
First, we will renew our efforts to deal with the budget
deficit through further cuts in the rate of growth in federal
spending. An analysis of today's situation in the U.S. indicates
that it is government spending, not tax cuts, that is the source
of the deficit. We project that long-term government revenues
will average approximately 19.5 percent of GNP between 1985-89
under our proposals. This is slightly higher than the period of
1964-79.
By contrast, federal government spending is far above its
historical levels. From 1964-74, federal government spending was
19.8 percent of GNP. From 1975-79, it was 22 percent. In 1984,
it was still nearly 24 percent of GNP (down from 25 percent in
1983). If major budget changes are to be made, they must be made
in the spending levels, not taxes. We will simply have to make
some very difficult spending decisions with the realization that
our government's resources are limited in the near term.
Tax Policies
The second key policy is that the Administration will
continue to reduce personal income tax rates and thereby create
added incentives for work, productivity, saving and investment.
The current tax system is heavily biased toward borrowing
and consumption — in essence creating a disincentive for
savings. This complicates our efforts to raise the capital
needed to ensure sustained non-inflationary growth. Given our
tax system biases, it is not surprising that the U.S. savings
rate is low relative to other countries.
The Treasury tax proposals that were announced late last
year are designed to make the system fairer, simpler, and more
economically neutral. The proposals are carefully designed to be
revenue-neutral. They are not an answer to our budqetary
problems.

- 9 -

For individuals, the proposal provides for a simple
three-bracket system replacing the current 14, with rates set at
15%, 25% and 35%. This will reduce marginal tax rates by an
average of 20 percent and will reduce individual tax liabilities,
on average, 8.5 percent.
For businesses, marginal tax rates will fall from 46 percent
to 33 percent, and the special provisions which gave preferences
to certain industries will be eliminated. Importantly, for the
first time we will be indexing capital costs and interest to
ensure only real, not nominal, gains are taxed.
I believe tax simplification and reform is an idea whose
time has come, and one of the major goals of the President's
second term will be to see that the United States has a tax
system' that is equitable, comprehensible and promotes economic
g rowth.
Reducing Structural Rigidities
The third element of the President's program has involved
instituting a far-reaching program of regulatory relief. We, and
this includes Democrats as well as Republicans, have recognized
that highly regulated industries were simply not competitive in
today's world. In essence, regulated firms lose the flexibility
to adapt to changes which are fundamental to remaining
competitive in dynamic, worldwide economic environments.
Consequently, we in the government have sought to provide
greater freedom for private industry. The gradual drift toward
greater and greater concentration of rule-making and
decision-making in Washington is being reversed.
Our results over the last four years in a number of areas
support this basic philosophy.
— Small businesses — which tend to be less
influenced by rigidities generated by labor
unions, for example, have been our greatest
source of job growth. For instance, small
enterprises with under 20 employees
generated all of the net new jobs in the
economy between 1980 and 1982. And in the
twelve months ending in September 1983,
employment in small-business dominated
subsectors rose 2.6 percent, compared to
growth of only 1.2 percent in large-business
dominated subsectors. Since 1980, the
employment of Fortune 500 companies has
actually declined.

- 10 -

—

Progress on deregulating some of our.,major...,.
industries has been important in enhancing
the flexibility of wages — a major force in
the reduction in inflation since 1980.
Among the most cogent examples of the effect
of deregulation on wages were the airline
and trucking industries, where the number of
trucking firms has jumped from 17,000 to
28,000. This means more jobs and more
choices for the consumers (an example of
enterprise).
At the risk of being controversial, as a friend, I should
say to European policymakers that increasing the flexibility and
adaptability of the United States' economy is already paying
handsome dividends for us and has substantial long-term
implications for you. In a world where economic markets are
becoming more unified and homogeneous, if the United States has a
substantial economic advantage over more structurally rigid and
overly regulated European economies, we will in the long run
continue to out-perform you.
Our growth and expansion hvae not come without critical
shifts. Individual industries such as steel and autos have
suffered real declines in output. However, such shifts are
expected in a dynamic economy. No one should strive for job
preservation in the buggy-whip industry nor are we preserving the
New England Whiskey industry. Other industries in a free market
economy will provide jobs.
In essence, the issue is whether the market allocation of
resources is quicker, more efficient, and provides a better
standard of living than a more dirigiste allocation process.
Shall consumers or government bureaucrats decide? The Reagan
Administration closely believes decisions should be made by the
consumers.
If Europe is to compete successfully in a worldwide
marketplace with the U.S. and Japan, perhaps it is time to
reconsider those EC and individual country policies that are
currently hindering Europe's initiative, adaptation, and
therefore economic growth.
The Outlook
The cumulative effect of these United States policies and
the progress that follows is the continued gradual shift on our
part to a country and people that increasingly will rely on the
private sector to generate sustainable growth.

- 11 -

Four years ago when President Reagan came to office he was
faced by an economy experiencing fundamental difficulties. The
problems of low growth, low investment, stagnant productivity,
and raging inflation have now been largely alleviated, allowing
the Administration to focus its primary attention on the goals of
further progress on reducing federal outlays and tax reform.
We are optimistic that the economy will remain on a steady
course in the future. The official economic forecast associated
with the FY 1986 budget will be available next week and will show
real GNP growth in the 4 percent range over the next several
years. There is no reason to anticipate any difficulties in
achieving that growth.
Over the past four years, we've been successful in
practicing a philosophy of free markets. We see important
opportunities ahead not only for the United States, but also for
the rest of the world. To capitalize on these opportunities,
however, we must recognize the new interdependencies that now
exist and continue to make the difficult political decisions to
remove structural rigidities and focus on long-term sustainable
economic growth.
PORTFOLIO THEORY OF EXCHANGE RATE MOVEMENTS
Before concluding, I have been asked to address exchange
rate movements and the rise of the dollar. In this vein I would
like to suggest a framework for assessing exchange rate movements
which, I believe, better fits the worldwide integration of
today's capital markets.
Today, international trade in goods and services totals
approximately $2 trillion per year. By comparison, estimates of
annual capital flows are usually in the $20-30 trillion range or
10 to 15 times those of goods and services.
Given this relative importance of capital flows versus trade
flows today, it seems clear that capital flows, not trade flows,
determine exchange market dynamics. In short, capital flows
today do affect exchange flows and alter trade flows, but not
vice versa. Hence specualtion that the current record United
States trade deficit will alone weaken the dollar is particularly
false.
Accordingly, I submit that exchange rate movements are a
function of many thousands of market investors simply seeking the
most attractive return on their investments, given the worldwide
array of possibilities. The following seems to be a more
complete explanation of the market changes we've seen recently.

- 12 -

Institutional investors alter exchange rates by shifting
their oortfolio preferences toward investments in countries where
the anticipated relative after-tax real rate of return from
investments is higher, given investment assets of comparable
maturity, financial uncertainty, and similar sovereign risks.
And, when investors sense that there are current or prospective
developments that will significantly alter anticipated relative
rates of return to invested capital, they realign their
investment preferences. Over time, the resulting flows of
international capital help to achieve a more efficient allocation
of resources on a worldwide basis.
Exchange rate movements are a function of investment
preferences at a country level. However, the movements are a
product of the relative attractiveness of all of the "portfolio"
options within an individual country and between countries.
Basic investment options within a country such as real estate,
equity, and fixed income investments can be further divided by
maturity structure and risk uncertainty, the after-tax real rate
of return for each investment type within a country determines
the demand, or relative attractiveness, of a given currency and
consequently exchange rate movements.
After-tax real rates of return are a function of the overall
economic and political environment impacting the investment
decision. To understand this fully, one must analyze each of the
individual components in a country relative to other countries.
Consider these factors in a disaggregated situation.
— Sustainable economic growth prospects in a country'
relative to all other countries
— Nominal pretax rates of return from equities, real
estate, or fixed income securities relative to all
other countries
Projected inflation rate in a country relative to
all other countries
— Effective tax rates on investments in a country
relative to all other countries
Capital market conditions in a country relative to
all other countries
— Government regulations and social regidity in a
country relative to all other countries
"" ?SV!n i«!»,and political ris* in a country relative
to all others .

•—

- 13 -

I submit that at the margin it is the aggregate of these
factors in each country relative to other key nations that
determines present and future exchange rates. At any point in
time, the factors are weighted differently by diverse investors
and are continually changing to reflect their disparate scenarios
for the future. It is the daily interaction of thousands of
international institutional and corporate investor's collective
response and weighting to those factors that provides both the
underlying trends and the day-to-day volatility in exchange
markets.
While I cannot present a precise mathematical equation to
calculate or predict exchange rates, I believe this framework is
more comprehensive than most in making strategic portfolio
decisions. As such, it suggests a model for evaluating the
dollar's strong performance in recent years and drawing
implications for future micro-economic policies for your firm and
macro-economic policies for the nation.
When discussing economic policy implications against this
backdrop, we should consider the current debate on reducing the
United States budget deficit. As I said earlier, many academics,
Wall Street types, and associated rail birds have called for a
reduction in the deficit to reduce U.S. interest rates and
thereby weaken the dollar.
Let me reiterate that the Reagan Administration, and I
believe the Congress, is clearly committed to reducing the budget
deficit through spending reductions, not tax increases. However,
given the framework I've outlined, the effect of reducing the
deficit should be to strengthen the dollar, not weaken it.
A reduced deficit would reduce federal borrowing
requirements, thereby reducing federal competition with the
private sector for available credit. All other things being
equal, this will improve the anticipation of sustained
non-inflationary growth in the United States relative to other
countries. Given an appropriate monetary policy, this will
undoubtedly result in an even more attractive U.S. investment
environment relative to other countries. Indeed, I submit that
cutting the budget deficit through reduced government spending
will further strengthen the dollar based on my portfolio shift
hypothesis.
I believe the dollar's strength reflects, not some temporary
interest rate or trade balance factor, but a fundamental relative
improvement in U.S. economic policies, performance and prospects
compared to the other reserve currencies. And, I suggest more
and'more observers will begin to believe that the dollar will
continue to be "strong" relative to the last half of the 1970's

- 14 -

for the foreseeable future, until and unless other countries
adopt policies which achieve more sustainable non-inflationary
growth with other factors being equal. This can only be done by
reducing structural ridigities, promoting growth and providing
for free and open capital markets.
The United States would welcome and anticipates some
improvement in European economic performance relative to the
United States in 1985. This could result in some appreciation of
major European currencies against the dollar. We will not try to
support any level for the dollar. However, those who suggest an
imminent collapse of the dollar either don't believe in the
portfolio shift explanation or are naively attempting to use a
single variable correlation to explain a multiple variant
phenomenon market.
I suggest that we consider the implications of this
integration of the world's financial markets or the trading
system and to think of protectionism.

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

February 12, 1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $14,000 million, to be issued February 21, 1985.
This
offering will provide about $525
million of new cash for the
Treasury, as the maturing bills were originally issued in the
amount of $13,463 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,000
million, representing ah additional amount of bills dated
November 23, 1984, and to mature May 23, 1985
(CUSIP
No. 912794 HD 9), currently outstanding in the amount of $6,827
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $7,000 million, to be
dated February 21, 1985, and to mature August 22, 1985
(CUSIP
No. 912794 HW 7).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing February 21, 1985.
In addition to the
maturing 13-week and 26-week bills, there are $8,529 million of
maturing 52-week bills. The disposition of this latter amount was
announced last week. Federal Reserve Banks, as agents for foreign
and international monetary authorities, currently hold $1,745
million, and Federal Reserve Banks for their own account hold $4,321
million of the maturing bills. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders from Federal Reserve Banks for themselves and as agents
for foreign and international monetary authorities will be accepted
at the weighted average 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 $1,395
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.
B-ll

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20239 prior to 1:00 p.m., Eastern Standard time, Tuesday,
February 19, 1985.
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. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
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

- 3 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 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 $1,000,000
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 February 21, 1985, in cash or other immediately-available funds
or in Treasury bills maturing February 21, 1985.
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.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

rREASURY NEWS
sartment of the Treasury • Washington, D.c. • Telephone 566-204
FOR RELEASE AT 4:00 P.M.

February 13, 1985

TREASURY TO AUCTION $9,000 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,000 million
of 2-year notes to refund $7,789 million of 2-year notes maturing
February 28, 1985, and to raise about $1,200 million new cash. The
$7,789 million of maturing 2-year notes are those held by the
public, including $598 million currently held by Federal Reserve
Banks as agents for foreign and international monetary authorities.
The $9,000 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks as agents for foreign and
international monetary authorities will be added to that amount.
Tenders for such accounts will be accepted at the average price of
accepted competitive tenders.
In addition to the public holdings, Government accounts and
Federal Reserve Banks, for their own accounts, hold $645 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

B-12

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED FEBRUARY 28, 1985
February 13, 1985
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
Payment through Treasury Tax ard
Loan (TT&L) Note Accounts
Deposit guarantee by
designated institutions
Key Dates:
Receipt of tenders
Settlement (final payment
due from institutions)
a) cash or Federal funds
b) readily collectible check

$9,000 million
2-year notes
Series S-1987
(CUSIP No. 912827 RX 2)
February 28, 1987
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
August 31 and February 28
$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 for TT&L Note
Option Depositaries
Acceptable
Wednesday, February 20, 1985,
prior to 1:00 p.m., EST

Thursday, February 28, 1985
Tuesday, February 26, 1985

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

FOR IMMEDIATE RELEASE
February 14, 1985

CONTACT:

CHARLES POWERS
(202) 566-2041

U.S.-DENMARK ESTATE TAX TREATY
ENTERS INTO FORCE
The Treasury Department today announced that the Government
of the Kingdom of Denmark has confirmed receipt of the U.S.
instrument of ratification of the "Convention Between the
Government of the United States of America and the Government of
the Kingdom of Denmark for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on
Estates, Inheritances, Gifts, and Certain Other Transfers,"
signed at Washington on April 27, 1983, and has agreed to the
reservation entered by the United States Senate to ratification.
The ratification procedures were completed on November 7, 1984
and the convention entered into force on that day.
Its
provisions have effect for estates of individuals dying on or
after November 7, 1984 and for gifts made or deemed transfers
occurring on or after that date.
o 0 o

B-13

TREASURY NEWS

epartment of the Treasury • Washington, D.c. • Telephon
FOR IMMEDIATE RELEASE
February 14, 1985
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $ 8,504 million of 52-week bills to be issued
February 21, 1985, and to mature February 20, 1986, were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount Investment Rate
Rate
Low
8.45%
High
8.46%
Average 8.46%

(Equivalent Coupon-Issue Yield) Price
9.16%
91.456
9.17%
91.446
9.17%
91.446

Tenders at the high discount rate were allotted 81%.
TENDERS RECEIVED AND ACCEPTED
Location
Boston $ 461,705 $ 19,705
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

(In Thousands)
Received

Accepted

39,492,275
18,165
15,055
34,250
41,150
1,173,630
80,780
12,570
59,410
12,430
2,219,730
114,695
$43,735,845

7,351,980
8,165
15,055
27,000
27,150
160,530
53,760
12,570
57,410
12,430
643,230
114,695
$8,503,680

Competitive
$41,432,420
Noncompetitive
578,425
Subtotal, Public
$42,010,845
Federal Reserve 1,600,000 1,600,000
Foreign Official
Institutions
125,000
TOTALS $43,735,845 $8,503,680

$6,200,255
578,425
$6,778,680

YPe

B-14

125,000

TREASURY NEWS

tepartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 2:00 p.m.
February 19, 1985
Testimony of the Honorable
James A. Baker, III
Secretary of the Treasury
Before the Senate Appropriations Committee
February 19, 1985

Mr. Chairman and Members of the Committee:
It is a pleasure to meet with you today to discuss our
fiscal affairs and the tasks that lie ahead. The economy has
done very well in the past year and the outlook for the future is
promising. But we are faced with the need to reduce what has
become an excessive rate of Federal spending. Because of that
Federal spending, the prospective budget deficits that would
develop in the absence of any offsetting action are far too large
for our long-run economic health. We must place the Federal
budget deficit on a declining path and keep.it there. With your
help and a bipartisan Congressional effort, I am sure that meaningful reductions in the growth of Federal spending can be
achieved. Legislative action along the lines recommended in the
President's Budget proposals will provide a fiscal framework
within which the economy can continue to prosper.
These past four years have been marked by truly dramatic
improvement in the performance of the U. S- economy. Four years
ago, it was the increasingly held belief that we had lost the
ability to control our economic destiny — that inflation was out
of control, that dwindling availability of natural resources
would put a cap on growth; and, most worrisome of all, we were
told that we had lost the innovative spirit that had propelled
this economy to world leadership.
Now, confidence in our ability to meet the challenges of the
future is being restored by the implementation of an economic
program designed specifically to:
bring inflation under control,

B-15

—

free markets from the burden of unnecessary government
interference,

— restore incentives for productivity and growth,
— and, thereby, increase opportunity for all.
That program has been remarkably successful by almost every
measure of economic performance.
Real growth for 1984 was the highest since 1951.
During the first two years of the current expansion, at
a 6.0 percent annual rate, real growth has been the
strongest for any expansion since the economy pulled out
of the strike-depressed recession trough of late-1949
into the Korean War boom.
— Growth of real business capital spending during this
expansion has far outpaced gains during any previous
postwar recovery.
Our economy has shown itself to be a remarkable jobcreating machine. Spurred by formation of new business
and by technological innovation, more than 7.3 million
jobs have been created during this recovery and expansion.
And even as the economy has shown this remarkable
growth, inflation has stayed under control. For each of
the past three years, it has not exceeded 4%. Last
year, as measured by the GNP deflator, it was the lowest
since 1967. And the trends of wages, oil prices, and
world raw material prices all remain favorable.
I have made a promise to myself that I know I may not be
able to keep. But I shall try. While I will of course
contribute to the development of economic forecasts that we use
for purposes of planning and analysis, I shall try to resist the
temptation to offer specific, detailed, numerical economic forecasts of my own.
The economic projections underlying the budget assume continued real economic growth and a steady decline in unemployment,
inflation, and interest rates.
onsistent with my promise to myself, let me say only this
the overall economic outlook. Prospects are excellent for

sustained economic growth without inflation — provided that we
act promptly and responsibly to continue what we have begun. And
by "we" I should emphasize that I mean to include both Houses of
the Congress, as well as the Executive Branch.
There is still much unfinished business.
We must not rest with the tax rate reduction we enacted in
1981. That simply adjusted for the hyper-inflation that the
economy had been experiencing before. Now we must go on, as the
President has directed, to overhaul the whole tax system — to
increase fairness, simplicity, and economic growth. This element
of our program is, as the President has said, of equal priority
with spending control.
The printed budget document includes a number of revenuerelated measures -- most of which have been submitted before.
These range from tuition tax credits to enterprize zone incentives to technical provisions related to certain trust funds.
The budget does not include the proposals for comprehensive overhaul of the tax system — for, as you know, those proposals, made
public on November 27, remain under review. But we believe that
— with constructive effort by all parties — a comprehensive
restructuring of the tax system could be enacted this year. And
I will be having a good deal more to say about this in other
contexts.
The focus of today's discussion is principally upon our
printed budget, however.
Immediate steps must be taken to narrow the deficit.
Just as important as closing the deficit is the manner by
which it is closed. It would be wrong to go back to our old ways
of pushing up taxes, either legislatively or by bracket creep in
a nonindexed system. In our view, the tax reductions of the past
several years have been largely responsible for the turnaround in
economic performance. This means that deficit reduction must be
accomplished from the spending side.
The large deficits that we face during the remainder of the
decade are due to an excessive rate of Federal spending. The
American people do not feel they are undertaxed. They want
government spending brought under control.
Between 1964 and 1979, Federal outlays averaged 20-1/2
percent of GNP. Now they are in the 24 to 25 percent range.
Federal outlays have virtually been living a life of their own.
The President's budget proposals would restrain the rate of
growth of outlays below that of the economy and shrink the

outlay-GNP ratio down to the 21 percent range by the end of the
decade. This would leave a deficit of less than $100 billion by
1990.
The President's budget proposes a combination of freezes,
reforms, user fees, program cuts and terminations that will
achieve savings for fiscal year 1986 of a little more than $50
billion. This is calculated from the "baseline" path that
spending would take if we did nothing. These reductions are
sufficient to hold total spending on government programs — that
is, everything but debt service — no higher in 1986 than in
1985. It is an ambitious target, but is achievable, without
damaging the social safety net, or our continued defense rebuilding, or any essential government function.
Achievement of our target of $50 billion in reductions would
accomplish two things. The deficit in 1986 would be about $40
billion less than in 1985. And, even more important., the actions
taken this year will have an amplified effect in later years,
resulting in annual savings of more than $100 billion by 1983.
This will set the deficit on a declining path — both in absolute
dollars and, even more significantly, as a share of GNP. Under
our economic assumptions, the deficit would drop from over 5 1/2
percent of GNP this year to less than 3 percent by 1988 — on
down to less than 1 1 / 2 percent by 1990. The exact percentages
are not the issue; the important thing is the trend.
The deficit has been accommodated thus far without damage to
the expansion, and interest rates have declined considerably.
But "real" interest rates remain too high. We need monetary
policies that will allow us to continue strong economic growth
without inflation. Such policies will help get interest rates
down further. At the same time, a firm, convincing policy of
deficit reduction will also help keep us on a course to still
lower interest rates — while insuring that the Government, in
financing the deficit, does not absorb such a large share of the
nation's savings as to impair private productive investment.
Our budget proposal represents a "freeze" in total program
spending. That is something that is easy for most to understand
—- and to most, I think, it makes sense. There will, we know, be
disagreements about what we propose specifically for one program
or another. But we believe our specific proposals are thoroughly
defensible on the merits. And we look forward to working with
the Congress to develop a comprehensive package that will bring
the budget under control — by freezing overall program spending
for fiscal year 1986.
With good will, we believe this can be done. We are sure it
is what the American people want to be done.

TREASURY NEWS

lepartment of the Treasury • Washington, D.c. • Telephone 566-20411
For Release Upon Delivery
Expected at 2:30 p.m.
February 20, 1985

Testimony of the Honorable
James A. Baker, III
Secretary of the Treasury
Before the U.S. Senate Committee on the Budget
February 20, 1985

Mr. Chairman and Members of the Committee:
It is a pleasure to meet with you today to discuss our
fiscal affairs and the tasks that lie ahead. The economy has
done very well in the past year and the outlook for the future is
promising. But we are faced with the need to reduce what has
become an excessive rate of Federal spending. Because of that
Federal spending, the prospective budget deficits that would
develop in the absence of any offsetting action are far too Large
for our long-run economic health. We must place the Federal
budget deficit on a declining path and keep it there. With your
help and a bipartisan Congressional effort, I am sure that meaningful reductions in the growth of Federal spending can be
achieved. Legislative action along the lines recommended in the
President's Budget proposals will provide a fiscal framework
within which the economy can continue to prosper.
These past four years have been marked by truly dramatic
improvement in the performance of the U. S. economy. Four years
ago, it was the increasingly held belief that we had lost the
ability to control our economic destiny — that inflation was out
of control, that dwindling availability of natural resources
would put a cap on growth; and, most worrisome of all, we were
told that we had lost the innovative spirit that had propelled
this economy to world leadership.
Now, confidence in our ability to meet the challenges of the
future is being restored by the implementation of an economic
program designed specifically to:
bring inflation under control.

B-16

f r e e markets from the burden of unnecessary government
interference,
restore incentives for productivity and growth,
and, thereby, increase opportunity for all.
That program has been remarkably successful by almost every
measure of economic performance.
Real growth for 1984 was the highest since 1951.
During the first two years of the current expansion, at
a 6.0 percent annual rate, real growth has been the
strongest for any expansion since the economy pulled out
of the strike-depressed recession trough of late-1949
into the Korean War boom.
Growth of real business capital spending during this
expansion has far outpaced gains during any previous
postwar recovery.
— Our economy has shown itself to be a remarkable jobcreating machine. Spurred by formation of new business
and by technological innovation, more than 7.3 million
jobs have been created during this recovery and expansion.
And even as the economy has shown this remarkable
growth, inflation has stayed under control. For each of
the past three years, it has not exceeded 4%. Last
year, as measured by the GNP deflator, it was the lowest
since 1967. And the trends of wages, oil prices, and
world raw material prices all remain favorable.
I have made a promise to myself that I know I may not be
able to keep. But I shall try. While I will of course
contribute to the development of economic forecasts that we use
for purposes of planning and analysis, I shall try to resist the
temptation to offer specific, detailed, numerical economic forecasts of my own.
The economic projections underlying the budget assume continued real economic growth and a steady decline in unemployment,
inflation, and interest rates.
Consistent with my promise to myself, let me say only this
about the overall economic outlook. Prospects are excellent for
sustained economic growth without inflation — provided that we

act promptly and responsibly to continue what we have begun. And
by "we" I should emphasize that I mean to include both Houses of
the Congress, as well as the Executive Branch.
There is still much unfinished business.
We must not rest with the tax rate reduction we enacted in
1981. That simply adjusted for the hyper-inflation that the
economy had been experiencing before. Now we must go on, as the
President has directed, to overhaul the whole tax system — to
increase fairness, simplicity, and economic growth. This element
of our program is, as the President has said, of equal priority
with spending control.
The printed budget document includes a number of revenuerelated measures -- most of which have been submitted before.
These range from tuition tax credits to enterprize zone incentives to technical provisions related to certain trust funds.
The budget does not include the proposals for comprehensive overhaul of the tax system — for, as you know, those proposals, made
public on November 27, remain under review. But we believe that
— with constructive effort by all parties — a comprehensive
restructuring of the tax system could be enacted this year. And
I will be having a good deal more to say about this in other
contexts.
The focus of today's discussion is principally upon our
printed budget, however.
Immediate steps must be taken to narrow the deficit.
Just as important as closing the deficit is the manner by
which it is closed. It would be wrong to go back to our old ways
of pushing up taxes, either legislatively or by bracket creep in
a nonindexed system. In our view, the tax reductions of the past
several years have been largely responsible for the turnaround in
economic performance. This means that deficit reduction must be
accomplished from the spending side.
The large deficits that we face during the remainder of the
decade are due to an excessive rate of Federal spending. The
American people do not feel they are undertaxed. They want
government spending brought under control.
Between 1964 and 1979, Federal outlays averaged 20-1/2
percent of GNP. Now they are in the 24 to 25 percent range.
Federal outlays have virtually been living a life of their own.
The President's budget proposals would restrain the rate of
growth of outlays below that of the economy and shrink the

n.irlav-GNP ratio down to the 21 percent range by the end of the
decade. This would leave a deficit of less than $100 billion by
1990.
The President's budget proposes a combination of freezes,
reforms, user fees, program cuts and terminations that will
achieve savings for fiscal year 1986 of a little more than $50
billion. This is calculated from the "baseline" path that
spending would take if we did nothing. These reductions are
sufficient to hold total spending on government programs — that
is, everything but debt service — no higher in 1986 than in
1985. It is an ambitious target, but is achievable, without
damaging the social safety net, or our_continued defense rebuilding, or any essential government function.
Achievement of our target of $50 billion in reductions would
accomplish two things. The deficit in 1986 would be about $40
billion less than in 1985. And, even more important, the actions
taken this year will have an amplified effect in later years,
resulting in annual savings of more than $100 billion by 1988.
This will set the deficit on a declining path — both in absolute
dollars and, even more significantly, as a share of GNP. Under
our economic assumptions, the deficit would drop from over 5 1/2
percent of GNP this year to less than 3 percent by 1988 — on
down to less than 1 1/2 percent by 1990. The exact percentages
are not the issue; the important thing is the trend.
The deficit has been accommodated thus far without damage to
the expansion, and interest rates have declined considerably.
But "real" interest rates remain too high. We need monetary
policies that will allow us to continue strong economic growth
without inflation. Such policies will help get interest rates
down further. At the same time, a firm, convincing policy of
deficit reduction will also help keep us on a course to still
lower interest rates — while insuring that the Government, in
financing the deficit, does not absorb such a large share of the
nation's savings as to impair private productive investment.
Our budget proposal represents a "freeze" in total program
spending. That is something that is easy for most to understand
— and to most, I think, it makes sense. There will, we know, be
disagreements about what we propose specifically for one program
or another. But we believe our specific proposals are thoroughly
defensible on the merits. And we look forward to working with
the Congress to develop a comprehensive package that will bring
the budget
under
control
— by freezing
program
spending
With good
will,
we believe
this canoverall
be done.
We are
sure it
for
fiscal
year
1986.
is what the American people want to be done.

TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-204
For Release Upon Delivery
Expected at 11:00 a.m.
February 21, 1985
Testimony of the Honorable
James A. Baker, III
Secretary of the Treasury
Before the House Budget Committee
February 21, 1985

Mr. Chairman and Members of the Committee:
It is a pleasure to meet with you today to discuss our
fiscal affairs and the tasks that lie ahead. The economy has
done very well in the past year and the outlook for the future is
promising. But we are faced with the need to reduce what has
become an excessive rate of Federal spending. Because of that
Federal spending, the prospective budget deficits that would
develop in the absence of any offsetting action are far too large
for our long-run economic health. We must place the Federal
budget deficit on a declining path and keep it there. With your
help and a bipartisan Congressional effort, I am sure that meaningful reductions in the growth of Federal spending can be
achieved. Legislative action along the lines recommended in the
President's Budget proposals will provide a fiscal framework
within which the economy can continue to prosper.
These past four years have been marked by truly dramatic
improvement in the performance of the U. S. economy. Four years
ago, it was the increasingly held belief that we had lost the
ability to control our economic destiny — that inflation was out
of control, that dwindling availability of natural resources
would put a cap on growth; and, most worrisome of all, we were
told that we had lost the innovative spirit that had propelled
this economy to world leadership.
Now, confidence in our ability to meet the challenges of the
future is being restored by the implementation of an economic
program designed specifically to:
bring inflation under control,

B-17

—

free markets from the burden of unnecessary government
interference,

— restore incentives for productivity and growth,
— and, thereby, increase opportunity for all.
That program has been remarkably successful by almost every
measure of economic performance Real growth for 1984 was the highest since 1951.
During the first two years of the current expansion, at
a 6.0 percent annual rate, real growth has been the
strongest for any expansion since the economy pulled out
of the strike-depressed recession trough of late-1949
into the Korean War boom.
Growth of real business capital spending during this
expansion has far outpaced gains during any previous
postwar recovery.
Our economy has shown itself to be a remarkable jobcreating machine- Spurred by formation of new business
and by technological innovation, more than 7.3 million
jobs have been created during this recovery and expansion.
And even as the economy has shown this remarkable
growth, inflation has stayed under control. For each of
the past three years, it has not exceeded 4%. Last
year, as measured by the GNP deflator, it was the lowest
since 1967. And the trends of wages, oil prices, and
world raw material prices all remain favorable.
I have made a promise to myself that I know I may not be
able to keep. But I shall try. While I will of course
contribute to the development of economic forecasts that we use
for purposes of planning and analysis, I shall try to resist the
temptation to offer specific, detailed, numerical economic forecasts of my own.
The economic projections underlying the budget assume continued real economic growth and a steady decline in unemployment,
inflation, and interest rates.
stent with my promise to myself, let me say only this
overall economic outlook. Prospects are excellent for

sustained economic growth without inflation — provided that we
act promptly and responsibly to continue what we have begun. And
by "we" I should emphasize that I mean to include both Houses of
the Congress, as well as the Executive Branch.
There is still much unfinished business.
We must not rest with the tax rate reduction we enacted in
1981. That simply adjusted for the hyper-inflation that the
economy had been experiencing before. Now we must go on, as the
President has directed, to overhaul the whole tax system -- to
increase fairness, simplicity, and economic growth. This element
of our program is, as the President has said, of equal priority
with spending control.
The printed budget document includes a number of revenuerelated measures — most of which have been submitted before.
These range from tuition tax credits to enterprize zone incentives to technical provisions related to certain trust funds.
The budget does not include the proposals for comprehensive overhaul of the tax system — for, as you know, those proposals, made
public on November 27, remain under review. But we believe that
— with constructive effort by all parties — a comprehensive
restructuring of the tax system could be enacted this year. And
I will be having a good deal more to say about this in other
contexts.
The focus of today's discussion is principally upon our
printed budget, however.
Immediate steps must be taken to narrow the deficit.
Just as important as closing the deficit is the manner by
which it is closed. It would be wrong to go back to our old ways
of pushing up taxes, either legislatively or by bracket creep in
a nonindexed system. In our view, the tax reductions of the past
several years have been largely responsible for the turnaround in
economic performance. This means that deficit reduction must be
accomplished from the spending side.
The large deficits that we face during the remainder of the
decade are due to an excessive rate of Federal spending. The
American people do not feel they are undertaxed. They want
government spending brought under control.
Between 1964 and 1979, Federal outlays averaged 20-1/2
percent of GNP. Now they are in the 24 to 25 percent range.
Federal outlays have virtually been living a life of their own.
The President's budget proposals would restrain the rate of
growth of outlays below that of the economy and shrink the

outlav-GNP ratio down to the 21 percent range by the end of tthe
l
decade. This would leave a deficit of less than $100 billion b v
1990.
The President's budget proposes a combination of freezes,
reforms, user fees, program cuts and terminations that will
achieve savings for fiscal year 1986 of a little more than $50
billion. This is calculated from the "baseline" path that
spending would take if we did nothing. These reductions are
sufficient to hold total spending on government programs — that
is, everything but debt service — no higher in 1986 than in
1985. It is an ambitious target, but is achievable, without
damaging the social safety net, or our continued defense rebuilding, or any essential government function.
Achievement of our target of $50 billion in reductions would
accomplish two things. The deficit in 1986 would be about $40
billion less than in 1985. And, even more important, the actions
taken this year will have an amplified effect in later years,
resulting in annual savings of more than $100 billion by 1988.
This will set the deficit on a declining path — both in absolute
dollars and, even more significantly, as a share of GNP. Under
our economic assumptions, the deficit would drop from over 5 1/2
percent of GNP this year to less than 3 percent by 1988 — on
down to less than 1 1/2 percent by 1990. The exact percentages
are not the issue; the important thing is the trend.
The deficit has been accommodated thus far without damage to
the expansion, and interest rates have declined considerably.
But "real" interest rates remain too high. We need monetary
policies that will allow us to continue strong economic growth
without inflation. Such policies will help get interest rates
down further. At the same time, a firm, convincing policy of
deficit reduction will also help keep us on a course to still
lower interest rates — while insuring that the Government, in
financing the deficit, does not absorb such a large share of the
nation's savings as to impair private productive investment.
Our budget proposal represents a "freeze" in total program
spending. That is something that is easy for most to understand
—- and to most, I think, it makes sense. There will, we know, be
disagreements about what we propose specifically for one program
or another. But we believe our specific proposals are thoroughly
defensible on the merits. And we look forward to working with
the Congress to develop a comprehensive package that will bring
With good
will,
we believe
this canoverall
be done.
We are
sure it
the budget
under
control
— by freezing
program
spending
is
what
the
American
people
want
to
be
done.
for fiscal year 1986.

TREASURY NEWS

apartment
of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
February 19, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,002 million of 13-week bills and for $ 7,004 million
of 26-week bills, both to be issued on February 21, 1985, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing May 23, 1985
Discount Investment
Rate
Rate 1/
Price

26-week bills
maturing August 22. 1985
Discount Investment
Rate 1/
Price
Rate

8.11%
8.16%
8.15%

8.24%
8.26%
8.25%

8.39%
8.45%
8.44%

97.950
97.937
97.940

8.72%
8.74%
8.73%

95.834
95.824
95.829

Tenders at the high discount rate for the 13-week bill6 were allotted 48%.
Tenders at the high discount rate for the 26-week bills were allotted 45%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
$ 405,670
14,877,050
25,935
80,415
60,940
47,635
1,216,175
94,575
15,180
52,800
50,250
1,474,290
341,485

$ 255,670
5,662,295
25,935
54,415
56,900
45,635
174,455
54,575
15,180
52,800
46,150
216,570
341,485

390,940
15,100,485
18,935
45,890
44,430
32,805
1,254,065
78,310
34,350
52,595
29,870
1,678,060
353,850

$
40,940
5,920,970
18,935
34,890
44,430
30,705
128,360
44,160
23,350
50,595
22,120
291,190
353,850

$18,742,400

$7,002,065

$19,114,585

$7,004,495

$15,995,005 $4,254,670
1,286,185
1,286,185
$17,281,190 $5,540,855

$16,258,735
990,450
$17,249,185

$4,148,645
990,450
$5,139,095

1,412,210 1,412,210

1,350,000

515;400

515,400

$19,114,585

$7,004,495

49,000

$18,742,400

$7,002,065

\J Equivalent coupon-i6sue yield.

B-18

Accepted

TREASURY NEWS
epartmerit of the Treasury • Washington, D.c. • Telephone 566-204
FOR RELEASE UPON DELIVERY
February 20, 1985
Testimony of
The Honorable Katherine D. Ortega
Treasurer of the United States
Before the
Joint Hearing
of
House Banking Subcommittee on
Consumer Affairs & Coinage
and
Senate Banking Subcommittee on Consumer Affairs
February 20, 1985
Mr. Chairman, I appreciate the opportunity to appear before
this Joint hearing of the Banking Committees of the House and
Senate to present the Department of the Treasury's views on
H.R. 47 and S. 233. These bills provide for the issuance of
commemorative coinage to help pay for restoration of the Statue
of Liberty and Ellis Island.
The Department of Treasury has traditionally resisted the
minting and marketing of commemorative coins on the grounds that
we are in the business of minting legal tender coins for the
money supply to serve the public interest and should not be
involved in private fundraising ventures. While Treasury is
aware that there are numerous causes worthy of financial
support, including the Statue of Liberty-Ellis Island
restoration, it hopes that the use of Federal minting facilities
for such purposes can be limited in the future.
B- 19

- 2 -

The Statue of Liberty-Ellis Island Centennial Commission was
established by the Secretary of Interior at the request of
President Reagan and the goal of restoring these monuments
through private fundraising is very much in keeping with
this Administration's philosophy.
The legislation states that the Secretary of the Treasury
shall take all actions necessary to ensure that there is no
net cost to the taxpayer.

The Department of Treasury takes

seriously its role of overseer of the public trust and would
like to suggest the Committee go further to ensure there
would be no cost to the taxpayer.

We would like the Committee

to explore the possibility of the private sector underwriting
the cost of this project as another safeguard mechanism.
In addition, the proposed legislation authorizes a general
waiver of the procurement regulations.

The procurement rules

assure competitive bidding which reduces the cost, guarantees
the quality of services provided, and maintains fairness in
government contracting.

However, the procurement requirements

also offer opportunities to disappointed bidders to challenge
the low bid award and in turn delay implementation of the
program.

Therefore, in this instance the waiver would be

useful in meeting the very demanding time frame and marketing
program in a venture of this nature.

We will establish our

own internal control regulations to make sure the procurement
process is fair yet fast.

- 3 The Department has two recommendations of changes to
the proposed bill that we believe would allow us to be more
flexible in the manufacturing and marketing of the coinage.
One, that the gold coin not be limited to only proof coins,
but that we also be authorized to produce uncirculated gold
coins as well. This additional coin will provide us with
the opportunity to offer a complete set of uncirculated statue
of Liberty-Ellis Island coins. It also provides an opportunity
for the jewelry market. The uncirculated coin is better suited
for jewelry as it does not highlight scratches and fingerprints
as do unprotected proof coins.
Two, a manufacturing organization needs flexibility to
use its facilities and equipment in an efficient and cost
effective manner. In keeping with a continuing mint objective
to be responsive to the many market segments for our products,
we need the flexibility of manufacturing each coin at our
different facilities. Being able to mint at our different
facilities would give us the opportunity to inject interest
in the program to collectors and the general public should we
encounter a sagging market. Therefore, we would recommend the
removal of the restriction of manufacturing at only one
facility.

- 4 -

The Department of Treasury urges this joint hearing to
earnestly consider these two changes in view of the magnitude of
the program proposed by these two bills and the unique marketing
program needed to ensure the success of the fund raising efforts
of the Statue of Liberty-Ellis Island Foundation.
That concludes my prepared remarks. I would welcome any
questions you or members of the two Committees might have.

# # »

rREASURYNEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M. February 19, 1985
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $14,000 million, to be issued February 28, 1985. This
offering will provide about $525
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount of
$13,467 million, including $1,783 million currently held by Federal Reserve Banks as agents for foreign and international monetary
authorities and $2,237 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 $7,000
million, representing an additional amount of bills dated
November 29, 1984,
and to mature May 30, 1985
(CUSIP
No. 912794 HE 7), currently outstanding in the amount of $6,828
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $7,000 million, to be dated
February 28, 1985,
and to mature August 29, 1985
(CUSIP
No. 912794 HX 5).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing February 28, 1985. 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.
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.

B-20

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. c.
20239 Drior to 1:00 p.m., Eastern Standard time, Monday,
February 25, 1985.
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. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
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

- 3 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 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 $1,000,000
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 February 28, 1985, in cash or other immediately-available funds
or in Treasury bills maturing February 28, 1985.
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.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

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

February 19, 1985

TREASURY TO AUCTION $7,000 MILLION
OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury will auction $7,000 million
of 5-year 2-month notes to raise new cash. Additional amounts
of the notes may be issued to Federal Reserve Banks as agents
for foreign and international monetary authorities at the average
price of accepted competitive tenders.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
Attachment
oOo

B-21

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR 2-MONTH NOTES
TO BE ISSUED MARCH 1, 1985
February 19, 1985
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation

$7,000 million

5-year 2-month notes
Series J-1990
(CUSIP No. 912827 RY 0)
Maturity date
May 15, 1990
Call date
No provision
Interest rate
To be determined based on
the average of accepted bids
Investment yield
To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
November 15 and May 15 (first
payment on November 15, 1985)
Minimum denomination available.... $1,000
Terms of Sale:
Method of sale
Yield Auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the average price up to $1,000,000
Accrued interest
payable by investor
None
Payment by non-institutional
investors
Full payment to be
submitted with tender
Payment through Treasury Tax
and Loan (TT&L) Note Accounts
Acceptable for TT&L Note
Option Depositaries
Deposit guarantee by
designated institutions
Acceptable
Key Dates:
Receipt of tenders
Tuesday, February 26, 1985,
_.
,
prior
to 1:00 p.m., EST
e Ul
Settlement (final payment
due from institutions)
a) cash or Federal funds
Friday, March 1, 1985
b) readily collectible check
Wednesday, February 27, 1985

"REASURY NEWS
FOR IMMEDIATE
RELEASE
February
20, 1985
artment
of the
Treasury • Washington, D.c.
• Telephone
566-2041
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $£,013 million of
$17,910 million of tenders received from the public for the 2-year
notes, Series S-1987, auctioned today. The notes will be issued
February 28, 1985, and mature February 28, 1987.
The interest rate on the notes will be 10%. The range of
accepted competitive bids, and the corresponding prices at the 10%
interest rate are as follows:
Yield
Price
99.858
10.08%
Low
99.752
10.14%
High
10.12%
99.788
Average
Tenders at the high yield were allotted 92%.
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
430,750
$
14,,179,710
29,250
149,200
55,245
75,435
1 ,680,665
142,880
50,845
127,380
27,650
957,440
3,795
$17 ,910,245

Accepted
$
99,150
7,249,700
29,250
124,200
55,085
75,435
619,985
124,800
50,845
125,840
27,570
427,480
3,795
$9,013,135

The $9,013 million of accepted tenders includes $953
million
of noncompetitive tenders and $ 8,060 million of competitive tenders
from the public.
In addition to the $9,013 million of tenders accepted in the
auction process, $320 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $645 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

-22

REASURYNEWS
rtment of the Treasury • Washington, D.C. •Telephone 566-2041
'OR IMMEDIATE RELEASE
'ebruary 22, 1985

Brien Benson

(202) 566-2041

Robert Snow

(Secret Service)
(202) 535-5708

TREASURY ANNOUNCEMENT
The Treasury Department today announced a new enforcement policy
:oncerning currency reproductions. The Department will henceforth
permit the use of photographic or other likenesses of United States
ind foreign currencies for any purpose, provided the items are
reproduced in black and white and are less than three-quarters or
jreater than one-and-one-half times the size, in linear dimension, of
sach part of the original item. Furthermore, negatives and plates
ised in making the likenesses must be destroyed after their use.
The policy is consistent with the Supreme Court's decision of
July, 1984, in the case of Regan v. Time, Inc., and was made with the
concurrence of the Department of Justice. This decision will, for
the first time, permit the use of currency reproductions in
commercial advertisements, provided they conform to these size and
color restrictions.
Under the new policy, the Treasury Department expects to
increase enforcement efforts against color currency reproductions and
against black-and-white reproductions that do not conform to the size
restrictions.
These restrictions are contained in Title 18 USC section 504.
0O0
3-23

REASURY NEWS
artment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
February 22, 1985

CONTACT:

Brien Benson
(202) 566-2041

TREASURY ANNOUNCES PLANS TO OFFER ITS
MARKETABLE SECURITIES IN BOOK-ENTRY FORM ONLY
The Department of the Treasury has announced plans to offer
issues of its marketable bonds and notes in book-entry form
exclusively, beginning in 1986. The Treasury hopes that this
early announcement will help investors and the financial
community with their planning and enable States to change their
laws, where such laws may still specify holding securities in
certificate form for certain purposes.
Although Treasury bonds and notes are available today in both
engraved certificate and book-entry form, approximately 95% of
Treasury marketable securities, including all Treasury bills, are
presently held as book-entries. The book-entry procedure, in
which securities are issued and maintained as computerized
records, offers important benefits to investors, the financial
community, and the Treasury by substantially improving operating
efficiency and eliminating the risk of loss in handling engraved
certificates. Payment at maturity is automatic and does not
require presentation of a security. Recognizing the efficiencies
of the book-entry system, the President's Private Sector Survey
on Cost Control (Grace Commission) has endorsed Treasury plans
for full book-entry.
Investors may obtain bonds and notes in book-entry form today
through depository institutions, brokers and dealers that have
book-entry accounts linked to or maintained directly at Federal
Reserve Banks and Branches. When full book-entry is implemented
in 1986, investors will also be able to establish book-entry bond
and note accounts directly with the Treasury, as they can today
for Treasury bills. A new automated system currently is being
developed for Treasury by the Philadelphia Federal Reserve Bank
to maintain and service such marketable securities.
Bonds and notes that have been issued under offering
circulars that authorize both certificate and book-entry form
will continue to be available in such forms even after the
implementation date for full book-entry in 1986.
During the coming year, Treasury intends to provide periodic
updates on the status of its book-entry plans.
###

B-24

QUESTIONS AND ANSWERS ABOUT FULL BOOK-ENTRY
1.

Why is Treasury planning to move to full book-entry?

Book-entry securities are significantly less costly to issue and
service than engraved certificates. Book-entry also reduces the risk of loss
to investors.
2. What does full book-entry mean?
Full book-entry means that about mid-1986 (the exact date has not yet
been determined) the Treasury will offer new issues of marketable Treasury
bonds and notes in book-entry form only. Engraved certificates will not be
available for these new Issues.
3. How do book-entry Treasury securities differ from registered securities?
Book-entry securities are evidenced by computer entries on the
records of Treasury, a Federal Reserve Bank, a financial Institution, or other
custodian, while registered securities are engraved certificates held by the
investor. With book-entry securities, interest payments and the par amount at
maturity are paid automatically. With registered securities, interest is paid
automatically, but the certificate must be presented for payment at maturity.
4. In what forms are Treasury securities currently available?
Treasury bills have been offered only 1n book-entry form since 1979.
New issues of Treasury bonds and notes are offered today 1n either book-entry
or registered form.
5. What Treasury securities are affected?
All Treasury marketable securities will be affected. The elimination
of engraved certificates will only affect bonds and notes since bills have
been available only in book-entry form since 1979. However, all Treasury
marketable securities - bonds, notes and bills - will be affected in that they
will all be governed by a new, single set of regulations. No other Treasury
securities, including savings bonds, will be affected.
6. If an Investor has a registered or bearer security issued prior to full
book-entry, will 1t have to be converted to book-entry in 1986?
No. If an offering of Treasury securities authorized their issuance
1n bearer or registered form, they will continue to be available in such form
until the maturity of those securities, and no outstanding certificates will
be affected by full book-entry.

7.
Will my existing book-entry account at a financial institution be
affected by this change?
No. Investors will be able to continue to have their Treasury
securities held in book-entry accounts at financial institutions, brokers,
etc. With this change, investors will also be able to hold book-entry bonds
and notes directly in a Treasury account.
3. Once full book-entry is in effect, will I be able to purchase Treasury
securities through a commercial financial institution?
Yes, purchases can be arranged in the same way as they are today. In
addition, investors will be able to purchase book-entry bonds and notes
directly from a Federal Reserve Bank or Branch and have the book-entry
securities held in an account maintained by the Department of the Treasury. A
new automated system is being developed which will allow investors to have a
single account with Treasury for their bonds, notes and bills.
9. Will I be charged a fee for holding book-entry securities in an account
with Treasury?
It is expected that book-entry note and bond accounts with the
Treasury will be maintained free of charge, just as book-entry bill accounts
are today.
10. Will I be able to sell or pledge book-entry securities?
Yes. Book-entry bonds and notes held at financial institutions and
securities dealers will remain as marketable as bonds and notes issued in
certificate form. However, securities held in the Treasury system will not be
available for a direct pledge or sale. They will first have to be transferred
to a financial institution before the pledge or sale can be conducted.
11. Will any exceptions be made to full book-entry for institutional
investors who may currently be required by State law or regulation to hold
Treasury securities in certificate form?
No. New issues of marketable Treasury securities will not be
available in certificate form once full book-entry is in effect.

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

REMARKS OF
THE HONORABLE JOHN M. WALKER, JR.
ASSISTANT SECRETARY (ENFORCEMENT AND OPERATIONS)
U.S. DEPARTMENT OF THE TREASURY
AT THE JOINT MEETING OF THE PRESIDENT'S
ORGANIZED CRIME DRUG ENFORCEMENT TASK FORCE AMD
THE NEW ENGLAND LAW ENFORCEMENT TASK FORCE
COORDINATING COMMITTEES
FEBRUARY 15, 19 8 5
The Struggle Against Drug-Related Crime:
The Treasury Initiatives
I want to thank the OCDE Task Force and the New England Law
Enforcement Coordinating Committees, and especially the United
States Attorney, Bill Weld, for the opportunity to participate
in this joint meeting. It is always a special pleasure for me
to have the opportunity to interact directly with professionals
in law enforcement, and to discuss matters that concern all of
us in the struggle against crime.
Today, I would like to bring you up to date on developments
in drug enforcement from the Treasury perspective. Rut first,
I think it might be helpful to consider where we were in our
drug-related initiatives four years ago, and where we are
today.
From both a Treasury perspective, and a governmental
perspective, one thing is clear: we have learned a lot from
our experience. We have applied this experience and we have
progressed as a result. We have also built the foundation
for more progress in the future. But as we all know, the
challenge ahead of us looms as large as ever.
Treasury's contribution to our nation's drug enforcement
strategy is in three areas: interdiction of drug supplies by
U.S. Customs; financial investigations under the Bank Secrecy
Act and the Internal Revenue Code, conducted by the IRS and
Customs; and ATF investigations into the firearms and explosives
violations that support organized crime, including the ^iruq
trade. I will address each of these areas, but as an" introduction I would like to share some observations regarding
drug enforcement on the whole--observations on what we have
learned.
B-25

- 2 First, we have learned from experience that the drug
trafficker is sophisticated, well-equipped and well-financed.
From our programs to seize his drugs as they enter into the
country, we have learned that he is informed—well informed —
about Federal initiatives to crack down on smuggling and
adept at responding to enforcement pressure by changing his
methods. For example, we have seen drug smugglers—who used
to invade South Florida with impunity—shift to more remote
localities. Much of the drug smuggling traffic in the North
Atlantic regions, including traffic here in New England, has
resulted from the intensity of our effort in the South. We
have also seen a greater shift to concealment of drugs in
cargo shipments. For example, recently—as in the p a s t Customs has seized cocaine that it has found concealed in
shipments of flowers and other perishables.
Second, we have learned that coordination among Federal
agencies is not only a good idea, it is essential. Our
organizing principle—that every Federal agency must be in
a position to contribute its particular expertise to the
fight against drug trafficking—seemed, four years ago,
unrealistic and overly ambitious. Today, we regard it as a
fact of enforcement life.
All of the President's major initiatives have incorporated this principle: The South Florida Task Force, the
National Narcotics Border Interdiction System and, of course,
the OCDE Task Forces and the LECC's.
Third, we have recognized that much of the battle against
drug-related crime is, and must be, fought at the State and
local levels. Accordingly, we realize now how much is at
stake in carefully coordinating Federal drug enforcement with
State and local efforts. The LECC's, through meetings such
as this one, carry out this realization. Another example is
the National Center for State and Local Lav/ Enforcement
Training, which Treasury and Justice administer jointly, at
the Federal Lav/ Enforcement Training Center.
From Treasury's financial investigations under the Bank
Secrecy Act and the Internal Revenue Code, we reached a fourth
conclusion: that the trafficker is financially vulnerable.
We have done much to exploit that vulnerability. The OCDE
Task Forces, for example, have as one of their principal
objectives the targeting and destroying of the financial
base of drug trafficking organizations.
From the results of the OCDE Task Forces themselves, we
•have seen that organized crime is vast in its depth and
reach. We have also seen that substantial 'inroads can be
made when we combine the task force approach with enhanced
investigative and prosecutorial resources.

- 3 Each of these conclusions has, of course, influenced
us as we have developed our major initiatives. I would now
like to briefly describe how Treasury is doing in those
initiatives for which it has the lead responsibility.
In drug interdiction, Treasury is seizing more drugs—
far more—than ever before in its history. Customs seized
three times the amount of heroin in Fiscal Year 1984
as it did in Fiscal Year 1981. The amount of cocaine seized
increased seven-fold. Even though Fiscal Year 1984 was a
record year, seizures this Fiscal Year may well exceed last
year's figures. In the first quarter of Fiscal Year 1985,
cocaine is up 23% over last year's total, and heroin is up 30%.
I hasten to add that we are still a long way from
stopping drugs from crossing our borders. And there are two
areas that need particular attention. One is the extremely
challenging task of detecting air and marine drug smuggling
at and around U.S. border areas. We are now engaged in the
process of improving this detection capability on a longrange basis. The other is obtaining in usable form tactical
intelligence in drug smuggling. To the extent that we can
make further improvements in our ability to collect and
transmit this intelligence, we can improve our interdiction
success.
ATF's Role in the OCDE Task Force
I mentioned earlier that the Bureau of Alcohol, Tobacco
and Firearms is also playing a key role in enforcement against
narcotics-related crime. ATF's 84 agents assigned to the
OCDE Task Forces are investigating the firearms and explosivesrelated violations that support the drug trade. Since joining
the Task Forces, these ATF agents have initiated over 250
cases involving more than 450 defendants. Back in 1981, we
were not fully exploiting the link between narcotics trafficking
and weapons trafficking. Today, we accept that this is an
essential part of our strategy.
Financial Investigations
Treasury's third contribution to the President's drug
strategy is its financial investigations. During the past
two days, you have heard some in-depth discussions regarding
financial investigations, addressing the means by which drug
money moves and the techniques for tracking drug proceeds.
I would like to take this opportunity to comment on Treasury's
overall effort to attack the financial base of organized
crime.

- 4 During the past four years, Treasury has greatly
expanded the resources that it directs to this major effort:
° We now have forty task forces working financial
investigations, up from two when we started.
This is over and above the thirteen OCDE task forces,
to which IRS and Customs have contributed approximately 400 special agents.
° We have established and developed the Financial Law
Enforcement Center at U.S. Customs, to provide analytical
support to on-going investigations and to generate
new leads.
° Federal bank examiners, at our request, have expanded
their examination procedures to ensure greater compliance
with reporting and recordkeeping requirements under
the Bank Secrecy Act.
° Treasury has markedly increased its
gations of banks suspected of
laundering ventures. IRS has
300 Bank Secrecy Act cases in

criminal investicooperating in money
opened approximately
the last four years.

° We have put at least eighteen major money laundering
syndicates out of business since 1980--syndicates
that had collectively laundered at least $2.8 billion
in crime proceeds.
These results are further indications of the value of
financial investigations. They are a potent weapon against
crime for several reasons:
° They can uncover the high-level criminals in a
narcotics enterprise, who are insulated from the
drugs themselves.
° Money seizures and evidence of huge transactions add
enormous jury appeal to a case.
° Seizures and forfeitures deprive an organization of
the means to continue its illegal activity. Drugs
can be replaced, but it is harder to replace money.
° Finally, the Bank Secrecy Act serves as an independent
basis for prosecution.
Financial investigations have served us well. But,
despite this progress, it is always difficult to assess our
impact on the money laundering problem. We do know, however,
that there is a large surplus in currency in the Florida
region, as reported by the Florida Federal Reserve. This
surplus is approximately $6 billion annually.

- 5 Not all of the currency surplus, of course, results from
drug trafficking, but we believe that a significant portion of
it represents narcotics proceeds.
A large part of the surplus may stem from laundering
accomplished overseas. For example, of the $6 billion, $1
billion came into the U.S. from the Central Bank of Panama.
Panama, as you all know, is known for its strict laws protecting
the identity of its banking customers and of the owners of its
corporations.
We have attempted to reach an agreement with the
government of Panama under which we could have access to
banking records when a suspected drug or money laundering
offense is involved. We have had mixed results so far, and
we are continuing to press for an agreement that will be
useful to law enforcement. The recent agreement with Great
Britain covering the Cayman Islands is an example of the type
of a mechanism that would help solve our problems with respect
to Panama.
In addition to the Florida surplus, we have had other
indications of extensive offshore money laundering. In June
of 1983, for example, Customs apprehended a licensed CPA in
Miami who was preparing to leave the country, bound for Panama
in a Lear Jet. Inside the aircraft Customs discovered $5.4
million, mostly in $20 bills. The CPA, Ramon Milian-Rodriguez,
was the head of a huge money laundering enterprise that had
arranged for the offshore laundering of over $300 million a
year. A new and possibly similar case has arisen in Texas.
A week ago, Customs seized $5,850,000 and a Saberliner aircraft
in Alice, Texas, and arrested four suspects.
Another way we are addressing the offshore money laundering
problem is through reporting of transactions—not just currency
transactions, but all kinds, including wire transfers—between
U.S. and foreign financial institutions. Because of the
great volume of such transactions, we cannot require routine
reporting without creating a substantial burden for the
banking industry. Instead, we intend to require reporting
of specific classes of transactions that are likely to reveal
currency flows possibly associated with illicit financial
activity.
In addition to the general problem of offshore laundering,
there are other issues affecting Bank Secrecy Act enforcement
that are of concern to us.
One is the problem of trafficking in cashier's checks.
These checks circulate among drug traffickers just as if they
were cash. While we require reporting when they enter or
leave the country in bearer form, we are now considering whether

- 6 we-should require reporting when the checks are in order
form as well. Because traffickers and money launderers use
false payees, shell corporations and forgeries, the fact
that a check is in order form does not stop it from being
used in money laundering. We are now exploring regulatory
solutions to this problem.
Besides the measures I have described, our attack on
money laundering needs another type of improvement. It needs
greater active participation by the financial community. I
am not proposing that financial institutions themselves be
saddled with the task of enforcing the lav/. But I am proposing
that banks and their employees take a more active part in
referring potential violations to law enforcement agencies.
I would like to draw an analogy here—the analogy is to
citizen's associations and neighborhood v/atches that fight
crime in communities across the nation. We must have the
same type of vigilance on the part of the financial community.
There is a major issue confronting us—the Right to
Financial Privacy Act, which today deters bank employees
from telling law enforcement about suspicious transactions.
While the current law does allow a bank employee to disclose
the fact that the institution has information that may be
relevant to a violation, it does not allow disclosure of the
information itself. I am not suggesting that we should do
av/ay with financial privacy. I do think, hov/ever, that the
balance could be shifted more toward lav/ enforcement by
permitting—indeed encouraging—bank disclosure of suspicious
activity.
Another way we can battle the money laundering problem
is through more use of civil penalties. I am convinced
that the size of the money laundering threat requires us to
pursue every avenue we have. Civil penalties serve a vital
purpose in encouraging compliance.
In sum, I am also convinced that we need to do more
to impress on the financial community that they have a cruciaL
responsibility here. They must be vigilant in detecting and
reporting illicit financial activity, if we are to have a
chance of bringing money laundering under control.
To conclude, Treasury is moving against drug-related
crime on three major fronts: interdiction, weapons violations,
and money laundering. We must face the realization, however,
that the drug problem is staggering in its dimensions, and v/e
have to increase the effectiveness of all the measures at our
disposal to combat it. With respect to money laundering in
particular, we are pursuing, as we must, new ways to attack
the financial base that supports the drug trade and all
organized
Thank crime.
you very much.

TREASURY NEWS

apartment of the Treasury • Washington, D.c. • Telephone 566-204
February 25, 1985

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,002 Billion of 13-week bills and for $7,007 million
of 26-week bills, both to be issued on February 28, 1985, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing May 30, 1985
Discount Investment
Price
Rate
Rate 1/
8.32%
8.39%
8.36%

8.62%
8.69%
8.66%

97.897
97.879
97.887

26-week bills
iturlng August 29, 1985
Discount Investment
Price
Rate
Rate 1/
:

8.51%
8.54%
8.53%

9.02%
9.05%
9.04%

95.698
95.683
95.688

Tenders at the high discount rate for the 13-week bills were allotted 4%.
Tenders at the high discount rate for the 26-week bills were allotted 15%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

402,160
13,274,660
25,605
52,260
56,095
58,660
1,388,925
90,990
24,930
59,200
40,885
1,241,555
292,970

$
52,160
5,293,260
25,605
52,260
56,095
58,660
650,165
55,990
24,930
59,200
40,885
339,555
292,970

$17,008,895

$7,001,735

$14,336,765
1,185,845
$15,522,610

Accepted

$
385,840
18,665,675
:
20,870
74,170
54,570
45,795
1,179,585
53,715
10,115
68,405
32,410
1,408,605
:
329,130

$
35,840
5,957,925
20,870
56,320
36,285
41,560
331,435
13,715
10,115
68,405
23,160
81,755
329,130

$22,328,885

$7,006,515

$4,329,605
1,185,845
$5,515,450

:
:
:

$19,535,395
917,190
$20,452,585

$4,213,025
917,190
$5,130,215

1,134,185

1,125,000

352,100

751,300

$17,008,895

$7,001,735

$22,328,885

$7,006,515

\J Equivalent coupon-issue yield.

B-26

Received
:

TREASURY NEWS

9epartment of the Treasury • Washington, D.c. • Telephone 566-204
FOR RELEASE AT 4:00 P.M.

February 26, 1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $14,000 million, to be issued March 7, 1985.
This
offering will provide about $550
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount of
$ 13,456 million, including $ 1,125 million currently held by Federal Reserve Banks as agents for foreign and international monetary
authorities and $ 3,491 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 $7,000
million, representing an additional amount of bills dated
December 6, 1984,
and to mature
June 6, 1985
(CUSIP
No. 912794 HF 4 ) , currently outstanding.in the amount of $6,827
million, the additional and original bills to be freely
interchangeable.
182-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
September 6, 1984,
and to mature September 5, 1985 (CUSIP
No. 912794 HL 1 ) , currently outstanding in the amount of $8,442
million, the additional and original bills to be freely
interchangeable.
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing March 7, 1985.
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.
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.
B-27

- 2Tenders will be received at Federal Reserve Banks and
BranchesTnd ^ t h e Bureau of the P ^ J S ^ - ^ J " ' D ' C '
20239, prior to 1:00 p.m., Eastern Standard time, Monday,
March 4, 1985.
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. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Bankinq 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
Payment for the full par amount of the bills applied for
any noncompetitive awards of this issue being auctioned prior to
must accompany all tenders submitted for bills to be maintained
the designated closing time for receipt of tenders.
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

- 3 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 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 $1,000,000
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
March 7, 1985,
in cash or other immediately-available funds
or in Treasury bills maturing March 7, 1985.
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.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

TREASURY NEWS®

ipartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOP PPL EASE rrPQN DELIVERY
EXPECTED AT 10:00 AM
Wednesday, February 27, 1985

TESTIMONY OF THE HONORABLE
JAMES A. BAKER III
SECRETARY OF THE TREASURY
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE

Mr. Chairman and Members of the Committee:
It is a pleasure to appear here today to discuss
fundamental tax reform with you. It is indeed fitting that my
first appearance as.Secretary of the Treasury before the
Committee on Ways and Means is in connection with hearings to
reexamine the basic principles of taxation. Because this is
the first appearance before this Committee of any
administration spokesman on the subject of tax reform, with
your permission, Mr. Chairman, I would like to read my entire
statement.
Earlier this month in his State of the Union Address, the
President called for "a Second American Revolution," a
revolution of hope and opportunity for all Americans. He
stressed the idea that freedom is the key to this revolution's
success.
For the economy, freedom means less arbitrary
interference by government- Freedom means that the
marketplace and not government determines what businesses
produce, how they produce it, and how that production is
organized and financed. Freedom means that the marketplace
and not government shapes individual consumption and
investment decisions. Freedom means that the tax structure
must be designed to be as neutral as is practicable with
respect to business and investment decisions.
Absent compelling reasons to the contrary, the tax system
must not be used to favor one taxpayer over another, to favor
one industry over another, to favor one form of consumption
over another, or to favor one investment over another. To
perpetuate these favoritisms in the absence of such reasons
would be to restrain economic freedom and deny the American

people a standard of living they could otherwise obtain.
This is why fundamental tax reform is so important. A
tax system that is unfair, that is unnecessarily complicated,
and that interferes with everyday economic decisions being
made by businesses, investors, and consumers is a tax system
that restrains economic growth; and economic growth is crucial
to a Second American Revolution.
'The economy is currently experiencing its strongest
sustained rate of growth since the mid-1960's. We are in our
27th month of economic expansion. Real growth for 1984 alone
was the highest it has been since 1951. During the first two
years of the current expansion, real growth, at a 6.1 percent
annual rate, has been the strongest for any expansion since
the economy pulled out of the strike-depressed recession
trough of late 1949 and into the Korean War boom.
This growth has generated employment levels never before
attained in the history of our nation. During this period of
expansion-, 7.3 million jobs have been created.
Importantly, this growth has taken place without high
inflation. Over the last three years inflation has averaged
just 3.9 percent. In none of these years has it exceeded 4
percent. Last year, as measured by the GNP deflator 4th
quarter over 4th quarter, inflation was the lowest it has been
since 1967.
Prospects for continued growth without inflation are
excellent provided that we act promptly and boldly to continue
what we have begun. The President has instructed me as a part
of this plan of action to begin work with Congress to develop
bipartisan tax reform legislation to further nurture economic
growth that will provide prosperity for all to share.
Common threads are woven into the fabric of most of the
major reform proposals under serious consideration.
Therefore, even though there are marked differences among
these plans — and there will undoubtedly have to be
compromises ~
there are sufficient similarities and a
sufficient sharing of common principles that we have ample
basis to begin a serious bipartisan effort.
We are willing to reexamine all provisions of the
Treasury package in light of the thoughtful views and comments
we have received, and will receive, from taxpayer groups,
members of the business community, members of Congress and
their staff, distinguished experts, and — not least — the

sometime forgotten Americans, the so-called "ordinary
taxpayers."
That is what the President had in mind when he has asked
me, on his behalf, to work with Congress to develop bipartisan
legislation that will reform and restructure our tax system
for fairness, simplicity, and economic growth. Only if
Congress and the administration share a common commitment will
we be able to enact such historic legislation — and do it
this year.
The President, in his State of the Union Address on
February 6, 1985, enumerated some of the goals of tax reform.
These goals were:
— Tax reform will not be a tax increase;
— The home mortgage interest deduction will not be
jeopardized;
— Personal tax rates will be reduced by removing many
preferences, with a top rate no higher than 35
percent;
— Corporate tax rates will be reduced while maintaining
incentives for capital formation; and
— Individuals living at or near the poverty line will
be exempt from income tax.
Mr. Chairman, I am here today at your request to open
those working discussions with you and members of this
committee. As I indicated to you in our earlier
conversations, I can testify today only with respect to
general principles. I am not yet prepared to discuss
provisions of the Treasury Department's study in detail. I
will, of course, be prepared to testify in detail
subsequently, as your hearings on this vital subject progress.
Today, I would like to open the dialogue by elaborating on the
principles to which we believe fundamental tax reform should
conform.
Principles for Tax Reform
We believe that the American taxpayer — individual
workers, investors, retirees, and businessmen — have enormous
capacity to make sound decisions that will strengthen the
economy for the benefit of all. This is not a new notion, but

its implications for public policy have not been followed for
decades. The tax system has long been misused to try to serve
one special interest or another.
Most economists agree on one thing: whenever the tax
structure is designed to function in a capacity other than to
raise revenues to finance government activities, there will be
a misallocation of productive resources — labor and capital
— away from their most productive uses. Only the market
forces of supply and demand can allocate resources in such a
way as to optimize economic growth; any other allocation, no
matter how well intended and how carefully planned, runs the
risk, in the long run, of leading to a lower standard of
living for all of us.
Low Tax Rates. This administration believes that tax
rates are too high and must be reduced. High tax rates stifle
incentives to work, save, and invest; they discourage
invention, innovation, and risk taking; they encourage
wasteful tax shelter "investments;" and they stimulate
underground economic activities generally. Thus, our first
principle for tax reform is that it is far better to levy a
low rate of tax on all income than to tax only some income at
extremely high rates. By bringing untaxed income into the tax
base we can reduce high marginal tax rates for both
individuals and corporations without any loss of revenues in
the short run. In the longer run, those lower rates should
lead to even higher revenues through sustained growth of the
tax base.
The Treasury proposals replace the current 15 tax
brackets with a simple, three-bracket system, with tax rates
set at 15, 25, and 35 percent. The top individual income tax
rate of 35 percent is exactly half the top rate when this
administration took office. It should be no higher.
The Treasury proposals lower the top corporation income
tax rate from 46 percent to 33 percent. Low corporate rates
are essential in order to maintain capital formation
incentives under a broad-based tax reform plan. Also, it is
desirable that the top corporate tax rate and the top
individual income tax rate do not differ markedly. Otherwise,
the tax system will continue to have an unhealthy influence on
the form of business organization.
Tax rates in the range proposed by the Treasury
Department as well as those adopted by the leading
Congressional alternatives go a long way toward removing
pressure for preferential tax treatments, because exemptions

and deductions will simply not be worth as much under a low
rate structure as they are now. Moreover, any remaining
distortions will be less troublesome.
Revenue Neutralihy. we must not allow total revenue to
decline and exacerbate the deficit. Nor can we permit a
hidden tax increase to masquerade in a tax reform disguise.
Fundamental tax reform must — and can —
stand on its own.
The issue of fundamental reform must not be confused with the
deficit reduction issue. Each has independent merit and
importance. Both are top economic priorities. But
fundamental tax reform legislation and deficit reduction
legislation must continue on two separate tracks.
In order to achieve low rates of tax without experiencing
declining revenue, sufficient untaxed income must be brought
into the tax base to offset the rate cut. The arithmetic is
elementary: the tax rate times the tax base equals total tax
revenue.
This principle of revenue neutrality imposes a special
discipline. We cannot give in to special interests bent upon
retaining particular exemptions, deductions, or credits aiid
still have significantly lower tax rates.
Fairness For Families. As the President said in his
State of the Union Address, we believe those living in or near
poverty should not pay income tax. They simply haven't the
ability to pay tax since their entire incomes are required for
subsistence. Consequently, a principle with which few will
quarrel is that tax-free income levels be raised enough that
families and individuals with income levels at or near poverty
be exempt from the federal income tax.
This can be accomplished by a combination of increases
made to the personal exemption and the zero bracket amount.
For example, under the Treasury proposals a family of four
would never be required to pay tax on the first $11,800 of
income (at 1986 levels of income), no matter what its income.
Another tenet under fairness for families that the
President has endorsed is retention of the deduction for home
mortgage interest expense. The sense of wellbeing and social
stability that has always been associated with wide-spread
home ownership sets this one deduction apart for special
consideration.
A final fairness principle is that tax reform should not
redistribute our current tax burden among those at different

income levels. I agree with the conclusion of the Treasury
Department study that it is pointless to enter into a debate
over the distribution of tax burdens among income classes.
Thus, except for somewhat larger tax reductions at the bottom
of the income scale that are required to remove those at or
near poverty from the tax rolls, the current distribution of
taxes should be maintained.
Rrnnnmic Neutrality. Economic neutrality, as well as
basic fairness, requires that all income should be taxed
equally, no matter how the income is earned or how it is
spent. This uniform treatment of all sources and uses of
income requires a broad and comprehensive definition of
income. Therefore, most special exclusions and adjustments
and many deductions now in the law that favor certain sources
and uses of income must be eliminated. So too must we get rid
of many special tax credits and tax deferrals. While perfect
economic neutrality is too much to expect, we should make
every effort to see to it that any tax reform legislation is
as economically neutral as possible.
simplicity. As more and more special features have been
added to the income tax laws over the years, the tax system
has become so complicated that 41 percent of all individuals
filing tax returns — and about 60 percent of those itemizing
their deductions — employ professional tax preparation
services.
Even Internal Revenue Service staff experts trained to
answer taxpayer questions can sometimes give conflicting
answers to identical questions. This is not faulty tax
administration. It is faulty tax law. Because of the
enormous volume of ever changing statutory provisions,
regulations, and rulings, the tax law is simply too ponderous
for the tax professional, as well as the average person, to
master.
If requirements to keep records on itemized deductions
and income tax credits are eliminated, as most tax reform
proposals would do by scaling back their use, the typical
middle-income taxpayer will be relieved of much of the
complexity he or she faces today. Also, a simpler tax
structure would pave the way for development of a "returnfree" system, whereby most taxpayers could elect to have their
taxes computed by the Internal Revenue Service entirely on the
basis of information reports filed with the Internal Revenue
Service by employers, other payors of income, and payees of
expenses such as mortgage interest.

Perhaps most important, a simpler, understandable tax
system — one without need for so many special rules,
cumbersome definitions, and legal jargon — will be perceived
as more fair by taxpayers generally. I believe that when many
taxpayers complain about complexity they are, in fact,
expressing frustration that tax burdens are unfair. They know
that those with equal incomes do not always pay the same tax
and that those with unequal incomes frequently do pay the same
tax. This understanding of our current system erodes taxpayer
morale and fosters noncompliance.
Fair And Orderly Transition. Last, but as important as
any other principle I have enumerated, is the need for fair
and orderly transition. The movement from our current tax
structure, with all its faults, inequities, and economic
distortions, to a reformed and more neutral tax structure will
inevitably cause shifts in economic resources — shifts that
can involve substantial hardships and economic disruptions
unless careful and generous transition rules are developed.
If the movement is too sudden or too rapid, economic
disruptions could be quite serious.
Despite their validity, we cannot allow these arguments
to be used to impede fundamental tax reform or to delay its
enactment. But we can, and will, be sensitive to concerns of
taxpayers who have made good-faith decisions in reliance on
current law.
Further, we will maintain vigilance to identify
other potential inequities that may arise to cause short-run
economic turmoil.
There is at present a great deal of uncertainty over when
tax reform legislation might be enacted and over the effects
such legislation would have on various businesses and
investments. This uncertainty may be altering taxpayer
decisions or causing such decisions to be accelerated or
postponed in order to avoid the effective dates of possible
legislation. We do not know the extent to which such
distortions in economic activity may be occurring, but we
believe it is important that the uncertainties created by the
debate over tax reform be held to a minimum.
Accordingly, let me state now, Mr. Chairman, that no
administration tax reform proposal will contain an effective
date earlier than January 1, 1986. In line with this
position, we have modified the effective date and transition
rules of the Treasury Department tax reform proposals by
substituting January 1, 1986 wherever the rules were
previously tied to the date tax reform was either introduced
or enacted. Details on these and certain other modifications

of effective dates and transition rules of the Treasury
proposals are contained in an appendix to this statement.
Effects of Tax Reform
Exactly what tax reform will mean to individual taxpayers
and to the economy generally is obviously a critical issue
because legislators will be influenced by the answers. The
Treasury proposals, along with the major Congressional
alternatives, have been widely discussed in the press,
although often evaluations have missed the mark because they
reported premature analyses based on incomplete information or
a misunderstanding of the proposals.
Under any one of the proposals meriting serious
consideration, there will be those with tax increases and
those with tax decreases. However, if the Treasury proposals
are any guide, families with tax cuts will outnumber families
with tax increases by more than two to one. In fact, under
the Treasury proposals, 78 percent will experience either a
tax cut or no change in tax and only 22 percent will face
higher taxes. Of this 22 percent, more than half will have a
tax increase of less than one percent of income. This means,
for example, that while most families with, say, $50,000 of
income would receive a tax reduction, those with an increase
in tax would typically have an increase of no more than $500.
Like individuals, businesses that pay little or no tax
now will face higher taxes. Those that pay the highest rates
of tax on total income under the current system will, by and
large, receive the greatest benefits. Those businesses are
concentrated in industries that do not enjoy many of the
special tax-reducing provisions of current law. This group
includes, especially, industries which typically have much of
their capital in the form of structures, technical know-how,
and inventories.
Under any of the comprehensive tax reform proposals,
long-term real growth would be encouraged by a combination of
increased incentives to work and save brought about by lower
marginal tax rates and a reduction in the distortions in the
allocations of capital and labor brought about by a more
neutral tax environment.

Conclusion
I do not underestimate the difficulty of the task we
face. I have no deadline for submission of an administration
proposal. However it is not nearly as important that a date
be set for us to return with specific language as it is for us
to continue a productive dialogue. By working together, I do
believe — as does the President — that we can enact this
year a tax bill for fairness, simplicity and growth.
Although the changes I have announced today in proposed
effective dates and transition rules should permit ordinary
business activity to be conducted without significant
disruption, it must be recognized that uncertainty and the
possibility of economic distortions will continue as long as
the debate over tax reform continues. No set of effective
dates or transition rules, however finely crafted, can protect
all taxpayers and all investments from the effects of a
fundamental reform of our tax system. Only final action on
tax reform legislation will permit businesses and ordinary
citizens alike to proceed free of uncertainty over tax
consequences.
The Treasury plan is a good starting point. The
foundation of the Treasury study — which shares common
philosophy and principles with the widely-discussed
Congressional proposals — is sound. Let us now reexamine
each provision of the various plans to construct a workable
and viable basis for legislation.
I have instructed my staff to reconsider every provision
of the Treasury Department plan upon which people have
commented to us. They are reviewing every recommendation that
business and taxpayer groups have made, and they are looking
anew at options that were dismissed or possibly overlooked.
We will not abandon the effort to achieve the principles
I earlier discussed; but you will find us openly receptive to
sound alternatives and eager to embrace those alternatives if
they are more workable. We will be prepared to make any
changes necessary as long as we find compelling reasons to do
so where such changes might abridge our principles.
In considering any changes, let us keep in mind those who
do not really have an organized lobby in Washington — the
average working taxpayer. For the majority of working
Americans, tax reform represents a fairer, simpler tax system
with dramatically lower tax rates. Although many existing
deductions, exclusions, and credits would be eliminated, for

the majority of taxpayers any resulting increases in tax
burdens would be more than offset by the substantial rate cuts
and increased personal exemptions and zero bracket amounts.
That is why it is so important that any changes we •
consider do not do great injustice to our principle of revenue
neutrality. This principle forces a measure of discipline
upon us that has rarely constrained the legislative process.
If we are to succeed in reforming the income tax
structure — and I hope we will — success will be the result
of a dedicated bipartisan effort. That success will engender
new respect not only for the tax system but for government
generally. Taxpayers will be treated more fairly. Workers
and families will have greater ability and incentive to save
and invest. The economy will be stronger. And America will
be greater.
Thank you very much.

0O0

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

For Release Upon Delivery
Expected at 9:30 a.m. E.S.T.
February 27, 1985

STATEMENT OF
RONALD A. PEARLMAN
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SURFACE TRANSPORTATION SUBCOMMITTEE OF THE
COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION
UNITED STATES SENATE
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the views of
the Treasury Department on the Federal income tax aspects of the
proposed sale by the Federal Government of its interest in the
Consolidated Rail Corporation ("Conrail"). Section 401 of the
Regional Rail Reorganization Act of 1973 enacted by the Northeast
Rail Service Act of 1981 directed the Secretary of Transportation
to submit to the Congress a plan for the sale of the Federal
Government's interest in approximately 85 percent of Conrail's
common stock to (1) ensure continued rail service; (2) promote
competitive bidding for the stock; and (3) maximize the
Government's return on its investment in Conrail. After careful
review of a number of purchase proposals, the Secretary of
Transportation has recommended sale to the Norfolk Southern
Corporation. In preparing that plan and reviewing other bids,
the Transportation Department consulted closely with the Treasury
Department on the Federal income tax aspects of the sale.
The two principal concerns of the Treasury Department
relating to the sale of Conrail are (1) the potential for the
transfer to a private person (Norfolk Southern Corporation) of
the tax benefits of Conrail that were earned while Conrail was
owned by the Federal Government and attributable to Federal
B-29

- 2 Government monies and (2) the separation of the Federal
Government (specifically the Internal Revenue Service) in its
role as administrator of the Federal income tax system and its
role as owner of the stock of Conrail to be sold to a private
person (Norfolk Southern Corporation) which is itself a taxpayer.
Treatment of Conrail's Tax Benefits
Section 401 directed the Transportation Department to devise
a plan for returning Conrail to the private sector, preferably by
sale of common stock rather than by a sale of its assets. Under
current law there are significant differences in the Federal
income tax treatment of a sale of stock and a sale of assets of a
corporation.
In general, a purchaser of the stock of a corporation
receives a tax basis in the stock purchased equal in amount to
the consideration paid for such stock. Other than this change in
tax basis for the stock purchased, upon the sale of stock of a
corporation there generally are no tax consequences to either the
purchaser or the corporation whose stock is sold ("target
corporation"). Accordingly, any tax attributes of the target
corporation generally remain intact even though the target
corporation is owned by different persons.
We understand that Conrail presently has a number of tax
attributes of considerable value to a purchaser, principally net
operating losses, investment tax credits and the tax basis of its
assets including the so-called "frozen asset base." V
If, as
under current law, the tax attributes of Conrail were allowed to
carryover after the sale to Norfolk Southern Corporation, the
availability of such tax benefits would presumably result in a
somewhat higher selling price to the Federal Government for the
Conrail stock. On the other hand, there would be a loss of
revenue to the Federal Government caused by the utilization of
the tax benefits. No net loss to the Federal Government would
result if it received the exact value of such tax benefits, i.e.,
the future use of the benefits was accurately predicted and the
proper discounted value of that use was paid. But, predicting
the use and value of these tax benefits is an inherently
uncertain
V Under the
exercise.
Economic Recovery Tax Act of 1981, which replaced
the replacement-retirement-betterment (RRB) method of
depreciation, the "frozen asset base" — which is the
aggregate amount of expenditures that were capitalized under
the RRB method of depreciation and whose cost was never
recovered — may be recovered over a period of between 5 and
50 years under rates of depreciation provided by prior law.

- 3 On the other hand, because a stock sale of Conrail was
statutorily preferred by Congress, it appears appropriate to
allow Conrail to carryover its historic tax attributes to the
extent such attributes are not attributable to monies contributed
by the Federal Government. Because the net operating losses,
investment tax credits and other carryovers of Conrail are
attributable to the period Conrail was owned by the Federal
Government and because such tax benefits are difficult to value,
the Department of Transportation plan for the sale of Conrail
appropriately provides that, as a sale condition, Conrail and the
Internal Revenue Service shall have entered into a closing
agreement for the surrender of Conrail's net operating losses,
investment tax credits, and other carryforwards as of the date of
sale (subject to their use against prior year audit deficiencies
and other limited exceptions).
With respect to the tax basis of Conrail's assets (including
the so-called "frozen asset base") after the sale to Norfolk
Southern Corporation, the Department of Transportation plan for
the sale of Conrail contemplates that such basis shall carryover,
i.e., shall be the same as it was in the hands of Conrail before
the sale to Norfolk Southern Corporation, under the ordinary tax
rule applicable to stock sales. Based upon the data that was
provided to us by the Department of Transportation, the aggregate
of the tax basis of Conrail's assets (including the amount of the
so-called "frozen asset base") was approximately the same as of
December 31, 1983 (the latest data that was available) as it was
on conveyence to Conrail on or about April 1, 1976. Such amount
as of April 1, 1976, was carried over to Conrail from the
predecessor transferor railroads and was not attributable to
Federal Government monies.
After Conrail was formed, Congress enacted special
legislation to provide for the tax treatment of the transfer of
assets to Conrail. Among other things, this legislation (now
embodied in section 374(c) of the Internal Revenue Code) provides
that neither Conrail nor any subsidiary shall succeed to any net
operating loss carryforward of any predecessor tranferor
railroad. Further, this legislation provides that the basis of
Conrail's assets received from the predecessor transferor
railroads shall carryover, i.e., shall be the same as it was in
the hands of the railroad corporation whose property was so
acquired. These same Federal income tax consequences will be
achieved by the Department of Transportation's plan for the sale
of Conrail to the Norfolk Southern Corporation, even though
current law would provide more favorable treatment to Norfolk
Southern Corporation and yield less tax revenue to the Federal
Government.

- 4 Separation of Government Roles
The Internal Revenue Service is charged with administration
and enforcement of the Federal income tax laws. In order to
effectively carry out this mission, no preference or special
rules can be adopted for any taxpayer.
The Department of Transportation plan for the sale of Conrail
does not provide for any restrictions on the Internal Revenue
Service in auditing or assessing tax liabilities against Norfolk
Southern Corporation or Conrail after the sale to Norfolk
Southern Corporation. To the extent the Norfolk Southern
Corporation and the Department of Transportation negotiated in
good faith any protections against tax liability of Conrail or
Norfolk Southern Corporation to accomplish the objectives of the
Department of Transportation in selling Conrail, such protections
were provided as warranties rather than covenants by the Internal
Revenue Service in order to be consistent with the Internal
Revenue Service's mission of evenly administering and enforcing
the Federal income tax laws. Certain legislation, which is
included in the proposal submitted by the Department of
Transportation, to implement a procedure for the Norfolk Southern
Corporation to enforce such tax warranties against the Federal
Government is required.
Special Legislation for Conrail's Employee Stock Ownership Plan
Certain legislation is also required to qualify for tax
purposes Conrail's employee stock ownership plan that was created
by earlier legislation. This legislation, which is included in
the proposal submitted by the Department of Transportation, is
necessary because of the unique form of Norfolk Southern's
arrangements with Conrail's labor unions and employees and the
unusual structure of Conrail's employee stock ownership plan.
* * *

This concludes my prepared remarks. I would be happy to
respond to your questions.

TREASURY NEWS

apartment of the Treasury • Washington, D.c. • Telephone 566-204'
FOR RELEASE UPON DELIVERY
February 27, 1985

REMARKS BY
THE HONORABLE THOMAS J. HEALEY
ASSISTANT SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE
THE COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE
OF THE HOUSE COMMITTEE ON GOVERNMENT OPERATIONS

Mr. Chairman and members of the Subcommittee:
I welcome this opportunity to discuss with you subjects
that relate to the soundness of the Federal Savings and Loan
Insurance Corporation (FSLIC) and regulatory actions taken
by the Federal Home Loan Bank Board (FHLBB) to preserve and
bolster the FSLIC Fund.
As you know, the Working Group for the Cabinet Council on
Economic Affairs (CCEA), which I directed, recently completed a
study on the federal deposit insurance system in which it made
five recommendations for strengthening the banking and thrift
industries and their respective insurance funds. The Working
Group recommendations concern: (1) risk-related pricing, (2)
increased capital, (3) the size of the funds, (4) accounting
and disclosure and (5) examination, supervision and enforcement.
I have attached a copy of the study for your information.
I will limit my testimony to the first three
recommendations since they are the areas on which you specifically invited comments. However, all five recommendations
would strengthen the deposit insurance system and that,
fundamentally, is everyone's major concern. I will, of course,
be happy to answer questions on all five recommendations.

B-30

- 2 I, also, want to stress that the Working Group's
recommendations are viewed as a complement to, not a substitute
for, the Administration's policies in favor of financial
deregulation (such as expanded powers for depository institution
holding companies and the liberalization of geographic restraints
on banking organizations) and the Vice President's Task Group's
proposals for reorganization of the federal regulatory agencies.
Need to Increase the Size of the Insurance Funds
I will briefly discuss two topics; the specific need to
increase the size of the FSLIC fund now and the Working Group's
recommendation concerning both the FSLIC and FDIC funds.
The Administration fully supports the efforts of the FHLBB
and the industry to develop a plan to increase the FSLIC fund.
The FHLBB has reported that deposits covered by the FSLIC
fund reached $785 billion in December of 1984, about a 17
percent increase over the level of deposits insured at the end
of 1983. Yet, at the same time the growing number of severe
asset credit problems at some FSLIC insured institutions has
caused the size of the FSLIC fund, for the first time in its
history, to decline. The book value of the fund has gone from
$6.4 billion at December 31, 1983", to less than $6.0 billion
in February of 1985. Thus, the ratio of the funds' assets to
insured deposits, which was 1.64 percent at year-end 1974 and
about 1.0 percent at year-end 1984, is expected to drop to .75
percent by the end of 1985 and to drop further if the size of
the fund is not increased. These figures confirm the need to
increase the FSLIC fund. The question is how. (See Chart 1).
A capitalization program similar to the one percent
assessment authorized for the National Credit Union Share
Insurance Fund in the Deficit Reduction Act of 1984 seems
conceptually appropriate. Under a similar type of plan
recently unveiled by the U.S. League of Savings Institutions
each FSLIC insured institution would be required to purchase
and maintain an equity position in the FSLIC equal to one
percent of its liabilities (i.e., deposits and borrowings).
The minimum normal dividend of the investment would result
from the plan's provision that the FSLIC would waive its normal
premium equal to 1/12 of one percent of deposits when FSLIC
expenses did not draw the funds' reserves below 1.25 percent
of institutions' deposits. in the event the FSLICs expenses
were to result in depleting its reserves to less than
?!Ifr??r?nt °l l i a b i l i t i e s , the FSLIC would require the
institutions to replenish the depleted equity.
have n
. °t worked through all the details and understand
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- 3 provide the FSLIC with the flexibility it needs during the
next few years. However, until the necessary legislation is
passed, the FHLBB should not be discouraged from implementing
a special 1/8 of one percent assessment to help meet the
expected outlays in 1985.
On a more general level, the Working Group found that
"determining appropriate sizes for the insurance funds of both
FDIC and FSLIC is important because the perceived adequacy of
the funds generates confidence in the system. Therefore, the
Administration should work with the agencies to determine
reasonable target sizes for the funds. As part of this
endeavor, additional tools for handling failure or near failure
of insured institutions should be developed. Moreover, the
insurance premiums should be extended to cover deposits payable
in foreign offices. In addition, it was strongly recommended
that any increases in the sizes of the funds be financed by
the insured institutions so that the potential costs to the
taxpayers would be minimized."
We have focused today on the FSLIC fund; however, the size
of the FDIC fund should be reviewed as well. For example, the
ratio of the assets of the FDIC insurance fund relative to
insured deposits has slightly increased over the past several
years to about 1.22 percent, but the ratio of the fund to
total liabilities, including letters of credit and deposits in
foreign offices has been considerably less and at the end of
1983 was only about .66 percent.
Adoption of Rules Requiring Insured Institutions to Increase
Their Net Worth Positions
The increased risks faced by financial institutions as a
result of changes in the economic environment, such as volatile
interest rates and increased competition both within and outside
the bank and thrift industries, argue for a significantly higher
capital requirement to serve as a buffer against difficult times
for the institutions and the insurance funds. Furthermore,
encouraging an increased stake by long-term capital investors
such as unsecured subordinated debtholders should provide a
more stable market discipline over time than that provided by
depositors because, unlike depositors, long-term capital holders
are uninsured and unsecured, and cannot withdraw their funds
quickly.
Capital, both equity and long-term debt, protects
institutions and insured deposits when losses are encountered,
provides market discipline on managers, and helps to preserve
the solvency of the federal deposit insurance funds. In a highly
leveraged financial institution, capital is the safety net.

- 4 The attached charts on total depositor protection (Charts
2 and 3) dramatize the differences between the capital position
of banks and thrifts and their respective funds. The ratio of
net worth to assets at insured savings and loans fell from
over 7 percent of total assets in 1974, to less than 4 percent
in 1983 if regulatory accounting principles (RAP) are used; to
3.27 percent if generally accepted accounting principles (GAAP)
are used, and to less than 1/2 of 1 percent of assets if the
goodwill booked during the acquisitions since 1980 is subtracted.
At the same time the size of the FSLIC fund has been declining.
By contrast the capital position of the banking industry
has remained constant and the size of the FDIC fund has been
rising slightly.
The FHLBB's recent rule requiring higher net worth ratios
on all new deposit growth is consistent with the Working Group's
recommendations. The requirement of higher levels on all new
growth is particularly important because in effect it phases
in higher capital over time and allows the market to decide how
fast or at what price an institution can grow, • depending on
the institution's riskiness. Secretary Regan stated in the
attached January 29, 1985 letter to Chairman Gray, that the
Administration supports the FHLBB's rule and considers it a
good first step toward raising the industry's net worth
position to a substantially higher level.
Risk-Related Premiums
The Working Group found that "the current flat-rate
premium structure for deposit insurance is inequitable because
healthy institutions subsidize troubled ones; and there is
little economic incentive to control risk-taking. Therefore,
introduction of risk-related pricing, although not necessarily
perfect, would clearly be better than the current flat-rate
system in simulating the operation of the free market and,
hence, reducing the inequity and risk-taking."
Based on its findings, the Working Group recommended
authorizing the insurance corporations to develop a method of
implementing risk-related premiums based on objective (not
subjective) measures of risk faced by individual depository
institutions. The goal would be to set an eventual premium
differential large enough to have an impact on management's
decision-making.
.T,}ank y°u for allowing me to present these views. I will
oe glad to answer any questions.
Attachments

Chart 1

FSLIC FUND
Percent of Equity to Total Deposits
1.4
Capitalization, then no
regular premium

1.3
1.2
1.11—
1.0
0.9
0.8
0.7

One time additional
1/8 premium
0.6
0.5
Status Quo
0.4
0.3
1983

1984

1985

1986
Fiscal Years

1987

1988

1989

1990

Chart 2

TOTAL DEPOSITOR PROTECTION AT S & Lfs
(as percent of total S & L assets)
%

Appraised Equity and
Loss Deferrals

3
Goodwill
2 —

-*-*i{ Tangible Net Worth*
| FSLIC Fund

_1_
1974

1975

1976

1977

_i_
1978

1979

I
1980

1981

1982

1983

TOTAL DEPOSITOR PROTECTION AT COMMERCIAL BANKS
(as percent of total commercial bank assets)
%o

8 Reserves
7-

Subordinated Debt

Equity

4 —

FDIC Fund

I
1974

1975

1976

I
1977

Source: Federal Deposit Insurance Corporation

1978

1979

1980

1981

1982

1983

THE SECRETARY OF THE TREASURY
WASHINOTOK

20220

January 29, 1985

Dear Ed:
On behalf of the Administration, I am writing to support
the Federal Home Loan Bank Board's recent proposal to increase
the net worth requirement for FSLIC insured institutions.
There has been a fundamental and permanent shift in the
nature of risks faced by thrift institutions as a result of
changes in the economic environment and the deregulation of
both assets and liabilities. The increase in the volatility
of interest rates and the riskiness of investments implies a
need for greater capital to reduce the exposure of the FSLIC
fund.
We view the net worth proposal as a good first step
towards raising the industry's net worth to deposit ratios
to a level more in keeping with the safety and soundness
standards maintained before the industry's severe losses in
1981 and 1982. The net worth proposal should curtail the
rapid growth of thrift institutions that do not have
adequate levels of capital to support additional growth.
In addition, focusing on capital requirements (and
accounting rules) avoids government intrusion into investment
portfolio decisions and other business policies of thrift
institutions. As you know, the Administration has vigorously
supported policies to deregulate assets and borrowing powers
of thrifts and other financial institutions. These deregulatory steps can contribute to the financial stability of
the industry and because of this, need not be a focus of
government efforts to avoid financial instability. Thus,
your efforts to focus on improvements in capital requirements
(and accounting rules) are supportive of our policies towards
continued deregulation.

- 2 Since we would like the FSLIC insured institutions to
increase their capital position as soon as possible, the
Administration strongly supports your proposal.
With best wishes.
Sincerely,

AT^x
Donald T. Regan
The Honorable
Edwin J. Gray
Chairman
Federal Home Loan Bank Board
1700 G Street, N.W.
Washington, D.C. 20552

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone
February 26, 1985

FOR IMMEDIATE RELEASE

RESULTS OF AUCTION OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury has accepted $7,005 million
of $19,252 million of tenders received from the public for the
5-year 2-month notes, Series J-1990, auctioned today. The notes
will be issued March 1, 1985, and mature May 15, 1990.
The interest rate on the notes will be 11-3/8%. The range
of accepted competitive bids, and the corresponding prices at the
11-3/8% interest rate are as follows:
Yield
Price
Low
11.42%
99.703
11.43%
99.664
High
11.43%
99.664
Average
Tenders at the high yield were allotted 80%.
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
239,363
16,,647,203
11,950
242,327
30,885
35,564
973,066
98,693
43,055
57,608
13,390
855,278
3,186
$19 ,251,568

Accepted
$
14,363
6,417,523
11,950
155,827
19,385
24,164
134,866
88,693
15,055
57,608
7,290
55,278
3,186
$7,005,188

The $7,005 million of accepted tenders includes $577
million of noncompetitive tenders and $6,428 million of competitive tenders from the public.

B-31

2041

TREASURY NEWS _

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

March 4, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,005 Billion of 13-week bills and for $7,015 Billion
of 26-week bills, both Co be issued on March 7, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13--week bills
maturing June 6, 198f
Discount Investment
Rate
Rate 1/
Price
8.69%a/
8.75%
8.73%

9.01%
9.07%
9.05%

97.803
97.788
97.793

26-veek bills
maturing September 5, 1985
Discount Investment
Rate
Rate 1/
Price
:

8.97%
" 8.98%
: 8.98%

9.53%
9.54%
9.54%

95.465
95.460
95.460

a/ Excepting 1 tender of $3,680,000.
Tenders at the high discount rate for the 13-week bills were allotted 52%.
Tenders at the high discount rate for the 26-week bills were allotted 99%.
TENDERS RECEIVED AND ACCEPTED
Received

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

(In Thousands)
Accepted
:

Accepted

58,445
408,445 $
5,522,110
12,889,000
26,580
26,580
59,900
59,900
52,940
52,940
56,110
56,110
211,325
1,093,725
57,145
• 97,145
4,195
4,195
73,840
73,840
35,340
37,740
513,700
1,418,900
333,215
333,215

396,805
: $
16,380,240
:
:
21,990
55,990
:
:
108,380
:
69,715
:
1,276,900
64,330
3,265
58,895
:
25,930
1,827,490
:
339,000

$
46,805
6,050,800
21,990
45,890
54,380
53,415
233,095
24,330
3,265
57,895
19,930
64.490
339,000

$16,551,735

$7,004,845

: $20,628,930

$7,015,285

$13,310,115
1,342,820
$14,652,935

$4,013,225
1,342,820
$5,356,045

: $17,344,370
:
1,018,860
: $18,363,230

$3,980,725
1,018,860
$4,999,585

1,848,700

1,598,700

1,750,000

1,500,000

50,100

515,700

$16,551,735

$7,004,845

: $20,628,930

$7,015,285

\J Equivalent coupon-issue yield.

B-32

Received

TREASURY NEWS

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

Statement of the Honorable David C. Mulford
Assistant Secretary of the Treasury
for International Affairs
before the
Committee on Foreign Affairs
Subcommittee on International Economic Policy & Trade
March 5, 1985

Mr. Chairman, Members of the Committee:
I welcome this opportunity to present the Treasury
Department's views on the important issues your subcomittee
has under consideration. These are complicated issues to
which there are no easy or "quick-fix" solutions.
In considering issues related to the strong dollar and
the rising trade and current account deficits, it is
important to understand the factors at work which have led to
these circumstances. Understanding of these basic factors
provides the only means for evaluating the desirability and
possible effectiveness of the various so-called "solutions"
to the trade deficit or the high value of the dollar.
Trade and Current Account Deficits.
Over the course of these hearings you will undoubtedly
hear that the major cause of our rising trade and current
account deficits is the "overvalued" dollar. While I
recognize that a strong dollar hurts the international price
competitiveness of U.S. industry, these deficits reflect more
fundamental factors which developed over a period of time am]
of which the strong dollar itself is a symptom. Let us begin
by looking at the evolution of the trade deficit.
During 1980 — the last year of the Carter
Administration — U.S. merchandise exports totaled $224
billion. Last year exports totaled $220 billion. Our

B-33

- 2 imports in 1980 were $250 billion. Last year's imports
totaled $328 billion. Why have imports risen so sharply
about 30 percent over 4 years — while exports are
essentially unchanged?

—

Three broad forces have been at work that explain the
distinctly different growth rates: relative economic
performance at home and in the other major industrial
countries; the LDC debt situation; and the strength of the
dollar.
Over the past 4 years there has been a strikingly sharp
contrast between U.S. economic performance and that of our
major trading partners. You are all well aware of the strong
U.S. expansion, and the large growth in U.S. employment. You
may be less aware of how our performance compares to that of
our trading partners. For example, industrial production in
the United States is 13 percent higher than it was 4 years
ago, despite a year long recession in 1982. In contrast,
industrial production in Europe at the end of 1984 was
essentially unchanged from its 1980 level. In 1980, 30
percent of our exports went to Europe, so it is hardly
surprising that our exports to Europe have not grown.
Of course industrial production is only a partial
measure of foreign demand for U.S. products. A broader
measure is foreign GNP. Again, there have been stark
performance differences. Our GNP in the fourth quarter of
1984 was 12 percent higher than during the recession's trough
in 1982. Outside the United States, real GNP in the
industrial countries has risen only 3-1/2 percent since the
end of 1982.
Some critics may counter these facts by arguing that
even though Europe has had problems, the Japanese economy has
expanded rather well. True enough. But Japan accounted foe
only 9 percent of U.S. exports in 1980. Its solid expansion
of 16 percent in real GNP since 1980 has not produced much
U.S. export growth. In 1980 our exports to Japan were $21
billion and 4 years later they were $24 billion. This low
growth reflects two key realities: most importantly the
closed nature of Japan's tradeable goods sector; and secondly
dollar appreciation. However, despite much talk about a
strong dollar and a weak yen, when measured solely against
tne yen, the dollar appreciated against the yen by 7 percent
over the past 2 years. Against currencies other than the
dollar, the yen has been very strong.
The non-OPEC LDCs accounted Cor nearly 30 percent of our
™ ! 5 * * * l n i 9 8 0 * B u t a s t h e i r external and domestic economic
conditl0ns deteriorated with the emergence of the
JZllJl*
" a u d e b t P r o b lem, their economic growth fell
*m! ? o « W l » L D C i m P ° r t s falling $12 billion between 1981
Q iyBJ
* A s v o u know, our Latin American trading partners

- 3have experienced particularly serious debt problems with one
of the results being that our exports to Latin America fell
$16 billion. Last year, as these debtor countries began to
see the initial benefits of adjustment efforts, our exports
to them rose a bit, recouping about $4 billion of the lost
exports. But exports were still $12 billion below their 1981
level.
If U.S. exports to LDCs had grown at a historically
reasonable 8 percent per annum in the 1982-84 period instead
of falling due to the debt situation, then total U.S. exports
would be $25 billion higher than they were last year. By a
similar calculation, our exports to Europe would also be some
$25 billion higher if their economies had experienced modest
growth. In other words, if Europe had expanded and the LDCs
had not experienced a serious debt crisis, we would be
discussing today a trade deficit of about $50 billion, a
modest increase over 4 years during the sharpest U.S.
expansion since the Korean war.
Turning to the growth in U.S. imports, the story is
quite similar. The very rapid U.S. expansion since the end
of 1982 has pulled in imports. Merchandise imports —
excluding oil — rose 46 percent over the past two years.
Our estimates suggest that about two-thirds of that expansion
was the result of our recovery.
Some witnesses will probably tell you that imports cost
us an enormous number of jobs. There has been some job loss
in certain sectors of the economy, but not for the economy as
a whole. The recent rise in our imports resulted from strong
growth. Without that vent for strong domestic demand the
U.S. economy might well have overheated. Undoubtedly,
bottlenecks in some sectors would have been a serious
problem. Capacity constraints would have been reached in
some industries. And our inflation performance — and bear
in mind how recently inflation was public enemy number one -would not have been as enviable as it has been.
The Dollar.
Mr. Chairman, your letter of invitation asked about "the
overvalued U.S. dollar." I would agree that the dollar is
stronger than it was in 1980 — a lot stronger. I would
agree that its value is "high" compared to what we
experienced in the late 70's. But I do not believe that one
can deduce from that that it is "overvalued."
The factors behind the dollar's strength are in many
respects similar to the cause of our trade deficit that I
have just outlined. The dollar is strong in part because of
outstanding U.S. economic performance, the best for the past
quarter century. For the first time in 20 years, inflation
has ratcheted downward coming out of the '82 recession.

- 4 Following past recessions, inflation ratcheted up. I recall
that many thought the trend had become a never-ending process
— a long and debilitating sickness. This time inflation is
well below its previous trough rate. And, importantly,
despite the strongest 8 quarter recovery/expansion in the
postwar period, inflation has stayed down. This fundamental
shift in inflation performance has slowly become accepted and
believed by markets and is causing a lowering of inflation
expectations. In my opinion, after 20 years of firsthand
experience in international markets, it is difficult to
overemphasize the power, the force, if you will, of the
change in market sentiment.
Equally important to our performance in absolute terms,
exchange markets look to the performance of one country
relative to another. As I noted earlier, our relative
performance has been superior to that of other major
countries. During the sixties, the U.S. economy grew at 4.3
percent; the rest of the industrial countries grew 5.7
percent. During the seventies the gap narrowed. We grew 3.1
percent on average and our major partners grew 3.8 percent.
Since 1982 our relative growth rates have been reversed. We
have grown an average 5.3 percent, while the other industrial
countries have grown 2.7 percent.
In addition, the Administration and the Congress have
succeeded in removing rigidities in our economy to increase
its flexibility to adapt to changing conditions. Deregulation, tax reductions, and a shift both in attitude and
behavior towards free markets has stimulated investment and
increased rates of return to entrepreneurship. Reflecting
this flexibility, the U.S. economy has created 7.3 million
new jobs during the current recovery/expansion. Unfortunately, our friends in Europe have not yet come to grips with
this important challenge. Europe faces serious structural
problems which affect employment growth, capital formation,
and the development of new industries. For example, an array
of hiring and firing regulations and generous unemployment
benefits raise the cost to firms of taking on new workers and
reduce the desire of workers to seek new jobs. Partly due to
these rigidities and others, there has been a loss of nearly
one million jobs in Europe during the past 2 years — and
that at a time of positive growth. Our ability to create new
jobs compared to Europe's problem in even maintaining jobs
has been reflected in exchange market developments.
It is not surprising that the dollar reflects both in
absolute and relative terms this economic performance and the
fundamentals which lie behind it.
T know many witnesses will argue that the dollar is
t n ^ " L ^ C a i ! S e u f hilh U * S - i n t e n t rates. Undoubtedly
™ * * tt " t ^ h a v e been a factor underlying dollar strength
over the past 4 years. But the facts do not demonstrate a

- 5 strong and consistent relationship between the strength of
the dollar and interest rate developments. Over the period
as a whole from 1980 - 1984, U.S. short-term interest rates
are down 10 percentage points. The interest rate differential favoring dollar-denominated assets against other
currencies is also down significantly. For example, the
differential favoring dollar-denominated over DM-denominated
assets has moved 6 percentage points against U.S. assets, but
the dollar has risen nearly 60 percent against the DM.
Against the French franc, the story is even more dramatic.
In 1980, U.S. interest rates were 7 percentage points above
French short-term rates. In December 1984 our rates were
below French rates. The shift in the differential in favor
of franc-denominated assets has been 9 percentage points.
But despite this massive shift, the dollar is up by over 100
percent against the franc. Clearly something besides
interest rates tells the story about franc weakness and
dollar strength.
The calculation of real interest rate differentials is
more complicated — and numerous types of estimates are
possible — but the story is the same. Real interest rate
differentials have moved against dollar assets.
What has happened more recently? The current dollar
appreciation started in early September. But U.S. interest
rates are now nearly 2 points below where they were at that
time, and during the intervening period, interest rates were
down by as much as 3 percentage points from September levels.
In my view the last move of the dollar set against a
scenario of clearly falling interest rates, both nominal and
real, has finally exploded the myth that dollar strength is
purely and simply a function of high interest rates. In a
sense that is what makes the present situation seem more
serious. It is being recognized that it is the fundamental
economic factors that influence money values, and this
focuses attention where it belongs — on fundamental economic
policies.
Solutions.
I know of only one sure way of lowering the value of the
dollar quickly: that would be to return to the inflationary,
stop-go policies of the 1970s. Put simply, if we reverse
U.S. economic policies; give up the hard-won inflation gains;
throw out the improved investment climate; and return to high
growth rates of government spending and what was recently
called stagflation — then we can be sure of lowering the
dollar in exchange markets. I — and I am sure you — reject
that approach.
The better approach is to encourage stronger economic
performance abroad. At the London Summit our leaders

- 6recognized the need for the removal of structural rigidities.
You can be assured that we will continue to urge our European
friends to move in this direction at this spring's Bonn
Summit. As Europe begins to solve its structural problems
and creates an environment more hospitable to investment,
then capital will be more inclined to stay in Europe and not
seek alternative investments in the United States. When
Europe strengthens, their currencies will strengthen too.
A number of ideas — mostly recycled from the sixties
and seventies — are being offered as "solutions" to the
strong dollar. It is important to look very closely at the
costs of these suggestions compared to the supposed benefits.
For example, an import surcharge is not a free good. It
will not raise revenues painlessly. First, it will be
inflationary. It will raise the cost of imports to domestic
buyers and reduce the pressure on U.S. producers to hold down
their own costs and prices. Second, if it reduces imports,
the dollar will rise, not fall. The dollar's strength
reflects the simple fact that there are not enough dollars in
foreigners' hands at its current price (the exchange rate).
As they try to acquire more dollars, they bid up its price.
Lower imports will reduce the supply of dollars and hence
cause the exchange rate to rise. Thirdly, an import
surcharge would lead to retaliation by foreigners. They may
erect trade barriers or increase subsidies to their own
exports to offset the effect of the surcharge. Finally, an
import surcharge runs directly counter to the basic
principles of this Administration. It would undermine the
Administration's free market approach that has proved so
successful in a wide range of areas such as trade
negotiations, the international debt strategy, and
multilateral development banks.
Restraints on investment flows into the United States
would run directly counter to the basic principle of open
capital markets that has served this nation so well. The
last time investment controls were tried in the sixties,
international capital markets were virtually nonexistent. In
fact, most analysts attribute the creation and early growth
of the Euromarket to the imposition of U.S. capital controls.
Even in those simpler days when, incidently, I began my own
career in international finance, capital found its way around
the artificial barriers, since capital is fungible, a
barrier on one form of capital inflow shifts the demand to
another form of inflow — that is, from traditional instru?n";L . n \ y u ? r e a t e d instruments and methods of finance.
In today's highly sophisticated, 24 hour a day, global
«»?,, 3 m a r k e t , controls simply would not work; they would
tation
a
oniy
any* sattempt
to
impose
would
c
a a ^distort.
na
os
T r"e pPu And
™*-off
in
safe
foreign
market
investments
forthem
investment,
placedseriously
in

- 7-

As regards monetary measures, at the initiative of the
Williamsburg and London Summits the Finance Ministers and
Central Bank Governors of the Group of Ten major industrial
countries have been seeking to identify the areas in which
progressive improvements in the functioning of the
international monetary system might be sought. A report is
scheduled to be completed in early summer and it would be
premature to Indicate at this time the conclusions and
recommendations that might be contained in that report.
However, based on the discussions so far, it is clear that
the focus will be on measures to encourage sound and
consistent economic policies in the major countries as the
key to greater exchange market stability rather than efforts
directed toward pegging exchange rates artificially at
particular levels or ranges. I might note, Mr. Chairman,
that one of the basic reasons for the collapse of the Bretton
Woods system of fixed exchange rates was the lack of convergence in economic performance among the major countries. It
was recognized at that time that the only effective way to
assure stable exchange rates was through convergence of
economic performance. We have made progress in recent years
towards reducing disparities in performance but more needs to
be accomplished.
You will notice that I have not dealt with exchange
market intervention in my remarks. This is because intervention is not one of the serious long-term solutions to the
strong dollar.
In terms of measures to reduce the trade deficit, I
would suggest that three courses of action are needed.
First, European economic expansion needs to be
strengthened and solidified.
Second, the Japanese economy must become a full partner
in the costs as well as the benefits from the international
trading system. Direct and indirect barriers to imports have
isolated that economy from the adjustment efforts required
due to shifting comparative advantage and emerging new
suppliers of manufactured products. The Administration now
has underway a new approach to trade discussions which focus
on fundamental market opening in key manufactured products
sectors of the Japanese economy. As the free world's second
largest economy, Japan must accept a share of manufactured
imports commensurate with its economic strength and size.
Finally, LDC adjustment efforts must be supported and
encouraged. In general, they have made important progress
but much more needs to be done. As LDC economies recover,
their demand for imports will strengthen.

- 8 -

In summary, the strong dollar and the trade deficit
fundamentally reflect a strong U.S. economy and relatively
weak performances overseas. Solutions rest in strengthening
performance abroad, not in a return to the tired old U.S.
policies of the past. Alternative solutions seem very
appealing. They may seem easy and harmless. Some even look
to be convenient revenue sources to reduce the budget
deficits. But they are ultimately all very costly to the
U.S. public.

TREASURY NEWS

epartment of the Treasury • Washington, D.c. • Telephone 566-2041
HOLD FOR RELEASE
EXPECTED AT 10:00 A.M., EST
WEDNESDAY, MARCH 6, 1985
STATEMENT OF ROBERT A. CORNELL
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL TRADE AND INVESTMENT POLICY
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 brief this Subcommittee on the status of
export credit negotiations and to assess the relationship
between the Administration's budget proposals and these negotiations. The Administration's budget proposal is one result of
our negotiating success in the export credit field during the
past four years. In essence, we have negotiated the virtual
elimination of export credit subsidies to industrialized
countries and significantly reduced export credit subsidies to
developing countries. Our budget proposal recognizes the
dwindling need to subsidize export credits. In our view, the
budget proposal should have no impact on our ability to maintain
and perhaps improve Arrangement rules on normal export finance.
The effect of the budget on our ability to eliminate tradedistorting tied aid credits is less certain.
In order to give perspective to the budget proposal, I
would like to describe first the export credit situation in
1981; second, our achievements during the past four years; and
third, the tied-aid, or so-called mixed credit loophole and our
efforts to close it.
Export Credit Arrangement: Historical Perspective
Export credit negotiations have been an integral part of
a long-standing United States' effort to eliminate the use of
official credit subsidies in international commerce. U.S.
economic policy, which minimizes government interference in the
marketplace, differs markedly from the explicit industrial
policies adopted by several other major governments. Industrial
policy frequently relies on subsidies to lead industrial development, exports, and employment. Since the GATT effectively
B-35

- 2 closed off many price subsidies for industrial goods during the
1970s some countries increasingly used credit subsidies to help
implement their industrial export policies.
Officially supported export credits thus became significant
during the 1970s. Prior to the LDC debt crisis of 1983, OECD
countries financed more than $50 billion of exports annually
(1980-1982 base) with medium-term and long-term official export
credit, much of which was subsidized. Annual short-term
official support amounted to at least $120 billion. Complete
data after 1982 are not yet available, but the global economic
slowdown and the LDC debt crisis decreased world demand while
damping the absolute level of officially supported credits.
This may have increased the proportional share of officially
supported export credits, however.
During the past decade, we have been negotiating in the
OECD with 22 other industrialized countries to reduce and
eliminate export credit subsidies. When the Export Credit
Arrangement was originally approved in April 1978, it was
moderately effective in controlling export credit subsidies.
However, skyrocketing market interest rates during 1979 and
1980 quickly outstripped the negotiated Arrangement interest
rates, allowing for significant subsidies.
The export credit subsidy problem had reached critical
proportions during 1981, when Arrangement interest rates were
nowhere near commercial bank rates. In the United States,
Eximbank was lending at an interest rate almost five percentage
points below its borrowing cost, resulting in subsidies amounting to more than $234 million per billion dollars authorized and
significant losses to Eximbank"s net income. Arrangement rates
in 1981 were significantly below government bond yields in other
currencies: half the cost of money (870 basis points) in
France, 40 percent (740 basis points) in the United Kingdom, 15
percent (320 basis points) in Germany, and 5 percent (110 basis
points) in Japan.
Current Export Credit Arrangement
Since 1981, we have negotiated significant improvements in
the rules governing export credits:
1. Substantial increases in minimum permissible interest
rates in the Export Credit Arrangement;
2. Automatic adjustment of these rates in response to
market changes;

- 3 3.

In principle, access to financing in low-interest-rate
currencies at the same commercial interest rates
available in that currency;

4. A ban of mixed or tied aid credits with grant elements
below 20 percent;
5. A sector agreement on large commercial jet aircraft with
France, Germany, and the United Kingdom; and
6. A Nuclear Power Sector Agreement.
These improvements in the Arrangement have significantly
reduced export credit subsidies and virtually eliminated these
subsidies for industrialized countries and newly industrialized
countries. The current average minimum interest rate under the
Arrangement, weighted by category, is now 11.05 percent compared
to 7.91 percent in 1981.
This successful negotiation enabled Eximbank to align its
interest rates to Arrangement rates without huge subsidy costs.
Combined with the fall in commercial interest rates, Eximbank's
cost of money has fallen from a peak of 15.7 percent in 1981 to
the current 11.47 percent (December 1984). Taking into account
mandatory fees charged by official export credit agencies —
such as the French guarantee fees and U.S. application fees —
export credit subsidies, when measured against the cost of money
to governments, have been virtually eliminated for all currencies (see table below).
When measured against commercial interest rates, however,
an element of subsidy still remains. Commercial interest rates
for the French franc, pound sterling and U.S. dollar are still
between 1.5 and 2.0 percentage points above the government's
cost of money. Thus, some subsidized official support is still
available in these currencies, usually in the form of an
interest rate buy down. For the Deutsche Mark, Swiss Franc and
Japanese yen, there is virtually no subsidy, even when measured
against commercial interest rates.
During the past four years, the Administration also
negotiated an agreement with other producer governments of large
commercial jet aircraft (France, Germany, and the United
Kingdom) to limit the trade credit subsidies for such aircraft.
This agreement, which only governs sales in non-producer
markets, sets the minimum interest at 12 percent for dollar
credits and establishes a ceiling on the amount of direct credit
support at 42.5 percent of the export value.

- 4 The Administration has also negotiated an agreement in the
OECD to limit export credit subsidies for export sales of
nuclear power plant and equipment. The minimum interest rates
are set at one percent above the permissible interest rates
under the Arrangement.
The impact of these changes is not small, since total
worldwide officially supported export credits annually amount to
about $50 billion in the medium- and long-term and at least $120
billion in the short-term. The U.S. taxpayer has benefited
significantly as a result of reduced Eximbank subsidies. U.S.
manufacturers have benefited from a more nearly level playing
field in the export credit game.
Tied Aid Credits
The tied aid or mixed credit problem is the one remaining
loophole in the Export Credit Arrangement. As originally
conceived, such credits were intended to constitute a form of
economic aid to developing countries, augmenting aid resources
with more plentiful commercial credit. When used for commercial
purposes, however, such credits distort both aid and trade.
Using aid monies to steal normal export business is so patently
unfair that it must be curtailed. The United States' objective
is to eliminate the current practice of diverting aid monies for
the purpose of penetrating markets and promoting exports.
OECD countries have agreed that the tied aid credit problem
is now the central issue in the export credits field. In May
1984, OECD Ministers instructed the appropriate bodies of the
OECD to take "prompt action" to improve discipline and transparency over tied aid credits. Since then, the United States
proposed a ban on all tied aid credits with a concessional element less than 50 percent as one way to ensure such credits are
used only for legitimate aid purposes and not for commercial
subsidies.
The tied aid credit problem is significant. But, quantitatively, the tied aid credit problem is not on a scale with
the overall export credit problems which we have already largely
solved.
In the peak year of 1982 (prior to agreement to ban tied
aid credits with a grant element below 20 percent), OECD count^tl 9 U K ? riZ f^ $ 6 * 4 b i l l i ° n i" tied aid Credits with a grant
element below 50 percent. m 1983, tied aid credits with a
grant Eelement
below 50 percent dropped to $3.7 billion.
• nfnr-!h??e n u m b ? r s maY b e overstated. Only about 15-:
. or really problematic or commercial foreign tied aid

- 5 credit cases, amounting to about $300-400 million, were brought
to our attention and confirmed during the last year. Worldwide, tied aid credits in sectors which would normally receive
export credit finance — subways, railroads, telecommunications,
power, steel, hydrocarbons — amounted to $3.7 billion in 1982
(about 2 percent of total exports supported with official
finance). In 1983 such credits amounted to only $900 million.
One should not try to gauge the trend in tied aid credits
from this data. Preliminary 1984 data show an increase in
notified offers, but a decrease in the number of loans actually
made. The United Kingdom, Germany, Italy, other European
countries, Canada and Japan are increasingly active not only in
countering French mixed credits but also in initiating mixed
credits or similar forms of concessional financing offers,
judging by the notifications of such offers which have been
received by Eximbank. While the increased notifications may be
a harbinger of expanded use of tied aid credits in the future,
they may also only be indicative of greater compliance with the
OECD information exchange; the actual credits may be more or
less than in the past.
Nonetheless, statistics reveal that the tied aid credit
problem is primarily a problem with one country — France.
France is the only country blocking increasing discipline among
the 22 Participants to the Arrangement on Export Credits.
France dominated the tied aid credit field in 1982:
* France authorized almost $2 billion in tied aid
credits (30 percent of OECD total) with grant elements
below 50 percent.
* France authorized 40 percent of all OECD tied aid
credits with grant elements below 35 percent.
* France authorized 75 percent of tied aid lines of
credit.
French dominance increased during 1983, despite the
downturn in LDC demand for project finance.
* As OECD-wide authorizations of tied aid credits with
grant elements less than 50 percent dropped from $6.4
billion in 1982 to $3.7 billion in 1983, French authorizations decreased only from $2.0 billion to $1.4
billion.
*
France authorized 37 percent of all tied aid credits
with grant elements below 50 percent.

- 6 -

*
France authorized over half of all tied aid credits
with grant elements below 35 percent.
* France authorized more than three-quarters of all
tied aid lines of credit.
* France accounted for almost 50 percent of the
amounts authorized for sectors with high internal rates
of return, such as telecommunications and transportation.
Therefore, it comes as no surprise that France has used
every means to block progress within the European Community,
and, by extension, in the OECD on this issue. The French were
successful in blocking an EC mandate last September, prompting
the United States to ask for a postponement of the September
meeting. The French have continued to block discussions of tied
aid credit discipline within the Community.
Our efforts to advance our objectives have taken many
forms. Eximbank has selectively matched egregious foreign tied
aid credits in the past 18 months. Eximbank and USAID have
combined their resources in two cases to counter a foreign tied
aid credit offer.
On the diplomatic front, we have raised the issue at the
highest levels in every available forum. Secretaries Regan and
Shultz and Ambassador Brock have pressed their counterparts in
the European Community and Japan over the past twelve months to
support greater discipline and transparency.
These efforts have borne some fruit. At the December meeting, we made technical progress, but not sufficient progress to
solve the tied aid credit problem. The EC made a constructive
proposal to improve the transparency of tied aid credits. This
proposal had the following three elements:
1. A better and more comprehensive definition of tied aid
credits to ensure all tied aid practices are subject to the
same discipline;
2

^°~day Prior notification by each Particioant of any
and all tied aid credits with a grant element less than 50
percent (currently rules are 10-day prior notification for
tied aid credits with grant elements less than 25 percent);
r
and
3. An agreement to hold face-to-face prior consultations
among concerned Participants for controversial cases.
'*

- 7 -

While the EC proposal is certainly a positive step, one
which we welcomed, we said that it should only go forward in
conjunction with significant improvements in discipline. Export
Credit negotiators must fulfill the OECD Ministerial Communique
of May 18, 1984, which called for improvements in both discipline and transparency. The two should go forward_Tn~~tandem.
The EC has yet to make a counter proposal to our idea of
banning tied aid credits with a grant element of less than 50
percent. The Export Credits Group has until the OECD Ministerial meeting of April 1985 to fulfill its mandate.
The Budget Proposal
The Administration's negotiating success during the last
four years has enabled us to propose the elimination of Eximbank' s direct credit program and place greater emphasis on
guarantees and insurance. When coupled with other factors such
as the LDC debt crisis, demand for Eximbank subsidized financing
has dropped significantly during the past two years and has not
increased commensurate with improvements in the global situation. Eximbank-subsidized direct credits dropped from a peak
of $5.0 billion in FY81 to $844.9 million in FY83 and $1.46
billion in FY84.
Unsubsidized financing has become increasingly competitive,
as evidenced by the recent demand for guarantees and insurance.
The proportional share of direct credits in Eximbank's long-term
financing has dropped from 85 percent in FY81 to about 50
percent in FY83 and FY84. The majority of medium-term support
is in the form of guarantees and insurance. During FY83,
Eximbank authorized $1.2 billion in long-term financial
guarantees, as compared to $684.7 million in long-term direct
credits. Medium-term guarantees and insurance amounted to
$829.1 million compared to $160.2 million in subsidized
medium-term credits. (This number does not include the special
facilities of $738.4 million authorized for Brazil and $500
million for Mexico.) In 1984, Eximbank authorized $899 million
in financial guarantees and $1.5 billion in medium-term
guarantees and insurance, compared to $1.1 billion in long-term
direct credits and $433.9 million in subsidized medium-term
credits.
The proposed elimination of Eximbank's $3.8 billion direct
credit program recognizes this new reality. Instead, we have
proposed expanding Eximbank's guarantee and insurance authority
from $10.0 billion to $12.0 billion in order to ensure sufficient access to trade finance.

- 8 In order to counter any significant subsidized competition
which still exists, we are proposing to allow the Bank to buy
down the interest rates on up to $1.8 billion of guaranteed
credits. We feel that these levels of support are more than
sufficient to counter any normal foreign subsidized competition,
particularly in the context of the current Arrangement interest
rates and market conditions. It is the intention of Eximbank to
structure the program which will replace Direct Credits and
Medium Term Credits so that there will be no change in the
nature of the financing provided to foreign buyers. Thus in our
view, the budget proposal should have no impact on our ability
to maintain and perhaps improve the current Arrangement rules on
normal export finance.
Eximbank's ability to match foreign tied aid credits has
always been significantly limited. In the past 18 months,
Eximbank has offered five concessional credits, of which only
one has been converted. The cost of an Eximbank concessional
credit, which can be as high as one dollar for each dollar of
exports supported, comes directly out of the Bank's already
dwindling capital and reserves.
While it is difficult to gauge exactly the impact of these
offers on the negotiating process, I think it is safe to say
that their effect on the major user of tied aid credits —
France — has been minimal. Moreover, it is doubtful whether a
mammoth tied aid credit program would improve the negotiating
climate. While matching another country's export subsidy gives
our exporter a chance, it makes the mixed credit problem worse.
It spoils the foreign market; buyers come to expect tied aid
credits from everyone.
Major tied aid credit matching programs by other countries,
especially the United Kingdom from 1980-82, did not seem to
deter the French practice of using aid monies for commercial
purposes. As long as the French are considered the initiator,
their exporters will be sought out first. Win or lose an
individual case, the French win preferred access to the market.
Therefore, matching foreign tied aid credits probably will
not solve the problem. While U.S. exporters may benefit from
such a program, matching will fail to discipline the French,
spoil the importing markets for all exporters, and result in
huge subsidy costs for the United States. That is an expensive
way to buy exports.
Given our need to control the Federal budget, the proposed
interest-rate-buy-down program does not permit Eximbank to match
foreign tied aid credits directly. Nonetheless, Eximbank will
still be able to combine with USAID to offer selective tied aid

- 9 credits. Under the FY86 budget proposal for USAID, funds for
tied aid credits will be available for Egypt, Pakistan, and
certain other of least developed countries.
Conclusion
The Administration's negotiating successes in the Export
Credit Arrangement have virtually eliminated export credit
subsidies in most currencies and significantly decreased the
need for a major export credit subsidy program in the United
States. The Administration's budget proposal is fully consistent with this new environment in export credits. We will continue to press for the elimination of commercially motivated
tied aid credits, but do not believe that Eximbank tied aid
credits, offered at significant cost to the U.S. taxpayer, would
advance our negotiating objectives to a degree commensurate with
their costs. In the coming weeks, we hope to get a high-level
political commitment at the OECD Ministerial to solve the tied
aid credit problem and close the one major loophole in the
export credit Arrangement.

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

March 5, 1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $14,000 million, to be issued March 14, 1985.
This
offering will provide about $450
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount of
$13,555 million, including $803
million currently held by Federal Reserve Banks as agents for foreign and international monetary
authorities and $3,133 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 $7,000
million, representing an additional amount of bills dated
June 14, 1984,
and to mature June 13, 1985
(CUSIP
No. 912794 GM 0), currently outstanding in the amount of $15,283
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $7,000 million, to be dated
March 14, 1985,
and to mature September 12, 1985 (CUSIP
No. 912794 HY 3).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing March 14, 1985.
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.
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.
B-34

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20239? prior to 1:00 p.m., Eastern Standard tune, Monday,
March 11 1985
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. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
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

- 3of 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 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 $1,000,000
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 March 14, 1985,
in cash or other immediately-available funds
or in Treasury bills maturing March 14, 1985.
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.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:30 a.m. EDT
March 5, 1985

STATEMENT OF
RONALD A. PEARLMAN
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Committee:
I am pleased to be here today to present the Treasury
Department's views on the requirement that taxpayers maintain
adequate contemporaneous records to substantiate business use of
vehicles. This requirement was imposed in the Deficit Reduction
Act of 1984 (the "DRA") to clarify the recordkeeping rules
applicable to vehicles used for both business and personal
purposes. It was designed to address significant concerns of the
Treasury Department and the Congress that taxpayers who own their
own vehicle were overstating the business use of these vehicles
and claiming excessive tax deductions. Similarly, in the case of
vehicles provided to employees by their employers, there was
evidence that the income attributable to personal use of these
vehicles was significantly understated.
In considering appropriate requirements for the
substantiation of business use of vehicles, it is of course
necessary to balance revenue and compliance objectives against
the costs and burdens that recordkeeping requirements entail for
ordinary taxpayers. Among the most important objectives of this
Administration has been to reduce the role of government in
private lives, including the paperwork and regulatory burdens
that governments characteristically impose. The Treasury
Department remains committed to this objective and will work to
ease regulatory burdens connected with the administration of the
tax laws wherever possible.
Our determination to limit regulatory burdens is necessarily
disciplined, however, by the need to ensure taxpayer compliance
with the Federal income tax system. I needn't remind the members
B-36
of this Committee that our system of taxpayer self-assessment,

- 2 which is a marvel to the rest of the world, depends upon public
confidence that the tax laws are not only fair, but also fairly
administered and enforced. We believe that the substantiation
requirements established by the DRA provide the appropriate
framework within which to strike a proper balance between fair
administration and the burdens of recordkeeping. The specific
recordkeeping requirements adopted under the DRA may have been
unduly burdensome; recently issued regulations have moderated
those requirements, however, and we are willing to work with this
Committee
taxpayers, to further refine the rules so as to preserve public
confidence in the fairness of the system without unduly burdening
BACKGROUND
A.

Law Prior to the Deficit Reduction Act of 1984

To understand the reasons for Congress' action in 1984 it is
important to review the rules in this area as they existed before
the DRA. Prior law applied different substantiation requirements
to deductions for business use of a vehicle depending on whether
the business use was for "local transportation" or in connection
with travel away from home. Business use of a vehicle for local
transportation was subject to the substantiation rules applicable
to business expenses generally under Section 162 of the Code,
whereas the use of a vehicle for travel away from home was
subject to the more stringent recordkeeping rules applicable
under Section 274(d).
Although a taxpayer bears the burden under Section 162 of
proving the amount of an expense and its business purpose, the
type of records needed to meet this burden where a vehicle was
used locally was unclear under prior law. Without a log, diary
or other contemporaneous record indicating the number of miles
driven for business and personal purposes, taxpayers, the
Internal Revenue Service and the courts had great difficulty
determining the amount of business use of a vehicle. When no
probative evidence was produced, the courts and the Service
routinely disallowed claimed deductions in full.
When a taxpayer came forward with some probative evidence as
to business use, however, the Internal Revenue Service or,
ultimately, a court was required to estimate the business use of
a vehicle based on evidence such as appointment calendars,
business records and any other corroborating evidence, including
£h« * a x p a Y e r ' s o w n statement. See Cohan v. Commissioner, 39 F.2d
540 (2d Cir. 1930). The audit U T e s of the Internal Revenue
Service and published tax cases are replete with instances where
the taxpayer's failure to keep sufficient records has required

- 3 the Internal Revenue Service and the courts to engage in the
tedious and inexact process of estimating business use by
reconstructing records years after the actual use occurred.
Obviously, under prior law, many taxpayers who used vehicles
for both business and personal purposes were not keeping adequate
records of their business use. Some of these taxpayers made good
faith and reasonably accurate estimates of business use, but many
others, whether intentionally or not, substantially overstated
their actual business use. In addition, employers provided
vehicles to employees and routinely failed to account properly
for the employees' personal use of the vehicles.
As the testimony of Commissioner Egger will address in more
detail, the audit experience of the Internal Revenue Service
under prior law confirms the seriousness of this noncompliance
problem. The inability of the Internal Revenue Service to
administer the rules regarding personal and business use of
vehicles left even well-intentioned taxpayers with little
incentive to maintain adequate records and encouraged others to
overstate the business use of their vehicles. Honest taxpayers
who kept records and did not claim deductions for the personal
use of a vehicle, as well as those taxpayers who did not receive
the use of a vehicle as a fringe benefit, justifiably concluded
that they were shouldering an unfair part of the total tax burden
because of the abuses in this area. As I mentioned earlier, such
perceptions of unfairness tear at the fabric of our
self-assessment system. A basic purpose of the changes brought
about in the DRA was to preserve public confidence in the
fairness of the tax system.
It is important to contrast the prior law substantiation
requirements for local business use of a vehicle with the
stricter recordkeeping rules applied to travel away from home
under Section 274(d). Under that section a taxpayer must
substantiate, by adequate records or by other sufficient
documentary evidence corroborating his own statement, the amount
of a travel expense, the time and place of the travel and the
business purpose of the expense. The legislative history to
Section 274(d) states that "a clear, contemporaneously kept diary
or account book containing information with respect to the date,
amount, nature and business purpose of the expense may constitute
an adequate record under this provision."
The regulations issued under Section 274(d), as enacted in
1962, provided that taxpayers could substantiate the use of a
vehicle for travel away from home or business by a log, diary or
similar record made at or near the time the travel occurred. The
intended effect of Section 274(d) was to reduce the
administrative and judicial conflicts over the amount of travel
expenses incurred by taxpayers while traveling away from home.

- 4 The essence of the rule was quite simple - no records, no
deduction. The courts have interpreted these requirements
accordingly, refusing to allow any deductions to taxpayers for
ule of a vehicle awaj from home where the taxpayer has no
documentary evidence establishing the level of business use.
B. The Deficit Reduction Act of 1984
Prompted by reports that cost recovery allowances were
spurring sales of expensive automobiles as well as the knowledge
that a substantial number of taxpayers routinely overstated the
business use of vehicles, Congress began considering means to
curtail business expense deductions claimed for vehicles used in
business. The House-passed version of the DRA imposed a limit on
the cost of luxury automobiles that could be taken into account
in computing depreciation deductions and the investment credit.
In addition, the House bill created a presumption that no more
than 50 percent of the use of an automobile was for business
purposes. The House Report makes clear that taxpayers remained
subject to the prior law rule that all business use of a vehicle
must be substantiated, but states that this Committee intended
"to elevate the standard of proof in cases where the proportion
of business use claimed exceeds 50 percent." H. Rept. 98-432,
98th Cong., 2d Sess. 1388 (1984). The bill, however, was silent
on the type of records taxpayers would have to keep to show
business use in excess of 50 percent.
The Senate also adopted limits on cost recovery allowances
for luxury automobiles, but expanded the compliance provisions to
impose specific requirements relating to the types of records
taxpayers would be required to keep to claim any deduction or
credit with respect to a vehicle. Specifically, the
Senate-passed version of the DRA modified Section 274(d) to
require that taxpayers must maintain adequate contemporaneous
records detailing all business use of a vehicle. The Senate bill
also imposed a requirement that tax return preparers could not
sign a tax return without verifying the accuracy of a taxpayer's
records supporting a claimed deduction.
In conference, the restrictions on cost recovery allowances
for luxury automobiles were modified, but the compliance
provisions included in the Senate bill were adopted with only
minor changes. The DRA provisions relating to recordkeeping
state no exceptions; taxpayers must document with adequate
contemporaneous records the business use of any vehicle. The
Conference Report indicates the breadth of the rule:
If the taxpayer does not have adequate
contemporaneous records, no credit or
deduction is allowed with respect to that item
... The Conferees expect that these records

- 5 will reflect with substantial accuracy the
business use of the property. The records
must indicate the business purpose of the
expense or use, unless the business purpose is
clear from the surrounding circumstances.
H. Rept. 98-631, 98th Cong., 2d Sess. 1031 (1984). With respect
to automobiles, the Conference Report explicitly states that
"logs recording the date of the trip and the mileage driven for
business purposes must be kept."
In addition, the Conferees provided that any underpayment
attributable to a failure to keep adequate contemporaneous
records is treated as negligence, unless the taxpayer produces
clear and convincing evidence to the contrary. The Conference
Report further provides that claiming a deduction or credit
without adequate contemporaneous records could lead to the
imposition of tax fraud penalties.
RECORDKEEPING REGULATIONS
The Treasury Department published temporary regulations on
October 24, 1984 implementing the DRA changes to Section 274(d).
With one narrow exception for vehicles of a type not ordinarily
susceptible to personal use, the temporary regulations imposed o
all vehicles used for business purposes the requirement outlined
in the Conference Report that logs be maintained detailing the
date, elapsed mileage and business purpose of each trip. Under
the statute, the log requirement applies to taxable years
beginning on or after January 1, 1985.
As the effective date of the recordkeeping rules approached,
the Internal Revenue Service began to receive a significant
number of complaints and comments on the temporary regulations.
These comments indicated that the changes to the recordkeeping
rules, as well as the temporary regulations implementing those
changes, applied too broadly, sweeping within the scope of the
log requirement many vehicles and taxpayers that did not involve
any of the abuses which prompted Congressional action.
In recognition that the new rules applied too broadly, the
Internal Revenue Service announced on January 25 its intention t
issue revised regulations, effective January 1, 1985, clarifying
the generally applicable recordkeeping requirements and providin
a series of special rules which would substantially reduce or
completely eliminate the recordkeeping requirement in certain
circumstances. In developing the revised regulations, the
Internal Revenue Service carefully reviewed each of the comments
on the original regulations and also conferred with company

- 6 administrators and independent consultants knowledgeable on the
business use of vehicles. The information gathered from the
comments and from these discussions formed the basis for the
rules adopted in the revised regulations.
These revised regulations change the recordkeeping rules
significantly. First, the new temporary regulations clarify that
for those taxpayers required to maintain logs, a single entry is
sufficient for any period of uninterrupted business use. Thus,
for example, a salesman who uses a vehicle to make a series of
appointments during a day and has no (other than de minimis)
personal use of the vehicle for that day need make only one entry
that summarizes the business use. This salesman would only have
to record the total mileage driven during the day, not the
mileage for each stop. This rule should significantly reduce the
recordkeeping burden for those taxpayers who are required to keep
logs.
The temporary regulations also provide several special rules
that eliminate the log requirement in a variety of circumstances.
First, the temporary regulations provide that a vehicle is not
subject to the log requirement if it is used in a business, kept
on the business premises overnight, and the business has
instituted a policy against personal use of the vehicle. Second,
a vehicle which is used by employees for commuting, but which
otherwise satisfies the above requirements is also exempt from
the log requirement if the employer accounts for the commuting
value of the vehicle by including $3 per day in the employee's
income. We expect that these two special rules will eliminate
the recordkeeping requirement for many business automobiles and
virtually all vans, trucks, and special purpose vehicles used in
a business.
The other special rules contained in the new temporary
regulations are premised on assumptions as to the level of
business use of certain classes of vehicles. A taxpayer
satisfying certain conditions may elect to treat a designated
percentage of the use of a vehicle as business use and the
balance as personal use. Alternatively, the taxpayer may elect
to keep track of only personal use of the vehicle. These options
can be used in two circumstances. First, they are available with
respect to a vehicle used in the business of a taxpayer who
spends most of a normal business day making deliveries or making
calls on customers or clients. Such a taxpayer may elect to
treat 70 percent of the use of such an automobile (or other
vehicle designed for personal use) as for business purposes; the
taxpayer may elect to treat 80 percent of the use of any othet
vehicle (e.g., a truck) as business use. The second circumstance
in which these options are available is for vehicles (other than
automobiles or other vehicles designed for personal use)
regularly used in the business of farming by a taxpayer whose
Sn^f- 1 " 0 0 ? 6 i ex ? lud ing passive investment income) consists
almost exclusively of farm income (at least 70 percent).

- 7 -

Based on the comments which the Internal Revenue Service
received on the original regulations, as well as the information
supplied by firms and independent consultants with extensive
experience on the business use of vehicles, we believe these
special rules will exempt from the log requirement a substantial
portion of all vehicles used for business purposes. Comments
received from interested taxpayers subsequent to the release of
those revised regulations confirm this belief.
Of course, the recordkeeping rules remain controversial
despite the issuance of the revised regulations. We have
received a large number of comments regarding the burden imposed
on small businesses by the recordkeeping requirement. In
addition, the DRA focused attention on whether a policeman or
other public safety employee is taxable on the use of an official
vehicle to commute to and from his home.
CONSEQUENCES OF REPEAL
Numerous bills to repeal the recordkeeping rules enacted as
part of the DRA have been introduced in both the House and
Senate. Repeal of the provisions would resolve few of the issues
in this area. Moreover, repeal could increase noncompliance and
certainly would result in a significant revenue loss.
Repeal of the DRA recordkeeping rules will not remove the
prior law requirement that taxpayers substantiate the business
use of vehicles. It will merely perpetuate the uncertainty
regarding the nature of the recordkeeping that is required and
contribute to the waste of administrative and judicial resources
that must be dedicated to resolving controversies where adequate
documentary records are not available.
The compliance concerns which prompted Congress to act in
1984 remain valid. Indeed, the controversy and publicity that
have surrounded the temporary regulations have heightened
taxpayers' awareness of the audit limitations of the Internal
Revenue Service in this area, and repeal of the DRA rules could
lead to increased noncompliance.
Although the recently revised regulations provide substantial
relief from the rules as originally imposed by the DRA and the
initial temporary regulations, we recognize that even under the
revised regulations many taxpayers will be required to maintain
logs. For this reason, the Treasury Department is willing to
work with this Committee to refine the existing recordkeeping
rules in an effort to preserve the principles of the DRA changes
while minimizing the recordkeeping burden on business and the
administrative burden of the Internal Revenue Service.

- 8 -

There may be circumstances beyond those identified in the
modified regulations which warrant special exceptions to the
general recordkeeping rules. If such circumstances are
identified we will endeavor to craft the appropriate exceptions.
To that end, we invite the members of this Committee and
taxpayers generally to assist the Treasury Department in
identifying situations which warrant exceptions to the
recordkeeping rules.
We are also willing to examine the generally applicable
recordkeeping standard to determine whether more practical
approaches to substantiation are feasible in lieu of the
requirement that taxpayers maintain logs. For example, we will
consider whether other contemporaneous records, such as a
calendar or appointment book, could serve as a basis for
determining the business use of a vehicle.
We urge, however, that the requirement that taxpayers
maintain some type of contemporaneous records be retained. When
the circumstances of a taxpayer's use of a vehicle do not warrant
a special rule, contemporaneous records are necessary to account
accurately for business and personal use. A deduction not based
on such records cannot be reliable. Perhaps more importantly,
the absence of a contemporaneous recordkeeping requirement would
leave the Internal Revenue Service unable to effectively
administer or enforce the law. We would return to a system in
which honest, conscientious taxpayers are made to feel foolish
for complying with rules that others ignore with impunity. A tax
system based on self-assessment cannot long endure such
disrespect nor can the Treasury afford the potentially
substantial loss in tax revenues. We therefore urge this
Committee to retain a requirement that taxpayers maintain records
that adequately document business use of a vehicle.
Finally, in light of the compliance problems we have
experienced in this area, it is increasingly important for tax
return preparers to play a role in promoting compliance with the
recordkeeping rules. Therefore, we urge this Committee to retain
the DRA rules relating to tax return preparers.
SUMMARY
mmJr? Treasury Department is willing to work with this
e
J™
I? develop reasonable recordkeeping rules for taxpayer*
f n „ ! ? M ! t i a t e - he b ? s i n e s s use of vehicles! We urge that the
X I ? J ?I r e c °9 n i z ? fche importance of retaining a requirement
subst a nM X ? a ^ r H™ a i n - a i? s u f f i c i*nt contemporaneous records
of a vehicle 9
" 9 * t 0 ° l a i m d e d u c t ions for the business use

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

STATEMENT OF THE HONORABLE JOHN M. WALKER, JR.
ASSISTANT SECRETARY (ENFORCEMENT AND OPERATIONS)
U.S. DEPARTMENT OF THE TREASURY
AT THE BRIEFING OF THE SUBCOMMITTEE ON FINANCIAL
INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
MARCH 5, 198 5
The Need for Concerted Action by Treasury, Bank
Regulatory Agencies, and Financial Institutions
to Combat the Problem of Money Laundering
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to meet with you to discuss
Treasury's enforcement and administration of the Bank Secrecy
Act and its initiatives against money laundering that occurs
through financial institutions.
In my statement today, I will describe how Treasury combats the problem of money laundering—through its regulatory
and administrative functions under the Act, and through its
financial investigations, which utilize the reporting information that the Act authorizes Treasury to collect. I will
also discuss measures Treasury has taken to increase compliance
with the reporting requirements, and I will address the need
for additional steps to further our progress.
T'he Bank Secrecy Act As A Tool to Combat Money Laundering
Congress passed the Bank Secrecy Act in 1970 to strengthen
Federal law enforcement efforts against white collar and organized crime. The need for this legislation became apparent
during extensive House and Senate hearings, which specifically
identified law enforcement's need for a better method of
identifying and documenting suspicious transactions, including
international transactions.
The Act and the regulations that Treasury has promulgated
under it today fulfill several basic purposes.

B-37

- 2 • First, they provide law enforcement a means of
detecting and documenting those financial transactions that
result from or have a connection with criminal activity.
More specifically, through the documentation provided by the
reporting requirements under the Act, Treasury is frequently
able to identify persons and corporations engaged in a wide
variety of crimes, including drug trafficking, racketeering,
extortion, and tax evasion.
• Second, the Act and the regulations under it serve
as a deterrent to the use of legitimate financial institutions
by criminal operatives to facilitate their illegal activities.
° Third, when illicit activity is uncovered, whether
or not it involves a financial institution, the Act functions
as its. own basis for prosecution. Charges can be brought
under the Bank Secrecy Act even if the government is unable
to bring criminal charges based on the underlying illegal
activity.
Treasury relies on the tools provided by the Bank Secrecy
Act, together with other statutory authorities, in conducting
its financial investigations into money laundering and other
criminal activity. Financial investigations are of critical
importance to law enforcement, for a number of reasons:
° Behind every organized crime transaction there is
money. If we can trace the money, the trail will often
lead to high-level criminals. The leaders in any criminal
enterprise usually take great pains to distance themselves
from the illegal source of their income. But they can usually
be found close to the money.
° That money, if seized, is potentially devastating
evidence at a criminal trial. A jury can get lost in the
technical details of a white collar crime. But if jurors
can be shown the illicit proceeds, they can more readily
understand the full impact of the crime.
° Also, through seizure and forfeiture, we can deprive a
criminal enterprise of its lifeblood. For instance, drugs can
be readily replaced by a drug trafficking organization, but its
cash reserves are essential to its functioning. Large monetary
seizures can cripple it, and possibly put it out of business
altogether.
I will discuss Treasury's financial investigations in
more detail m a moment, but first I think it would be helpful
to outline the basic regulatory mechanism that is now in
place under the Act.

- 3 In 1972, the Treasury Department issued regulations that
require banks to maintain certain basic records, including
the following:
— cancelled checks and debits over $100;
signature cards;
statements of account;
extensions of credit in excess of $5,000; and
records of international transfers of more than
$10,000.
The regulations also provide for the following reports:
First, all financial institutions are required to
report to IRS currency transactions in excess of
$10,000. There are a few exceptions to this requirement. Transactions solely with or originated
by financial institutions need not be reported.
Also, financial institutions may exempt from reporting transactions with established customers
maintaining deposit relationships, provided that
the amounts deposited do not exceed amounts that
are reasonable and customary given the type of
business engaged in by the customer, and further
provided that the business is of a type that customarily produces large cash receipts.
Second, with the exception of certain shipments made
by banks, the international transportation of currency
and certain other monetary instruments in bearer form
and in excess of $10,000 is required to be reported
to the Customs Service. The civil sanctions for violations of this requirement are especially powerful.
Customs can seize the entire amount of unreported
currency or other monetary instruments involved in
a violation at the time a violation occurs. If a
violation is detected too late to effect a seizure,
Treasury can assess a civil penalty equal to the
amount of unreported monetary instruments that were
not seized.
Third, Treasury requires reporting to IRS of the
ownership or control of foreign financial accounts,
by all persons subject to U.S. jurisdiction.
In addition to the responsibility for implementing the
purposes of the Act through regulations, the Secretary exercises overall responsibility for ensuring compliance with
the recordkeeping and reporting requirements of the Act. In
accordance with the intent of the Act, Treasury's implementing
regulations delegate this responsibility to those agencies
that supervise the various financial institutions.

- 4 Compliance with the Reporting Requirements
Mr. Chairman, in this regard, we recognize that our bank
supervisory agencies have other important missions in addition
to supervisory compliance with the Bank Secrecy Act. However,
from a law enforcement point of view, none are more critical.
Compliance with the Act is critical from the standpoint of
the soundness of the financial institution as well, and indeed
from the standpoint of the integrity of our country's banking
system. Both our government and our financial community have
an important stake in ensuring that our financial institutions
are not used in connection with criminal activity.
In 1980, the Treasury Department, responding to the need
to strengthen the currency transaction reporting regulations
and to improve the overall compliance of the banking industry,
began a number of regulatory, administrative, and enforcement
improvements in this area. The regulations were amended at
that time to limit a bank's discretion concerning the reporting
of currency transactions. In addition, bank examination procedures were improved. These steps, in conjunction with enhanced criminal enforcement by IRS, have had a very positive
effect on compliance since that time. In 1979, for example,
121,000 Form 4789's were filed, which report cash transactions
in excess of S10,000. This figure has grown each year since
then, reaching 425,000 in 1982, 535,000 in 1983, and approximately 700,000 in 1984.
However, the Treasury Department believes that further
gains are called for, particularly in light of the pervasive
threat that organized crime and money laundering pose to our
society and our financial institutions. We are committed to
further improvements in the levels of compliance with reporting
requirements. We sincerely welcome this Committee's interest
in this subject and the opportunity to work with the Congress
to achieve these further enhancements in the effectiveness of
the Bank Secrecy Act.
•I-K ?uerwthf past several years, Treasury has been working
with the bank regulatory agencies to improve the examination
function, we have stressed the importance of procedures designed to result in maximum compliance.
cedures T^tV! tne deVeJ°pment of ^P^ved examination proe
f c q ™ " 8if a n d u w ? h a v e w o r k e d with the bank regulatory
a
imoorra™ X ^ u ? t h ! l r i m Pl^entation. We recognize the
ln9 f r t h e r steps
take
rv?L
?
' a n d w e have recently undertaken a review of examination procedures for this purpose.

- 5 I would like to mention, in this regard, that the
contribution of the President's Commission on Organized Crime
has been a substantial help to us in reviewing our overall
program. We have worked with the PCOC in examining the
legislative, regulatory and administrative issues involved
with the Bank Secrecy Act and with money laundering in general,
and we have found their analysis to be extremely helpful.
Because the recommendations submitted by the PCOC are
extremely detailed, I will not go into depth regarding each
of them. I will, however, comment generally that we are in
agreement with most of the recommendations. We have taken
steps to implement some of them already, and we are considering
ways of effectively implementing others.
I would like to mention some of the more significant
changes that have been completed or are underway.
1. We agree with the Commission that currency transaction reports should be reviewed and signed by
a supervising bank officer prior to submittal, and
we are considering a regulatory or administrative
change to accomplish this.
2. The Commission recommended that officers and
employees of financial institutions receive more
extensive training, both in the regulations and
in ways to recognize suspect transactions and
possible money laundering schemes. We are
emphatically in agreement that this is necessary,
and we have made progress in this area over the
past year.
3. Regarding exemption lists, the Commission recommended
that banks perform background investigations on
customers requesting to be on such lists. Over the
past several years, Treasury has reviewed exemption
lists of a great number of financial institutions,
and we have identified the need for compliance
improvements in this area. We are now considering
possible regulatory changes to address this problem.
Our intention is to ensure that such lists are
administered by banks in such a way that they
cannot be used by criminals to escape the reporting
requirements.
4. The Commission also recommended that Treasury's
regulations be extended to require reporting by
casinos and endorsed a provision in a Treasury
proposed rule that would accomplish this. The
regulations requiring reporting by casinos have
recently been promulgated.

- 6 In addition to the regulatory and administrative recommendations, the President's Commission also set forth recommendations
for legislative changes. Some of these recommendations, as
this Committee is aware, have already been enacted as part
of the Comprehensive Crime Control Act of 1984. Treasury is
considering the other changes and communicating with other
departments and agencies to solicit their views. We look
forward to working with the Congress in this regard and offer
our assistance as this process moves forward.
Treasury's Use of the Reporting Data in Financial Investigations
As I mentioned earlier, the data reported to Treasury by
financial institutions under the Bank Secrecy Act is of
critical importance to law enforcement. Treasury analyzes
this data at the Treasury Financial Law Enforcement Center,
or TFLEC, which is located at the headquarters of the U.S.
Customs Service. TFLEC provides analytical information for
the field investigations by IRS and Customs, but it also
provides assistance to other Federal law enforcement agencies.
Treasury places the highest of priorities on financial
investigations. They have proven to be a potent weapon
against drug trafficking and other types of organized crime.
In 1980, Treasury launched Operation Greenback, a major
initiative to combat money laundering in the Florida region.
Greenback produced 255 indictments and 109 convictions for
currency violations during its four-year term. Its success
spawned forty additional Treasury financial task forces,
which are now located across the country.
Greenback itself has become a component in one of the
President's Organized Crime Drug Enforcement Task Forces,
which now number thirteen. These Task Forces have initiated
over 800 cases, even though they have been fullv operational
for only 20 months. They have produced indictments of more
than 4300 individuals and have resulted in more than 1600
convictions. Two out of three Task Force cases have a
financial component.
Treasury's financial task forces have also had a significant impact on violations of currency laws. Since 1980:
o

they have produced over 1300 indictments and over
460 convictions;
they have resulted in $81.8 million in currency
seizures and $34.3 million in property seizures;

- 7 °

they have destroyed eighteen major money laundering
enterprises, which laundered a documented total
of $2.8 billion.

In view of increased compliance and enforcement efforts
at banks, securities dealers and money exchanges, we have
found in the last few years that drug traffickers, members
of organized crime and other criminals have been seeking
alternative methods of moving and concealing the vast amounts
of cash that they receive from illegal activities. We have
noted, for instance, that many criminal organizations are
moving large amounts of cash directly out of the country,
utilizing private aircraft and commercial flights. We have
also noted that many criminal organizations are resorting to
the use of offshore banking facilities as part of their
effort to conceal their ill-gotten gains.
In response to this trend, Treasury proposed regulations
on April 15, 1984, that would establish procedures under
which the Secretary could require specified U.S. banks to
report financial transactions with foreign financial institutions. This regulation, which will be promulgated in final
form in the near future, will provide a mechanism to help
identify money transfers related to drug trafficking or other
organized crime that occur between U.S. and foreign financial
institutions.
In exercising the authority under this regulation,
Treasury will select classes of transactions with foreign
financial institutions as the subject of reporting on the
basis of available information indicating unusual financial
activity. Treasury will strive to impose reporting requirements in the least burdensome manner consistent with our
need for the information. The Act is quite specific in
requiring that Treasury carefully consider how its international transaction reporting requirements affect financial
institutions.
Most of the money laundering offenses that Treasury has
uncovered do not involve criminal wrongdoing on the part of a
financial institution. Where banks have been involved at all,
they have typically been unwitting participants in schemes
to wash illicit crime proceeds, and I would add that Treasury
has received a great deal of cooperation from many banks as it
conducts its financial investigations. However, there have been
a few cases in which banks themselves have had criminal culpability for the currency violations that Treasury has investigated.

- 8 For example, in April 1984, the Great American Bank of
Dade County, Florida, pleaded guilty to four felony counts of
failing to report cash transactions and was subsequently
fined $375,000. A former vice president of the bank, the
head teller, and an assistant teller also pleaded guilty to
Bank Secrecy Act violations.
In September 1984, the Rockland Trust Company of Boston
also pleaded guilty to charges of failing to file currency
transaction reports with IRS, and was fined $50,000.
More recently, as this Committee is well aware, the
First National Bank of Boston entered a guilty plea to charges
of failing to file reports in connection with international
transactions of $1.22 billion, and was fined $500,000.
The Need for Vigilance on the Part of Financial Institutions
Regarding the matter of banks becoming unwitting participants in money laundering schemes, there is one point I cannot
emphasize strongly enough: Financial institutions must themselves assume a greater degree of responsibility for compliance
with the Act and Treasury's regulations, and for recognizing
possible illegal activity occurring in their midst.
Treasury has taken, and will continue to take, steps to
increase the level of compliance by financial institutions.
But in the long run, our nation's struggle against money
laundering and organized crime also depends on the willingness
of financial institutions to take an active role in ensuring
that they are not conduits for the washing of crime proceeds.
For those who assert that mere adherence with the
reporting and recordkeeping requirements is all that an
institution can do, and should be expected to do, I would
pose a question: What would bank officials do if they
discovered that drug traffickers were making drug deals, or
doing other illegal activity, in their lobby? I raise this
question only to point out that crime-related financial
activity is just as much an integral component of organized
crime as is the selling of drugs and the racketeering that
it is designed to support.
Zt
S
< ourse
' strongly in the interest of a bank to
ana,„ +i L °1 ?
' t h a J . x V s n 0 t U S e d b y c r i m e figures in furtherance of
Jii 2 ii-IS ? X t !: ? U t b e y ° n d t h i s ^ " - i n t e r e s t , every bank
a, wfi?
T. X!!
^tegrity of our country's financial system
out of ; h *7? n 3 S K S u 2 e ^ S m u s t b e vigilant in keeping crime
?o keen crimp ^ ? S r h K ° d ^ b a n k s m u s t t a k e voluntary actions
to keep crime out of the financial community.

- 9 We must not confine our thinking to legal obligations.
There are ethical and moral obligations as well. Any financial institution that hopes to retain the trust of the community it serves must rigorously adhere to them.
I recognize that there is a fundamental interest for
banks in maintaining the confidentiality of the financial
affairs of its customers. But in protecting this confidentiality, it is essential that our financial institutions
do not overlook other fundamental responsibilities to our
society. To do so is to risk eroding public confidence in
our banking system itself.
In conclusion, Mr. Chairman, Treasury has made significant
progress in the fight against money laundering. Financial
investigations have succeeded in disrupting and destroying
major criminal money laundering enterprises. Compliance with
regulatory requirements by financial institutions is today at
a higher level than ever before. But there is much more we
need to do in ensuring compliance with the legal and regulatory
requirements under the Bank Secrecy Act. Given the enormity
of the money laundering problem facing us, we must take further
steps to deter and detect currency violations, and to ensure
that our financial institutions are not used for the benefit
of criminal activity.
This concludes my prepared remarks. I would be pleased
to answer any questions that the Committee may have.

TREASURY NEWS

Department of the Treasury • Washington, D.c. • Telephone 566-21
FOR RELEASE AT 12:00 NOON March 8, 1985
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $8,500 million of 364-day
Treasury bills to be dated March 21, 1985,
and to mature
March 20, 1986
(CUSIP No. 912794 JX 3). This issue will
provide about $250
million new cash for the Treasury, as the
maturing 52-week bill is outstanding in the amount of $8,252
million.
The bills will be issued for cash and in exchange for
Treasury bills maturing March 21, 1985.
In addition to the
maturing 52-week bills, there are $13,549 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 $1,311 million, and Federal
Reserve Banks for their own account hold $5,521 million of the
maturing bills. These amounts represent the combined holdings of
such accounts for the three issues of maturing bills. Tenders from
Federal Reserve Banks for themselves and as agents for foreign and
international monetary authorities will be accepted at the weighted
average bank discount rate 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 $345
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.
20239, prior to 1:00 p.m., Eastern Standard time, Thursday,
March 14, 1985.
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.
B-38

- 2 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. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
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.
A noncompetitive bidder may not have entered into an agreement, nor make an agreement to purchase or sell or otherwise dispose of any noncompetitive awards of this issue being auctioned
prior to the designated closing time for receipt of tenders.
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 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

- 3 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 $1,000,000 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. 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 March 21, 1985,
in cash or other immediately-available funds
or in Treasury bills maturing March 21, 1985.
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.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must"include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
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 566-20'
FOR RELEASE AT 4:00 P.M.

March 8, 1985

TREASURY EXPANDS STRIPS PROGRAM
The Department of the Treasury announced today that effective
March 15, 1985, the 10-year note, 11-5/8% Treasury Notes of Series
C-1994, and the 30-year callable bond, 11-3/4% Treasury Bonds of
2009-2014, both of which were issued November 15, 1984, will be
eligible to be held in STRIPS form (Separate Trading of Registered
Interest and Principal of Securities). Treasury's plan to include
these securities in the STRIPS program was announced on January 15.
The minimum amount required to obtain STRIPS form is
$1,600,000 for the 11-5/8% Note and $800,000 for the 11-3/4% Bond.
Larger amounts must be a multiple of the minimum required. In
STRIPS form, only the Bond's interest payments that are payable
before or on the first call date may be separated from the principal. As with the February 15 issues, separate CUSIP numbers will
be assigned to each security's Principal and Interest Components.
Further details are given in the amendments to the circulars,
including the CUSIP numbers for the components. Copies of the
offering circulars, as amended, can be obtained by contacting the
nearest Federal Reserve Bank or Branch.
oOo

B-39

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
March 11, 1985 " *

—7 1/

JAMES A. BAKER, III
SECRETARY OF THE TREASURY
James A. Baker, III, was confirmed as the 67th Secretary of
the Treasury on January 29, 1985.
Mr. Baker had been Chief of the White House Staff since
January 1981. Previously, he served as-Deputy Director of the
Reagan-Bush Transition and as a senior advisor to the 1980
Reagan-Bush Committee.
A 1952 graduate of Princeton University, Mr. Baker served
two years on active duty with the U.S. Marine Corps from
1952-1954. He received his law degree from the University of
Texas at Austin with honors in 1957.
He practiced law with the Houston, Texas, law firm of
Andrews, Kurth, Campbell and Jones from 1957 until August 1975,
when he was appointed Under Secretary of Commerce by President
Ford.
Mr. Baker was active in President Ford's campaign in 1976
serving as its national chairman during the general election.
After returning to Andrews, Kurth, Campbell and Jones in late
1976, he ran in 1978 as the Republican nominee for Attorney
General of Texas. From January 1979 until May 1980 he was the
national chairman of the George Bush for President Committee.
Active in numerous civic endeavors, Mr. Baker has served on
the governing bodies of Texas Childrens Hospital, Houston, and
the M.D. Anderson Hospital and Tumor Institute and the Woodrow
Wilson International Center for Scholars at the Smithsonian.
Mr. Baker and his wife, the former Susan Garrett, reside in
Washington, D.C. They have eight children. Mr. Baker was born
April 28, 1930 in Houston, Texas.
****

B-40

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
March 11, 1985
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for S 7,014 million of 13-week bills and for $7,004 million
of 26-week bills, both to be issued on March 14, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing June 13, 1985
Discount Investment
Rate '
Rate 1/
Price

26-week bills
maturing September 12, 1985
Discount Investment
Rate
Rate 1/
Price

8.44%
8.49%
8.48%

8.77%
8.80%
8.79%

8.74%
8.80%
8.79%

97.867
97.854
97.856

9.30%
9.34%
9.33%

95.566
95.551
95.556

Tenders at the high discount rate for the 13-week bills were allotted 20%.
Tenders at the high discount rate for the 26-week bills were allotted 59%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received

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

Accepted

:
:
:
:

438,005
15,325,295
19,865
40,630
59,165
58,305
1,308,280
53,785
32,200
48,795
30,625
1,241,195
384,655

$
46,300
5,855,035
19,865
40,630
50,655
50,220
210,050
38,785
26,050
48,385
23,575
209,495
384,655

$7,014,185

$19,040,800

$7,003,700

$16,483,065
1,349,440
$17,832,505

$3,782,185
1,349,440
$5,131,625

:
:
:

$15,951,530
1,089,380
$17,040,910

$3,914,430
1,089,380
$5,003,810

1,582,630

1,550,000

299,930

449,890

$19,715,065

$7,014,185

: $19,040,800

$7,003,700

411,315
15,783,595
31,185
113,825
56,925
65,135
1,250,160
94,725
38,735
60,815
43,310
1,437,980
327,360

$
61,315
5,283,915
31,185
113,825
56,925
55,335
206,760
55,725
20,735
59,815
34,310
706,980
327,360

$19,715,065

An additional $23,770 thousand of 13-week bills and an additional $32,510
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
_!_/ Equivalent coupon-issue yield,

B-41

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
STATEMENT BY
JAMES W. CONROW
DEPUTY ASSISTANT SECRETARY FOR DEVELOPING NATIONS
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
MARCH 12, 1985
Mr. Chairman, I appreciate the opportunity to appear
before the Committee to present the Administration's
legislative proposals for the multilateral development
banks, or "MDBs." In negotiating these proposals, the
Treasury Department attempted to keep the Committee
informed and to take into account the Committee's views.
We trust that the results of our negotiations will have
your support.
African Development Fund
The first program which I would like to address today
is the replenishment of the African Development Fund, or
"AFDF". This particular institution is designed to help
advance our humanitarian objectives. In recent months, we
have all been struck by the plight of hungry people on the
African continent and by the bleak economic prospects for
the region.
However, as Senator Danforth and you, Mr. Chairman,
noted in your hearings last year, "the long-term food
problem can only be solved by putting Africa in a position where it can produce more food for itself, and
this cannot be done without development assistance."

B-42

- 2 The African Development Fund replenishment is in
large part targeted to precisely that purpose, serving
our humanitarian objectives on that continent and
promising the possibility of a future where a more
stable environment for prosperity might be in place.
The proposal is to participate in the $1.5 billion
Fourth Replenishment of the African Development Fund
with a U.S. contribution of $225 million dollars over
three years. The United States would be the largest
single donor by providing 15.4 percent of the total —
followed by Japan with 14 percent and Canada with 9.5
percent.
In the negotiations, we succeeded in obtaining a
commitment that ninety percent of replenishment
resources would be allocated to countries with per
capita GNPs of less than $510 per year. The remainder
is to go to countries with per capita GNPs of less
than $990. This aspect of Fund lending policy will
help meet the developmental needs of the poorest
African countries, those with low per capita incomes
and limited external debt repayment capacity.
During the replenishment, 40 percent of the lending
will be given to projects aimed at meeting basic food
requirements (including food production, processing,
storage, marketing, and distribution and transportation).
Human resource development and maintenance through educacation and health projects will also be emphasized and are
slated to receive 15 percent of AFDF lending. The Fund
will lend 10 percent of its resources for basic infrastructure (water supply and sewage, telecommunications,
and electricity) which provide services to the urban or
rural poor. Twenty-five percent of Fund lending will
go for transportation projects which would provide market
outlets for agricultural produce or private trade or would
better integrate transport systems to improve the delivery
of food or other priority commodities. We succeeded in
limiting the level of non-project lending to five percent
of the total replenishment.
The United States has a strong humanitarian interest
in aiding Sub-Saharan Africa where most of the world's
least developed countries can be found. Moreover, we
continue to have important political and security
interests on the continent which underscore the importance of improving the economic performance of African
countries.
Economic development has been particularly slow in
Africa over the past decade. Part of this poor performance
can be attributed to inappropriate economic policies. In
addition, Sub-Saharan Africa is coping with an extensive
drought, adverse external economic conditions, such as

-3world-wide recession and falling commodity prices, and
civil conflict. Recently, however, there has been a
growing awareness among African countries of the need
to reassess their development strategies to make better
use of available resources. While Africa continues to
face a difficult development challenge, more African
governments now agree that properly valued exchange
rates, incentive prices for farmers, and a better allocation in investment resources are important preconditions
to economic growth. Whether this new realism will result
in more effective economic policies and better economic
results depends on how quickly African Governments act
and how much support the international community will
provide.
Although a few countries have been able to make some
progress in the past, the outlook for improvement in the
absence of better economic policies looks grim for most.
Africa has most of the poorest, smallest and most vulnerable economies in the developing world. Socio-economic
indicators demonstrate that these countries are worse off
in terms of health, nutrition and literacy than other
countries at comparable income levels, and their relative
position has worsened- in recent years- It is clear that
for Africa, as a whole, there is a need for a coordinated
donor effort in order to improve living standards on the
continent.
African economies are at a critical point. Economic
growth has been disappointing, especially for the poorest
countries. Many countries have been unable to mobilize
domestic resources to meet basic food requirements. The
rate of growth of investment has declined significantly.
The share of investment as a result of GDP has fallen to
13.7 percent in Africa, while rising to 25 percent in
low income countries worldwide. The low domestic savings
rates mean that it will be difficult to increase GDP
growth rates on the basis of domestic resources alone.
The economic crisis in Africa is especially evident
in agriculture. Few countries have seen their agricultural output increase by as much as 3 percent a year
during the 1970s and early 1980s. In a number of countries, agricultural production has either stagnated or
actually fallen during this period. At the same time,
population has been increasing by an annual average of
2.5 percent in the 1960s, 2.7 percent in the 1970s and
about, 3 percent in more recent years. Consequently, per
capita food production is currently less than 80 percent
of the level which prevailed during the period of 1961-65.
African countries have, thus, become increasingly dependent on imported
foodthat
forare
consumption
— using for
scarce
foreign
exchange
resources
then unavailable
investment.

- 4 The problems facing African countries reinforce the
need for major adjustment in economic policies, especially
by removing the economic policy bias against agricultural
production — and this now appears to be widely appreciated.
In instances where countries have undertaken appropriate
economic adjustment measures, such as devaluation, increases
in producer prices or changes in tax regimes, there has been
an encouraging increase in the production of agriculture.
While more countries are determined to alter policies to
improve the outlook for economic revival, concessional
assistance is an essential complement in support of their
efforts.
The recitation of these all-too-well-known problems
is not designed to suggest that the African Development
Fund offers a unique avenue toward solutions. There is
no such avenue. Solutions will emerge largely from the
African countries themselves, but support from the international community, through every reasonable means, will
help to make those solutions easier — and sooner.
The African Development Fund, with its emphasis on
lending for agriculture, water supply, health and transportation can be an effective channel for responding to
the key development problems of Africa.
The nations of Africa view the African Development
Bank and Fund as their regional development institutions.
While other development agencies may supply more funds,
the African Development Bank and Fund are particularly
important as regional forums for discussing continentwide financial and economic issues. The level of U.S.
participation in the Bank and Fund is viewed by many
in Africa as a gauge of U.S support for the development
objectives of African countries.
I hope the Committee will support the Administration's
proposal for the African Development Fund.
International Finance Corporation
A fundamental component of the Administration's
approach to development assistance is the conviction
that the private sector holds the key to economic growth
in developing countries. Treasury's 1982 assessment found
that those nations that have encouraged private sector
development, both domestic and from abroad, have generally
achieved more rapid and sustainable growth than those which
have not. Put simply, market-oriented private enterprise —
by responding to profitable opportunities — produces jobs,
earns foreign exchange and builds a technical and managerial
base in the labor force.

- 5 The proposal to participate in the capital increase
for IFC is our third — and most important — step toward
strengthening MDB support for the private sector in developing countries. In many respects, Treasury's 1982 assessment
found that direct support from the MDBs for the private
sector had lagged in recent years. Since taking office,
the Administration has joined with other member countries
to support:
— the start-up of a small but well-targetted equity
investment program in the Asian Development Bank.
—• the creation of the Inter-American Investment
Corporation, and
— now, a significant redirection and capitalization
of IFC.
The Administration's proposal is for a $175 million
U.S. share in a five year $650 million dollar IFC capital
increase, that would double IFC's authorized capital to $1.3
billion.
Specifically, the Administration's legislative proposal
would authorize the U.S. Governor to vote in favor of the
proposed capital increase, to subscribe subject to appropriations to IFC shares valued at $175 million and to authorize
the appropriation of $175 million to pay for these shares.
The previous capital increase for IFC was approved in
1977. The final U.S. subscriptions were provided by the
Congress in 1981. The 27 percent U.S. share of IFC capital
is being maintained in the proposed replenishment.
IFC has made valuable contributions to the economies
of developing countries through a broad spectrum of industries, including agrobusiness, building materials, chemicals, wood products, tourism, energy and financial services.
Since its establishment in 1956, IFC has invested $5.2
billion in 83 countries.
IFC is also doing pioneering work to improve the environment for direct foreign investment and to increase the
flow of international equity capital. IFC has provided
technical assistance to help developing country governments
write legislation to attract foreign direct investment. It
has directly supported the formation of several new equity
investment funds designed to foster more rapid development
of emerging capital markets in some of the developing
countries. We commend this initiative and are encouraging
IFC to expand its efforts in this area.

- 6 The proposed capital increase is designed to mobilize
foreign and domestic sources of capital at a commendable
ratio of six to one to be used in support of a five year
investment program totalling $4.4 billion. The program
feature major investment initiatives in the following
areas:
— For an Expanded Capital Market Development Program:
IFC is the principal — and in many countries, the
only — multilateral development institution providing technical assistance to develop new financial
instruments and to establish stock markets. In
addition, IFC is the main multilateral development
institution funding private financial firms. The
five year program would earmark 14 percent, or
roughly $500 million, for financial market and
institutional development; availability of entrepreneurial talent are least favorable. To enhance
the chances for successful private sector development, IFC has fashioned a $478 million, four-pronged
strategy for Sub-Saharan Africa:
— For Corporate Restructuring: The economic adjustment process which many developing countries are
going through has placed severe constraints on the
growth of the private sector and the availability
of credit. To help private firms adapt to these
constraints and become leaner, more efficient economic endeavors, IFC anticipates providing technical
assistance and investing about $210 million to support firms that can restructure their businesses
into more promising areas. Financial resources will
be provided for working capital loans, for long-term
capital or for equity, as circumstances may suggest.
— For Energy Exploration and Development: IFC contemplates investing about $100 million in exploration
activities with the participation of small independent
oil service or production companies, which have thus
far invested in developing countries only to a limited
extent. The IFC share of such ventures would normally
be limited to ten percent in order to maximize the
catalytic role of the Corporation. In addition, up
to $400 million more would be invested in other energy
ventures, including energy development and production,
through loans or equity.
— For Sub-Saharan Africa: Tradeoffs between sound
and creditworthy investment and sometimes risky
developmental objectives are necessary in Sub-Saharan
Africa where the national economic policies and the
* More intensive promotional activities. IFC will
offer investment analysis and advisory services
through expanded venture capital companies. These
services will earn appropriate fees whenever
possible.

-7* Taking a larger investment share. In circumstances
where it proves difficult to mobilize resources
for otherwise worthwhile projects in Africa
the IFC may waive its usual practice of limiting
participation to 25 percent of total capital.
* More and smaller projects. In full knowledge
that project preparation costs per unit of
investment will be higher, IFC will invest
in projects in the $1 million to $5 million
range to take advantage of the relatively
larger number of opportunities for smaller
scale investments in the region.
* More intensive use of development finance
corporations. To reach the many investment
opportunities below the $1 million level in
Africa IFC will make more intensive use of
well-run development finance corporations,
even if government owned.
The Administration believes that the proposal to
increase IFC capital — together with companion activities in the other MDBs — will give a strong impetus to
a private sector development effort that holds real
potential for long term growth.
The IBRD Selective Capital Increase
The IBRD — an estimated $11 billion lending program
in fiscal year 1985 — is the world's preeminent multilateral financial intermediary operating in developing
countries.
The Administration strongly supports the IBRD and is
committed to working constructively with management and
other members to increase the Bank's effectiveness. In
addition to its proven expertise as an investment project
lender, we value highly the Bank's ability to provide
essential policy guidance and technical assistance, and
to act as a catalyst in encouraging private enterprise and
investment capital. The importance of the IBRD to recipient
countries is underscored by the very difficult adjustment
problems now faced by many developing countries and by the
Bank's very considerable efforts to encourage and facilitate
such adjustment.
The United States has regarded "equitable cost-sharing"
among donors to be a key element of our participation in
the MDBs and has over time gradually reduced the U.S. share
in all the MDBs, including the World Bank. To this end, the
United States has traditionally been a strong supporter
of "parallelism" insofar as it suggests that countries
which, by virtue of their economic growth, have taken a
larger quota in the International Monetary Fund (IMF),
should take up increased shares in the capital stock of
the IBRD. This is accomplished by Selective Capital
Increases,
the
United
members
supporting
closely
If-rPwith
the
quota
practice
reviews.
of States
timing and
such other
SCIs Bank
to follow

-8In April, 1983, World Bank management proposed
initiating consultations with Bank members regarding
an SCI to "parallel" the increase in IMF quotas, which
had been adopted. The Bank's position was that an
increase of 141,800 shares — amounting to about S17
billion — would be necessary to parallel fully the
IMF's quota increases.
The U.S. position in subsequent SCI negotiations
had three key elements:
(a) to focus an SCI specifically on the need to
adjust shares and not as a means of supporting
increased Bank lending,
(b) to get the cost of the SCI to the United States
as low as possible, and
(c) to provide the United States with the option of
subscribing a level of shares sufficient to retain
a U.S. veto (i.e., 20 percent of the voting power)
over any amendment of the Bank's Charter.
After more than a year of negotiations, the Bank's
Executive Directors agreed on an SCI in May 1984 which
would increase the IBRD's capital stock by 70,000 shares
valued at $8.4 billion, of which 8.75 percent would
consist of paid-in capital. The proposed allocation
for the United States was 12,453 shares or 17.8 percent
of the total, valued at $1.5 billion. Following the SCI,
the United States would still retain a 20 percent share
of IBRD allocated shares — and thus, our veto over
amendments to the Charter.
The most significant adjustment in country shares
related to Japan. As a result of the SCI, Japan's ranking in the share capital of the IBRD — i.e., potential
voting power — changed from fifth to second position.
This change, while logical in terms of Japan's relative
economic position in the world eocnomy, required a
prolonged period of difficult negotiations among the
Japanese and the three affected European countries
(Germany, Britain and France) for whom "ranking" was
sensitive from both a political and economic standpoint.
Japan's position as the second largest IBRD shareholder is in keeping with the size and importance of
the Japanese economy and the need for Japan to assume
greater responsibilities in the international financial
system, commensurate with its economic strength and
political importance.
U.S. subscription to the shares allocated by the 1984
SCI would cost $1,502 million of which 8.75 percent or
$131.4 million, would be paid-in. The Administration
has requested authorization for the full subscription
in FY 1986, with the necessary appropriations provided
in two equal installments in FY 1986 and FY 1987.

- 9 -

U.S. support for the SCI was conditioned on the
understanding that the IBRD's lending program will not
exceed a conservatively defined sustainable level of
lending (SLL). This is defined as the level of IBRD
lending to countries which can be sustained indefinitely
(in nominal terms) without any further increase in Bank
capital under current lending policies. A conservatively
defined SLL is important to insure we do not come under
pressure to subscribe to a new General Capital Increase
on the grounds that the Bank's lending volume would decline
without a GCI.
The SCI proposal shares the cost of IBRD membership
more equitably. As a measure of support for an effective
institution, we urge the Committee's favorable action.
Conclusion
The proposed legislation for the African Development
Fund, International Finance Corporation and the World
Bank is the result of three extended negotiations carried on over the last two years. I know you are aware,
Mr. Chairman, of the course of those discussions.
Appropriations to fund these programs are included
in the President's FY 1986 budget request. Thus, timely
enactment of this legislation is essential.
I hope the Committee will conclude that these
proposals are positive contributions to the U.S foreign
assistance program and that the legislation merits your
support.

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

STATEMENT OF THE HONORABLE JOHN M. WALKER, JR.
ASSISTANT SECRETARY (ENFORCEMENT & OPERATIONS)
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
GOVERNMENTAL AFFAIRS COMMITTEE
UNITED STATES SENATE
March 12, 1985
Improving Bank Secrecy Act Compliance by Financial Institutions
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to appear before you today
to discuss the compliance of financial institutions with the
provisions of the Bank Secrecy Act. As this Committee is aware,
the laundering of money through legitimate financial institutions
in support of organized criminal activity is both a threat to our
financial system and a grave challenge to law enforcement.
Since 1980, Treasury has taken a number of steps to improve
compliance with the reporting and recordkeeping requirements
of the Act and its implementing regulations. That we have made
considerable progress is demonstrated by the increase in the
numbers of CTR forms filed. In 1979, 121,000 such forms were
filed, but the number increased to about 700,000 last year.
Another measure of our success is the use of reporting
information as a law enforcement tool. Treasury's financial
investigations, as carried out by task forces across the country,
have resulted in the substantial destruction of criminal enterprises engaged in the laundering of proceeds from drug trafficking
and other forms of organized crime. The eighteen largest organizations uncovered and destroyed since 1980 had laundered a documented total exceeding $2.8 billion.
Nevertheless, Mr. Chairman, Treasury believes that much
more remains to be done in improving the level of compliance
with the reporting requirements. We sincerely welcome the
ongoing interest this Committee has expressed in this vital
topic and look forward to assisting this Committee in every
way we can in the development of any changes deemed to be
necessary.
B-43

- 2 -

In my testimony today, I want to address several topics.
First, I will discuss important changes made in the Bank Secrecy
Act regulatory system in 1980. Second, I will briefly summarize
actions Treasury has taken to assess and improve compliance. In
particular, I will describe the procedures Treasury followed in
1982 in conducting a survey of compliance by financial institutions in the State of Massachusetts. I will then describe how
criminal investigations are authorized, and how today they are
supported by the analytical work conducted at the Treasury
Financial Law Enforcement Center. Finally, I will bring to the
Committee's attention current and possible future initiatives
to improve the bank examination process.
Changes Made by the 1980 Amendments to the Regulations
Prior to 1980, a bank had broad latitude in exempting
regular customers and inter-bank transactions. In 1980, as
a result of indications of massive money laundering activity
in Florida, the regulations were tightened. As a result of
this change, all transactions with domestic securities dealers,
exchange dealers, and other non-bank financial institutions
were required to be reported. The change in the regulations
also required reporting of transactions with foreign banks.
Treasury took the step of expanding the scope of the
reporting requirement to cover transactions with foreign banks
and with non-bank financial institutions for two basic reasons.
First, more information was needed concerning flows of currency,
both domestically and internationally, in light of indications
that the level of international cash transactions related to
drug trafficking was increasing. Second, the information
provided by this reporting was needed to help Treasury monitor
compliance with the Act. By requiring banks to report transactions with non-bank financial institutions, Treasury had a
mechanism to check on compliance of those institutions and to
make certain that they are filing reports of transactions with
their customers.
Another change made by the 1980 regulatory amendment
tightened the rules regarding exemption lists. Even prior to
the change, banks were authorized to grant an exemption from the
requirement to file Form 4789's only to an established customer
maintaining a deposit relationship with the bank, in amounts that
the bank could reasonably conclude were commensurate with and
customary for the business of such customer. Treasury retained
this limitation in 1980, but added an additional requirement:
that the business be within the United States and be a retail
establishment or be the type of establishment, such as a bar
or restaurant, that could be expected to have substantial cash
transactions as a normal part of its business. The regulatory

- 3 change also required that the bank document the approval of the
exemption, specify certain information pertaining to the exemption,
maintain the list in an up-to-date form, and make the list available to Treasury within 30 days of Treasury's demand.
The need for the changes regarding exemptions was clear:
Treasury required more information on the use of exemptions and
the customers being exempted to reveal possible relationships
with illicit financial activity. Additionally, Treasury wanted
to confine use of the exempt list to its intended purpose, the
reduction in unnecessary and unproductive reporting. Our position then, as now, is that most businesses do not routinely
deposit large amounts of currency, and hence, should not be
exempt from the reporting requirements of the Act.
Treasury's Review of Compliance by Financial Institutions
Over the last three years, Treasury has become aware of
particular problems in the level of reporting of cash transactions. Even though overall compliance has steadily improved,
the currency transaction reporting from some regions of the
country is still not commensurate with the level of financial
activity that might be expected to take place in such regions.
Accordingly, Treasury has directed particular enforcement attention to such regions in an attempt to bring about compliance
improvements.
In early 1982, Treasury obtained a statistical summary of
the filings of Form 4789 during the previous year. That summary
showed that banks in Massachusetts, a state that is among the
top states in total bank deposits, had filed only 2,543 currency
transaction reports out of a total of 347,882 filed nationwide.
On April 28, 1982, Treasury requested the banks in Boston
to submit their exempt lists within 30 days. On May 27, 1982,
we requested exempt lists from the Massachusetts banks outside
Boston. That same day, my staff in Treasury Enforcement and
Operations visited the Federal Reserve Bank in Boston to determine how data on currency deposits and withdrawls could best
be obtained. Then, during the week of June 21, one member of
my staff, with the assistance of two national bank examiners and
two aides from the IRS/Criminal Investigations Division in
Boston, analyzed every currency deposit and withdrawal made by
commercial banks at the federal Reserve Bank in Boston during
the four-month period from January through April, 1982. From
this analysis, we developed a list specifying the total deposits
and total withdrawals for the period made by each Massachusetts
bank that had dealings with the Federal Reserve Bank.

- 4 -

The information on that list was then compared with data
obtained from the Treasury Financial Law Enforcement Center
(TFLEC) that showed the number and dollar amounts of currency
transaction reports filed with IRS by each bank in Massachusetts
during the first part of 1982. This information coupled with
the banks' exempt lists was used to determine which banks
we would select for special compliance reviews by the bank
examiners.
Our findings, based on the comparison of CTRs with the
amounts of currency turned in to the Federal Reserve Bank and
on the exempt list review, were of the existence of a generally
poor level of compliance in Massachusetts. By September, 1982
we had selected 20 banks for special attention. Most noteworthy
among these was the Bank of Boston. It had handled hundreds
of millions of dollars in currency during the four-month test
period but had filed only 59 currency reports.
Our review of its exempt list, forwarded to us under cover
of a letter dated June 3, 1982, had prompted a June 8, 1982
letter to the bank to point out numerous companies that did
not appear to qualify for exempt status.
Moreover, my office, in July 1982, received a telephone
call from an officer in the bank's cash division who had stated
that he was not fully familiar with the reporting requirements,
including those covering international bank-to-bank transactions.
As a result of all of this information, in September 1982 we
requested in writing, that the Comptroller conduct a special
examination of the Bank of Boston for compliance with the Bank
Secrecy Act. A similar request was made of the Comptroller and
other regulatory agencies with respect to the other 19 banks.
At the same time, we made available to the IRS all information
pertaining to the Bank of Boston for possible criminal investigation.
How Criminal Investigations Are Authorized
Mr. Chairman, I would now like to turn to the question of
how Treasury authorizes criminal investigations of suspected
Bank Secrecy Act violations.
When Treasury's Office of Enforcement and Operations
receives information of significant violations from any source,
we refer the information to the IRS so that they may advise us
as to whether they believe a full investigation is warranted.
That decision is usually initiated in the appropriate IRS
district office and then reviewed at higher levels within
IRS. Once we receive an affirmative response from the IRS,
we authorize the investigation immediately.

- 5 -

If the information of a possible violation comes to us
in the first instance from IRS instead of one of the bank
regulatory agencies, we also review the matter promptly, and
we usually respond within one week. In priority cases, such
as the Bank of Boston case, the process is expedited and can
be accomplished in one day, as was done in that case.
We believe that a criminal investigation by the IRS of
a financial institution should not be undertaken without highlevel review and approval. Such an investigation, if unwarranted,
could unfairly damage public trust in a financial institution
and possibly encourage large withdrawals that could imperil
the institution's financial condition.
Operations of the Treasury Financial Law Enforcement Center
Mr. Chairman, I understand that the Subcommittee staff
has raised a question concerning the timely transmittal of
information from the Treasury Financial Law Enforcement Center,
or TFLEC, to investigative personnel in the field. We are not
aware of any particular problem in the transmittal of such information, but in response to this inquiry, I have asked the Customs
Service to resolve any problem that may exist and to report on
the situation. We will continue to take action to correct any
problems that we discover.
I would like to point out, however, that Treasury and
Customs have recently effected some internal changes designed
to enhance TFLEC's operations. Whereas both analytical and
investigative responsibilities at TFLEC were in the hands of
Customs investigators, the analytical function has now been
assumed by the Customs Office of Intelligence. This change
frees the enforcement personnel involved to concentrate on
investigative functions and should result in an overall
improvement in TFLEC operations.
Ensuring Compliance with the Bank Secrecy Act
and Improvements to the Examination Process
Mr. Chairman, the Treasury Department shares a concern
with this Committee that the current system of ensuring compliance with the Bank Secrecy Act through the financial institution
regulatory agencies is in need of improvement. I believe it
would be helpful at this point to summarize briefly the history
behind the development of the current system.

- 6 -

As this Committee is aware, the legislative history of the
Act contemplated that the task of examining banks for compliance
with the reporting requirements would be delegated to the bank
supervisory agencies. Accordingly, as early as 1972, Treasury
recognized that such a system of delegation could be effective
only if minimum standards were established for the examination ,
process.
The first step taken toward this goal was the preparation
by Treasury and-the supervisory agencies of a checklist summarizing the provisions of Treasury's Bank Secrecy Act implementing regulations, which first became effective in 1972.
In 1973, the basic reporting system under the regulations
was adopted by the regulatory agencies. It provides statistics
on each agency's compliance activities, including the number
of banks examined and the number of violations uncovered. At
that time, however, there was no specified procedure that the
supervisory agencies were required to follow in checking for
compliance with the reporting provisions.
In the mid-1970's, law enforcement agencies discovered
widespread non-compliance at a major New York bank, and in
response to this finding, Treasury, with the cooperation of
the bank supervisory agencies, developed a specific examination
procedure. In 1979, it became apparent that despite the new
procedure, reporting problems remained. This was particularly
obvious in Florida. In recognition of the need for more
detailed procedures so that the bank supervisory agencies would
have adequate guidance for the examinations they conducted,
Treasury and the agencies established new, expanded procedures
in 1981. These examination procedures are comprehensive and
complete. In our opinion, if a bank examiner follows the
entire set of procedures, there is a high probability that
any major incident of noncompliance at a financial institution
will be detected. These procedures have been available since
1981, and Treasury has continually urged that they be followed.
From the standpoint of the Office of Enforcement and Operations, it is difficult for Treasury to ensure that the expanded
procedures are in fact being employed. The supervisory agencies,
for example, conduct the examinations out of field offices spread
over the country. There is no current means by which we can
gain independent access to the bank records necessary to review
a bank's compliance and to assess the effectiveness of the
examination process in uncovering compliance problems. This is,
however, a problem that Senator D'Amato's^bill addresses and
that Treasury fully intends to resolve, and we welcome the opportunity to work with this Committee toward that end.

- 7 -

With regard to the general matter of Bank Secrecy Act
reporting and measures to prevent money laundering through
financial institutions, Treasury met last December with the
Examination Council, on which the various supervisory agencies
sit. We discussed with the Council the recommendations of
the President's Commission on Organized Crime and we will
continue this dialogue with the supervisory agencies. The
Council and the regulatory agencies have agreed to work with
us in strengthening the overall system for ensuring Bank
Secrecy Act compliance.
In addition, we are seeking to increase the awareness of
the banking community of the role of money laundering in facilitating organized crime and the nature of its threat to the
integrity of our financial system. For example, we have recently met with the American Bankers Association, which has
offered to cooperate with Treasury and the supervisory agencies
in a program to increase the training of bank managers and
personnel in matters pertaining to the Act and Treasury's
regulations.
Finally, my office is considering regulatory and administrative changes to improve the current system. An area where
improvement is clearly called for, as this Committee is aware,
is in the matter of exemptions from the reporting requirements.
As I have discussed today, our regulations were improved in 1980,
yet we now have indications that even more rigorous control and
analysis of these exemptions are called for. We also consider
it critical that legal barriers that inhibit voluntary reporting
by bank employees of suspicious financial transactions be removed.
Mr. Chairman, this concludes my prepared statement. I
would be pleased to answer any questions this Committee may
have.
0O0

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

March 12, 1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $14,000 million, to be issued March 21, 1985.
This
offering will provide about $450
million of new cash for the
Treasury, as the maturing bills were originally issued in the
amount of $13,549 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
December 20, 1984, and to mature
June 20, 1985
(CUSIP
No. 912794 HG 2 ) , currently outstanding in the amount of $6,956
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $7,000 million, to be
dated
March 21, 1985,
and to mature September 19, 1985 (CUSIP
No. 912794 HZ 0 ) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing March 21, 1985.
In addition to the
maturing 13-week and 26-week bills, there are $8,252 million of
maturing 52-week bills. The disposition of this latter amount was
announced last week. Federal Reserve Banks, as agents for foreign
and international monetary authorities, currently hold $1,316
million, and Federal Reserve Banks for their own account hold $5,497
million of the maturing bills. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders from Federal Reserve Banks for themselves and as agents
for foreign and international monetary authorities will be accepted
at the weighted average 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 $971
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.
B-44

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20239, prior to 1:00 p.m., Eastern Standard txme, Monday,
March 18, 1985.
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. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
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

- 3 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 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 $1,000,000
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 March 21, 1985,
in cash or other immediately-available funds
or in Treasury bills maturing March 21, 1985.
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.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
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 RELEASE AT 4:00 P.M.

March 13, 1985

TREASURY TO AUCTION $9,000 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,000 million
of 2-year notes to be issued April 1, 1985. This issue will provide
about $550 million new cash, as the maturing 2-year notes held by
the public amount to $8,458 million, including $568 million
currently held by Federal Reserve Banks as agents for foreign and
international monetary authorities.
In addition to the maturing 2-year notes, there are $3,384
million of maturing 4-year notes held by the public. The disposition of this latter amount will be announced next week. Federal
Reserve Banks as agents for foreign and international monetary
authorities currently hold $1,113 million, and Government accounts
and Federal Reserve Banks for their own accounts hold $1,115 million
of maturing 2-year and 4-year notes.
The $9,000 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks for their own accounts,
or as agents for foreign and international monetary authorities,
will be added to that amount. Tenders for such accounts will be
accepted 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

B-45

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED APRIL 1, 1985
March 13, 1985
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
Payment through Treasury Tax and
Loan (TT&L) Note Accounts
Deposit guarantee by
designated institutions
Key Dates:
Receipt of tenders
Settlement (final payment
due from institutions)
a) cash or Federal funds
b) readily collectible check

$9,000 million
2-year notes
Series T-1987
(CUSIP No. 912827 RZ 7)
March 31, 1987
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
September 30 and March 31
$5,000
Yield Auction
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,000
None
Full payment to be
submitted with tender
Acceptable for TT&L Note
Option Depositaries
Acceptable
Wednesday, March 20, 1985,
prior to 1:00 p.m., EST

Monday, April 1, 1985
. Thursday, March 28, 1985

TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566
FOR IMMEDIATE RELEASE
March 14, 198 5
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $ 8,506 million of 52-week bills to be issued
March 21, 1985,
and to mature March 20, 1986,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Investment Rate
Rate _ (Equivalent Coupon-Issue Yield) Price
Low
9.22%
10.06%
90.678
High
9.27%
10.12%
90.627
Average 9.24%
10-08%
90.657
Tenders at the high discount rate were allotted 52%.

Location

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
B-46

$ 377,225
13,897,460
9,250
23,100
35,205
29,370
1,297,270
84,345
17,515
53,900
12,350
1,211,170
119,005
$17,167,165

$
27,225
7,603,260
9,250
23,100
35,205
29,370
200,870
59,345
17,515
53,900
12,350
315,170
119,005
$8,505,565

$14,321,300
645,865
$14,967,165
2,000,000

$5,659,700
645,865
$6,305,565
2,000,000

200,000
$17,167,165

200,000
$8,505,565

2041

CONVENTION BETWEEN THE GOVERNMENT OF THE
UNITED STATES OF AMERICA AND THE GOVERNMENT
OF THE DEMOCRATIC SOCIALIST REPUBLIC OF
SRI LANKA FOR THE AVOIDANCE OF DOUBLE
TAXATION AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME

The Government of the United States of America and the
Government of the Democratic Socialist Republic of Sri Lanka,
desiring to conclude a convention for the avoidance of double
taxation and the prevention of fiscal evasion with respect to
taxes on income, have agreed as follows:

Article 1
PERSONAL SCOPE

1. Except as otherwise provided in this Convention, the
Ccnv.-ition shall apply to persons who are residents of one or
both of the Contracting States.
2. The Convention shall not restrict in any manner any
exclusion, exemption, deduction, credit or other allowance now or
hereafter accorded
a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting
States.
3. Notwithstanding any provision of the Convention except
paragraph 4, a Contracting State may tax its residents (as
determined under Article 4 (Resident)), and by reason of
citizenship may tax its citizens, as if the Convention had not
come into effect. For this purpose, the term "citizen" shall
include a former citizen whose loss of citizenship had as one of
n. ncipal purposes the avoidance of tax, but only for a
period of 10 years following such loss.
4. The provisions of paragraph 3 shall not affect
a) the benefits conferred by a Contracting State under
paragraph 2 of Article 9 (Associated Enterprises), under
Article 14 (Grants), under paragraphs 2 and 3 of Article
19 (Pensions, Social Security and Child Support
Payments), and under Articles 24 (Relief From Double
Taxation), 25 (Non-Discrimination), and 26 (Mutual
Agreement Procedure); and

the benefits conferred by a Contracting State under
Articles 20 (Government Service), 21 (Students and
Trainees), and 28 (Diplomatic Agents and Consular
Officers), upon individuals who are neither citizens of,
nor have immigrant status in, that State.

Article 2
TAXES COVERED

Convention shall apply to taxes on income imposed on
f a Contracting State, irrespective of the manner in
ire levied.
existing taxes to which the Convention shall apply are ,
in Sri Lanka: the income tax, including the income tax
based on the turnover of enterprises licensed by the
Greater Colombo Economic Commission (hereinafter
referred to as "Sri Lanka tax");
in the United States: the Federal income taxes imposed
by the Internal Revenue Code (but excluding the
-cumulated earnings tax, the personal holding company
tax, and social security taxes), and the excise taxes
imposed on insurance premiums paid to foreign insurers
and with respect to private foundations. The Convention
shall, however, apply to the excise taxes imposed on
insurance premiums paid to foreign insurers only to the
extent that the risks covered by such premiums are not
reinsured with a person not entitled to the benefits of
this or any other Convention which applies to these
taxes (hereinafter referred to as "United States tax").

The Convention shall apply also to any identical or

substantially similar taxes which are imposed by a Contracting
State after the date of signature of the Convention in addition
bo, or in place of, the existing taxes. The competent
authorities of the Contracting States shall notify each other of
any significant changes which have been made in their respective
taxation laws and shall notify each other of any official
published material concerning the application of the Convention,
including explanations, regulations, rulings, or judicial
decisions.

Article 3
GENERAL DEFINITIONS

In this Convention, unless the context otherwise requires
a) the term "Sri Lanka" means the Democratic Socialist
Republic of Sri Lanka;
b) the term "United States" means the United States of
America, but does not include Puerto Rico, the Virgin
Islands, Guam, or any other United States possession or
territory;
c) the terms "a Contracting State" and "the other
Contracting State" mean Sri Lanka or the United States
as the context requires;
d) the term "person" includes an individual, a partnership,
a company, an estate, a trust, and any other body of
persons;
e) the term "company" means any body corporate or any
entity which is treated as a body corporate for tax
purposes;

the terms "enterprise of a Contracting State" and

"enterprise of the other Contracting State" mean
respectively an enterprise carried on by a resident of a
Contracting State and an enterprise carried on by a
resident of the other Contracting State;
g) the term "international traffic" means any transport by
a ship or aircraft, except where such transport is
solely between places in the other Contracting State;
h) the term "nationals" means
(i) in the case of the United States, all individuals
who are United States citizens, and in the case of
Sri Lanka, all individuals possessing the
nationality of Sri Lanka; and
i) all legal persons, partnerships and associations
deriving their status as such from the laws in
force in a Contracting State;
i) the term "competent authority" means
(i) in the case of Sri Lanka, the Commissioner-General
of Inland Revenue; and
(ii) in the case of the United States, the Secretary of
the Treasury or his delegate.
As regards the application of the Convention by a Contracting
ate any term not defined therein shall, unless the context
herwise requires and subject to the provisions of Article 2.6
lutual Agreement Procedure), have the meaning which it has under
e laws of that State relating to the taxes which are the
bject of the Convention.

Article 4
RESIDENT

1. For purposes of this Convention, the term "resident of a
Contracting State" means any person who, under the laws of that
State, is liable to tax therein by reason of his domicile,
residence, citizenship, place of management, place of
incorporation, or any other criterion of a similar nature,
provided, however, that
a) this term does not include any person who is liable to
tax in that State in respect only of income from sources
in that State; and
b) in the case of income derived or paid by a partnership,
estate, or trust, this term applies only to the extent
that the income derived by such partnership, estate, or
trust is subject to tax as the income of a resident of
that State, either in its hands or in the hands of its
partners or beneficiaries.
2. Where by reason of the provisions of paragraph 1 an
individual is a resident of both Contracting States, then his
status shall be determined as follows
a) he shall be deemed to be a resident of the State in
which he has a permanent home available to him. If he
has a permanent home available in both States, he shall
be deemed to be a resident of the State with which his
personal and economic relations are closer (center of
vital interests);

if the State in which he has his center of vital

interests cannot be determined, or if he has not a
permanent home available to him in either State, he
shall be deemed to be a resident of the State in which
he has an habitual abode;
c) if he has an habitual abode in both States or in neither
of them, he shall be deemed to be a resident of the
State of which he is a national;
d) if he is a national of both States or of neither of
them, the competent authorities of the Contracting
States shall settle the question by mutual agreement.
Where by reason of the provisions of paragraph 1 a
• a resident of both Contracting States, then if it is
r organized under the laws of a Contracting State or a '
olitical subdivision thereof, it shall be treated as a resident
f that State.
Where by reason of the provisions of paragraph 1 a person
ther than an individual or a company is a resident of both
ontracting States, the competent authorities of the Contracting
tates shall by mutual agreement endeavor to settle the question
nd to .termine the mode of application of the Convention to
uch person.
For purposes of the Convention, an individual who is a
ational of a Contracting State shall also be deemed to be a
esident of that State if the individual is (a) an employee of
hat State or an instrumentality thereof in the other Contracting
tate or in a third State; (b) engaged in the performance of
overnmental functions for the first-mentioned State; and (c)
ubjected in the first-mentioned State to the same obligations in

respect of taxes on income as are residents of the firstmentioned State. The spouse and minor children residing with the
employee and subject to the requirements of (c) above shall also
be deemed to be residents of the first-mentioned State.

Article 5
PERMANENT ESTABLISHMENT

1. urposes of this Convention, the term "permanent
es t" means a fixed place of business through which the
business of an enterprise is wholly or partly carried on.
2. The term "permanent establishment" shall include especially
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a store or premises used as a sales outlet; and
c7l ne, an oil or gas well, a quarry, or other place of
extraction of natural resources.
3. The term "permanent establishment" likewise encompasses
a) a building site or construction or installation project,
or an installation or drilling rig or ship used for the
exploration for or development of natural resources, but
only if it lasts more than 183 days; and
b) the furnishing of services, including consultancy
services, by an enterprise through employees or other
personnel engaged by the enterprise for such purpose,
but only where activities of that nature continue (for

the same or a connected project) within the country for
a period or periods aggregating more than 183 days
within any 12 month period.
4. Notwithstanding the preceding provisions of this Article, the
term "permanent establishment" shall be deemed not to include
a) the use of facilities solely for the purpose of storage,
display, or delivery of goods or merchandise belonging
to the enterprise, other than goods or merchandise held
for sale by such enterprise in a store or premises used
as a sales outlet;
b) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
storage, display, or delivery, other than goods or
merchandise held for sale by such enterprise in a store
or premises used as a sales outlet;
c) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
processing by another enterprise;
d) the maintenance of a fixed place of business solely for
the purpose of purchasing goods or merchandise, or of
collecting information, for the enterprise;
e) the maintenance of a fixed place of business solefy for
the purpose of carrying on, for the enterprise, any
other activity of a preparatory or auxiliary character;
f) the maintenance of a fixed place of business solely for
any combination of the activities mentioned in
subparagraphs (a) to (e) of this paragraph.
5. Notwithstanding the provisions of paragraphs 1 and 2,
where a person - other than an agent of an independent status to
whom paragraph 7 applies - is acting in a Contracting State on

behalf of an enterprise of the other Contracting State, that
enterprise shall be deemed to have a permanent establishment in
the first-mentioned State in respect of any activities which that
person undertakes for the enterprise, if such a person
a) has and habitually exercises in that State an authority
to conclude contracts in the name of the enterprise,
unless the activities of such person are limited to
those mentioned in paragraph 4 which, if exercised
through a fixed place of business, would not make that
fixed place of business a permanent establishment under
the provisions of that paragraph; or
b) has no such authority, but habitually maintains in the
first-mentioned State a stock of goods or merchandise '
from which he regularly fills orders or makes deliveries
on behalf of the enterprise and additional activities
conducted in that State on behalf of the enterprise have
contributed to the conclusion of the sale of such goods
or merchandise.
6. Notwithstanding the preceding provisions of this Article, an
insurance enterprise of one of the Contracting States shall,
except in regard to re-insurance, be deemed to have a permanent
establishment in the other Contracting State if it collects
premiums in the territory of that other State or insures risks
situated therein through a person other than an agent of an
independent status to whom paragraph 7 applies.
7. An enterprise shall not be deemed to have a permanent
establishment in a Contracting State merely because it carries on
business in that State through a broker, general commission
agent, or any other agent of an independent status, where such
persons are acting in the ordinary course of their business.

However, when the activities of such an agent are devoted wholly
or almost wholly on behalf of that enterprise, he will not be
considered an agent of an independent status within the meaning
of this paragraph, if it is shown that the transactions with the
agent and the enterprise were not made under arm's-length
conditions.
8. The fact that a company which is a resident of a Contracting
State controls or is controlled by a company which is a resident
of the other Contracting State, or which carries on business in
that other State (whether through a permanent establishment or
otherwise), shall not of itself constitute either company a
permanent establishment of the other.

Article 6
INCOME FROM IMMOVABLE PROPERTY (REAL PROPERTY)

1. Income from immovable (real) property may be taxed in the
Contracting State in which such property is situated.
2. The term "immovable property" shall have the meaning which it
has under the law of the Contracting State in which the property
in question is situated. The term shall in any case include
property accessory to immovable property, livestock and equipment
used in agriculture and forestry, rights to which the provisions
of general law respecting landed property apply, usufruct of
immovable property, and rights to variable or fixed payments as
consideration for the working of, or the right to work, mineral
deposits, sources and other natural resources; ships, boats, and
aircraft shall not be regarded as immovable property.

/*.

The provisions of paragraph 1 shall apply to income derived

from the direct use, letting or use in any other form of
immovable property.
4. The provisions of paragraphs 1 and 3 shall also apply to the
income from immovable property of an enterprise and to income
from immovable property used for the performance of independent
personal services.

Article 7
BUSINESS PROFITS

= business profits of an enterprise of a Contracting State
shall be taxable only in that State unless the enterprise carries
on business in the other Contracting State through a permanent
establishment situated therein. If the enterprise carries on
business as aforesaid, the business profits of the enterprise may
be taxed in the other State but only so much of them as is '
attributable to (a) that permanent establishment, (b) sales in
that other State of goods or merchandise of the same or similar
kind as those sold through that permanent establishment, or (c)
other business activities carried on in that other State of the
same or similar kind as those effected through that permanent
establishment.
2. Subject to the provisions of paragraph 3, where an enterprise
of a Contracting State carries on business in the other
Contracting State through a permanent establishment situated
therein, there shall in each State be attributed to that
permanent establishment the business profits which it might be

expected to make if it were a distinct and independent enterprise
engaged in the same or similar activities under the same or
similar conditions.
3. In the determination of the business profits of a permanent
establishment, there shall be allowed as deductions expenses
which are incurred for the purposes of the business of the
permanr -,t establishment, including executive and general
administrative expenses, research and development expenses,
interest, and other expenses incurred, whether in the State in
which the permanent establishment is situated or elsewhere.
However, no such deduction shall be allowed in respect of
amounts, if any, paid (otherwise than towards reimbursement of
actual ' ---arises) by the permanent establishment to the head
off enterprise or any of its other offices, by way of
ro .ees, or other similar payments in return for the use
of patents or other rights, or by way of commission, for specific
services performed or for management, or by way of interest on
moneys lent to the permanent establishment. Likewise, no account
shall be taken, in the determination of the profits of a
permanent establishment, for amounts charged (otherwise than
towards reimbursement of actual expenses), by the permanent ,
establishment to the head office of the enterprise or any of its
other offices by way of royalties, fees, or other similar
payments in return for the use of patents or other rights, or by
way of commission for specific services performed or for
management, or by way of interest on moneys lent to the head
office of the enterprise or any of its other offices.
4. Insofar as it has been customary in a Contracting State to
determine the profits to be attributed to a permanent
establishment on the basis of an apportionment of the total

profits of the enterprise to its various parts, nothing in
paragraph 2 shall preclude that State from determining the
profits to be taxed by such an apportionment as may be customary;
the method of apportionment shall, however, be such that the
result will be in accordance with the principles contained in
this Article.
5. No business profits shall be attributed to a permanent
establishment by reason of the mere purchase by that permanent
establishment of goods or merchandise for the enterprise.
6. For the purposes of the preceding paragraphs, the business
profits to be attributed to the permanent establishment shall be
determined by the same method from year to year unless there is
good and sufficient reason to the contrary.
7. Where business profits include items of income which are
dealt with separately in other Articles of this Convention, then
the provisions of those Articles shall not be affected by the
provisions of this Article.

Article 8
SHIPPING AND AIR TRANSPORT

1. Profits of an enterprise of a Contracting State from the
operation in international traffic of aircraft shall be taxable
only in that State.
2. Profits of an enterprise of a Contracting State from sources
within the other Contracting State from the operation in
international traffic of ships shall be taxable in both
Contracting States; provided, however, that the tax imposed by
that other Contracting State shall not exceed 50 percent of the

tax otherwise imposed by the internal law of that State.

For

purposes of this paragraph, the amount of such profits subject to
tax in Sri Lanka shall not exceed 6 percent of the sums
receivable in respect of the carriage of passengers or freight
embarked in Sri Lanka.
3.

For the purposes of this Article, profits from the operation
aft in international traffic include profits from the
of aircraft if such aircraft are operated in international

traffic by the lessee or if such rental profits are incidental to
other profits described in paragraph 1.
4.

Income from the rental on a full or bareboat basis of ships

operated in international traffic by the lessee which is derived
by an

nterprise of one Contracting State from sources within the

other Contracting State and which is incidental to profits
described in paragraph 2 shall be taxable in both Contracting
States; provided, however, that the tax imposed by that other
Contracting State shall not exceed 50 percent of the tax which
would otherwise be imposed by that other State under the
provisions of paragraph 3 of Article 12 (Royalties).
5.

Profits of an enterprise of a Contracting State from the use,

maintenance or rental of containers (including trailers, barges,
and related equipment for the transport of containers) used in
international traffic and derived from sources within the other
Contracting State shall be taxable in both Contracting States;
provided, however, that the tax imposed by that other Contracting
State shall be restricted to 50 percent of the tax which would
otherwise be imposed by that other State under the provisions of
paragraph 3 of Article 12 (Royalties).
6.

For purposes of determining the maximum tax which may be

imposed by a Contracting State under paragraphs 2, 4 and 5, the
following rules shall apply:

the tax which may be imposed by the other Contracting

State under paragraph 2 shall not exceed the lesser of
the tax which may be imposed under the provisions of that
paragraph, and the lowest rate of Sri Lanka tax that may
be imposed on the profits of the same kind derived under
similar circumstances by a resident of a third State.
For purposes of this subparagraph, if Sri Lanka imposes
an additional amount of a tax which is not covered by
this Convention in place of the income tax on an
enterprise resident in a third State, the amount of such
additional tax shall be treated as Sri Lanka tax; and
b) the tax which may be imposed by the other Contracting
State under paragraphs 4 and 5 shall not exceed the ' '
lesser of the tax which may be imposed under the
provisions of those paragraphs, and the lowest Sri Lanka
tax burden on such income derived by a resident of any
third State.
For purposes of this paragraph, Sri Lanka tax imposed on a
resident of a third State shall not include tax imposed by Sri
Lanka under special provisions of its statutory law, in 'effect on
the date of signature of this Convention, on income of the kind
dealt with in this Article, which special provisions are
applicable only to income derived by the government or by a
government agency of a third State.
7. The provisions of the preceding paragraphs shall likewise
apply in respect of participations in a pool, a joint business,
or an international operating agency of any kind by enterprises
engaged in the operation of ships or aircraft in international
traffic.

Article 9
ASSOCIATED ENTERPRISES

1. Where
a) an enterprise of a Contracting State participates
directly or indirectly in the management, control or
capital of an enterprise of the other Contracting State;
or
b) the same persons participate directly or indirectly in
the management, control or capital of an enterprise of a
Contracting State and an enterprise of the other
Contracting State,
and in either case conditions are made or imposed between the two
enterprises in their commercial or financial relations which
differ from those which would be made between independent
enterprises, then any profits which would, but for those
conditions, have accrued to one of the enterprises, but, by
reason of those conditions, have not so accrued, may be included
in the profits of that enterprise and taxed accordingly.
2. Where a Contracting State includes in the profits of an
e* rise of that State, and taxes accordingly, profits on which
an enterprise of the other Contracting State has been charged to
tax in that other State, and the profits so included are profits
which would have accrued to the enterprise of the first-mentioned
State if the conditions made between the two enterprises had been
those which would have been made between independent enterprises,
then that other State shall make an appropriate adjustment to the
amount of the tax charged therein on those profits. In
determining such adjustment, due regard shall be had to the other
provisions of this Convention and the competent authorities of
the Contracting States shall if necessary consult each other.

The provisions of paragraph 1 shall not limit any provisions

of the law of either Contracting State which permit the
distribution, apportionment, or allocation of income, deductions,
credits, or allowances between persons owned or controlled
directly or indirectly by the same interests when necessary in
order to prevent evasion of taxes or clearly to reflect the
income of any of such persons.

Article 10
DIVIDENDS

1. Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State / '
may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting
State of which the company paying the dividends is a resident and
ace -J.-" -o the laws of that State, but if the beneficial owner
of t. lends is a resident of the other Contracting State,
the tax so charged shall not exceed 15 percent of the gross
amount of the dividends.
3. The term "dividends" as used in this Article means income
from shares, mining shares, founders' shares, or other rights,
not bein:- debt-claims, participating in profits, as well as \
income from other corporate rights which is subjected to the same !
taxation treatment as income from shares by the taxation laws of [
the State of which the company making the distribution is a
resident.
4. The provisions of paragraph 2 shall not apply if the
beneficial owner of the dividends, being a resident of a
Contracting State, carries on business in the other Contracting

State of which the company paying the dividends is a resident
through a permanent establishment situated therein, or performs
in that other State independent pers-onal services from a fixed
base situated therein, and the holding in respect of which the
dividends are paid is effectively connected with such permanent
establ<- ent or fixed base. In such a case, the provisions of
Ar ;\LP 7 (Business Profits) or Article 15 (Independent Personal
Sej ...;), as the case may be, shall apply.

Article 11
INTEREST
t

1. Interest arising in a Contracting State and paid to a
resident of the other Contracting State may be taxed in that
other State.
2. However, such interest may also be taxed in the Contracting
State in which it arises and according to the laws of that State,
but if the beneficial owner of the interest is a resident of the
other Contracting State, the tax so charged shall not exceed 10
percent of the gross amount of the interest.
3. Notwithstanding the provisions of paragraph 2, interest
arising in a Contracting State shall be exempt from tax in that
State if
a) the payer of the interest is the Government of that
State, a political subdivision or a local authority
thereof;

the interest is derived and beneficially owned by the

Government or an agency of the Government of the other
Contracting State (including, in the case of the United
States, the Export-Import Bank and the Overseas Private
Investment Corporation); or
c) the interest is paid to the Federal Reserve Banks of the
United States or the Central Bank of Ceylon.
4. The term "interest" as used in this Convention means income
from Government securities, bonds, or debentures, whether or not
secured by mortgage, and whether or not carrying a right to
participate in profits, and debt-claims of every kind as well as
a ncome assimilated to income from money lent by the
t iaws of the State in which the income arises.
5. The provisions of paragraphs 2 and 3 shall not apply if the'
beneficial owner of the interest, being a resident of a
Contracting State, carries on business in the other Contracting
State in which the interest arises through a permanent
establishment situated therein, or performs in that other State
independent personal services from a fixed base situated therein,
and the debt-claim in respect of which the interest is paid is
effectively connected with such permanent establishment or fixed
base. In such a case, the provisions of Article 7 (Business
Profits) or Article 15 (Independent Personal Services), as the
case may be, shall apply.
6. Interest shall be deemed to arise in a Contracting State when
the payer is that State itself, a political or administrative
subdivision, a local authority or a resident of that State.
Where, however, the person paying the interest, whether he is a
resident of a Contracting State or not, has in a Contracting
State a permanent establishment or a fixed base in connection

with which the indebtedness on which the interest is paid was
incurred, and such interest is borne by such permanent
establishment or fixed base, then such interest shall be deemed
to arise in the State in which the permanent establishment or
fixed base is situated.
7. Where, by reason of a special relationship between the payer
and the beneficial owner or between both of them and some other
person, the amount of the interest, having regard to the
debt-claim for which it is paid, exceeds the amount which would
have been agreed upon by the payer and the beneficial owner in
,the absence of such relationship, the provisions of this Article
shall apply only to the last-mentioned amount. In such a case,
the excess part of the payments shall remain taxable according t'o
the laws of each Contracting State, due regard being had to the
other provisions of this Convention.

Article 12
ROYALTIES

1. Royalties arising in a Contracting State and paid to a
resident of the other Contracting State may be taxed in that
other State.
2. Royalties defined in paragraph 4(a) may also be taxed in the
Contracting State in which they arise and according to the laws
of that State, but if the beneficial owner of such royalties is a
resident of the other Contracting State, the tax so charged shall
not exceed 10 percent of the gross amount of the royalties.
3. Royalties defined in paragraph 4(b) may also be taxed in the
Contracting State in which they arise and according to the laws
of that State; however, if the beneficial owner of such royalties

JIA

is a resident of the other Contracting State, the rate of tax
charged in the first-mentioned State shall not exceed 5 percent
of the gross amount of the royalties.
4. The term "royalties" as used in this Article means
a) payments of any kind received as a consideration for the
use of, or the right to use, any copyright of literary,
artistic or scientific work, including cinematograph
films or films or tapes used for radio or television
broadcasting, any patent, trade mark, design or model,
plan, secret formula or process, or other like right or
property, or for information concerning industrial,
commercial, or scientific experience. The term
"royalties" also includes gains derived from the
alienation of any such right or property which are
contingent on the productivity, use, or disposition
thereof;
b) rentals for the use of tangible personal (moveable)
property.
5. The provisions of paragraphs 2 and 3 shall not apply if the
beneficial owner of the royalties, being a resident of a
Contracting State, carries on business in the other Contracting
State in which the royalties arise through a permanent
establishment situated therein, or performs in that other State
independent personal services from a fixed base situated therein,
and the right or property in respect of which the royalties are
paid is effectively connected with such permanent establishment
or fixed base. In such a case, the provisions of Article 7
(Business Profits) or Article 15 (Independent Personal Services),
as the case may be, shall apply.

For purposes of paragraph 1

a) the term "immovable property situated in the other
Contracting State", where the United States is the other
Contracting State, includes a United States real
property interest and immovable property referred to in
Article 6 (Income from Immovable Property (Real
Property)) which is situated in the United States; and
>^ the term "immovable property situated in the other
-;tracting State", where Sri Lanka is the other
Contracting State, includes
(i) immovable property referred to in Article 6
(Income from Immovable Property (Real Property))
which is situated in Sri Lanka;
(ii) an interest in a company the assests of which
consist, directly or indirectly, principally of
such immovable property; and
(iii) an interest in a partnership, trust, or estate to
the extent attributable, directly, or indirectly,
to such immovable property.
3. Gains from the alienation of movable property forming part of
the business property of a permanent establishment which an
enterprise of a Contracting State has in the other Contracting
State or of movable property pertaining to a fixed base available
to a resident of a Contracting State in the other Contracting
State for the purpose of performing independent personal
services, including such gains from the alienation of such a
permanent establishment (alone or with the whole enterprise) or
of such fixed base, may be taxed in that other State.

Gains derived by an enterprise of a Contracting State from

the alienation of ships or aircraft operated in international
traffic or movable property pertaining to the operation of such
ships or aircraft shall be taxable only in that State.
5. Gains derived by a resident of a Contracting State from the
..-ion of shares of the stock of a company which is a
c£-' it of the other Contracting State representing a
t- -icipation of 50 percent or more may be taxed in that other
State.
6. Gains described in Article 12 (Royalties) shall be taxable
only in accordance with the provisions of Article 12.
7. Gains from the alienation of any property other than that
referred to in paragraphs 1 through 6 shall be taxable only in '
the Contracting State of which the alienator is a resident.

Article 14
GRANTS

1. Where the Government of Sri Lanka or any agency thereof makes
rant or any similar payment for the purposes of
investment promotion and economic development in Sri Lanka to a
resident of the United States in respect of an enterprise in Sri
Lanka which is wholly owned by such resident of the United
States, or to a company resident in Sri Lanka which is wholly
owned by a resident of the United States, the amount of such
grant or payment shall be excluded from the gross income of such
resident or company, and shall not increase the earnings and
profits of such resident or company, for the purpose of computing
United States tax.

£6

Where the cash grant or payment referred to in paragraph 1

has been made to a resident of the United States, then
a)

if the resident is a company the amount of such grant or
payment shall be treated as a contribution to its
capital;

the resident shall be deemed to have contributed the
amount of such grant or payment to the Sri Lanka company
designated by the terms of the grant or payment;

the resident's basis for the stock of the Sri Lanka
company shall not be increased by the amount deemed
contributed under (b) above; and

the basis of property of the Sri Lanka company shall be
reduced by the amount of the deemed contribution under
(b) above in accordance with rules prescribed by the
Secretary of the Treasury of the United States.

Where the cash grant or payment referred to in paragraph 1

has been made to a company resident in Sri Lanka, then
a)

the amount of such grant or payment shall be treated as
a contribution to its capital; and

the basis of property of such company shall be reduced
by the amount of the contribution to its capital under
(a) above in accordance with rules prescribed by the
Secretary of the Treasury of the United States.

The cash grant or similar payment referred to in paragraph 1

shall not include any amount which in whole or in part, directly
or indirectly
a)

is in consideration for services rendered or to be
rendered or for the sale of goods;

is measured in any manner by the amount of profits or
tax liability; or

is taxed by Sri Lanka.

5. Notwithstanding the preceeding provisions of this Article, if
the cash grant or similar payment referred to in paragraph 1 is
made to a resident of the United States, such resident may elect
to include such grant or payment in gross income for the purposes
of computing United States tax, and in such a case the provisions
of this Article shall not apply.

Article 15
INDEPENDENT PERSONAL SERVICES

'--nine derived by an individual who is a resident of a
r -* -; State from the performance of personal services in an
independent capacity shall be taxable only in that State unless
such services are performed in the other Contracting State and
a) the individual is present in that other State for a
period or periods aggregating more than 183 days within
any 12 month period; or
b) the individual has a fixed base regularly available to
him in that other State for the purpose of performing
his activities, but only so much of the income as is
attributable to that fixed base may be taxed in such
other State.

Article 16
DEPENDENT PERSONAL SERVICES

1. Subject to the provisions of Articles 13 (Artistes and
Athletes), 19 (Pensions, Social Security and Child Support
Payments), and 20 (Government Service), salaries, wages, ani

SL8-

other similar remuneration derived by a resident of a Contracting
State in respect of an employment shall be taxable only in that
State unless the employment is exercised in the other Contracting
State. If the employment is so exercised, such remuneration as
is derived therefrom may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration
dr.- *•• • ry a resident of a Contracting State in respect of an
e nt exercised in the other Contracting State shall be
taxable only in the first-mentioned State if
a) the recipient is present in the other State for a period
or periods not exceeding in the aggregate 183 days
within any 12 month period; and
b) the remuneration is paid by, or on behalf of, an
employer who is not a resident of the other State; and
c) the remuneration is not borne by a permanent
establishment or a fixed base which the employer has in
the other State.
;•. 'ithstanding the preceding provisions of this Article,
reir.L r -ion derived in respect of an employment as a member of
the regular complement of a ship or aircraft operated by an i
1
enterprise of a Contracting State in international traffic may be j
taxed only in that State. i

I
Article 17
DIRECTORS' FEES

Directors' fees and other similar payments derived by a
resident of a Contracting State for services rendered in the
other Contracting State as a member of the board of directors of
a company which is a resident of that other State may be taxed in
that other State.

Article 18
ARTISTES AND ATHLETES

1. Notwithstanding the provisions of Articles 15 (Independent
Personal Services) and 16 (Dependent Personal Services), income
derived by a resident of a Contracting State as an entertainer,
such as a theatre, motion picture, radio, or television artiste,
or a musician, or as an athlete, from his personal activities as
such exercised in the other Contracting State, may be taxed in
that other State, except where the amount of the gross receipts
derived by such entertainer or athlete, including expenses
reimbursed to him or borne on his behalf, from such activities do
not exceed six thousand United States dollars ($6,000) or its
f -. in Sri Lanka rupees for the taxable year concerned.
-.icome referred to in paragraph 1 shall not be taxed in jthe
Contracting State in which the activities are exercised if the
visit of the entertainers or athletes to that State is directly
or indirectly supported wholly or substantially from the public
funds of the Government of either Contracting State. For the
purposes of this paragraph, the term "Government" includes a
state Government, a political subdivision or a local authority of
either Contracting State.
3. Where income in respect of activities exercised by an
entertainer or an athlete in his capacity as such accrues not to
that entertainer or athlete but to another person, that income
may, notwithstanding the provisions of Articles 7 (Business
Profits), 15 (Independent Personal Services), and 16 (Dependent
Personal Services), be taxed in the Contracting State in which
the activities of the entertainer or athlete are exercised. For
purposes of the preceding sentence, income of an entertainer or

3o-

athlete shall be deemed not to accrue to another person if it is
established that neither the entertainer or athlete, nor persons
related thereto, participate directly or indirectly in the
profits of such other person in any manner, including the receipt
of deferred remuneration, bonuses, fees, dividends, partnership
distributions, or other distributions.

Article 19
PENSIONS, SOCIAL SECURITY AND CHILD SUPPORT PAYMENTS

1. Subject to the provisions of Article 20 (Government Service),
3 and other similar remuneration paid to a resident of a
-ting State in consideration of past employment may be
taxed only in that State.
2. Notwithstanding the provisions of paragraph 1, pensions paid
and other payments made under a public scheme which is part of
the social security system of a Contracting State shall be
taxable only in that State.
3. Periodic payments for the support of a minor child made
pursuant to a written separation agreement or a decree of
divorce, separate maintenance or compulsory support, paid by a
resident of one of the Contracting States to a resident of the
other Contracting State shall be exempt from tax in both States.

Article 20
GOVERNMENT SERVICE

Remuneration, including a pension, paid from the public funds
of a Contracting State or a political subdivision or a local
authority thereof to a citizen or national of thac State in
respect of services rendered in the discharge of functions of a
governmental nature shall be taxable only in that State.
However, the provisions of Articles 15 (Independent Personal
Services), 16 (Dependent Personal Services), or 18 (Artistes and
Athletes), as the case may be, shall apply, and the preceding
sentence shall not apply, to remuneration paid in respect of
services rendered in connection with a business carried on by a
Contracting State or a political subdivision or local authority
thereof.

Article 21
STUDENTS AND TRAINEES

1. Payments which a student, apprentice, or business trainee who
is or was immediately before visiting a Contracting State a
resident of the other Contracting State and who is present in the
first-mentioned State for the purpose of his full-time education
or training receives for the purpose of his maintenance,
education, or training shall not be taxed in that State provided
that such payments arise from sources outside that State.
2. An individual who is a resident of one of the Contracting
States at the time he becomes temporarily present in the other
Contracting State and who is temporarily present in that other

L _ . . — — J'•.Ci.-kw*••[•>: ^w-.. T -f.^.>'v..- ..L', ...j.V>J?/^->"'-»'.'7 '" '

4*.

State as an employee of, or under contract with, a resident of
the first-mentioned State, or as a participant in a program
sponsored by the Government of the other State or by any
international organization for the primary purpose of
a) acquiring technical, professional, or business
experience from a person other than that resident of the
first-mentioned State or other than a person related to
such resident; or
studying at a university or other recognized educational
institution in that other State,
shall be exempt from tax by that other State for a period not
exceeding one year with respect to his income from personal
services in an aggregate amount not in excess of six thousand
United States dollars ($6,000) or its equivalent in Sri Lanka
rupees.

Article 22
OTHER INCOME

1. Items of income of a resident of a Contracting State, ,
wherever arising, not dealt with in the foregoing Articles of
this Convention shall be taxable only in that State.
2. Notwithstanding paragraph 1, items of income of a resident of
a Contracting State not dealt with in the foregoing Articles of
this Convention and arising in the other Contracting State may be
taxed in that other State.

33.

Article 23
LIMITATION ON BENEFITS

1. A person (other than an individual) which is a resident of
one of the Contracting States shall not be entitled under this
Convention to relief from taxation in the other Contracting State
pursuant to Articles 10 (Dividends), 11 (Interest), and 12
(Royalties) unless:
a)

more than 50 percent of the beneficial interest in such
person (or in the case of a company, more than 50
percent of the number of shares of each class of the
company's shares) is owned, directly or indirectly, by
any combination of one or more of:
(i)

individuals who are residents of United States; >

(ii)

citizens of the United States;

(iii) individuals who are residents of Sri Lanka;

(iv)

companies as described in subparagraph (b); and

(v)

the Contracting States;

it is a company in whose principal class of shares there
is substantial and regular trading on a recognized stock
exchange; or

the establishment, acquisition and maintenance of such
person and the conduct of its operations did not have as
one of its principal purposes the purpose of obtaining
benefits under the convention.

*•-z the purposes of subparagraph 1(b), the term "a recognized

stock exchange" means
a)

the NASDAQ system owned by the National Association of
Securities Dealers, Inc. and any stock exchange
registered with the Securities and Exchange Commission as
a national securities exchange for the purposes of the
Securities Exchange Act of 1934;

Article 23
LIMITATION ON BENEFITS

1. A person (other than an individual) which is a resident of
one of t v e Contracting States shall not be entitled under this
Co

to relief from taxation in the other Contracting State

:>t to Articles 10 (Dividends), 11 (Interest), and 12

(Royalties) unless:
a)

individuals who are residents of United States;

(ii)

citizens of the United States;

(iii) individuals who are residents of Sri Lanka;

(iv)

companies as described in subparagraph (b); and

(v)

the Contracting States;

it is a company in whose principal class of shares there
is substantial and regular trading on a recognized stock
exchange; or

the establishment, acquisition and maintenance of such
person and the conduct of its operations did not have as
one of its principal purposes the purpose of obtaining
benefits under the convention.

For the purposes of subparagraph 1(b), the term "a recognized

stock exchange" means
a)

^^hWsm^y^^^^f^-^^^
Jjr

the Colombo Brokers Association of Sri Lanka; and

c) any other stock exchange agreed upon by the competent
authorities of the Contracting States.

Article 24
RELIEF FROM DOUBLE TAXATION

In the case of the United States, double taxation shall be

avo: follows: In accordance with the provisions and subject
tc imitations of the law of the United States (as it may be
amended from time to time without changing the general principle
hereof), the United States shall allow to a resident or citizen of
the United States as a credit against the United States tax the
appropriate amount of tax paid to Sri Lanka; and, in the case of a
United States company owning at least 10 percent of the voting
sto- f a company which is a resident of Sri Lanka from which it
receives dividends in any taxable year, the United States shall
allow credit for the appropriate amount of tax paid to Sri Lanka
by that company with respect to the profits out of which such
dividends are paid. Such appropriate amount shall be based upon
the amount of tax paid to Sri Lanka, but the credit shall not
exceed the limitations (for the purpose of limiting the credit to
the United States tax on income from sources outside of the United
States) provided by United States law for the taxable year. For
purposes of applying the United States credit in relation to tax
paid to Sri Lanka, the taxes referred to in paragraphs 2(a) and 3
of Article 2 (Taxes Covered) shall be considered to be income
taxes.

For purposes of the credit allowed by the United States, any

taxes paid in Sri Lanka by a company which is a resident of Sri
Lanka in respect of a distribution or remittance of dividends
shall be regarded as a tax on the shareholder.
3. In the case of Sri Lanka, double taxation shall be avoided as
follows: In accordance with the provisions and subject to the
limitations of the law of Sri Lanka (as it may be amended from
time to time without changing the general principle hereof), Sri
Lanka shall allow to a resident of Sri Lanka as a credit against
the Sri Lanka tax the appropriate amount of tax paid to the United
States; and in the case of a Sri Lanka company owning at least 10
percent of the voting stock of a company which is a resident of
the United States from which it receives dividends in any taxable
year, Sri Lanka shall allow credit for the appropriate amount qf ,
tax paid to the United States by that company with respect to the
profits out of which such dividends are paid. Such appropriate
amount shall be based upon the amount of tax paid to the United
States, but the credit shall not exceed the limitations (for the
purpose of limiting the credit to the Sri Lanka tax on income from
sources outside of Sri Lanka) provided by Sri Lanka law for the
taxable year. For purposes of applying the Sri Lanka credit in
relation to tax paid to the United States, the taxes referred to
in paragraphs 2(b) and 3 of Article 2 (Taxes Covered) shall be
considered to be income taxes.
4. For the purposes of allowing relief for double taxation
pursuant to this Article, income and profits shall be deemed to
arise exclusively as follows
a) income and profits derived by a resident of a
Contracting State which may be taxed in the other
Contracting State in accordance with this Convention

(other than solely by reason of citizenship in
accordance with paragaraph 3 of Article 1 (Personal
Scope)) shall be deemed to arise in that other State;
b)

income and profits derived by a resident of a
Contracting State which may not be taxed in the other
Contracting State in accordance with this Convention
shall be deemed to arise in the first-mentioned State.

Article 25
NON-DISCRIMINATION

1. Nationals of a Contracting State shall not be subject in the
other Contracting State to any taxation or any requirement
connected therewith which is other or more burdensome than the
taxation and connected requirements to which nationals of that
other State in the same circumstances are or may be subjected.
This provision shall apply to persons who are not residents of
one or both of the Contracting States.

However, for the purposes

of United States tax, a United States national who is not a
resident of the United States and a Sri Lanka national who is not
a resident of the United States are not in the same
circumstances.
2.

The taxation on a permanent establishment which an enterprise

of a Contracting State has in the other Contracting State shall
not be less favorably levied in that other State than the
taxation levied on enterprises of that other State carrying on
the same activities.

This provision shall not be construed as

obliging a Contracting State to grant to residents of the other
Contracting State any personal allowances, reliefs, and

--^~-1 T • • » y » r

" • » i' « **

reductions for taxation purposes on account of civil status or
family responsibilities which it grants to its own residents.
Nothing in this paragraph shall be construed as affecting the
right of Sri Lanka to impose on a permanent establishment of an
enterprise of the United States the tax referred to in subsection
(1)(b) of Section 34 of the Inland Revenue Act, No. 28 of 1979,
as amended, except that such tax may not exceed 15 percent of
remittances, as defined in such Section.
3. Except where the provisions of paragraph 1 of Article 9
(Associated Enterprises), paragraph 7 of Article 11 (Interest),
and paragraph 7 of Article 12 (Royalties) apply, interest,
rr and other disbursements paid by a resident of a
C< State to a resident of the other Contracting State
shall, for the purposes of determining the taxable profits of the
first-mentioned resident, be deductible under the same conditions
as if they had been paid to a resident of the first-mentioned
State. Similarly, any debts of a resident of a Contracting State
to a resident of the other Contracting State shall, for the
purposes of determining the taxable capital of the firstmentioned resident, be deductible under the same conditions as if
they had been contracted to a resident of the first-mentioned
State.
4. Enterprises of a Contracting State, the capital of which is
wholly or partly owned or controlled, directly or indirectly, by
one or more residents of the other Contracting State, shall not
be sub•)€-.. .t-3 in the first-mentioned State to any taxation or any
requirement connected therewith which is other or more burdensome
than the taxation and connected requirements to which other
similar enterprises of the first-mentioned State are or may be
subjected.

The provisions of this Article shall, notwithstanding the

provisions of Article 2 (Taxes Covered), apply
a) in relation to the United States, to taxes of every kind
imposed at the national level; and
b) in relation to Sri Lanka, to all taxes administered by
the Commissioner-General of Inland Revenue.

Article 26
MUTUAL AGREEMENT PROCEDURE

1. Where a person considers that the actions of one or both of
the Contracting States result or will result for him in taxatiort
not in accordance with the provisions of this Convention, he may,
irrespective of the remedies provided by the domestic law of
those States, present his case to the competent authority of the
Contracting State of which he is a resident or national.
2. The competent authority shall endeavor, if the objection
appears to it to be justified and if it is not itself able to •
arrive at a satisfactory solution, to resolve the case by mutual
agreement with the competent authority of the other Contracting
State, with a view to the avoidance of taxation which is not in
accordance with the Convention. Any agreement reached shall be
implemented notwithstanding any time limits or other procedural
limitations in the domestic law of the Contracting States,
provided that the competent authority of the other Contracting
State has received notification that such a case exists within
three years of the first notification to such person of an action
which results or will result in taxation not in accordance with
the provisions of this Convention.

I M P * . U IPJBH L.I
ftfr-frc--:---~f - - -

HI
i -

The competent authorities of the Contracting States shall

endeavor to resolve by mutual agreement any difficulties or
doubts arising as to the interpretation or application of the
Convention.

In particular the competent authorities of the

Contracting States may agree
a)

to the same attribution of income, deductions, credits,
or allowances of an enterprise of a Contracting State to
its permanent establishment situated in the other
Contracting State;
to the same allocation of income, deductions, credits,
or allowances between persons;

to the same characterization of particular items of
income;

to the same application of source rules with respect to
particular items of income;

to a common meaning of a term;

to increases in any specific amounts referred to in the
Convention to reflect economic or monetary developments;
and

to the application of the provisions of domestic law
regarding penalties, fines, and interest in a manner
consistent with the purposes of the Convention.

They may also consult together for the elimination of double
taxation in cases not provided for in the Convention.
4.

The competent authorities of the Contracting States may

communicate with each other directly for the purpose of reaching
an agreement in the sense of the preceding paragraphs.

Article 27
EXCHANGE OF INFORMATION AND ADMINISTRATIVE ASSISTANCE

1. The competent authorities of the Contracting States shall
exchange such information as is necessary for carrying out the
provisions of this Convention or of the domestic laws of the
Contracting States concerning taxes covered by the Convention
insofar as the taxation thereunder is not contrary to the
Convention, as well as to prevent fiscal evasion. The exchange
of information is not restricted by Article 1 (Personal Scope).
Any information received by a Contracting State shall be treated
•as secret in the same manner as information obtained under the
domestic laws of that State and shall be disclosed only to
persons or authorities (including courts and administrative ,
bodies) involved in the assessment, collection, or administration
of, the enforcement or prosecution in respect of, or the
determination of appeals in relation to, the taxes covered by the
Convention. Such persons or authorities shall use the
information only for such purposes. They may disclose the
information in public court proceedings or in judicial decisions.
2. In no case shall the provisions of paragraph 1 be construed
so as to impose on a Contracting State the obligation
a) to carry out administrative measures at variance with
the laws and administrative practice of that or of the
other Contracting State;
b) to supply information which is not obtainable under the
laws or in the normal course of the administration of
that or of the other Contracting State;
c) to supply information which would disclose any trade,
business, industrial, commercial, or professional secret
or trade process, or information the disclosure of which
would be contrary to public policy (ordre public).

4-Z

If information is requested by a Contracting State in

accordance with this Article, the other Contracting State shall
obtain the information to which the request relates in the same
manner and to the same extent as if the tax of the firstmentioned State were the tax of that other State and were being
imposed by that other State.
com

If specifically requested by the

authority of a Contracting State, the competent

authority of the other Contracting State shall provide
information under this Article in the form of depositions of
witnesses and authenticated copies of unedited original documents
(including books, papers, statements, records, accounts, and
writings), to the same extent such depositions and documents can
be obtained under the laws and administrative practices of that
r State with respect to its own taxes.
-h of the Contracting States shall endeavor to collect on
behalf of the other Contracting State such amounts as may be
necessary to ensure that relief granted by the Convention from
taxation imposed by that other State does not enur» to the
benefit of persons not entitled thereto.
5.

Paragraph 4 of this Article shall not impose upon either 'of

the Contracting States the obligation to carry out administrative
measures which are of a different nature from those used in the
collection of its own taxes, or which would be contrary to its
sovereignty, security, or public policy.
6.

For the purposes of this Article, the Convention shall,

notwithstanding the provisions of Article 2 (Taxes Covered),
apply
a)

in relation to the United States, to taxes of every kind
imposed at the national level; and

in relation to Sri Lanka, to all taxes administered by
the Commissioner-General of Inland Revenue.

"' m;
II• Tim—w^mmmmto
\immmm%'» i a i i t — M i l
•I

~^ - i -^ w - - ' ' —

—

Article 28
DIPLOMATIC AGENTS AND CONSULAR OFFICERS

Nothing in this Convention shaj.1 affect the fiscal privileges
of diplomatic agents or consular officers under the general rules
of international law or under the provisions of special
agreements.

Article 29
ENTRY INTO FORCE

1. •"'- - Convention shall be subject to ratification in
e with the applicable procedures of each Contracting '
c-.nd instruments of ratification shall be exchanged at
Washington as soon as possible.
2.

The Convention shall enter into force upon the exchange of

instruments of ratification and its provisions shall have effect
a)

in respect of taxes withheld at source, for amounts paid
or credited on.or after the first day of the second •
month next following the date on which the Convention
enters into force;

in respect of other taxes, for taxable periods beginning
on or after the first day of January of the year in
which the Convention enters into force.

Article 30
TERMINATION

1. This Convention shall remain in force until terminated by a
Contracting State.

Either Contracting State may terminate the

Convention at any time after 5 years from the date on which the
Convention enters into force, provided that at least 6 months'
prior notice of termination has been given through diplomatic
channels.

In such event, the Convention shall cease to have

effect
a)

in respect of taxes withheld at source, for amounts
paid or credited on or after the first day of January
next following the expiration of the 6 months' period;

in respect of other taxes, for taxable periods
inning on or after the first day of January next
following the expiration of the 6 months' period.

DONE at Colombo in duplicate, in the English and Sinhala
languages, the two texts having equal -authenticity, this
day of "A. - . -/. /-/ 19•?•-'."

FOR THE UNITED STATES FOR THE DEMOCRATIC SOCIALIST
OF AMERICA:
REPUBLIC OF SRI LANKA:

; \r r /••• \ '

federal financing bank
WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

EW
March 14, 1985

FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of January 1985.
FFB holdings of obligations issued, sold or
guaranteed by other Federal agencies totaled $146.0
billion on January 31, 1985, posting an increase of
$0.8 billion from the level on December 31, 1984.
This net change was the result of increases in
holdings of agency assets of $0.1 billion, agency
debt issues of $0.1 billion and holdings of agencyguaranteed debt of $0.6 billion. FFB made 281
disbursements during January.
Attached to this release are tables presenting
FFB January loan activity, new FFB commitments to
lend during January and FFB holdings as of January 31,
1985.
# 0 #

B-47

FEDERAL FINANCING BANK

Page 2 of 8

JANUARY 1985 ACTIVITY

BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

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

#424
#425
#426
#427
#428
#429
#430

Power Bond Series 1985 A

1/2
1/7
1/15
1/17
1/21
1/24
1/31

$ 330,000,000.00
425,000,000.00
305,000,000.00
435,000,000.00
310,000,000.00
415,000,000.00
185,000,000.00

1/15/85
1/17/85
1/21/85
1/24/85
2/1/85
2/4/85
2/8/85

8.245%
8.205%
8.075%
8.125%
8.125%
8.025%
8.225%

1/17

100,000,000.00

1/31/15

11.695%

5,000,000.00
20,000,000.00
15,000,000.00
15,000,000.00
15,000,000.00
25,000,000.00
2,500,000.00
15,000,000.00
25,000,000.00
1,000,000.00
7,945,000.00
350,000.00

4/3/85
4/3/85
4/8/85
4/9/85
2/8/85
4/12/85
4/12/85
4/15/85
4/16/85
4/18/85
4/29/85
3/18/85

8.225%
8.225%
8.245%
8.185%
8.185%
8.135%
8.135%
8.165%
8.115%
8.125%
8.215%
8.225%

1/1/95
1/1/00

11.205%
11.295%

9/15/92
11/30/12
4/30/11
4/15/14
4/30/11
5/10/92
3/20/93
6/30/96
6/15/91
9/15/92
7/10/94
6/10/96

11.655%
11.775%
11.815%
11.865%
11.925%
11.685%
9.675%
11.201%
11.335%
11.695%
11.615%
11.537%

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

#288
#289
#290
#291
#292
#293
#294
#295
#296
#297
#298
#299

1/3
1/3
V7
1/9
1/9
1/11
1/11
1/14
1/16
1/18
1/30
1/31

OFF-BUDGET AGENCY DEBT
UNITED STATES RAILWAY ASSOCIATION
+Note #33 1/3 73,793,686.38 4/1/85 8.225%
AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership
1/31 500,000,000.00 1/1/90 10.805% 11.097% ann.
1/31
50,000,000.00
1/31
140,000,000.00
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Spain 6
Somalia 4
Greece 14
Egypt 6
Greece 14
Indonesia 9
Indonesia 10
Korea 19
Spain 5
Spain 6
Thailand 10
El Salvador 7
•rollover

1/2
1/2
1/2
1/4
1/4
1/4
1/4
1/4
1/4
1/4
1/8
1/9

110,208.00
53,258.25
770,072.53
52,267.12
169,877.00
903,798.80
2,549,944.10
1,511,596.00
1,373,395.93
36,277.50
10,000.00
1,399,194.93

11.519% ann.
11.614% ann.

FEDERAL FINANCING BANK
JANUARY 1985 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual )

INTEREST
RATE
(other than
sani-annual)

Foreign Military Sales (Cont'd)
Philippines 10
Egypt 6
Greece 15
Morocco 11
Morocco 12
Philippines 10
Turkey 13
Tunisia 16
Turkey"17
Morocco 13
Greece 15
Egypt 6
Somalia 4
Egypt 6
Greece 14
Jordan 10
Jordan 11
Oman 6
El Salvador 7
Peru 10
Liberia 10
Egypt 6
Morocco 13
El Salvador 7
Thailand 9
Thailand 10
Thailand 11
Turkey 13
Jordan 12
Jordan 11
Egypt 6

1/9
1/11
1/11
1/11
1/11
1/11
1/11
1/14
1/24
1/15
1/16
1/17
1/17
1/18
1/18
1/18
1/18
1/18
1/23
1/23
1/23
1/24
1/24
1/29
1/29
1/29
1/29
1/29
1/31
1/31
1/31

$ 2,921,480.78
5,068,501.29
299,100.36
115,110.96
419,992.00
242,066.40
395,033.66
773,165.98
125,000.00
7,373,871.12
322,348.06
1,899,985.85
17,556.62
1,269,257.85
8,240,903.74
24,786.65
376,026.15
54,577.07
354,872.55
89§,065.00
90,483.00
5,274,000.00
1,126,317.30
720,875.00
711,827.59
736,619.41
1,767,287.00
489,016.44
1,216,143.37
629,100.00
18,344,779.38

7/15/92
10.781%
4/15/14
11.745%
6/15/12 , 11.625%
9/8/95
11.615%
9/21/95 . 11.605%
7/15/92
10.835%
3/24/12
11.795%
2/4/96
11.705%
11/30/13 11.675%
5/31/96
11.251%
6/15/12
11.648%
4/15/14
11.805%
11/30/12 11.825%
4/30/11
11.775%
4/30/11
11.826%
3/10/92
9.385%
11/15/92 9.595%
5/25/91
11.385%
6/10/96
11.365%
4/10/96
11.246%
5/15/95
11.375%
4/15/14
11.514%
5/31/96
11.020%
6/10/96
11.216%
9/15/13
11.205%
7/10/94
11.225%
9/10/95
10.935%
3/24/12
11.405%
2/5/95
10.735%
11/15/92 9.690%
4/15/14
11.328%

DEPARTMENT OF ENERGY
Gsothermal Loan Guarantees
NPN Partnership

1/2

650,000.00

4/1/85

8.370%

Synthetic Fuels - Non-Nuclear Act
Great Plains
Gasification Assoc. #128a*
#128b*
#128c*
#128d
#129
#130

1/2
1/2
1/2
1/2
1/14
1/31

134,500,000.00
69,500,000.00
230,000,000.00
76,000,000.00
6,000,000.00
8,000,000.00

4/1/85
7/1/85
10/1/85
1/2/86
1/2/86
1/2/86

8.885%
9.425%
9.765%
10.055%
9.195%
9.785%

1,171,600.00
4,500,000.00
3,015,000.00
584,349.00
50,000.00
500,000.00
773,600.00
250,000.00
290,667.00
300,000.00
500,000.00

1/2/90
1/3/97
1/4/95
7/15/85
8/1/85
2/15/86
8/15/86
12/1/85
8/1/85
1/15/88
1/15/90

10.685%
11.682%
11.489%
8.795%
8.845%
9.395%
9.855%
9.095%
8.635%
10.715%
10.777%

DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
'Lawrence, MA
Flint, MI
Roanoke, VA
Dade County, FL
Long Beach, CA
St. Louis, MO
Santa Ana, CA
St. Petersburg, FL
Provo, UT
Akron, OH
*St. Louis, MO
*maturity extension

1/2
1/3
1/4
1/4
1/4
1/4
1/11
1/11
1/14
1/15
1/15

10.970%
12.023%
11.819%
8.817%
8.897%
9.616%
10.098%
9.275%
8.668%
11.002%
11.067%

ann
ann
ann
ann
ann
ann
ann
ann
ann
ann
ann

Page 4 of 8
FEDERAL FINANCING BANK
JANUARY 1985 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

1/18
1/24
1/24
1/29
1/30
1/30

$ 649,675.00'
665,286.00
288,260.00
39,000.00
125,000.00
100,000.00

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

Community Development (Cont'd)
Detroit, MI
Dade County, FL
Tacoma, WA
Somerville, MA
Mayaguez, PR
Long Beach, CA

9/1/85
7/15/85
10/15/03 ,
5/1/85
8/1/85 •
8/1/85

8.725%
8.435%
11.419%
8.125%
8.605%
8.605%

8.796% ann
11.745% anr.
8.609% ann
8.609% ann

DEPARTMENT OF THE NAVY
Ship Lease Financing
Hauge
Kocak
Baugh
Obregon
Cbregon

1/15
1/15
1/15
1/15
1/15

127,806,502.52
106,462,912.85
124,202,449.12
105,816,000.00
57,000,000.00

4/15/85
4/15/85
4/15/85
4/15/85
2/15/85

8.105%
8.105%
8.105%
8.105%
8.075%

1/29

216,003.63

10/1/92

10.890%

Defense Production Act
Gila River Indian Community

10.746% qtr.

RURAL ELECTRIFICATION ADMINISTRATION
New Hampshire Electric #270 1/7
*San Miguel Electric #110
•Central Electric #128
*wabash Valley Power #104
*Wabash Valley Power #206
•Wolverine Power #101
•Wolverine Power #100
Deseret G&T #211
•Brookville Telephone #53
•Wolverine Power #183
•Hoosier Energy #107
•Hoosier Energy #202
N.E. Texas Electric #280
•Basin Electric #137
Golden Valley Electric #81
•New Hampshire Electric #192
•Wabash Valley Power #252
•Western Farmers Electric #133
•western Farmers Electric #220
•Kansas Electric #282
•East Kentucky Power #140
•Western Illinois Power #160
•Cajun Electric #76
•Colorado Ute Electric #71
•Colorado Ute Electric #96
•Ponderosa Telephone #35
•Cooperative Power #130
•Wolverine Power #183
•Soyland Power #165
Sitka Telephone #213
Oglethorpe Power #246
Allegheny Electric #255
•Sitka Telephone #213
•Colorado Ute Electric #96
United Power #145
United Power #159
•San Miguel Electric #110
•Colorado Ute Electric #168
•Basin Electric 4137
•Plains Electric #158
•maturity extension

1,997,000.00 3/31/87
1/7
6,218,000.00
1/8
1,341,000.00
1/10
8,872,000.00
1/10
623,000.00
1/10
1,263,000.00
1/10
1,350,000.00
1/14
1,232,000.00
1/14
65,000.00
1/14
583,000.00
1/14
7,224,000.00
1/14
4,776,000.00
1/15
2,522,000.00
1/17
20,000,000.00
1/16
-700,000.00
1/17
902,000.00
1/17
1,352,000.00
1/17
725,000.00
1/17
2,700,000.00
1/17
1,550,000.00
1/17
5,900,000.00
1/18
123,000.00
1/22
50,000,000.00
1/22
1,850,000.00
1/22
708,000.00
1/22
99,000.00
1/22
6,600,000.00
1/22
232,000.00
1/224,135,000.00
1/22
455,000.00
1/24
24,800,000.00
1/24
20,697,000.00
1/24
4,307,093.00
1/24
230,000.00
1/25
4,302,000.00
1/25
1,798,000.00
1/25
9,005,000.00
1/28
32,119.00
1/28
20,000,000.00
1/28
10,000,000.00

10.385%
1/7/88
10.745%
1/8/87
10.135%
1/12/87
10.075%
1/12/87
10.075%
1/12/87
10.075%
3/31/87
10.267%
1/14/87
10.205%
12/31/17 11.811%
1/13/88
10.725%
1/2/18
11.811%
1/2/18
11.811%
3/31/87
10.366%
1/19/87
10.115%
3/31/87
10.258%
1/19/87
10.115%
1/19/87
10.115%
10.,145%
1/27/87
10.,145%
1/27/87
3/31/87
10.250%
1/20/87
10.115%
12/31/19 11.743%
1/22/87
10.045%
1/22/87
10.045%
1/22/87
10.045%
1/22/87
10.045%
1/22/87
10.045%
1/22/88
10.505%
12/31/15 11.678%
1/22/87
10.045%
1/26/87
9.965%
3/31/87
10.085%
1/26/87
9.965%
1/26/87
9.965%
1/26/87
9.875%
1/26/87
9.875%
2/5/87
9.395%
9.885%
1/28/87
9.885%
1/28/87
9.915%
1/29/87

10.254% qtr.
10.604% qtr
10.010% qtr.
9.951% qtr.
9.951% qtr.
9.951% qtr.
10.139% qtr.
10.078% qtr.
11.642% qtr.
10.585% qtr.
11.642% qtr.
11.642% qtr.
10.235% qtr.
9.990% qtr.
10.130% qtr.
9.990% qtr.
9.990% qtr.
10.020% qtr.
10.020% qtr.
10.122% qtr.
9.990% qtr.
11.576% qtr.
9.922% qtr.
9.922% qtr.
9.922% qtr.
9.922% qtr.
9.922% qtr.
10.371% qtr.
11.512% qtr.
9.922% qtr.
9.844% qtr.
9.961% qtr.
9.844% qtr.
9.R44% qtr.
9.756% qtr.
9.756% qtr.
9.776% qtr.
9.766% qtr.
9.766% qtr.
9.795% qtr.

FEDERAL FINANCING BANK
JANUARY 1985 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
•Colorado Ute Electric #203 1/29 $ 1,154,000.09
•San Miguel Electric #110
1/30
8,152,000.00
•Hoosier Energy #107
1/30
30,000,000.00
North Carolina Electric #268
1/30
5,461,000.00
•Wolverine Power #182
1/30
459,000.00
•Upper Missouri G&T #172
1/30
1,870,000.00
•Basin Electric #137
1/31
35,000,000.00
•Basin.Electric #232
1/31
228,000.00
Plains Electric G&T #300
1/31
5,751,000.00
Brazos Electric #230
1/31
4,130,000.00
•Allegheny Electric #93
1/31
3,831,000.00
Kansas Electric #266
. 1/31
1,788,000.00
•Allegheny Electric #93
1/31
2,867,000.00
•Allegheny Electric #93
1/31
5,432,000.00
•Allegheny Electric #93
1/31
1,443,000.00
•Allegheny Electric #175
1/31
7,042,000.00
•United Power #25
1/31
33,500.00
•Tex-La Electric #208
1/31
600,000.00
•Allegheny Electric #93
1/31
1,443,000.00
Allegheny Electric #175
1/31
1,708,000.00

1/29/87
1/28/88
12/31/14
3/31/87 '
2/1/88 •
1/30/87
2/2/87
2/2/87
3/31/87
2/2/87
3/31/87
3/31/87
3/31/87
3/31/87
3/31/87
1/31/88
12/31/12
2/2/87
3/31/87
1/12/88

9.915%
10.405%
11.339%
10.035%
10.415%
9.925%
9.885%
9.885%
10.015%
9.885%
10.012%
10.035%
10.012%
10.012%
10.012%
10.405%
11.312%
9.885%
10.012%
10.028%

SMALL BUSINESS ADMINISTRATION
State & Local Development Company Debentures
Texas Panhandle Reg. Dev. Corp. 1/9
Opportunities Minnesota Inc.
1/9
Albany Local Dev. Corp.
1/9
Ark-Tex Regional Dev. Co., Inc. 1/9
Houston-Galveston Area Dev. Corpl/9
Texas Panhandle Reg. Dev. Corp. 1/9
S. Cen. Illionis Reg. P&D Oanti. 1/9
Forward Development Corp.
1/9
Fulton County Cert. Dev. Corp. 1/9
Illinois Sm. Bus. Growth Corp. 1/9
Lake County Sn. Bus. 503 Corp. 1/9
San Diego County Loc. Dev. Corp.1/9
Georgia Mountains Reg. E.D.C
1/9
Fayetteville Progress, Inc.
1/9
Hudson Development Corp.
1/9
Evergreen Community Dev. Assoc. 1/9
Caprock Local Development Corp. 1/9
Columbus Countywide Dev. Corp. 1/9
Metro Sm. Bus. Assistance Corp. 1/9
Empire State CDC
1/9
Commonwealth Sm. Bus. Dev. Corp.1/9
Milwaukee Economic Dev. Corp.
1/9
Verd-Ark-Ca Development Corp.
1/9
The Brattleboro Dev. Or. Corp. 1/9
Area Investment & Dev. Corp.
1/9
Pioneer County Dev., Inc. '
1/9
Buffalo Trace Area Dev Dis, Inc 1/9
Four Rivers Dev., Inc.
1/9
CDC Business Dev. Corp.
1/9
The Bus. Dev. Corp. of Nebraska 1/9
Columbus Countywide Dev. Corp. 1/9
Houston-Galveston Area L.D.C.
1/9
Long Island Development Corp.
1/9
Greater Spokane Business Dev.
1/9
The Southern Dev. Council, Inc. 1/9
The St. Louis County L.D.C.
1/9
Albany Local Development Corp. 1/9
Los Angeles LDC, Inc.
1/9
The St. Louis County L.D.C.
1/9
The St. Louis County L.D.C.
1/9
•maturity extension

32,000.00
51,000.00
59,000.00
60,000.00
63,000.00
67,000.00
78,000.00
83,000.00
87,000.00
107,000.00
109,000.00
,124,000.00
126,000.00
' 126,000.00
143,000.00
146,000.00
152,000.00
154,000.00
168,000.00
170,000.00
189,000.00
260,000.00
342,000.00
364,000.00
26,000.00
35,000.00
45,000.00
57,000.00
59,000.00
70,000.00
84,000.00
86,000.00
92,000.00
97,000.00
98,000.00
99,000.00
99,000.00
103,000.00
104,000.00
105,000.00

1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00

i/i/od
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/00
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05

11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.599%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%

9.795% qtr.
10.273% qtr.
11.183% qtr.
9.912% qtr.
10.283% qtr.
9.805% qtr.
9.766% qtr.
9.766% qtr.
9.893% qtr.
9.766% qtr.
9.890% qtr.
9.912% qtr.
9.890% qtr.
9.890% qtr.
9.890% qtr.
10.273% qtr.
11.156% qtr.
9.766% qtr.
9.890% qtr.
9.905% qtr.

Page 6 of 8
FEDERAL FINANCING BANK
JANUARY 1985 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
INTEREST
RATE
RATE
(semi(other than
semi-annual)
annual)

State & Local Development Company Debentures (Cont'd)
Long Island Development Corp.
1/9
Coon Rapids Development Co.
1/9
Central Ozarks Development, Inc.1/9
Ocean State Bus. Dev. Auth., Incl/9
Brockton Reg. Econ. Dev. Corp. 1/9
Alabama Community Dev. Corp.
1/9
McPherson County S.B.D. Assoc. 1/9
Cen. Ozarks Development, Inc. 1/9
N. Regional Planning Com., Inc. 1/9
Evergreen Community Dev. Assoc. 1/9
Econ. Dev. Fnd. of Sacramento
1/9
Gr. Kenosha Development Corp.
1/9
Bay Area Employment Dev. Co.
1/9
Nevada State Dev. Corp.
1/9
Cen. Mississippi Dev. Co.
1/9
E.D.C. of. Jefferson County, MO 1/9
San Diego County L.D.C.
1/9
San Diego County L.D.C.
1/9
Evergreen Community Dev. Assoc. 1/9
Econ. Dev. Fnd. of Sacramento
1/9
Delaware Development Corp.
1/9
Metropolitan Growth & Dev. Corp.1/9
Vermont 503 Corporation
1/9
Bus. Dev. Corp. of Nebraska
1/9
Washington Community Dev. Corp. 1/9
SW Illinois Areawide B.D.F. Corpl/9
N. Community Investment Corp.
1/9
San Diego County L.D.C.
1/9
SCEDD Development Company
1/9
Greater Spokane Bus. Dev. Assoc.1/9
Coastal Enterprises, Inc.
1/9
Ocean State Bus. Dev. Auth., Incl/9
Econ. Dev. Fnd. of Sacramento
1/9
Clay County Development Corp.
1/9
The St. Louis Local Dev. Co.
1/9
Union County Ec. Dev. Corp.
1/9
1/9
Jacksonville L.D.C, Inc.
1/9
New Castle Econ. Dev. Corp.
1/9
San Diego County L.D.C.
McPherson County S.B.D. Assoc. 1/9
Saint Paul 503 Development Co. 1/9
Clark County Development Corp. 1/9
1/9
Region Nine Development Corp.
1/9
River East Progress, Inc.
Brockton Reg. Econ. Dev. Corp. 1/9
1/9
Opportunities Minnesota, Inc.
Texas Panhandle Reg. Dev. Corp. 1/9
N. Virginia Local Dev. Co.,Inc .1/9
Wilmington Industrial Dev., Inc.1/9
1/9
Bay Colony Development Corp.
1/9
Alabama Community Dev. Corp.
1/9
River East Progress, Inc.
1/9
Union County Econ. Dev. Corp.
Evergreen Community Dev. Assoc 1/9
Charlotte Certified Dev. Corp. 1/9
Bay Area Business Dev. Company 1/9
1/9
San Diego County L.D.C.
1/9
MSP 503 Development Corp.
Evergreen Community Dev. Assoc 1/9
1/9
San Diego County L.D.C.
Wilmington Indus. Dev. Incorp. 1/9
1/9
Delaware Development Corp.
1/9
Bay Area Business Dev. Co.
1/9
Los Medanos Fund

112,000.00
115,000.00
115,000.00
123,000.00
123,000.00
125,000.00
127,000.00
137,000.00
147,000.00
155,000.00
157,000.00
158,000.00
168,000.00
185,000.00
195,000.00
204,000.00
254,000.00
263,000.00
273,000.00
310,000.00
350,000.00
361,000.00
381,000.00
400,000.00
421,000.00
428,000.00
429,000.00
439,000.00
441,000.00
444,000.00
450,000.00
457,000.00
500,000.00
38,000.00
42,000.00
56,000.00
68,000.00
75,000.00
' 88,000.00
105,000.00
109,000.00
118,000.00
122,000.00
126,000.00
126,000.00
130,000.00
133,000.00
137,000.00
139,000.00
151,000.00
173,000.00
178,000.00
186,000.00
202,000.00
205,000.00
210,000.00
217,000.00
222,000.00
254,000.00
258,000.00
265,000.00
277,000.00
279,000.00
305,000.00

Vl/05
1/1/05
1/1/05 1/1/05
1/1/05 •
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/05
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10
1/1/10

11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.723%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
11.760%
1^.760%
11.760%
11.760%

Page 7 of 8
FEDERAL FINANCING BANK
JANUARY 1985 ACTIVITY
DATE

BORROWER

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
INTEREST
RATE
RATE
(semi(other than
annual) semi-annual)

State & Local Development Company Debentures (Cont'd) ,
Gr. Eastern Oregon Dev. Corp. 1/9
Columbus Countywide Dev. Corp. 1/9
Bay Area Employment Dev. Co.
1/9
Tulsa Economic Development Corp.1/9
The St. Louis County L.D.C.
1/9
Warren Redev. & Planning Corp. 1/9
Texas Certified Dev. Co., Inc. 1/9
N. Virginia Local Dev. Co., Inc .1/9
Centralina Dev. Corp., Inc.
1/9
Evergreen Community Dev. Assoc. 1/9

S 315,000.00
336,000.00
357,000.00
411,000.00
420,000.00
420,000.00
460,000.00
500,000.00
500,000.00
500,000.00

11.760%
1/1/10
1/1/10 ' 11.760%
1/1/10
11.760%
1/1/10 • 11.760%
1/1/10
11.760%
1/1/10
11.760%
1/1/10
11.760%
1/1/10
11.760%
1/1/10
11.760%
1/1/10
11.760%

Snail Business Investment Company Debentures
Equity Capital Corporation
Equity Capital Corporation
First North Florida SBIC
Equity Capital Corporation
Hamco Capital Corporation
Latigo Capital Partners
Market Capital Corporation
North Star Ventures, Inc.
RIHT Capital Corporation

1/23
1/23
1/23
1/23
1/23
1/23
1/23
1/23
1/23 .

200,000.00
250,000.00
1,000,000.00
100,000.00

i,odo,ooo.oo
1,000,000.00
500,000.00
500,000.00
2,000,000.00

1/1/90
1/1/92
1/1/92
1/1/95
1/1/95
1/1/95
1/1/95
1/1/95
1/1/95

11.015%
11.375%
11.375%
11.515%
11.515%
11.515%
11.515%
11.515%
11.515%

TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
Note A-85-04

1/31

506,334,974.03

4/30/85

8.215%

1/30

151,215.65

6/30/06

11.320%

DEPARTMENT OF TRANSPORTATION
Section 511—4R Act
Milwaukee Road #511-2

FEDERAL FINANCING BANK
January 1985 Commitments
BORROWER
Inglewcod, CA
Lorain, OH
Newburgh, NY
Wilmington, DE
Blue Ridge Electric
Vermont Electric
L&O Power
Wilmington Trust Co.

GUARANTOR

HUD
HUD
HUD
HUD
REA
REA
REA
(Obregon)

Navy

AMOUNT
$5,808,000.00
1,000,000.00
255,000.00
828,000.00
4,987,000.00
24,220,000.00
6,050,000.00
200,000,000.00

EXPIRES
8/1/86
11/1/85
8/1/85
1/15/86
12/31/90
12/31/90
12/31/90
4/15/90

MATURITY
8/1/86
11/1/85
8/1/85
1/15/05
12/31/19
12/31/19
12/31/16
1/15/10

Page 8 of 8

FEDERAL FINANCING HANK HOLDINGS
(in millions)
Program

January 3 1 , 1985

December 3 1 , 1984

Net; Change
1/1/85-1/31/85

Net Chanqe—FY 1985
10/1/84-1/31/85

On-Budget Agency Debt
Tennessee Valley Authority $ 13,810.0
Export-Import Bank
NCUA-Central Liquidity Facility

$ 375.0
162.3
17.3

15,852.2
286.2

$ 13,710.0
15,852.2
290.4

S 100.0
-0-

1,087.0
i>i.J

1,087.0
!>l..i

-0-

59,066.0
115.7
132.0
8.3
3,536.7
37.6

58,971.0
115.7
132.0

95.0

8.8

-0.5

3,536.7
38.3

-0-

-0.7

-2.5

* 17,404.8
5,000.0
11.8
1,428.0
239.2
33.5
2,146.2
411.3
36.0
28.3
902.3
521.3
4.0
20,652.5
880.7
448.4
1,570.5
155.6
177.0

17,365.1
5,000.0
11.2
1,338.0
230.9
33.5
2,146.2
411.3
36.0
28.7
902.3

39.7

293.8

-00.7

-05.6

90.0

138.0
31.0

-4.2

Off-Budget Agency Debt
U . S . Postal Service
U . b . KaiiUa, Association

-u-

-0-u-

Agency Assets
Farmers Home Administration
DHHS-Health Maintenance O r g .
DHHS-Medical Facilities
Overseas Private Investment C o r p .
Rural Electrification Admin.-CBO
9nall Business Administration

-0-0-

-445.0
-0.4

-0-2.7

Covernnent-Guaranteed Lending
DOD-Foreign Military Sales
DEd.-Student Loan Marketing A s s n .
DOE-Geothermal Loan Guarantees
DOE-Non-Nuclear A c t (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 Ccranunications C o .
DON-Ship Lease Financing
DON-Defense Production A c t
Rural Electrification A d m i n .
SBA-Small Business Investment C o s .
SBA-State/Local Development C o s .
TVA-Seven States Energy C o r p .
DOT-Section 511
DOT-WMATA
TOTALS4 5 146,034.3
•figures m a y not total d u e t o rounding

8.3
-0-0-0-0-0.4

-0-

-0-32.3
-2.0

-0-0.4
-52.3
521.3

-03.8

521.3

0.2

0.9

20,693.0
885.0
426.8
1,577.9
157.0
177.0

-40.5
-4.3
21.6
-7.4
-1.5

65.4
20.4
93.8
15.0
-4.0

-0-

S 145,216.9

$ 817.4

$ 1,198.2

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
March 18, 1985

FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $7,000 million of 13-week bills and for $7,000 million
of 26-week bills, both to be issued on March 21, 1985,
were accepted today.
RANGE OF ACC1SPTED
COMPETITIVE 1BIDS:

Low
High
Average

13--week billB
maturing June 20, 1985
Discount Investment
Rate
Rate 1/
Price
8.54%a/
8.69%
8.64%

8.85%
9.01%
8.96%

26-•week bills
maturlng September 19 , 1985
Discount Investment
Rate
Rate 1/
Price

97.841
9.00%
97.803
9.07%
97.816 • 9.04%

9.56%
9.64%
9.60%

95.450
95.415
95.430

a/ Excepting 1 ten<ler of $2,500,000.
Tenders at the high discount rate for the 13-week bills were allotted 41%.
Tenders at the high discount rate for the 26-week bills were allotted 30%.

Location

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received

Accepted

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

$ 390,270
11,868,295
35,365
59,255
56,520
53,070
960,670
• 74,190
13,805
59,150
42,420
755,365
313,160

$ 190,270
5,367,995
35,365
59,255
56,520
53,070
480,670
74,190
13,805
59,150
42,420
254,365
313,160

$ 390,890
12,793,925
27,230
42,625
57,015
45,555
927,650
48,875
18,075
50,725
34,145
711,475
343,125

$ 73,390
5,698,925
27,230
42,625
57,015
45,555
350,150
48,875
18,075
50,725
34,145
210,475
343,125

TOTALS

$14,681,535

$7,000,235

$15,491,310

$7,000,310

Tjroe
Competitive
Noncompetitive
Subtotal, Public

$11,413,675
1,231,705
$12,645,380

$3,732,375
1,231,705
$4,964,080

$12,250,285
1,049,725
$13,300,010

$3,759,285
1,049,725
$4,809,010

1,797,455

1,700,000

Federal Reserve
Foreign Official
Institutions

1,797,455
238,700

238,700

491,300

TOTALS

$14,681,535

$7,000,235

$15,491,310

$7,000,310

_1/ Equivalent coupon-issue yield.

B-48

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone
FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m. EDT
Tuesday, March 19, 1985

TESTIMONY OP MIKEL M. ROLLYSON
TAX LEGISLATIVE COUNSEL
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE HOUSE WAYS AND MEANS SUBCOMMITTEE ON
SELECT REVENUE MEASURES
MARCH 19, 1985
Mr. Chairman and Members of the Committee:
I am pleased to appear today to discuss H.R. 983, which would
extend and liberalize the Targeted Jobs Tax credit (TJTC).
Experience has indicated that the TJTC is an expensive tax
subsidy whose effectiveness in increasing employment
opportunities has not been demonstrated. In addition, the
Federal government already provides substantial employment and
training assistance through The Job Training Partnership Act, for
instance. Accordingly, the Administration opposes any extension
or expansion of the TJTC.
Description of HR. 983
H.R. 983 would extend the TJTC for five years, making it
available for eligible individuals hired through December 31,
1990. It would also expand the credit in two ways. First, by
relaxing the definition of economically disadvantaged workers,
H.R. 983 would make more workers eligible for the TJTC.
Currently, an individual is defined as economically disadvantaged
for purposes of the TJTC if that individual is a member of a
family with an income that is equal to or below 70 percent of the
lower living standard published by the Department of Labor
(DOL). Under H.R. 983, the 70 percent floor would be raised to
80
percent. Second, under H.R. 983 the amount of annual wages
B-49

2041

-2earned by each eligible worker that could be subsidized by the
credit would be increased to $10,000 from the currenb level of
$6,000.
The revenue loss attributable to H.R. 983 would be $Q_. 3
billion in fiscal year 1986, $0.6 billion in fiscal year 1987,
increasing to $j.6 billion in 1990, with a total cost of $7,2
billion for the 5 year extension.
Background and Current Law
The TJTC was enacted in 1978, and was intended to help
hard-to-employ individuals find employment in the private forprofit sector. The nonrefundable credit is available for
employers who hire individuals from any of nine targeted groups.
Target group members are either beneficiaries of government
assistance programs or members of economically disadvantaged
families. The largest eligible group is economically disadvantaged youth age 18 through 24 whose family income during a defined
six month period was equal to or less than 70 percent of the
lower living standard published by DOL. Current law requires
that employers have or request in writing eligibility determinations of employees within five calendar days after the day the
individual begins work for the employer. Eligibility determinations are performed by State employment security agencies.
The credit is computed by reference to wages paid to eligible
employees. Generally, an eligible individual's first $6,000 of
wages in the first year of employment qualifies for a 50 percent
credit. The maximum credit that may be claimed for an eligible
individual in the first year of employment is thus $3,000. In
the second year of the individual's employment, the credit is
equal to 25 percent of qualifying wages. An enriched credit is
available, however, for economically disadvantaged summer youth
employees age 16 or 17. The qualified summer youth employee
credit is equal to 85 percent of the first $3,000 of wages earned
between May 1 and September 15, for a maximum credit of $2,550
per employee. The employer's deduction for wages paid to
eligible employees must be reduced by the amount of the credit;
this keeps the rate of subsidy constant at the stated percentage
irrespective of the employer's marginal tax rate.
The credit is scheduled to expire on December 31, 1985.
Nevertheless, the credit will continue to be available with
respect to workers hired before the end of 1985. Because
employers can earn the credit on wages paid during the first two
years of an eligible individual's employment, the credit will
continue to be claimed through the end of 1987.
Data regarding the TJTC is very limited. The number of
employed individuals the Labor Department has certified as being
eligible for the TJTC is summarized in Table 1. Income tax
return data from the Internal Revenue Service shows how the TJTC
was distributed among industries and is summarized in Table 2.

-3Analysis
The TJTC obviously benefits employers who claim the credit.
The credit lowers effective wage costs, which in turn increases
the employers' profitability and may encourage employers to
expend relatively more on eligible labor as opposed to other
production costs. The reduced wage costs also may enable these
employers to expand their output and thus their total employment.
These are the expected substitution and scale (output) effects
for individual firms that, according to economic theory, occur
from any wage subsidy. Thus, an individual employer that takes
advantage of the credit may show an increase in the number of
both his targeted and non-targeted employees.
One must be mindful, however, that the desired effect of the
credit is achieved only when targeted employees are hired that
otherwise would not have been hired. In many cases these new,
targeted hires are not produced, even in those cases where the
employer claims the credit. The clearest case of ineffectual
credits occurs where the eligible worker for whom the credit is
claimed would have been hired by the same employer or by another
employer without regard to the existence of the credit. The
incidence of ineffectual credits appears to be quite prevalent.
The Labor Department has estimated that in 1981 between 2.4
million and 3.0 million economically disadvantaged youth were
hired by the private for-profit sector. During fiscal year 1981,
there were 176,000 certifications for economically disadvantaged
youth, or a participation rate of 6 to 8 percent of the eligible
hires. Estimates of the participation rate for several other
eligible groups were not greater than 10 percent.1/ In fiscal
year 1984, there were 328,213 certifications of economically
disadvantaged youth. Assuming that the same number of
economically disadvantaged youth were hired in 1981 and 1984
implies a 1984 participation rate of 11 to 14 percent of eligible
hires. In other words, almost nine out of ten economically
disadvantaged youth, who were eligible for the credit, found
employment without the benefit of the TJTC.
The potential explosion in ineffectual credits is apparent.
If employers simply checked the eligibility of workers whom they
currently hire, the cost of the TJTC program could increase
tenfold without one additional targeted workers being hired.
1/No single explanation can be cited for the credit's low
participation rate. It is clear that the certification
system leaves much of the burden of identifying eligible
workers on employers and that many employers are still not
familiar with the TJTC. The cost of identifying eligible
individuals and the nonrefundable nature of the tax credit
reduces the net value of the credit for many employers.

-4Indeed, the most likely explanation for the exponential growth in
certifications from 202,261 in 1982 to 563,381 in 1984 is
employers learning about the credit and claiming it for workers
whom they have always hired.
It is also important to recognize that even when the TJTC is
directly responsible for the employment of a targeted employee,
no net increase in targeted employment need occur. This is so
because the credit may result in a reallocation of employment
between new targeted workers who qualify for the credit and
previously employed targeted workers who do not. If there is an
increase in targeted employment as a result of the TJTC, it may
come at the expense of nontargeted but nonetheless low-paid
individuals who are displaced by the targeted individuals.
There may be social benefits achieved from targeted workers
finding employment in the private for-profit sector of the
economy, such as gains in economic self-sufficiency for
individuals who have been dependent on welfare. In measuring the
social benefits, however, one must weigh the benefits provided to
targeted workers who found jobs because of the credit against the
detriment to those low-paid employees or even those targeted
workers that were displaced, as well as against the financial
cost discussed below.
It is likely that any increase in hiring of eligible
individuals as a result of the credit will come at the expense of
other low-skilled workers, who have not qualified for the credit
but have job skills similar to those of the targeted groups.
The substitution of targeted workers for other workers does not
necessarily mean that other workers are laid off by an employer;
the substitution is more likely to occur through the job hiring
process where a targeted worker is hired in lieu of a nontargeted worker.
Finally, increases in targeted employment by firms claiming
the credit are counterbalanced by the loss of employment in other
sectors of the private economy. The cost of the TJTC program
ultimately must be financed either through higher taxes or lower
government outlays. Financing the credit results in lower output
and employment in other sectors of the economy, which offsets any
higher output and employment of businesses using the TJTC. For
example, if the program is financed by higher income taxes, firms
elsewhere in the economy will tend to reduce their output and
correspondingly their employment.
Conclusion
The Administration opposes H.R. 983 or any extension of the
TJTC program. In this period of fiscal restraint we should not
commit $7.2 billion of tax dollars to a program whose effectiveness in increasing employment opportunities has not been
demonstrated.

Table 1
Targeted Jobs Tax Credit Certifications
Issued by the Department of Labor (DOL)
By Target Group: FY 1982 - FY 1984

Targeted Group

1982

Fiscal Year
1983

1984

Economically Disadvantaged
Youth, Age 18-24

132,195

259,309

328,213

Economically Disadvantaged
Summer Youth, Age 16-17

33,538

30,137

Economically Disadvantaged
Vietnam Veterans

13,271

24,141

29,000

Economically Disadvantaged
Ex-Convicts

13,332

21,929

27,278

Vocational Rehabilitation 14,757 25,412 38,263
Referrals
General Assistance Recipients 8,136 14,480 24,101
AFDC Recipients/WIN Registrants 18,503 50,736 84,769
Supplemental Security
Income Recipients

782

1,254

1,620

Unemployed CETA Workers 1,285 383 0
Economically Disadvantaged
Cooperative Education Students

Total 1/ 202,261 431,182 563,381
Office of the Secretary of the Treasury
Office of Tax Analysis

March 18, 1985

1/ The Education Department is responsible for certifying
eligible cooperative education students, but they maintain
no records of total certifications. DOL performs "economic
determinations" for cooperative education students. The
number of economic determinations is an upper bound on the
number of certifications for cooperative education
students. There were 8,324 economic determinations of
cooperative education students in FY 1983 and 6,724 in
FY 1984. A comparable number is not available for 1982.

Table 2
Jobs Tax Credits Claimed by
Corporations in Taxable Year 1982 by Industry 1/

Industry
Agriculture
Mining
Construction
Manufacturing
Transportation
& Public Utilities
Wholesale Trade
Retail Trade
Finance, Insurance &
Real Estate
Services
Other
Total
Office of the Secretary
of the Treasury
Office of Tax Analysis

Amount
of
Jobs
Credits
($ millions)

Percent of
Total

$4.3
2.4
28.5
90.4

1.3
0.7
8.7
27.6

10.3
13.6
93.8

3.2
4.1
28.7

18.4
65.1
0.5

5.6
19.9
0.2

$327.3

100.0
March 18, 1985

Comparable data by industry are unavailable for
noncorporate businesses. Approximately $92
million of Jobs Tax credits were claimed on
individual tax returns in 1982.

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

M a r c h 19#

1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $14,000 million, to be issued March 28, 1985.
This
offering will provide about $525
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount of
$13,479 million, including $1,497 million currently held by Federal Reserve Banks as agents for foreign and international monetary
authorities and $2,509 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 $7,000
million, representing an additional amount of bills dated
December 27, 1984,
and to mature June 27, 1985
(CUSIP
No. 912794 HH" 0), currently outstanding in the amount of $6,833
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $7,000 million, to be dated
March 28, 1985,
and to mature September 26, 1985 (CUSIP
No. 912794 JA 3).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing March 28, 1985.
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.
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.

B-50

- 2 Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. c.
20239, prior to 1:00 p.m., Eastern Standard time, Monday,
March 25, 1985.
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 $10r000. 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. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
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 "whe-n 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
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

- 3 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 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 $1,000,000
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 March 28, 1985,
in cash or other immediately-available funds
or in Treasury bills maturing March 28, 1985.
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.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
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 RELEASE AT 4:00 P.M.

March 19, 1985

TREASURY ANNOUNCES NOTE AND BOND OFFERINGS
TOTALING $16,250 MILLION
The Treasury will raise about $12,875 million of new cash by
issuing $6,250 million of 4-year notes, $5,750 million of 7-year
notes, and $4,250 million of 20-year 1-month bonds. This offering
will also refund $3,384 million of 4-year notes maturing March 31,
1985. The $3,384 million of maturing 4-year notes are those held
by the public, including $545 million currently held by Federal
Reserve Banks as agents for foreign and, international monetary
authorities.
In addition to the maturing 4-year notes, there are $8,458
million of maturing 2-year notes held by the public. The disposition of this latter amount was announced last week. Federal
Reserve Banks, as agents for foreign and international monetary
authorities, currently hold $1,113 million, and Government accounts
and Federal Reserve Banks for their own account hold $1,115 million
of maturing 2-year and 4-year notes. The maturing securities held
by Federal Reserve Banks for their own account may be refunded by
issuing additional amounts of the new 2-year and 4-year notes at
the average prices of accepted competitive tenders.
The $16,250 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added
to that amount. Tenders for such accounts will be accepted at
the average prices of accepted competitive tenders.
The 20-year 1-month bond will become eligible for STRIPS
(Separate Trading of Registered Interest and Principal of Securities) after the first interest payment date of November 15, 1985.
Details about each of the new securities are given in
the attached "highlights" of the offerings and in the official
offering circulars.
oOo
Attachment

B-51

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 4-YEAR NOTES, 7-YEAR NOTES, AND 20-YEAR 1-MONTH BONDS
Amount Offered:
To the p u b l i c .
Description of Security;
Term and type of security
,
Series and CUSIP designation..,
Issue date ...
Maturity date.
Call date
Interest rate.
Investment yield
Premium or discount....
Interest payment dates.

March 19, 1985
$6,250 million

$5,750 million

$4,250 million

4-year notes
Series L-1989
(CUSIP No. 912827 SA 1)
April 1, 1985
March 31, 1989
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
September 30 and March 31

7-year notes
Series E-1992
(CUSIP No. 912827 SB 9)
April 2, 1985
April 15, 1992
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
October 15 and April 15 (first
payment on October.15, 1985)
$1,000

20-year 1-month bonds
Bonds of 2005
(CUSIP No. 912810 DQ 8)
April 2, 1985
May 15, 2005
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
November 15 and May 15 (first
payment on November 15, 1985)
$1,000

Yield Auction
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the
average price up to $1,000,000

None

Acceptable for TT&L Note
Option Depositaries

Full payment to be submitted
with tender

Acceptable

Wednesday, March 27, 1985,
prior to 1:00 p.m., EST

Thursday, March 2 8 , 1985,
prior to 1:00 p.m., EST

Tuesuay, n^ril 2, 19o5
Friday, March 29, 1985

Tuesday, April 2, 1985
Friday, March 29, 1985

Minimum denomination available.. $1,000
Terms of Sale:
Method of sale
Competitive tenders.

Noncompetitive tenders.

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

Accrued interest payable
by investor
None
Payment through Treasury Tax
and Loan (TT&L) Note Accounts... Acceptable for TT&L Note
Option Depositaries
1'; /rment by non-institutional
:.:• >es tors
Full payment to be submitted
with tender
:>osit guarantee by
isignated institutions.
Acceptable
' Dates:
:eipt of tenders

Tuesday, March 26, 1985,
prior to 1:00 p.m., EST

:tlement (final payment
i from institutions)
a) cash or Federal funds
Monday, April 1, 1985
b) readily collectible check.. Thursday, March 28, 1985

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

STATEMENT OF THE HONORABLE JOHN M. WALKER, JR.
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT AND OPERATIONS)
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
COMMITTEE ON ENERGY AND COMMERCE
U.S. HOUSE OF REPRESENTATIVES
MARCH 19, 198 5
Enforcement of Trade Agreements
on Imported Steel
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear before you today
to discuss the administration and enforcement of our country's
trade agreements involving imported steel.
In my testimony today, I will address specifically the
enforcement by Customs of the EC Pipe and Tube Arrangement
and the Customs embargo of steel pipe and tube products
from the EC that was requested by the Secretary of Commerce.
In addition, I will briefly discuss our actions in enforcing
further voluntary restraint agreements based on the EC model
and the specialty steel quota. Finally, I am prepared to submit for the record a summary of cases in which Customs has
been involved as a result of its steel enforcement proyram.
Mr. Chairman, I would now like to summarize briefly the
sequence of events concerning our implementation of the EC
pipe and tube arrangement". On November 14, 1984, Secretary
of Commerce Malcolm Ba]drige requested that Secretary Regan
take the necessary steps to prohibit entry of EC pipe and
tube, beginning on November 19, 1934. In response, Custom^
immediately issued a telex to all field personnel advising
them of the embargo and designating November 19 as the
effective date. The embargo was in effect for the remainder
of calendar year 1934.

B-52

- 2 -

Almost immediately after this telex was forwarded,
the Department of Commerce advised Customs that the
effective date was to be changed to November 29, 1984.
The Customs Service immediately took the necessary
prohibitive action. At the same time, Customs agreed to
initiate monitoring procedures on pipe and tube similar
to those being used to track other EC steel exportations.
None of the instructions cited above created unusual
difficulties for Customs field operations. There were no
start-up problems for Customs; however, shipments of EC
pipe and tube already on the high seas were warehoused or
left on the docks, where they incurred warehouse charges.
To further ensure the effectiveness of this program,
the Customs Office of Inspection and Control, in a separate
and special issuance, informed all inspectional personnel
of the embargo. In addition, Customs updated its automated
"accept system" to reflect the relevant tariff schedule
classification numbers as they related to the prohibition.
On December 31, 1984, the Secretary of Commerce
advised Secretary Regan that effective January 1, 1985,
shipments of EC pipe and tube could be allowed entry provided the merchandise was accompanied by an EC certificate
and was exported after January 1, 1985. Customs acted
immediately to implement this request. It was subsequently
decided that the Department of Commerce would control the
quota levels through procedures already established for
other arrangements. Customs immediately telexed instructions covering this decision to its field offices.
On March 1, 1985, the Commerce Department advised
us of the lifting of the embargo on goods exported prior
to January 1 and restated the need for certificates for
all shipments exported on or after January 1. The entry
and release of the embargoed steel was conducted without
any problems.
On March 5, 1985, two additional telexes discussing
various procedural issues were forwarded to field locations.
Commerce requested that all outstanding EC certificates for
steel mill products other than pipe and tube for 1984 be
forwarded to them by March 20. To date, no problems involving this request have been experienced.

- 3 -

On March 1, 1985, the Commerce Department notified
Customs that four voluntary restraint agreements had been
reached between this government and the governments of
Spain, South Africa, Finland, and Australia. On March 14,
1985, Commerce notified Customs that two additional voluntary restraint agreements had been reached with Mexico
and Brazil. These agreements encompassed virtually all
steel products from these countries, including some assembled products, and are effective for a period of 5 years.
Again Customs moved immediately to implement these agreements. Customs immediately notified all field locations
of the agreements and the procedures to be followed upon
importation of steel from these countries. Essentially,
these procedures parallel those instituted for the previous
EC Arrangements and, to date, have not posed a problem
for Customs import specialists.
I will now turn to the enforcement of the quota for
specific specialty steel products. As you know, this
quota, which was implemented by Presidential Proclamation
5074 of July 19, 1983, was issued to effectuate the International Trade Commission's Section 201 decision regarding
these products. The Proclamation originally established
a global quota, and Customs so administered it duriny
the first quarter of its existence. Then, on October 20,
1983, the quota was modified by USTR to accommodate the
orderly marketing agreements which it had negotiated.
Since that time we have received no modifications to
these quota amounts other than necessary adjustments for
individual countries. Since October 1984, we have received
from the USTR exception notices only for specific shipments.
These have not been identified by importer or country,
but rather by specifications defining the categories of
merchandise to be excepted from the quotas.
Finally, I have with me today a document, which I
would like to submit for the record, listing those steel
cases which Customs has been pursuing in its efforts to
enforce against the possible circumvention of the EC
steel arrangement.
Mr. Chairman, thank you for giving me this opportunity
to appear before your Committee on this important matter.
I shall be pleased to answer any questions you and members
of the Committee may have.

SUMMARY STATS ON CURRENTLY OPEN STEEL CASES
TOTAL STEEL CASES BY OFFICE
Total Steel
Cases

Office
Houston
Portland
Newark
Los Angeles
Chicago
Detroit
Anchorage
San Francisco
Rouses Point
New Haven
Philadelphia
Blaine
Mobile
Honolulu
Seattle
St. Louis
Dallas
New Orleans
Wilmington

16
14
5
5
4
4
3 •
3
2
2
2

TOTAL

Total Accepted
for Prosecution

Total Being
Activ ely Worked

5
2
0
0
0
2
0
0
0
0
0
0
1
0
0
0
1
0
0

11
10
5
5
4
3
3
3
2
2

CASES INVOLVING THE STAINLESS STEEL QUOTAS
Our records indicate that there are currently no cases in
progress relating to circumvention of these quotas.
CASES INVOLVING THE EUROPEAN STEEL ARRANGEMENT
Our records indicate a total 7 cases involving the steel covered
by the European Steel Arrangement. Of these cases, 1 was closed
with no violations found. The remaining 6 are open and being
actively worked. None have as yet been accepted for criminal
prosecution. The cases are detailed on the following sheets.
REVISED: March 18, 19 85

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
STATEMENT OF THE HONORABLE JOHN M. WALKER, JR.
ASSISTANT SECRETARY FOR ENFORCEMENT AND OPERATIONS
U.S. TREASURY DEPARTMENT
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT INFORMATION,
JUSTICE AND AGRICULTURE
COMMITTEE ON GOVERNMENT OPERATIONS
U.S. HOUSE OF REPRESENTATIVES
MIAMI, FLORIDA
MARCH 15 - 16, 1985
Treasury's Continuing Efforts
to Combat Drug Smuggling
Mr. Chairman, Senators, Members of the Committee, and
Distinguished Guests:
It is with both a sense of pride and a feeling of
deep concern that I appear before this Committee today.
Commissioner von Raab, who accompanies me here,
will testify specifically on some of the most promising
and effective initiatives that the Customs Service has
ever mounted against the operations of drug smugglers.
We are extremely proud of the Customs accomplishments in
this area under the leadership of Commissioner von Raab.
The source of my concern, however, is this: Our drug
enforcement efforts, despite their successes, come at a
time when both the House Committee on Foreign Affairs
and the Select Committee on Narcotics report the most
threatening and serious levels of drug availability in
our nation's history. Even though our government is now
conducting a more aggressive and extensive battle against
the drug menace than it has ever done before, the pervasive
problems of drugs and drug trafficking remain the most
serious law enforcement challenge facing our nation.
The surge of drugs into our society and the violence
and corruption which it brings threaten our communities,
our homes, our schools, our security, and the very fabric
of our society. You have also heard from General Gorman
how gun trafficking and insurgencies in South and Centra]
America are benefitting from the trade in drugs and threaten
the security of this country and other democracies in our
hemisphere. I have little doubt as to the accuracy of
General Gorman's assessment.
B-53

Mr. Chairman, as you know, the drug trafficker is a
brutal and arrogant enemy. He is well financed, cunning,
and flexible. He is well informed about our interdiction
operations. He has the ability to shift his smuggling
activities away from areas of enforcement pressure and
to recoup from the losses we inflict on him.
Here in Miami over the past year, we have seen
cocaine and marijuana traffickers shift some of their
operations to avoid the Customs enhanced air winq. Simultaneously, we have seen the increased use of Rahamian
waters for air drops and the use of fast boats to invade
our borders. In Miami and elsewhere, we have seen drug
traffickers continue to ply their deadly trade despite
the build-up of our interdiction effort to date.
For this reason, the Department of the treasury
considers it imperative to develop a program that creates
deterrence across all the modes by which drugs enter the
United States. The ability of our enforcement teams to
detect smuggling in the air -- and on the water as well -must be balanced with the efforts directed against smuggling
across land borders, or in cargo or by commercial passengers.
In his testimony today, Commissioner von Raab will
outline how Customs, with the support of the Department
of Defense, is progressing in a number of initiatives to
counter each of these facets of the drug smuggling threat.
From the viewpoint of the treasury Department, I would
like to emphasize that we consider the Customs drug
interdiction program to be Treasury's highest enforcement
priority. For example, the FY 1986 budget submitted to
the Congress includes an amount for Customs air operations
and maintenance that exceeds the FY 1^85 total by 36%
and is by far the highest, in real terms, ever requested
or expended for this effort.
Nevertheless, we are under no illusions, Mr. Chairman,
concerning the magnitude of the drug problem we are confronting.
In addition to increased resources, it will take our full
measure of dedication and resolve to mount an effective
challenge to the drug threat.
nie recent cover stories of Newsweek and Time
magazines on the cocaine wars, the brutal slayings of
our drug enforcement agents, the violence in Colombia
and the recent epidemic of heroin deaths in the Nation's
capital all point to a compelling need for us to hold
fast in our resolve to raise the stakes anainst the drug
trafficker.

- 3 While it is true that the deployment, supported by
members of this Committee, of both airborne radars on
balloons and the P-3A aircraft have sharply enhanced our
ability to detect smuggler aircraft, and that new improvements in balloon radar will aid us in detecting marine
smugglers, our program is in need of further strengthening.
For example, we need to do more in the collection and
dissemination of the real-time intelligence necessary to
increase our interdiction rate across all smuggling
modes. We also need to continue to plan for expansion
of our overall existing drug interdiction capability.
As we are doing so, we must continue to support all the
other elements of our Federal drug strategy -- eradication
at the source, investigation of drug traffickers and
their money launderers, and demand reduction through
prevention and education.
It is in this context, Mr. Chairman, that I would now
like to turn to the proposal that you and Senator DeConcini
have offered, a proposal to establish a Special Operations
wing in support of the Customs interdiction mission.
As I have stated before, the assistance of the Department
of Defense in providing equipment, surveillance and
expertise in our anti-smuggling program has been invaluable
to us. Your plan, by extending further the support role
of the Department of Defense, has the clear potential to
benefit the Customs air and marine interdiction mission.
As you know, the Customs Air Program has grown
significantly over the past year, and it is scheduled
for continued expansion with respect to its detection,
interception and seizure capability. Clearly, your
program would have a positive effect in providing extensive additional surveillance resources to Customs.
We are now carefully analyzing this proposal, with
a view to evaluating it from an operational and a budgetary
standpoint. I am sure that we can all anree that in these
times of fiscal restraint, any program enhancement carries
with it a particular burden that it be justified relative
to other options. On the other hand, I yield to no one
in the recognition that the threat is great and that
more must be done. I hasten to add that this Administration,
in response to the drug crisis, has deployed substantial
new resources for the war on drugs. The ^Y l°-86 Customs
budget, to which I referred earlier, is clearly a reflection
of this policy. We will work closely with the Department
of Defense in analyzing the budgetary implications of your
proposal for both the Treasury and Defense Departments.

- 4 Let there be no doubt that the Treasury Department
considers it essential that our current ability to detect
air and marine smuggling targets be enhanced. w e are,
therefore, evaluating your proposal to better determine
whether it is the most efficient and cost-effective
means of providing additional surveillance capability.
Additionally, we must also consider whether the
program is consistent with an interdiction effort
that is balanced across smuggling modes. As you are
aware, it would not be effective for us to disproportionately increase our attention on one mode, such as
smuggling by air, without commensurately increasing our
ability to counter smuggling the various other methods.
We must also view the program from the standpoint
of our entire Federal drug strategy, foreign and domestic.
As you know, this requires that we coordinate our planning
not only with the Department of Defense but also with
the Department of Justice and other Federal Agencies and
Departments with a role in drug enforcement.
At this time, I would like to take this opportunity,
once again, to recognize the leadership provided by the
members of this Committee, and the Committee staff,
in the development of our country's drug interdiction
capability. The plan that you, Chairman English, and
Senator DeConcini have put forward demonstrates a strong
commitment to addressing the drug smuggling challenge as
one that is not only a problem for law enforcement, but
also, for all the reasons General Gorman has set forth,
a problem for national security as well. As in the past,
we look forward to continuing our close cooperation with
your Committee as we move forward.
Treasury and Customs also owe a great debt of
gratitude to each of the Senators and Representatives who
are here with us today. Each of you has continued to
dedicate your leadership and support to the fight against
drugs. The progress we have made, and the development of
plans to increase our interdiction capability, are the
results of a joint and bipartisan effort over the past
four years. Here is an excellent example of cooperation
between the executive and legislative branches of our
government.
In summary, Mr. Chairman, while our government has
done much to hurt the drug trafficker, we have not hurt
him enough. I am confident, however, that our joint
efforts will ultimately produce the effective and costefficient enhancement of our detection capability that
is clearly needed, and that our entire interdiction

- 5 program will benefit as a result. We are advised that
the Department of Defense finds your proposal both meritorious and worthy of further consideration. Clearly,
the enhanced detection capabilities that your program is
designed to achieve would measurably strengthen the Customs
air and marine programs and complement the other drug
enforcement initiatives that our government has launched
over the past four years.
This concludes my formal statement, and I would be
pleased to answer any questions this Committee may have.

TREASURY NEWS
FOR IMMEDIATE
Department
of theRELEASE
Treasury • Washington, D.c.March
• Telephone
20, 1985 566-2041
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $ 9,015 million of
$22,025 million of tenders received from the public for the 2-year
notes, Series T-1987, auctioned today. The notes will be issued
April 1, 1985, and mature March 31, 1987.
The interest rate on the notes will be 10-3/4%. The range of
accepted competitive bids, and the corresponding prices at the
interest rate are as follows:
Yield
Price
Low
10.83%1/
99.860
High
10.88%
99.772
Average
10.86%
99.807
Tenders at the high yield were allotted

10-3/4 !

6%.

TENDERS RECEIVED AND ACCEPTED (In Thousands)
Received
Location
Accepted
Boston
$
454,460
$
94,460
New York
18,559,490
7,162,310
Philadelphia
45,000
45,000
Cleveland
235,515
161,835
Richmond
110,630
89,530
Atlanta
135,740
124,100
Chicago
1,193,895
402,075
St. Louis
154,975
143,095
Minneapolis
61,210
61,210
Kansas City
171,810
170,830
Dallas
33,510
30,690
San Francisco
857,670
519,550
Treasury
10,645
10,645
Totals
$22,024,550
$9,015,330
The $9,015 million of accepted tenders includes $1,325 million
of noncompetitive tenders and $7,690 million of competitive tenders
from the public.
In addition to the $9,015 million of tenders accepted in the
auction process, $440
million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $750
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
y Excepting 1 tender of $10,000.

B-54

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

March 25, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 7,079 million of 13-week bills and for $ 7,014 million
of 26-week bills, both to be issued on March 28, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13--week bills
maturing June 27, 1985
Discount Investment
Rate
Rate 1/
Price
8.40%
8.41%
8.41%

8.70%
8.71%
8.71%

97.877
97.874
97.874

:
:

26--week bills
maturlng September 26 , 1985
Discount Investment
Rate
Rate 1/
Price
8.85%
8.87%
8.86%

9.39%
9.41%
9.40%

95.526
95.516
95.521

Tenders at the high discount rate for the 13-week bills were allotted 24%.
Tenders at the high discount rate for the 26-week bills were allotted 50%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received
Received

404,555
24,643,410
32,930
142,480
71,575
62,030
1,490,905
' 72,575
27,225
46,080
41,560
2,971,540
272,355

$
53,855
5,708,745
32,325
52,480
51,575
57,855
101,655
51,550
17,225
45,080
31,560
603,135
272,355

$30,279,220

$7,079,395

$27,392,505
1,182,365
$28,574,870

$
408,390
23,406,165
23,475
115,510
71,470
61,550
1,264,495
91,620
32,580
62,175
41,655
1,326,520
340,100

$
70,890
5,927,300
23,475
115,260
59,770
56,795
94,745
40,120
25,080
62,175
31,655
166,770
340,100

$27,245,705

$7,014,135

$4,192,680
1,182,365
$5,375,045

:
:
:

$24,116,205
1,116,600
$25,232,805

$3,884,635
1,116,600
$5,001,235

1,308,550

1,200,000

395,800

812,900

$30,279,220

$7,079,395

: $27,245,705

$7,014,135

\J Equivalent coupon-issue yield.
B-55

Accepted

DEPARTMENT OF THE TREASURY

Report to the Congress
on the
Functioning of the
International Monetary and Financial System
and the
Role and Operation of the
International Monetary Fund

March 15, 1985

TABLE OF CONTENTS

Introduction and Summary
Chapter I The International Monetary Fund and the
Exchange Rate System
Chapter II The IMF's Financing
Chapter III The IMF's Resources
Chapter IV The International Monetary System and
International Debt Problems
Potential Impact of International Monetary Fund
Quota Expansion on World Oil Prices

INTRODUCTION AND SUMMARY
During Congressional consideration of U.S. participation in
the 1983 IMF quota increase and the increase in the General
Arrangements to Borrow (GAB), a number of issues were raised
concerning the operation of the international monetary system and'
IMF policies for addressing international financial difficulties.
In Section 813, Sec. 50(b) and (c), of P.L. 98-181 (the Domestic
Housing and International Recovery and Financial Stability Act),
Congress requested that the Secretary of the Treasury transmit a
report on "the operation of the international monetary and
financial system" and on "strengthening the role and improving
the operation of the International Monetary Fund".
Congress requested that several individual topics be
addressed, including "consideration of United States membership
in the Bank for International Settlements". A separate report on
this issue was transmitted to Congress on November 30, 1984.
This report covers the remaining study topics in Section 50(b)
and (c). A concordance (on page v) provides a list of the topics
requested for study and indicates where they are covered in the
Treasury report.
This report is divided into four chapters, plus an annex, as
follows:
Chapter I. The International Monetary Fund and the Exchange
Rate System
Concerns about the impact of volatile exchange rates and the
strong dollar on trade and capital flows have stimulated numerous
proposals for revising the flexible exchange rate system, which
has now been in effect for more than a decade.
This chapter reviews the key elements and performance of the
current exchange rate system, as compared to the previous par
value system, and discusses the impact of short-term_variability
and longer-term swings in exchange rates on international trade
and investment, as well as concerns about misalignments and
exchange rate manipulation. It also discusses proposals for
increased government intervention in exchange or capital markets,
and provides a status report on the ongoing study by Finance
Ministers of the ten key industrial countries on possible
improvements in the international monetary system.
The review concludes that exchange rate changes during the
past decade have reflected the turbulent global economic
environment and divergent economic policies and performance among
the major nations. The current exchange rate system has, in
fact, made a positive contribution to the adjustment process and

- iv It concludes that the debt strategy is generally working well
and should be continued, based on a flexible case-by-case
approach to individual countries. Debtor nations' adjustment
measures, together with economic recovery in the industrial
countries, have enabled a substantial reduction in debtors*
balance of payments deficits and debt service ratios. The
maturity structure of outstanding debt has also improved
significantly.
Alternative proposals for systematic, global debt restructuring, in contrast, would weaken the incentives for economic
adjustment and for continued lending by financial institutions.
International efforts are currently focusing on ways to avoid
similar problems in the future, rather than on proposals to alter
the basic debt strategy. An important part of that effort is the
work underway within the IMF and other international institutions
to improve the collection and review of data on international
debt.
Annex: Potential Impact of International Monetary Fund Quota
Expansion on World Oil Prices
The Congress requested an assessment of the potential impact
of expansion of IMF quotas on world oil prices. The study
reviews oil export levels by 15 net oil exporters for the period
1981-1983 and concludes that their exports either remained
constant or increased following drawings on regular IMF resources
by these countries. Oil exports declined only in cases where the
net oil exporter drew under the Compensatory Financing Facility
based on export shortfalls in other commodities or under the
Buffer Stock Financing Facility. IMF quota expansion is
therefore not likely to reduce the short-run availability of oil
supplies. On the demand side, IMF lending programs tend to
either sustain or to reduce petroleum demand levels, rather than
to increase them in the short run.
Over the longer term, Fund programs could result in reduced
government subsidies to petroleum imports or production, and
hence higher domestic prices, thereby reducing energy demand.
Improved prospects for sustained growth and development, however,
would promote increased demand for energy and could stimulate the
development of additional energy resources, making the composite
effects difficult to predict.

- v -

CONCORDANCE BETWEEN CONGRESSIONAL STUDY REQUESTS
AND TREASURY REPORT
Section of
Legislation

Study Request

Chapter of
Treasury Report

Sec. 50(b)(2)

Proposals to improve exchange Chapter I
rate system

Sec. 50(c)(1)

Ways to maintain realistic
exchange rates and avoid
exchange rate manipulation,
particularly for major trading
partners with a substantial
trade surplus with the U.S.
Ability of IMF to promote noninflationary growth under IMF
stabilization programs.

Sec. 50(c)(2)(A)

Chapter I

Chapter II

Sec. 50(c)(2)(B) Feasibility of IMF issuing
securities in private capital
markets, effect on U.S.

Chapter III

Sec. 50(c)(2)(C) Feasibility of returning IMF
gold reserves to members or
private market sales of gold.

Chapter III

Sec. 50(c)(2)(D) Feasibility of temporary IMF
supplemental financing
facilities.

Chapter III

Sec. 50(c)(2)(E) Feasibility of an IMF Gold
Lending Facility.

Chapter III

Chapter I
Sec. 50(c)(2)(F) Recommended amendments to
IMF Articles of Agreement to
improve its role in the international monetary system.
Chapter III
Sec. 50(c)(2)(G) Effect on market price of gold,
countries with central bank gold
reserves, and U.S. credit markets
of actions in (C), (D) or (E).
Chapter II
Actions taken to carry out
Sec. 50(c)(3)
Section 33 of this Act (safeguarding basic human needs).

- vi -

Section of
Legislation

Study Request

Chapter of
Treasury Report

Sec. 50(c)(4) Progress in implementing Chapter III
Chapter 48 of this Act (Fund
remuneration and charges).
Sec. 50(c)(5) Study of past and potential Annex A
impact of Fund loan quota
extension on world oil prices.
Sec. 50(c)(6)(A) Assessment of systematic re- Chapter IV
structuring and stretching out
of developing country debt.
Sec. 50(c)(6)(B) Assessment of role of global Chapter IV
recovery in solving debt crisis
and of possible interim financing
measures.
Sec. 50(c)(6)(C) Assessment of adequacy of IMF Chapter II
resources to finance balance of
payments deficits.
Sec. 50(c)(6)(D) Role of IMF in providing finance Chapter II
and credit to least developed
countries.
Sec. 50(c)(6)(E) Progress in consultations among Chapter I
Finance Ministers and IMF
Managing Director on improving
the international monetary system.
Sec. 50(c)(7) IMF collection, review, comment, Chapter IV
and reporting procedures, as
provided in Section 42 of this
Act (regarding international
financial information).

The International Monetary Fund
and the Exchange Rate System
The system of "fixed" exchange rates adopted in 1944 at the
time of the creation of the International Monetary Fund was in
place for nearly three decades. By the early 1970s, however, it
was evident that major changes were necessary to meet the demands
of a rapidly changing global environment and to accommodate
substantial divergencies in economic performance among the key
industrial countries.
A more flexible exchange rate system has now been in effect
for more than a decade. During that time the world community has
weathered two major oil shocks, a period of rapid global inflation followed by deep recession, and critical debt problems in a
number of developing countries. Some have been concerned that
the current monetary arrangements may have exacerbated these
problems and have called for major reforms in the international
monetary system — in particular, to reduce the scope for
exchange rate movements. Others are convinced that while some
improvements are clearly needed, major reforms are not required,
and could be counterproductive.
This chapter briefly reviews the Bretton Woods exchange rate
system, analyzes its shortcomings, and discusses the major
systemic changes introduced in the mid-1970s. It then reviews
some of the concerns about the current system and proposals for
possible improvements.
The Bretton Woods System
The original IMF Articles of Agreement, drafted during the
latter part of World War II, were designed to help avoid the
exchange restrictions, instabilities, and competitive exchange
rate practices of the inter-war period. The drafters of the
Bretton Woods system sought to create a multilateral payments
system to replace the bilateralism and discriminatory practices
to prevent competitive currency practices by limiting cnanges in
exchange rates to situations involving a fundamental disequilibrium in a country's external position.
To promote exchange rate stability, the IMF's founders
established a system of stable but adjustable exchange rates.
Each nation undertook to maintain its exchange rate witmn narrow
margins around its agreed "par value", expressed in terms of
qold
They also agreed to convert foreign official holdings of
their currencies into gold or the currency of the foreign holder
upon request.

- 2 In oractice, most countries maintained par values for their
currencies in terms of the dollar by intervening in U S . dollars
in foreign exchange markets. Only the United States directly
bought and sold gold in transactions with foreign monetary
authorities to maintain its exchange rate parity, set at $35 per
ounce of gold. The United States was, in effect, at the center
of the system, with an obligation to convert other countries'
holdings of dollars into gold and, conversely, to buy gold with
dollars.
Fixed exchange rates could be maintained up to a point by
intervention purchases or sales of U.S. dollars. But when any
member country's inflation or balance of payments performance got
too far out of line with other member countries, intervention was
simply not enough. Under such circumstances, a country had to
choose between a change in its basic economic policies or a
change in its exchange rate parity. Since parities were to be
changed only in cases of "fundamental disequilibrium", the
ultimate basis for maintaining fixed exchange rates under the
Bretton Woods system was a willingness by all participants to
have relatively disciplined economic policies.
The resources of the IMF were to be available under appropriate policy conditions to help countries meet temporary balance
of payments financing needs while they adjusted domestic economic
policies. Restrictions on trade and payments, in the meantime,
were to be discouraged.
The Bretton Woods exchange rate system lasted roughly 25
years, but it became increasingly rigid and unsustainable during
its last decade. Some of its key assumptions eventually
contained the seeds of its own collapse. In essence, the system
was both too weak to force the domestic policy changes that would
have been needed to maintain fixed parities, and too rigid to
accommodate parity changes warranted by basic shifts in
countries' relative economic size and competitive power.
Shortcomings of the system included the following:
(1) Dependence on gold and U.S. balance of payments
deficits. Limited production of gold and the growth of
industrial and commercial uses meant that the supply
available for monetary purposes was wholly unrelated to
the needs of an expanding world economy. To obtain
liquidity to finance rapidly expanding international
transactions, countries purchased dollars through
intervention on the exchange markets. The system
thereby became dependent on, and to a degree promoted,
U.S. balance of payments deficits. Foreign official
holdings of dollars increased substantially during the
period, and in time, exceeded the value of total U.S.
gold holdings, thus undermining confidence in the

- 3 ability of the United States to convert dollars into
gold at its agreed par value.
(2) Inability to change the par value of the dollar. A
change in the dollar's par value might have helped to
address this problem, and would have permitted a
realignment of exchange rates to take account of the
change in competitive positions that had occured.
However, there was a general reluctance to change the
gold parity of the U.S. dollar, because this link was
seen as central to preservation of the fixed exchange
rate system. Moreover, there was no assurance that
other countries would not change their par value, thus
preventing the necessary realignment of exchange rate
relationships.
(3) Lack of symmetry in pressures to adjust. Under the
Bretton Woods system, pressures to adjust fell almost
exclusively on weak currency countries. As they ran out
of gold or dollar reserves to use for intervention to
support their currencies, countries with weak currencies
were forced to either devalue or change policies. However, exchange rate adjustments, when they did occur,
were often too little and too late. Strong currency
countries, on the other hand, could accumulate reserves
for prolonged periods and thus postpone revaluing their
currencies or adopting other adjustment measures that
might reduce their competitiveness.
A key lesson of the Bretton Woods system was that exchange
rates could remain "fixed" only so long as economic policies and
oerformance in all the major currency countries were broadly
similar. Although cyclical differences could be accommodated,
provided they were small and temporary, the system could not
adapt quickly enough when structural changes resulted in large
cumulative disequilibria or in the face of rapid increases in
international capital flows, which gained in importance as
capital markets were liberalized. By the early 1970s the
accumulated disequilibria required a fundamental adjustment of
countries' payments positions, and a basic reform of the system.
The decision by the United States in August 1971 to suspend
the convertibility of foreign official holdings of dollars into
gold triggered a major realignment of exchange rates in December
1971, which was followed by a further exchange rate_realignment
in February 1973, and a move to a floating rate regime. The
1971 developments also spurred formal negotiations to reform the
international monetary system. These negotiations oegan in July
1972 with the establishment of the IMF's Committee of Twenty
(C-20?
The report of the C-20 subsequently provided a basis for
discussion in the IMF's new Interim Committee, which was
esta'olisSed in October 1974. However, these discussions were

- 4 seriously complicated by the rapid escalation of worldwide
inflation, the adoption of widespread exchange rate floating, and
the sharo increase in oil prices. Negotiations on longer-term
reform were not completed until 1976, when the IMF's new Interim
Committee reached agreement in Jamaica on a major revision of the
Bretton Woods arrangements.
The Current Exchange Rate System
The reform efforts ultimately revolved around correcting the
shortcomings of the Bretton Woods system by designing a system
which would permit greater flexibility of exchange rates, provide
effective and symmetrical inducements to balance of payments
adjustment by both surplus and deficit countries, and replace
gold's nominally central role in the system.
The Jamaica agreement to amend the IMF Articles:
— eliminated any important monetary role for gold in the
IMF;
— legalized existing exchange rate practices, including
floating;
— provided wide latitude for individual countries to adopt
specific exchange arrangements of their own choosing,
providing the country fulfills certain obligations,
including the promotion of orderly underlying economic
conditions and the avoidance of manipulation of exchange
rates to gain unfair competitive advantage;
— provided a flexible framework for the future adaptation
of exchange arrangements; and,
— provided the Fund with clear authority to oversee the
international monetary system to ensure its effective
operation, and to monitor the compliance of each member
with its obligations, including firm surveillance over
the exchange rate policies of members.
As under the Bretton Woods system, a basic objective of the
amended IMF Articles is the restoration and maintenance of
stability in the world economy. But in sharp contrast to the
theory underlying the par value provisions of the Bretton Woods
Articles ~ which sought stability by requiring adherence to
fixed exchange rates — the amended Articles focus instead on
achieving the underlying economic stability that is the
prerequisite to exchange stability.

- 5 The new Articles implicitly recognize that the relationships
between currencies must reflect the evolution of domestic
economies and differences in developments as between national
economies; and that the economic stability sought by the authors
of the Bretton Woods par value provisions cannot be imposed from
"without" through action to fix or manage exchange rates.
Instead, stability must come from "within." If each country
maintains sustainable, non-inflationary rates of economic growth,
then exchange rate relations will also be relatively stable.
Stable economic policies are therefore seen as more important to
exchange rate stability than the actual structure of the system
itself.
In order to promote an orderly system of exchange rates,
members agreed to:
— pursue orderly economic growth and reasonable price
stability;
— promote orderly underlying economic conditions;
— avoid the manipulation of exchange rates to prevent
effective balance of payments adjustment or to gain an
unfair competitive advantage; and,
— pursue exchange policies compatible with these
undertakings.
These provisions reflect a recognition that systemic stability can be jeopardized as much by insufficient exchange rate
flexibility (through prolonged maintenance of overvalued or
undervalued rates) as by excessive flexibility.
According to the IMF Articles, a decision to establish
general exchange arrangements applicable to all countries (such
as a return to a more rigid exchange rate system) requires an 35
percent majority vote. This, in effect, provides the United
States with a controlling voice in the future adoption of general
exchange arrangements for the system as a whole.
Under the current system, the ability of individual countries
to select their own exchange arrangements has resulted in a
variety of exchange rate practices. Over 90 countries (almost
all developing countries) have chosen to peg their currencies to
a single currency or to a currency composite, adjusting the peg
as necessary to maintain external competitiveness. An additional
17 countries have chosen limited flexibility. These include the
eight European countries that adhere to the exchange arrangements
of the European Monetary System, which in turn floats against the
rest of the world. Another 35 countries have adopted more
flexible exchange arrangements, including independent floating by
four major industrial countries (Canada, Japan, the United
Kingdom, and the United States).

- 6 There is, therefore, no single "exchange rate system" now in
effect. Nevertheless, because most of the largest traders do not
peg their exchange rates, 65-80 percent of world trade in fact is
conducted at floating rates.
Perceived Problems with the Current System
Proponents of a more flexible exchange rate system originally
expected that such a system would permit greater autonomy for
domestic monetary and fiscal policies, with automatic adjustment
of the exchange rate to reflect changes in a country's fundamental economic situation vis-a-vis other nations. Changes in
the exchange rate would, over time, restore balance to the external payments situation. Although some increase in exchange
rate variability was expected in the early years, proponents
expected that such variability would diminish over time.
Exchange rate variability in fact increased substantially
during the past decade, as compared with the period of fixed
exchange rates. This is true for both short-term and longer-term
exchange rate movements. As a result of this marked variability,
and, in particular, the recent strength of the dollar vis-a-vis
other major currencies, some have expressed concern that:
(1) Short-term variability or "volatility" of exchange rates
has been excessive, with an adverse impact on international trade, investment, and the domestic allocation
of resources.
(2) Large swings in exchange rate levels over the longer
term have not necessarily reflected changes in underlying economic fundamentals, resulting in significant
misalignments.
(3) Other countries might be manipulating their exchange
rates to gain an unfair competitive advantage and to
avoid exchange rate adjustment in order to maintain or
achieve a strong external trade position.
Impact of Short and Longer-Term Exchange Rate Fluctuations
Recent fluctuations in exchange rates have been symptomatic
of the turbulent world economic and political environment during
the past decade. The major oil price increases and raoid
inflation of the 1970s, the global recession and debt crises of
the early 1980s, and divergencies in economic oerformance
throughout this period have all had an impact on trade and
capital flows and, hence, on exchange rates as well

- 7 Moreover, government responses to the resulting political and
economic pressures differed widely among the industrial countries
and were subject to vaccilation and sharp changes of course. The
result has been both a high degree of short-term volatility in •
exchange markets and substantial long-term swings in exchange
rates.
It is clear, in any event, that a "fixed" exchange rate
system could not have survived the strains of the last decade,
and attempts to maintain such a system most probably would have
disrupted international transactions. Fixed rates would likely
have resulted in frequent exchange rate crises, in which fixed
parities could be defended only over short periods, through large
scale intervention and marginal policy changes. Frequent major
realignments would have been necessary. But experience under the
Bretton Woods system (and more recently, to a more limited
extent, in the European Monetary System) suggests that the
realignments would often have been difficult to negotiate,
postponed beyond the most appropriate time, and effected in a
crisis atmosphere. Countries also would have been hard pressed
to avoid considerable reliance on trade and capital controls.
Changes in exchange rates, in fact, made a major contribution
to balance of payments adjustment during a period in which oil
shocks and diverging policies and performance resulted in major
external imbalances. Moreover, substantial changes in exchange
rates were occasionally an important signal of the need for
policy changes, and this tended to reinforce the adjustment
process.
The current flexible system, in contrast, results in rapid
exchange rate adjustment. While exchange rates at times have
fluctuated sharply, economic agents have generally learned to
deal with exchange risk in a number of ways, including using
forward markets and diversifying the currency composition of
borrowings. Although some might argue that greater short-term
exchange rate stability might be desirable, researchers ha*/e
failed to produce persuasive evidence suggesting that increased
short-term exchange rate variability has had negative impacts on
the total volume of trade, investment, and the overall performance of the major industrial economies.
In addition, while many private traders and investors would
prefer greater certainty about near-term exchange rate behavior,
in practice those whose governments allow them access to
uncontrolled forward markets can hedge at small cost to avoid
exchange risk. Thus, there is no convincing case for shifting
any burdens caused by short-term exchange rate variability from
private transactors to governments.
A stronger case can be made that long-term movements in
exchange rates may impose significant economic costs,
particularly on traded-goods industries, and may add to the

- 8 „.__ fnr nrot-ectionism. There is no question,
?orTx mp LV^LTl---lrll
Appreciation of the dollar in the
oast few years has adversely affected the U.S. competitive
position in both U.S. and foreign markets, increasing domestic
protectionist pressures. But the strong dollar has been only one
of several factors affecting U.S. trade flows, among which must
be included the strong U.S. economic growth relative to foreign
growth, and the sharp reduction in imports by debt-burdened
developing countries. As growth in other industrial countries
improves, the dollar should adjust to reflect these relative
changes in underlying economic situations.
In the meantime, U.S. imports, encouraged by strong U.S.
economic growth, have helped to strengthen a sluggish European
economic recovery. They also have made a substantial
contribution to the export earnings of debtor LDCs, facilitating
their economic adjustment to their debt problems.
Domestically, the benefits of U.S. economic growth have
helped to offset the negative impacts of a bigger trade deficit,
both for the economy as a whole and for the traded-goods
industries. For American consumers as a group there are also
significant gains from a lower cost of imported goods, which
leads directly to lower inflation and increased real buying
power. Greater foreign competition also indirectly affects the
U.S. inflation rate by keeping the pressure on U.S. firms for
lower costs, greater efficiency, and lower prices.
Some would argue that the U.S. traded goods sector, in the
meantime, is forced to assume an unfair share of the adjustment
burden, and some industries may be forced out of business, move
overseas, or delay needed investment, adversely affecting growth
for some time into the future. It would undoubtedly be desirable
to avoid these kinds of costs in cases where large exchange rate
changes are subseguently reversed. But such changes are
difficult to predict and even more difficult to control.
Furthermore, the usual proposals to "manage" exchange rate
changes that are perceived to be inconsistent with underlying
economic fundamentals (and therefore subject to reversal), also
could entail a broad misallocation of resources. Such proposals
include exchange market intervention, imposition of capital
controls, and import restrictions. Past" experience with capital
controls and exchange market intervention, as well as their
economic costs, are discussed in more detail in a subsequent
section of this chapter.
U.S. laws permit individual industries to request temporary
import relief when they can demonstrate injury due to surging
imports. Such cases are reviewed on their merits on a
case-by-case basis. Nevertheless, restrictions in individual
cases, however justified, will tend to increase the burden of
adjustment for the remaining "open" import sector, as well as the

- 9 export sector, distorting the allocation of domestic resources as
between those industries and the protected ones. Protectionism
at home also tends to breed protectionism abroad, further
compounding the problems of export industries and reducing global
welfare. It is therefore not a good response to any perceived
exchange market misalignments.
Currency Manipulation
There has been some concern in recent years that the Japanese
Government has been manipulating the value of the yen vis-a-vis
the dollar and in effect preventing the normal adjustment of the
yen/dollar exchange rate to a large Japanese trade surplus. The
United States has found no evidence of such manipulation to
weaken the yen. To the contrary, Japanese macroeconomic policy
objectives, foreign exchange market intervention, and reluctance
to lower the official discount rate have all pointed to efforts
to strengthen the yen.
Nevertheless, shortly after President Reagan took office in
January 1981, the Administration began discussions with the
Japanese Ministry of Finance on exchange rate and capital market
issues. The Reagan Adminstration initiated these discussions
because it was its belief that yen exchange rates did not reflect
the true strength of the Japanese economy. The Administration
also believed that rigidities and restrictions in Japan's capital
market not only created economic inefficiencies but also
precluded full particiption by U.S. firms in the Japanese capital
market.
U.S. analysis concluded that the limited international role
of the yen reflected the existence of a segmented, highly
regulated domestic capital market and an overt policy of
restraining the use of yen by non-Japanese. This set of
policies, in turn, worked to inhibit the yen from reflecting its
underlying strength in exchange markets, exacerbating the U.S.
trade deficit with Japan.
President Reagan personally conveyed his deep concern about
these issues during his talks with Prime Minister Nakasone in
November 1983. The President and Prime Minister Nakasone
expressed at that time their "mutual commitment toward specific
steps to achieve open capital markets (to) allow the yen to
reflect more fully Japan's underlying political stability and
economic strength as the second largest economy in the free
world."
A joint U.S.-Japan Ad Hoc Group on yen/dollar exchange rate
issues, and a subsidiary Working Group, were subsequently
established with a mandate to internationalize the yen and
liberalize Japan's domestic capital market. The final report of
the Working Group in May 1984 outlined policy changes announced
by the Japanese Ministry of Finance in three broad areas: the

- 10 Euroyen market, the operation of Japan's domestic capital market,
and the access of foreign financial institutions to the Japanese
capital market.
These are significant steps to help assure that Japan's
capital markets will operate in a more market-determined fashion
and to internationalize the yen. Other things being equal, this
could, over time, fundamentally alter the underlying demand for
the yen and lead to yen appreciation against other currencies,
including the dollar.
In the meantime, numerous other factors will also affect the
yen/dollar exchange rate, including the relative growth rates of
the U.S. and Japanese economies, the extent of trade protection
— or anticipated protectionist measures — against Japanese
exports, and the continued "safe haven" demand for dollars.
Bilateral trade flows represent only part of the broader picture
and do not alone determine the path of exchange rate adjustments.
The recent deterioration in the U.S. bilateral trade balance with
Japan to a deficit of nearly $26 billion during the first three
quarters of 1984 (approximately double the bilateral deficit
during the same period in 1983), therefore, cannot be expected by
itself to result in a sharp appreciation of the yen relative to
the dollar.
The dollar, in fact, rose by about 8 percent against the yen
in 1984. This may reflect in part the anticipated increase in
capital outflow from Japan in response to the internationalization of the yen. But it also represents a smaller depreciation than that of the German mark, which depreciated by 10
percent in dollar terms during this same period, even though the
German government intervened actively to support the mark.
Improving the International Monetary System
Concern about exchange rate volatility and the strong
appreciation of the dollar has resulted in numerous proposals to
revise tne current international monetary system. In response to
these concerns, the leaders of the seven major industrial countries, at the Williamsburg Economic Summit in June 1983:
"invited Ministers of Finance, in consultation with the
Managing Director of the IMF, to define the conditions
tor improving the international monetary system and to
consider the part which might, in due course, be played
in tnis process by a high-level international monetary
conference."
Governors^rSl f 1983,the Finance Ministers and Central Bank
UnlteS States T ^ U P P ° f T e n ( G _ 1 0 ) industrial countries (the
Canada Belainm ~ k G e ™ a n y , the United Kingdom, France, Italy,
Canada, Belgium, cweden and the Netherlands) agreed to have their

- 11 Deputies identify areas in which progressive improvements might
be sought and to prepare a report for the Ministers. The
Deputies agreed to review the following areas:
(1) the functioning of the exchange rate system;
(2) enhancing IMF surveillance;
(3) international liquidity (including the issue of a new
SDR allocation); and,
(4) the role of the International Monetary Fund.
The G-10 Deputies provided an interim report on their studies
and received further guidance from the G-10 Ministers in May,
1984. At that time the Ministers agreed that:
(1) The flexible exchange rate system has made a positive
contribution to the maintenance of international trade
and payments and to the adjustment process in a difficult
global environment.
(2) A return to a generalized system of fixed parities is
unrealistic at the present time, but the current system
should be improved.
(3) A greater convergence in economic performance and
compatible, non-inflationary policies would make an
essential contribution to exchange rate stability.
The current schedule of the G-10 Deputies is aimed at
meeting the target set by the G-10 Ministers and reaffirmed at
the June 1984 London Summit, which invited Finance Ministers:
"to carry forward, in an urgent and thorough manner, their
current work on ways to improve the operation of the
international monetary system....and to complete the
present phase of their work in the first half of 1985
with a view to discusssion at an early meeting of the IMF
Interim Committee."
In order to meet this deadline, the Deputies are expected to
complete their report for the review of the G-10 Ministers in the
spring of 1985.
Recommendations to reform the international monetary system
and provide increased exchange rate stability fall basically into
two camps: proposals for increased government intervention in
exchange or capital markets; or, proposals to make the current
monetary system operate more efficiently. Both approaches are
discussed further below.

- 12 Increased Intervention
Proposals to increase government intervention include a
return to a fixed exchange rate system similar to tnat of Bretton
Woods, adoption of a more flexible "target zone' system, coordinated government intervention under certain circumstances, or the
imposition of controls on capital flows. As already noted, the
G-10 Finance Ministers have basically ruled out any return to the
Bretton Woods system at this time, although some countries
believe it might be possible to revert to fixed exchange rates
once conditions of greater stability have been achieved.
Exchange rate target zones have been proposed as an
alternative means of increasing exchange rate stability by
combining a wider band of acceptable exchange rates than under
the Bretton Woods system with the flexibility to change exchange
rates by mutual agreement if the underlying economic fundamentals
justify such a change. Under one variant of the target zone
proposal, target exchange rates would be established based on the
collective determination by the major currency countries of
"fundamental equilibrium exchange rates" for each of their
currencies.
Depending on how strictly the system's rule were drawn,
exchange rate movement toward either boundary of the target zone
would either spur consultations or, under a more stringent
system, reguire market intervention, a change in monetary policy,
adjustment of the target zone or other measures (such as capital
controls). The width of the target zone and the ability of key
governments to agree to adjust the whole zone upward or downward
could also affect the flexibility of the system.
Although the exchange rate band under a target zone system
would be wider than under a fixed rate system, the principle is
the same. Countries would still arbitrarily determine a
"correct" exchange rate or range of acceptable rates, which they
then endeavor to enforce. Moreover, the chosen rate remains
valid only as long as the government is willing and able to
maintain it through intervention or through policy changes that
may not be consistent with domestic objectives.
If the market's perception of a country's actual and
anticipated economic performance is not consistent with that
implied by the target zone, then the country's formal commitment
to a particular target zone will be affective only if: (1) the
government has sufficent foreign exchange reserves to resist
market pressure; or, (2) the government is able to imolement
changes in domestic policies that will be perceived as sufficient
to move performance into line with the target zone

- 13 A study of experience with exchange market intervention by
the seven industrial Summit countries was requested by the
Versailles Summit and completed in March 1983. The study
concluded that government intervention in exchange markets
normally has a limited impact, which fades quickly if
complementary policy changes are not adopted. Such intervention
cannot resist fundamental market trends, the study found,
although it might be effective to counter "disorderly markets".
Moreover, experience indicates that capital controls cannot
resist market trends for long, and the costs of trying to use
them on the required scale would be immense. Although
governments might be tempted to use trade restrictions or other
trade-distorting practices instead of changing domestic policies,
such measures can only account for a relatively minor part of the
total balance of payments and are likely to have only a minimal
effect on the exchange rate.
Domestic policy changes are therefore necessary in any event
to keep an exchange rate within its target zone. Governments
must then collectively determine which countries will be required
to adjust domestic policies, and to what degree. Such
discussions would inevitably be highly contentious. Further,
changes in macroeconomic policies are often difficult to
implement quickly and do not have precise impacts on exchange
rates, making "fine tuning" a very difficult task.
Attempts to agree on targets and defend them, furthermore,
would likely reduce governments' recent emphasis on fundamental
efforts to improve underlying economic performance. In the long
run, these efforts seem more likely to produce exchange rate
stability than would sudden, ad hoc changes in economic policies
aimed at achieving a given exchange rate target.
Exchange rate movements are driven by the reactions of market
participants to perceived changes in actual and prospective
economic conditions. As policies and prospects change, both
absolutely and in relation to one another, markets adjust. The
key to stable exchange rates is stable policies and policy
expectations and more convergent economic performance in the
major industrial countries, not an artificial determination of
the appropriate exchange rate at any given point in time.
It is highly questionable whether official judgement can
determine an exchange rate that is more appropriate than the
market rate given current economic policies and conditions, or
whether the alternative rate can be imposed on the market without
fundamentally changing economic policies and conditions. A
better remedy appears to be to increase the stability and
predictability of national policies, rather than to maintain
exchange rates that could quite possibly be inconsistent with
underlying fundamentals.

- 14 Improving the Operation of the Current System
The following conclusions can be drawn from the previous
discussion:
(1) Government intervention cannot circumvent the collective
judgement of the market, although it can be useful to counter
clearly disorderly exchange market conditions.
(2) A return to more rigid exchange rates would not resolve
problems caused by unsound underlying policies.
It is therefore necessary to assure sound economic policies in
individual nations and convergence in economic performance among
the key industrial countries in order to have a smoothly
functioning exchange rate system.
Recent large movements in exchange rates have been due in
large part to divergent policies and performance among the major
economies. Such movements are normally consistent with the
underlying economic fundamentals, as perceived by the market —
provided that markets are reasonably open. Where trade or
capital movements are restricted, however, exchange rates may be
affected. The proper policy response in these cases is not an
effort to maintain artificially a fixed rate, but rather an
effort to liberalize trade and capital markets, as the United
States has recently encouraged with regard to Japan.
Efforts to strengthen IMF surveillance will be essential in
improving the current international monetary system. The IMF
Articles provide for firm IMF surveillance over members' exchange
rates and balance of payments policies to ensure that they are
fulfilling their obligations. These obligations commit member
nations:
to collaborate with the IMF and other members to ensure
orderly exchange arrangements and to promote a stable
system of exchange rates;
to direct their economic and financial policies toward
fostering orderly economic growth with reasonable price
stability; and,
to seek to promote stability by fostering orderly
underlying economic and financial conditions.
Iv^rnfr^i??3 reflect a recognition that domestic growth and
^ n n ^ f i st ^?4 lt: y c a n only derive from sound and stable national
economic policies and performance.

- 15 Fund surveillance of individual member countries is conducted
through annual Fund consultations with each member country. The
Fund assesses the economic situation in the member country and
may underline areas of concern and make non-binding recommendations for policy changes. However, decisions on national
economic policies ultimately rest with the national governments
and the Fund's leverage is accordingly limited.
Other important elements of the surveillance process include
multilateral reviews in the context of the IMF's World Economic
Outlook, and discussions within the IMF Executive Board and
Interim Committee. These activities are also enhanced by
consultations within other institutions, including the BIS, OECD,
and GATT. These multilateral reviews normally focus primarily on
the economic performance, outlook, and policies of the major
industrial countries.
The United States has maintained that it is necessary to
develop further both the content and procedures of IMF
surveillance in order to improve mutual understanding of current
and prospective economic developments in individual member
countries and their international linkages, to promote a common
analytical framework, and to enable the IMF to exert greater
influence on the policies of member governments. As Treasury
Secretary Regan stated in his address to the annual meeting of
the IMF and the World Bank Group in September, 1984:
"The United States is prepared to move ahead decisively to
strengthen international surveillance. We believe that
such measures as increased public awareness of Article IV
consultations with member countries, and a greater use of
ad hoc consultations between the Managing Director and
Finance Ministers, could be very useful. We hope that
others will support proposals such as these for a
stronger IMF surveillance role."
The U.S. Government has suggested both procedural and
substantive improvements in the IMF's Article IV consultation
process, including measures to increase the publicity given to
IMF staff and Executive Board assessments, more specific IMF
policy suggestions to member countries, and more frequent use of
ad hoc consultations.
The United States has also suggested that the content of
multilateral surveillance be enhanced, to permit comprehensive
assessment of macroeconomic policies affecting the international
monetary system, including more analysis of the capital account
and greater attention to impediments caused by market-distorting
practices.

- 16 A number of the issues discussed above are currently under
review within the Group of Ten, for subsequent transmittal to the
IMF's Interim Committee during 1935.
Conclusion
The system of flexible exchange rates which was formally
adopted in the mid-1970s to correct the shortcomings of the
Bretton Woods fixed exchange rate system has made a positive
contribution to the world economy during a decade of turbulent
economic developments. A continuation of the Bretton Woods
exchange rate system during this period would undoubtedly have
resulted in greater resort to capital and trade restrictions and
repeated exchange rate crises. Moreover, it is generally
recognized that restoration of a fixed rate system is neither
practical nor desirable at the present time.
Nevertheless, the volatility of both short and longer-term
exchange rate changes increased significantly during this period.
While some would contend that this volatility has increased
uncertainty, to the detriment of international trade and
investment, a recent IMF study has found that there is no
consistent evidence that recent exchange rate fluctuations have
reduced the level of international trade or investment. Nor has
the United States found any evidence of alleged Japanese
manipulation of exchange rates.
Leaders of the seven key industrial countries, however,
recognized at the Williamsburg and London Summits the need to
improve the current international monetary system. The Finance
Ministers of the Group of Ten industrial countries have therefore
asked their Deputies to review the current system and propose
possible improvements this year.
Suggestions for increased government management of exchange
rates (through such mechanisms as target zones, capital market
controls, or coordinated government intervention) are all aimed
at increasing exchange market stability through measures to
enforce mutually selected exchange rate levels. Domestic
monetary policies would therefore once again be subject to an
external exchange rate target, with less flexibility to pursue
low inflation and economic growth objectives.
Proposals to strengthen IMF surveillance procedures, on the
other hand, would aim at improving stability from within national
economies, rather than imposing stability from without. This
approach would seek to promote sound national policies and a
greater degree of convergence in economic performance among the
major countries, as well as capital market and trade liberalization to improve the functioning of markets and exchange market
stability.

- 17 The IMF's Financing
The IMF is the world's central monetary institution. As
such, it is serving as the linchpin for the cooperative strategy
of debtor governments, creditor governments and financial
institutions that defused the immediate financial consequences
associated with the global debt crisis. The IMF and many
countries experiencing temporary balance of payments difficulties
have cooperatively put into place the economic adjustment programs needed to reduce payments deficits and debt service burdens
and thus establish the necessary conditions for the resumption of
economic growth in debtor countries. The Fund exercises its role
by extending its own finance to support economic adjustment
efforts by member countries, and by acting as a catalyst to the
provision of additional finance, and debt relief, from private
financial institutions and other official sources.
The IMF's leadership role in the coordinated international
approach to the debt problem has of necessity strengthened its
role in the world economy. The scale of the Fund's effort,
together with the complexity of the L D C s economic problems, has
led to concerns whether the IMF's policies and programs are
suitable for LDC economies, and has prompted a number of
proposals for reform. This chapter examines those concerns and
proposals in light of the purpose and content of Fund programs
and the available evidence on their impact.
Purpose and Scope of IMF Adjustment Financing Programs
The purpose of the IMF's financing role is to mitigate the
impact of balance of payments problems on world trade and growth.
The IMF was given a role in balance of payments finance because
the international community recognized, in light of its experience with the mutually destructive, beggar-thy-neighbor policies
of the 1930s, that adjustment within an established framework
based on internationally agreed rules of behavior was in the best
interest of all countries. The IMF provides financing to allow
countries breathing space to adjust their economies without
resort to measures, such as restrictions on trade and payments,
that would ultimately lead to lower growth in both the countries
that impose them and in the world economy.
The IMF's Articles of Agreement specify that its resources be
provided in support of adjustment of the economies of the borrowing countries. This requirement is supportive of, not contrary
to, efforts to maximize non-inflationary economic growth. In
general, countries with payments problems must adjust their
economies to reduce the deficit to sustainable levels which may
be financed in the medium term by private capital flows and/or
official development assistance.

- 18 -

Most countries coming to the Fund for assistance often have
allowed their balance of payments to deteriorate to such an
extent that all, or almost all, sources of external finance have
been withdrawn. In such circumstances, the balance of payments
deficit is a binding constraint on a country's ability to grow.
In the absence of sufficient external financing, a country
typically must reduce imports drastically to match the reduced
level of foreign financing. This type of economic adjustment is
inevitably disruptive and inefficient. Countries need foreign
exchange for a wide variety of transactions, and import goods and
services for many purposes. For example, most countries must be
able to import in order to export, and adjustment forced by a
scarcity of foreign exchange thus is likely to impair a country's
ability to export. Moreover, imports will probably be cut back
indiscriminately, with the burden falling most heavily on the
most vulnerable economic groups. The likely result of these
restrictions is falling or slower growth and rising unemployment.
It is not surprising, therefore, that many countries which delay
an approach to the Fund until they have encountered severe payments problems are now experiencing economic contraction as well
as high rates of inflation.
An alternative to adjustment forced by the reduction of
capital inflows is financed, planned adjustment. The IMF
provides resources to allow countries breathing space to resolve
their balance of payments difficulties in a manner less disruptive to the structure of the economy and less harmful to domestic
growth and employment and world trade. Moreover, agreement
between a country and the IMF on an economic program is an international seal of approval which acts as a catalyst to restore the
country's international creditworthiness. In general, the amount
of private and official financing from non-IMF sources made
available after the adoption of a Fund program is a multiple of
drawings on the Fund.
Thus, the concern that the Fund imposes austerity is partly
due to confusion between the impact of the balance of payments
constraint and the effects of the IMF program. It is the balance
of payments constraint, not the Fund, that limits potential
growth. The entire reason for the IMF's financing role is to
safeguard, and promote, the conditions for balanced growth.
Limits to the Fund's Role
Some of the concerns about the Fund's impact on economic
activity relate to a misconception about the Fund's role. There
ILix t % •" ! ? m e garters that an even larger financing role
would be desirable because it might allow higher growth rates and
? n ^ l e r f?3 u ! i t m e n t P at h. However, the Fund's financing role is
°na11/ Waited by member governments as to purpose,
duration and amount.

- 19 -

The amount of adjustment necessary for each country will
depend on the size of the initial balance of payments disequilibrium, prospects for world growth and trade, and the amount of
financing available, both from the IMF and other sources. Why
shouldn't the IMF provide substantially more financing to allow
countries to delay adjustment even longer?
First, there is strong evidence that attempts to avoid
adjustment only exacerbate the economic trends that have caused
an economy to diverge from the performance of trading partner
economies and encounter balance of payments difficulties.
Adjustment to the conditions of the international economy is
inevitable and, if delayed, is more likely to take place in a
crisis atmosphere at greater cost to domestic social, economic
and political objectives. In fact, the low world growth rates of
recent years have meant that the burden of adjustment for countries with balance of payments disequilibria has been greater
than in a period of rapidly expanding world trade. In addition,
the progress of many countries in reducing inflation has set a
much tougher standard for countries in disequilibrium than was
the case after the first oil shock.
Secondly, the Fund is not an institution for the pursuit of
global anti-cyclical policies. The total amount of IMF financing, and the amount and nature of the adjustment associated with
it, are shaped by the prevailing conditions in the world economy
and the financial markets. Thus the IMF faces the same resource
constraints as the member countries which contribute those
resources.
Lastly, the IMF's role is deliberately limited by its member
governments to preserve its role as the central international
monetary institution the Fund's focus is squarely on the
operation of the international monetary system. Its mandate to
promote balance of payments adjustment is intended to help it to
meet its systemic responsibilities. The IMF promotes growth
through its support for the open world trade and payments system
essential for mutually beneficial trading relations. The IMF
does support growth directly in member countries to which it
extends"financing, but its involvement is intended only to allow
an orderly resolution of the balance of payments difficulties
that make sustained growth impossible. The IMF is not, nor was
it ever intended to be, either a substitute or competitor for
private capital markets or a development institution.
The IMF and the Finance of the LDCs: Principles Governing the
IMF's Financing Role and Guidelines on Conditionality
Concerns that the IMF requires too great an adjustment effort
from LDCs in view of their structural weaknesses and political
difficulties are sometimes reflected in proposals that the Fund
apply a different, weaker standard of adjustment to the LDCs.
These proposals usually assume that the weaker standard of
adjustment would be accompanied by increased amounts of finance.

- 20 -

Such proposals would require a major institutional reform of
the IMF, one which would represent a departure from the principles which define and maintain the Fund's character as a monetary
institution. Such a reform would transform the Fund into a development, rather than a monetary institution. While the shortrun attractions to the LDCs are obvious, the long-term damage to
the health of the international monetary system, and thus to all
national economies, of a weakening of the Fund's role must be
taken into account.
The Articles of Agreement establishing the Fund were written
to embody the principle of formal equality of members: all
member countries enjoy equal rights and accept equal responsibilities in the IMF. Like the other basic tenets which govern
the Fund's activities, the principle of formal equality is
intended to ensure that the Fund's focus on its primary responsibilities to the international monetary system will be preserved,
and that the guidelines according to which it operates will
facilitate, not hinder, its ability to carry out those
responsibilities.
Therefore, the Fund's relations with the LDCs are conducted
according to the same principles that guide its relations with
other countries. The IMF was deliberately circumscribed from a
role as a development institution as part of the consensus among
members that the Fund's efforts should not be diverted from its
primary responsibilities. Unlike the development institutions,
the Fund was not divided into distinct groups of permanent
debtors and creditors.
The principles of equal treatment of all member countries and
of respect for the sovereignty of all members are reflected in
the Guidelines on Conditionality, last revised by the IMF's
Executive Board in 1979. The Guidelines call on the Board to
ensure adequate policy coordination in order to maintain the
nondiscriminatory treatment of members.
However, the Guidelines also explicitly provide that the
number of performance criteria (that is; the specific policy
targets and measures members must achieve in order to draw IMF
financing) may vary because of the diversity of problems and
institutional arrangements of members. Thus the Fund is formally
required by its own rules to adapt conditionality to the
circumstances of individual members, rather than applying an
identical policy prescription to all countries. The principle of
nondiscriminatory treatment is applied by requiring a"broadly
equivalent adjustment effort by all members in similar
circumstances, implemented through measures appropriate to
individual circumstances.
The Guidelines also make explicit the requirement that the
Fund respect the sovereignty of its members. The Guidelines
stipulate that the IMF must pay due regard to the domestic social

- 21 -

and political objectives, the economic priorities, and the
circumstances of members. Moreover, the IMF must limit performance criteria to those macroeconomic variables necessary to
evaluate implementation of the program with a view to ensuring
the achievement of its objectives. Peformance criteria may
relate to other variables only in exceptional cases when they are
essential for the effectiveness of the member's program because
of their macroeconomic impact.
Thus, the IMF does not "impose" any specific policy measures
on governments. Requests for IMF financing are initiated by the
member country, and the precise type of financing and its
conditions are settled through the member government's representatives and the IMF. Each member proposes its own stabilization
program in support of its financing request. The Fund does not
insist on a particular approach to adjustment. However, it may
well express its views on the appropriateness of particular
policy measures within the total policy mix, and must be
satisfied that the policy package proposed by the member country
will bring about a sustainable balance of payments position
within a medium-term framework.
Relevance of the IMF's Role to the Adjustment Process
A smoothly functioning international monetary system is
especially important to the development process. The development
of new industries, and the modernization of traditional sectors,
frequently depends on imported goods and technologies. This in
turn requires access to foreign capital flows, since few LDCs are
in a position to run a consistent foreign trade surplus based on
their traditional export industries, and official development
assistance can play only a limited role. International monetary
disturbances which disrupt the flow of capital provided by the
international capital markets therefore inhibit the ability of
developing countries to import the investment goods essential to
their development programs and require them to rely more heavily
on traditional export sectors for foreign exchange.
The IMF's balance of payments financing is by its nature
general assistance and may not be specifically linked to
particular development projects or sectors. Were the IMF's
financing tied to specific projects or sectors, it would not be
available for general balance of payments financing purposes.
However, although the IMF's finance may not be directed to
specific development objectives, its balance of payments
assistance is often critical to further economic development. In
the absence of this assistance domestic growth and income are
likely to contract substantially as import shortages disrupt
domestic production. The IMF's financing, by permitting smoother
adjustment of payments imbalances, minimizes the interruptions to
growth and development for countries which adopt Fund-sponsored
adjustment programs.

- 22 -

The Content of IMF Programs - Conditionality
IMF assistance is provided through a variety of facilities
which have evolved over the years to meet the changing needs of
member countries. All of the facilities except the "reserve
tranche", to which all countries have nearly automatic access,
require that the borrowing country accept conditions on economic
performance. The practice of applying conditions, or "conditionality", to IMF drawings is the primary focus of the criticism and
controversy surrounding the Fund's role.
The practice of conditionality evolved in the early years of
the Fundus history as a means of meeting the requirements of the
Fund's charter, the Articles of Agreement. The Articles specify
that the IMF's financing be temporary, associated with adequate
safeguards for repayment, and extended in support of effective
adjustment. These requirements of the Articles guarantee the
"revolving character" of the IMF's resources - that each member
make only temporary use of the IMF's financing so that funds will
be available to meet the needs of other members when they arise.
The conditions applied to economic performance provide assurance
that the borrowing country will take steps to remedy its balance
of payments problems so that it will be in a position to repay
the Fund. However, the conditions also help the Fund fulfill its
much broader mission to assure that the process of international
balance of payments adjustment is accomplished without undue cost
to the country experiencing difficulties or to the IMF's entire
membership.
The conditions attached to IMF adjustment programs can help a
country return to a sustainable balance of payments position
by correcting the underlying policy maladjustments that have
contributed to the payments problem. Programs seek to establish
the right signals at the macroeconomic level by using a wide
range of policy tools involving taxation and spending, credit,
interest rates, exchange rates, labor markets and prices to
encourage a shift of resources toward greater production of
export and import-competing goods and services and discourage
excessive absorption of imports. Often, adjustment will involve
a short-term reduction in aggregate demand as well as a switch in
expenditures, because previous policies had contributed to an
unsustainable expansion of demand and rising inflation which had
increased the gap between domestic absorption and production.
Although the IMF's approach to balance of payments adjustment
was developed in the early years of its existence when the
principal users of the Fund's resources were industrialized
countries, the the pattern of policy weaknesses in countries
which have experienced the most severe debt difficulties do not
differ fundamentally from those experienced by industrial
countries with financing problems. "Traditional" IMF policy
recommendations are in fact often appropriate to both the LDCs
ornh?o™eX"??St!:iai c o u n t r i e s - A review of some of the major
problems illustrates this point.

- 23 -

(a) Fiscal deficits in the non-oil LDCs have expanded rapidly
since the late 1970s, doubling to nearly 6 percent of GNP in
1982. The expansion was particularly marked for the three major
Latin American borrowers, whose average deficits rose from 7-8
percent of GDP in 1979 to 14-18 percent in 1982. Such a rapid
and sizeable expansion in budget deficits can place enormous
financing pressures on domestic financial markets. The result,
in many countries, was inflationary money creation, and an
aggravation of balance of payments and external financing
difficulties. Those countries which borrowed abroad in large
amounts, and which ultimately had to reschedule their debts,
experienced rates of money growth and inflation substantially
higher than those in countries without such serious problems.
(b) Negative real interest rates are another pervasive
feature of LDC economies in recent years. These unrealistic
rates discourage domestic savings in financial (as opposed to
real) assets and encourage capital flight even in countries with
the most rudimentary capital markets. Moreover, they discourage
inflows of capital from abroad which would ease the balance of
payments constraint on the economy. They also distort investment
decisions by encouraging investment in inflation hedges rather
than in more productive areas.
(c) Unrealistic producer pricing policies in the agriculture
and large nationalized, sectors of many LDC economies tend to keep
prices well below the cost of production or world market price.
This in turn tends to encourage excessive consumption and leads
to rising subisidies to those sectors and a strain on fiscal
deficits. Moreover, by distorting relative prices such policies
discourage domestic production of affected goods, and encourage
the inefficient use of scarce resources.
(d) Countries which experienced debt difficulties to such a
degree that they had to reschedule had, as a group, allowed the
maturity structure of external debt to deteriorate substantially
through heavy reliance on short-term foreign borrowing. Those
countries which managed to avoid rescheduling had experienced a
more modest deterioration in the maturity profile due to more
prudent debt management policies.
(e) Exchange rate adjustments are often the most strenuously
resisted of policy changes. Studies by the IMF show that
countries which had to reschedule in 1982-83 had, as a group,
allowed their exchange rates to appreciate by more than 20
percent in real terms in the two years leading up to the payments
difficulties, whereas countries managing to avoid reschedulings
recorded only a small appreciation. Exchange rate adjustments
are often absolutely critical to the adjustment process. In many
cases, severe balance of payments difficulties are the result of
a protracted period of overly expansionary domestic policies,
which have pushed domestic demand far out of line with a
country's ability to produce, and domestic prices and costs far
out of line with international counterparts.

- 24 -

In the absence of offsetting exchange rate adjustments, the
economy's international competitiveness will be adversely
affected. Moreover, a clearly overvalued exchange rate
encourages speculation and capital flight, leading many countries
to impose controls on imports and capital flows which only
exacerbate inflationary trends and encourage distortions and
black market activities. Attempts to bring about the necessary
adjustment in relative prices and costs solely through domestic
demand management policies are necessarily more costly in terms
of domestic growth and employment. The argument for exchange
rate adjustment only strengthens with the size of the balance of
payments imbalance.
The IMF works with countries seeking financial assistance to
implement a package of policy measures which will help the
country move to a viable balance of payments position within a
reasonable period of time and in a manner consistent with a
resumption of sustainable growth. Although the policy measures
will be carefully tailored to the situation of each individual
country, an effective adjustment program will generally include
demand management policies designed to achieve reasonable price
stability, pricing and other supply-side policies framed to
encourage the efficient allocation of resources and strengthen
the productive base, and prudent external debt management
policies.
The IMF's conditionality practices are thus both broadly
appropriate to the adjustment problems facing the LDC economies,
as well as appropriate for specific problems encountered in those
economies. Moreover, the range of the IMF's financing facilities
allow it to offer quick-disbursing financing, longer periods of
adjustment and a larger scale of assistance when the nature of a
country's balance of payments problems require them and when the
quality of the adjustment effort merits them. These options have
proved to be of particular benefit to the LDCs.
The IMF's Special Facilities
It has been proposed that the IMF respond to the current
financing problems of LDCs by creating new supplementary
financing facilities. However, the IMF has responded in the past
to evolving international financing needs by establishing special
financing facilities and thus already has a range of programs
under which it may vary the amount, maturity and conditionality
of its financing according to the situation of the borrowing
country.
Compensatory Financing Facility. The Compensatory Financing
Facility (CFF) was established in 1963 to orovide financing
to members experiencing balance of payments difficulties due to
a temporary shortfall in export earnings due largely to factors
beyong their control. The CFF was later expanded to cooe with
surges in food import costs, also attributable to factors beyond
the memoer's control.

- 25 -

Buffer Stock Facility. The Buffer Stock Facility was
established in 1969 to help members meet a balance of payments
financing need resulting from their contributions to
international buffer stocks that meet specified IMF criteria.
Extended Fund Facility. The Extended Fund Facility (EFF)
was established in 1974 to address the widespread, severe balance
of payments problems experienced by many countries after the
first oil shock. The EFF is designed to address the following
situations: 1) "severe payments imbalances due to structural
maladjustments in production and trade where price and cost
distortions have been widespread;" and, 2) an "economy
characterized by slow growth and an inherently weak balance of
payments position which prevents pursuit of active development
policy."
Thus the IMF, through the Extended Fund Facility, explicitly
recognizes and provides for cases in which the achievement of
balance of payments viability is possible only in the mediumterm. Under the EFF, a country may draw continuously IMF
resources for up to three years, and repayment takes place over
the extended period of four to ten years.
The standards of conditionality applied to EFF drawings are
similar to those under the shorter-term stand-by facilities, but
its resources are intended to support a more sustained adjustment
effort, with emphasis on policy measures to mobilize resources
and improve resource utilization, and reduce reliance to external
restrictions. The EFF provides resources to a country which
meets the facility's requirements for balance of payments need
and is willing to undertake a comprehensive, medium-term plan of
adjustment that includes policies of a scope and character
required to correct strucural imbalances in production, trade and
prices.
A substantial portion of IMF lending since the onset of the
debt problem has been chanelled through the EFF. At the end of
1984,'about 55 percent of total resource commitments under IMF
programs are EFF funds, largely reflecting the large EFF programs
implemented by Mexico and Brazil.
Enlarged Access. The Enlarged Access Policy (EAP) was
established in 1981 to meet the needs of countries whose payments
imbalances are large relative to quota. The EAP succeeded the
earlier Supplementary Financing Facility (SFF), which was
established in 1979 to provide members with access to Fund
resources in addition to drawing privileges under a regular
stand-by or EFF program. The Interim Committee decided in
September 1984 that under the EAP a country may draw a maximum of
95"percent of its IMF quota annually, and up to 280 percent over
three years, provided cumulative drawings do not exceed 408
percent of quota. Larger drawings may be made in exceptional
circumstances.

- 26 -

The current access limits reflect a substantial evolution
of the IMF's lending policies in the post-1973 period in response
to the much more difficult international financial situation and
the much larger, more intractable payments problems of its member
countries. In particular, the two oil shocks and the economic
and financial instability of the 1970s exposed the structural
weaknesses of the LDC economies and contributed to large payments
imbalances in many countries. The IMF responded to the problems
of the LDCs, and of other member countries experiencing
difficulties in those years as well, with the creation of several
special financing facilities: the Oil Facility, which provided
additional resources with minimal conditionality; the EFF; the
SFF; and finally, the EAP. These several facilities together
have allowed the IMF substantial flexibility to extend loans of
much greater size and longer maturity than the maximum 100
percent of quota, one-year standby programs which were the norm
prior to 1973.
Experience of Countries Under Fund-Sponsored Adjustment Programs
Thus, IMF programs may be designed flexibily in order to
minimize the unavoidable costs of balance of payments adjustment
by providing financing to support implementation of policy
.measures best suited to borrowers' individual circumstances. Do
IMF programs succeed in meeting the objective of bringing about
balance of payments adjustment while fostoring the conditions for
sustainable growth? An examination of the record supports the
conclusion that they do, and suggests some of the conditions
which make successful adjustment more likely.
The IMF staff performed an aggregated analysis of experience
with more that 70 programs during the 1970s. The results of any
aggregated survey of countries' experience must be interpreted
with caution. First, the great diversity among the different
countries makes it difficult to generalize about them. Secondly,
it is difficult to make judgements about what would have happened
in the absence of the IMF programs. In addition, the analysis
does not take account of the extent to which exogeneous
conditions differed from assumptions made when formulating
program objectives. Further, it is not possible in a strictly
quantitative analysis to take account of the extent to which
? K U n ^ i e S a ? t u a l l v implemented policy measures. Nevertheless,
the IMF analysis yielded some interesting results.
The study found that on average, countries that pursued IMF
programs recorded a significant improvement in the ratio of the
o * r r p n ^ a C C ° U - \ d e f i c i u t 0 G D P * 0 n average, the ratio fell 1.5
9
, 0 1 ! ! S i n t h e y e a r o f t h e P^gram, and 1.2 percentage
fo
!•!«« - i 5 e e f a r S f o l l o w i n g the program. In contrast,
n n 01
° 7 i fveloping countries as a whole, the ratio of
r
current account deficit to GDP rose in those years.

- 27 -

Countries pursuing IMF adjustment programs were less
successful in reducing the rate of inflation. In fact, inflation
rates increased about two percentage points on average in the
program year and in the subsequent three year period. However,
inflation performance by the non-oil developing countries as a
group was, on average, substantially worse than for countries
with IMF programs. For those countries, inflation rose by 3.2
percentage points and 6.9 percentage points in the one and three
year periods respectively.
There was no significant difference in the growth performance
of countries with IMF programs and non-oil developing countries
as a group. In fact, the real growth rate for countries with
programs declined by 0.3 percentage points on average in the
short run but was unchanged in the subsequent three year period.
At the same time, the average real growth rate for non-oil
developing countries fell 0.2 percentage points in the short run
and 0.4 percentage points over the longer period. In addition,
there was only a marginal decline (0.2 to 0.3 percentage points)
in the growth rate of real consumption expenditures for countries
with IMF programs. On average, the growth rate of consumption
remained rather high - about four percent.
Therefore, on average, countries which pursued Fund-sponsored
adjustment in the 1970s were able to achieve a significant
improvement in their balance of payments positions, with no
systematic loss in real growth or consumption, and with an
inflation performance which, if disappointing, was markedly
better that that of non-oil developing countries as a group.
Moreover, the conclusions that Fund-sponsored adjustment works,
and that it works without excessive sacrifices of consumption or
economic growth, are borne out by recent experience among LDC
debtor countries and the outlook for those countries.
At year-end 1984, 33 IMF members, including some of the most
significant LDC debtors, were implementing IMF programs, and
others were being negotiated. The record of balance of payments
adjustment since the beginning of the debt crisis is impressive.
Between 1981 and 1983, the combined current account deficits of
all non-oil developing countries fell from $108 billion to $52
billion. For the Latin American region alone the deficit fell
from $46 billion to $15 billion in those years.
The adjustment was associated with low real growth rates GDP-weighted real growth in the non-oil LDCs fell from 3.1
percent in 1981 to 1.8 percent in 1983 - and a 9 percent import
volume reduction (about $60 billion). However, in most cases,
growth and imports turned down before the IMF came on the scene,
and the adjustment would doubtless have been much more severe
without the $20 billion in IMF financing disbursed in 1982-83.

- 28 -

Moreover, the outlook is encouraging. Growth rates in
countries with Fund programs during 1984 are expected to have
improved noticeably, with growth rates in most countries in a
range of one to six percent. Of 36 countries with IMF programs
last year, 29 project stronger growth in the program year as
compared to the previous year; only 3 of the 36 are expected to
experience zero or negative growth. The improvement extends to
Mexico and Brazil, the largest LDC debtors. Contrary to the
misperception that the IMF suppresses imports, imports are
forecast to expand in 27 of the 36 countries with IMF programs,
and in 7 of them, imports should rise between 10 and 20 percent.
Imports should rise about 12 percent in the nine "major" LDC
debtors in 1984, compared to a decline of 9 percent in 1983.
Although, there is persuasive evidence that the IMF's
approach to economic adjustment is effective, not all countries
fully achieve their program objectives. However, experience
suggests that a number of conditions are likely to increase the
probability of achieving sustainable real growth.
It is essential that the government of the country
experiencing payment difficulties be committed to effective
adjustment, and that it be able to win public understanding and
support for its adjustment program. Countries that delay
adjustment, and implement corrective measures only partially, are
predictably less likely to be successful in reaching the
objectives of their IMF programs.
Adjustment is much easier to accomplish if undertaken early,
before the distortions in an economy result in financial crisis.
At the crisis stage, the political and social costs of adjustment
are likely to be quite high, and thus less acceptable. Countries
willing promptly to adapt policies to changing conditions are
most successful in bringing about adjustment. Experience shows
that unforeseen developments that make adjustment more difficult
do not have a systematic impact on performance. Countries
willing to adapt or strengthen policies have been able to perform
very well, while the absence of adverse unforeseen developments
is not enough to assure success.
Finally, a willingness to stay the course and continue to
pursue sound policies once the initial crisis stage is passed,
and to continue to implement adjustment measures until necessary
structural reforms are completed, increases the chances that a
country will reach a viable external position. Unfortunately,
durable economic adjustment cannot be achieved overnight, and
unsound, short-sighted policies can undermine even the most
robust economy.

- 29 -

The Issue of Prolonged Use
Although the record is clear that IMF programs are both
appropriate to the problems of LDC economies, and help bring
about adjustment while creating the conditions for sustained
growth, some countries have failed to make significant progress
toward adjustment despite successive IMF programs. The reasons
for these disappointing performances are multiple and complex.
Countries may fail to make progress because of inadequate
implementation of the IMF program measures, or because the
adjustment effort was not sufficiently prolonged. In some cases
insufficient adjustment is due to external factors, such as
weaker than expected demand for exports, wars or natural
disasters. In other cases, a lack of progress may be
attributable to an inadequate appreciation of the size of the
adjustment effort needed, or an overestimation of the ability of
the supply side of the economy to adapt.
The prolonged use of IMF resources (that is; continued
recourse to IMF borrowing with the associated long-standing
financial obligations to the Fund) by a limited group of
countries has important negative implications for the role of
the IMF as a monetary institution. As a monetary institution,
the IMF's resources must be available to all member countries,
not just a limited number, to meet potential payments problems.
This means that use of IMF resources by any one member must be
temporary - the resources must "revolve" back to the IMF to be
available to other members in case of need.
The related issues of prolonged use and inadequate economic
adjustment by borrowers are difficult ones and are now under
close review in both the IMF and the U.S. government. In fulfillment of the call at the London Summit for intensified
coordination between the IMF and the IBRD, the Administration is
exploring the possibility that increased Bank/Fund coordination
might contribute to a resolution of the problem of prolonged use.
In particular, there may be certain situations in which
strengthened IMF surveillance of the macroeconomic policies of
countries with a record of prolonged use may, in concert with a
World Bank structural adjustment program, be more appropriate
than increased IMF financing.
Measures Taken to Implement Section 33 of the Bretton Woods
Agreement Act
Concern that the process of economic adjustment might
adversely affect the provision of basic human needs in borrowing
countries led to the adoption of Section 33 of the Bretton Woods
Agreements Act, which directs the Administration to take measures
to ensure that the IMF's economic adjustment programs safeguard
and promote the provision of basic human needs.

30 -

The IMF makes a substantial indirect contribution to the
satisfaction and improvement of basic human needs through its
support for international monetary cooperation, reductions in
barriers to international transactions, and a vigorously
expanding world economy. More directly, by providing financing
and serving as the catalyst for additional private financing, the
IMF eases the inevitable near-term burden of the adjustment
effort.
Over the last three years a number of important specific
steps have been taken pursuant to the provisions of Section 33.
The National Advisory Council on International Monetary and
Financial Policies (NAC), which includes the Departments of
Treasury, State, Commerce, the Federal Reserve Board, the
Export-Import Bank, Office of the U.S. Trade Representative and
the International Development Cooperation Agency, has primary
responsibility for reviewing all IMF loans. As a first step, the
NAC agencies were informed of the provisions of Section 33, and
the NAC has served as a mechanism for reviewing the impact of IMF.
programs on basic human needs. In this connection, assessments
of the human needs impact of proposed IMF programs have been made
pursuant to Section 33(b) by the Treasury Department with the
assistance of the Department of State and International
Development Cooperation Agency. These analyses have been taken
into account by the U.S. Executive Director in formulating his
statement and position on proposed IMF adjustment programs.
Retrospective analyses, which rely in part on information
provided by U.S. embassies in borrowing countries, have also been
prepared and submitted to Congress.
Progress has also been made in increasing coordination
between the IMF and World Bank, also prompted by Section 33(b).
Increased Fund/Bank collaboration is manifested in a number of
forms - briefings of the staffs of the other institution before
and after a mission is undertaken; parallel or joint missions by
the two institutions; exchange of country data and information;
and solicitation of comment on draft staff papers. The Fund and
Bank have begun working particularly closely in devising
complementary programs in support of countries' structural
adjustment efforts. World Bank loans to enhance production
capabilities, improve marketing and pricing systems, and
rationalize microeconomic development policies can complement
IMF-supported adjustment of macroeconomic policies affecting
exchange and interest rates and overall levels of economic
activity.
Such coordination can minimize short-term dislocations and
accelerate production responses - both of which can directly and
indirectly improve the capacity to meet basic human needs. U.S.
representatives have played a key role in bringing together the
managements and Executive Board members of the two institutions
to improve Fund/Bank operations in individual countries. We are
continuing efforts to intensify this collaboration.

- 31 -

In addition to the general approach set forth above which
supports basic human needs objectives, U.S. representatives have
encouraged and supported various IMF program design improvements
to promote further the objectives of Section 33 in a manner
consistent with the other provisions of the Bretton Woods
Agreement Act. These include increased emphasis on policies to
promote savings, investment, production and employment. With
strong U.S. support, the IMF is taking a particular interest in
encouraging the adoption of rational pricing and production
policies crucial to balanced growth in the poorest LDCs. Recent
IMF programs have encouraged the removal of exchange rate
rigidities and producer price restrictions which discourage
domestic production and encourage budget deficits. In a number
of African countries such policy steps have contributed to
significant increases in food production thus contributing both
directly and indirectly to efforts to meet basic human needs.
The U.S. Executive Director has pressed the Fund to help
countries frame their economic adjustment programs in a mediumterm context. Consequently, one year, multiyear, and successive
programs extending beyond three years are better able to support
serious adjustment efforts which can improve the balance of
payments-position and promote economic growth and employment.
Where it is clear that the adjustment effort may take longer than
consistent with the temporary character of IMF financing, the
U.S. Executive Director has encouraged the Fund to explain the
financing implications to official creditors and donors and has
urged the Fund to play an active role, where appropriate, in
efforts to enlist their assistance to help close external
financing gaps. The catalytic role of the IMF programs in
prompting official and private capital inflows has been
especially vital over the last two years for the many countries
confronting debt servicing difficulties.
The U.S. Executive Director has also strongly advocated
expanded IMF technical assistance efforts to improve members'
macroeconomic policy management. In many IMF member countries,
such assistance has been extremely helpful in promoting more
efficient use of scarce economic resources. The U.S. Director
has also urged greater use of IMF resident representatives in
order to maintain closer IMF working relations with national
authorities and to promote more effective program implementation.
In pursuing the individual provisions of Section 33, we have
been mindful of its legislative history, the recognition that its
provisions should be implemented "to ensure the effectiveness of
economic adjustment programs supported by Fund resources," and
the clear Congressional support over nearly forty years for the
IMF's focus on providing short-term balance of payments financing
to countries making needed policy adjustments.

- 32 -

In this context certain provisions of Section 33, if
improperly implemented, could seriously undermine effective IMF
support for balance of payments adjustment and ultimately weaken
the longer-range economic prospects for borrowing countries,
contrary to the intent of Section 33. Special caution has
therefore been required in seeking to have IMF members, or the
IMF itself, explicitly identify and quantify the impact (both
projected and past) of countries' adjustment efforts on living
standards.
The IMF cannot and does not dictate the design of adjustment
programs. It conditions use of its resources on the implementation of sound economic policies so as to safeguard the revolving
character of its resources and promote orderly balance of
payments adjustment. To do this it establishes, in negotiation
with national authorities, macroeconomic performance targets —
such as levels of public sector deficits, credit expansion and
foreign exchange reserves — judged sufficient to promote and
guide the adjustment process. Ultimately, however, individual
governments are responsible for the selection and implementation
of policies necessary to achieve those targets. They must
establish their own fiscal, monetary and international priorities. The IMF does not have the mandate or leverage to dictate
such decisions. This is why we have emphasized in implementing
Section 33 the need for the Bank (and also bilateral aid
agencies) to be actively and simultaneously involved in countries
using Fund resources.
It is clear that the adjustment programs which countries
adopt — supported by IMF financing — do take into account the
possible social effects. Few, .if any, governments undertaking
comprehensive economic adjustment programs would frame such
programs without considering the social impact and potential
political ramifications. Indeed, the IMF acknowledges these
considerations in its "Conditionality" guidelines, which
specifically direct that "in helping members to devise adjustment
programs, the Fund will pay due regard to the domestic social and
political objectives, the economic priorities, and the
circumstances of members, including the causes of their balance
of payments problems." In this connection, IMF staff missions
can and do offer technical assistance and advice to member
governments developing adjustment programs, drawing on the Fund's
extensive experience in this area.
In summary, the Executive Branch has sought to implement
the provisions of Section 33 in a manner consistent with the
fundamental purposes and objectives of the IMF. We will continue
to pursue the mandate of Section 33. We believe that our
approach has effectively promoted sound macroeconomic adjustment
policies which both promote balance of payments adjustment and
lay the basis for renewed investment and productive growth that
can meet basic human needs.

- 33 -

Conclusion: Strengthening the Role and Improving the Operation
of the Fund in Promoting Balance of Payments Adjustment
The IMF's role in promoting economic adjustment is controversial because adjustment is almost always controversial. The
adjustment process of the past two years has been particularly
difficult for several reasons: it followed a long period during
which expectations were kept unrealistically high in some
countries with the assistance of unconditional private market
financing; it was triggered by a major financial crises; and, it
was initiated in the midst of a deep world recession.
However, the experience of the last two years has largely
reaffirmed that the IMF's approach to balance of payments
adjustment is effective, that it is appropriate to the problems
of both developed and developing countries, and that it promotes
adjustment while minimizing short-term losses in output and
fostering an early resumption of stronger economic growth. At
the same time, that experience has made very clear the importance
of timely adjustment, the dangers and costs of an extended period
of unconditional financing and the importance of determined
efforts to carry out adjustment once the effort is undertaken.
The task before the international community now is to assure
that the progress in resolving current debt problems is sustained
and to ensure that similar problems do not recurr. The lessons of
the past two years suggest that the proper course is to ensure
that the IMF's lending policies encourage, to the maximum
feasible extent, the economic adjustment crucial to the resolution of current problems and the avoidance of similar problems in
the future.
This should not require any change in the IMF's institutional
structure through amendment of the Fund's Articles. The existing
structure is adequate. Moreover, it will not require any
addition to the current range of IMF financing facilities. In
theory, the creation of new, supplemental financing facilities is
always feasible. However, it would be very difficult to marshall
support for new facilities at present in view of the severe
resource constraints faced by most member governments. Further,
by weakening the focus on prompt, effective adjustment measures,
the establishment of new, supplemental financing facilities would
be counterproductive. The IMF's existing range of financing
facilities is adequate to the different needs of its member
countries. The IMF's resources, augmented by the 1983 quota
increase, are adequate to provide appropriate amounts of finance
in support of adjustment.
Rather, efforts to strengthen the role of the IMF and improve
its operation with respect to its financing role should focus on
steps to ensure that its limited resources will be used most
efficiently for temporary balance of payments financing in
support of adjustment. In this context, the Administration has

- 34 -

already taken steps, and will continue to work to improve the
effectiveness of the IMF's conditionality. For example, greater
use has been made of one-year or successive one year programs,
rather than multi-year arrangements, to help ensure more
effective program implementation. In addition, more use has been
made of measures which countries agree to implement before IMF
drawings begin (prior actions) in order to provide more assurance
that prompt adjustment will in fact take place. Further, the
Fund has taken steps to reinforce the market orientation of its
policies through greater emphasis on such factors as positive
real interest rates, realistic pricing policies, and the
elimination of subsidies and restrictions on trade and
investment.
To complement these steps, individual countries' access to
IMF resources as a percentage of quota has been reduced, and will
be reduced further, to ensure that IMF financing will be used to
promote adjustment, and that it will be "leveraged" with respect
to private financing to the greatest extent. In addition, it was,
decided that countries may not automatically receive maximum
access; instead, the amount of financing made available to each
country depends on the strength of the adjustment effort and the
seriousness of the balance of payments need. Access limits were
originally increased because of the serious, sizeable financing
needs of some member countries. However, it was subsequently
recognized that continued large-scale financing would both erode
the Fund's financial position and delay necessary adjustment.
Thus, the Fund has decided, with U.S. support, that the enlarged
access policy will be phased out as conditions permit.
The Administration has suggested ways in which the IMF's
surveillance over the economic policies of member countries might
be strengthened to bring about greater convergence of economic
policies among all countries, to ensure the pursuit of the kind
of sound economic policies necessary to financial market confidence after the completion of IMF adjustment programs, and, in
some situations, to provide a stronger macroeconomic policy
framework in coordination with World Bank structural adjustment
lending for countries which have made prolonged use of IMF
resources. The progress made thus far toward resolution of the
debt problem, together with the much improved international
economic outlook, suggests that the time is ripe for such
actions, both to strengthen international adjustment effort and
reduce to the pressure on the IMF's resource base.

- 35 The IMF's Resources

The financial strains of recent years have led to a substantial rise in official financing needs. The IMF is playing a
major role in providing those resources and in encouraging continued financing from other sources in the context of appropriate
economic adjustment programs. Since 1979, IMF quota resources
have increased from $38 billion to $92 billion, and outstanding
loans have increased from $8 billion to $35 billion. This has
resulted in questions about the appropriate role for IMF financing, the amount of resources needed for this purpose, and possible alternative sources of financing. This chapter addresses
those issues.
IMF Operations
The IMF is a unique institution, differing fundamentally from
the multilateral development banks or foreign aid agencies.
There is no fixed class or group of lenders or borrowers in the
IMF, no concept of "donor" or "recipient." Each member is obligated to provide financing to the IMF for use in IMF drawings by
other countries facing balance of payments needs, and each
country in turn has the right to draw upon the IMF when it faces
a balance of payments need. The U.S. subscription to IMF
resources has been used (and repaid) many times over the years.
In turn, the United States has itself drawn upon (and repaid) IMF
resources on 24 occasions, most recently in 1978, for a total
equivalent to about $6.5 billion, the second largest drawings of
the entire membership.
The IMF is essentially a revolving fund of currencies, and
its financing operations take the form of foreign exchange transactions with members. A member drawing from the IMF uses its own
currency to "purchase" foreign exchange or SDRs from the IMF to
help meet balance of payments financing needs. Drawings thus
increase IMF holdings of that member's currency and reduce IMF
holdings of other currencies or SDRs. A member repays the IMF
either by using reserve assets (SDRs or useable foreign exchange)
to "repurchase" IMF holdings of its currency in excess of its
quota/ or as a result of its own currency being used by the IMF
to finance drawings by other members. Repurchases by a member
thus reduce the IMF's holdings of that member's currency, and the
IMF's holdings of other currencies or SDRs are correspondingly
increased.
When a country's currency is used by the IMF to finance a
drawing, its repurchase obligations, if any, are reduced, or, (to
the extent IMF holdings of its currency fall below its quota), it
receives a "reserve position" in the IMF. This IMF reserve position is an international reserve asset, and is automatically and

-36-

unconditionally available to the member in case of balance of
payments need. The reserve position in the Fund earns "remuneration" (interest) at a rate calculated as a percentage of the
weighted average of short-term interest rates on the five currencies in the SDR valuation basket.
The IMF's basic financing operations are conducted under the
"tranche" policies. As indicated above, drawings in the reserve
tranche (equivalent to the amount by which a member's quota exceeds IMF holdings of its currency) are available automatically
upon the member's representation of balance of payments need, are
interest-free and are not subject to policy conditions or to
repurchase obligations.
Purchases beyond the reserve tranche (that is, those purchases that would raise the IMF's holdings of a member's currency
above its quota) are made in four credit tranches, each amounting
to 25 percent of the member's quota. Credit tranche drawings
generally must be repurchased within 3-5 years and are subject to
interest charges, currently equal to 7.0 percent per annum.
Drawings in the first credit tranche require presentation of an
economic program which satisfies the IMF that the member is
making a reasonable effort to correct its balance of payments
problems. Drawings in the three remaining, or upper, credit
tranches, require "substantial justification" and the undertaking
of specified economic policy measures by the borrower. Such
conditions are normally incorporated in a "stand-by arrangement,"
under which IMF financing is made available only as the member
meets agreed "performance criteria." In addition, the IMF has
established several special facilities (described in the previous
chapter) to help meet balance of payments financing needs arising
from particular problems.
IMF Resources
a) Quotas
Financing provided by the IMF is drawn primarily from
members' quota subscriptions, supplemented at times by IMF
borrowing. Under standard IMF procedures, a portion of each
member's quota subscription (25 percent) is paid in the form of
reserve assets, and the balance (75 percent) in the form of a
letter of credit issued by the member upon which the IMF can call
to obtain the member's currency to finance drawings by other
countries.
As the Fund's permanent resource base, quotas determine: the
amount of IMF financing a member can obtain when in balance of
payments need; members' obligations to provide resources to the
IMF when in a strong balance of payments position; the distribution of SDR allocations; and, voting power in the institution.

-37-

The IMF Articles of Agreement provide that "the Fund shall,
at intervals of not more than five years, conduct a general
review, and if it deems appropriate propose an adjustment of the
quotas of members." An 85 percent majority of the total voting
power is required for any change in quotas proposed as the result
of a general review, and no individual quota can be changed
without the consent of the member concerned. Pursuant to these
provisions, there have been eight general reviews of quotas in
the past, with increases implemented on six occasions, including
the 1983 quota increase.
The IMF's reliance on quota subscriptions as the principal
source of official financing reflects both the role of the Fund
as an official monetary institution and the operating requirements arising from that function. The resources of the Fund are
intended to address relatively short-term balance of payments
problems, which may be experienced by any country. Moreover, the
benefits to be derived from a smoothly functioning monetary
system accrue to all countries, regardless of income levels or
stages of development. Consequently, a fundamental tenet of the
IMF is that all members have an obligation to contribute to
overall monetary stability by providing financing to the IMF when
in a strong enough position to do so; and each has access to the
Fund's resources to meet balance of payments needs on the basis
of standard conditions and criteria.
b) IMF Official Borrowing
In addition to meeting requirements for official balance of
payments financing in normal circumstances, the IMF also serves
as the financial backstop for the system. The IMF must have, and
be seen to have, the means to deal with the extraordinary
financing demands that arise from time to time. In this
connection, the IMF has authority to borrow to supplement its
quota resources in case of need and has established borrowing
arrangements with official creditors on several occasions in the
past.
Official borrowing became an important but still secondary
source of finance for the IMF in the decade following the first
oil shock. The various borrowing arrangements have been used to
finance the Fund's lending under the special facilities established to address the substantial and persistent payments
imbalances of these years. Additionally, the 1983 increase in
the General Arrangements to Borrow (GAB) contingency credit line
strengthened the IMF's ability to deal with potential emergency
situations.
General Arrangements to Borrow (GAB). The GAB was originally
established in 1962 to provide supplementary resources to the IMF
to forestall or cope with a potential impairment of the international monetary system. Ten industrial member countries agreed

-38-

to provide specified amounts of their currencies to the IMF to
facilitate drawings from the IMF by any of the ten members in
order to meet this purpose. The GAB has an indefinite duration.
The GAB has been activated a number of times over its life, most
recently in connection with U.S. drawings on the IMF in 1978.
Switzerland became a full GAB participant in 1984 but previously
participated as an associate. The size of the GAB credit lines
were increased substantially in 1983, from the equivalent of
about SDR 6.5 billion to SDR 17.0 billion.
In addition, in 1983 Saudi Arabia entered into a parallel
arrangement with the IMF under which the Saudi Arabian Monetary
Authority (SAMA) agreed to provide up to SDR 1.5 billion to the
GAB to be drawn under the same circumstances and for the same
purposes as the GAB. As part of the 1983 negotiations increasing
the size of the GAB, it was also decided to expand the use of the
GAB to allow it to be activated for conditional financing for
non-GAB IMF members, if the IMF were faced with an inadequacy of
resources arising from an exceptional situation associated with
requests from countries with balance of payments problems of a
character or an aggregate size that could pose a threat to the
stability of the international monetary system.
Oil Facility. In 1974 and 1975, the IMF borrowed the equivalent of SDR 6.9 billion from a group of industrial and oil
producing countries to finance loans to countries experiencing
balance of payments difficulties attibutable to higher oil import
costs. The United States did not participate in this arrangement, and the facility ceased new lending operations in 1976.
Supplementary Financing Facility (SFF). The SFF was financed
by lines of credit from thirteen industrial and oil exporting
nations totalling SDR 7.8 billion. The U.S. share was SDR 1,450
million (but not to exceed the $1,831 million appropriated by
Congress). The facility was established in 1979 to provide additional assistance to countries with payments imbalances that were
large relative to quotas. SFF loans were fully committed by
early 1981, although disbursements actually took place through
early 1984. The United States is now receiving repayments on its
SFF loan.
Enlarged Access. To help finance the policy of Enlarged
Access adopted in 1981, the IMF entered into loan agreements with
SAMA for amounts equivalent to SDR 4 billion for each of two
years, and with thirteen industrial countries for the equivalent
of SDR 1.1 billion, one half of which was provided by the Bank
for International Settlements. In early 1984, the Fund concluded
a new agreement for SDR 6 billion with SAMA and a group of
countries from the BIS area to meet demands for enlarged access
financing which were expected to exceed the amounts committed
under the earlier borrowing arrangements.

-39Adequacy of the IMF's Resources
Judgements about the adequacy of the IMF's resources must
take account of both the likely demand for Fund financing and the
character of the IMF as a monetary institution in support of
adjustment. The IMF's resources must be adequate to oermit it to
meet demands for official balance of payments suooort'which
reasonably may be expected to occur over the medium term, and to
address emergency situations which may threaten the international
monetary system. However, to preserve the IMF's monetary role,
IMF financing must be limited to situations of clear balance of
payments need, and should encourage rather than postpone
effective economic adjustment.
The Fund's ability to meet legitimate claims upon its
resources, that is, its "liquidity," depends on: the size of
members' quotas and the IMF's access to official borrowing; the
composition of its currency holdings and of its credit lines,
since only the currencies of countries in strong balance of
payments and reserve positions are usable to finance IMF drawings
at any particular point in time; the size and distribution of
payments imbalances, which affect the potential demand for IMF
resources; and, the likelihood that liquid claims on the IMF, the
"reserve tranches" of countries for which the IMF's holdings of
currency fall below the amount of quota, will be utilized.
Factors influencing the demand for IMF resources are the strength
of IMF conditionality, and the availability of alternative
sources of finance.
As a result of the latest quota increase and the expansion of
the GAB, the IMF's current liquidity position is strong. At the
beginning of 1985, it is estimated that the IMF's usable currency
holdings exceeded SDR 30 billion. Moreover, the full amount of
the GAB is available to meet emergency needs. Finally,
substantial loan repayments are scheduled to be made over the
next few years. Consequently, it is not anticipated that a
further increase in IMF resources will be required before the
completion of the 9th general review quotas, scheduled for late
1988.
Proposals for Alternative Sources for IMF Financing
As noted above, the IMF has traditionally relied mainly on
quota subscriptions as the principal source of its financing,
supplemented from time to time by borrowing from official
sources. However, severe budget constraints have led to renewed
interest in alternative sources of funds, including private
market borrowing and mobilization of the IMF's gold holdings.
a) IMF Borrowing in the Private Markets
Proposals for IMF recourse to private markets as a means of
obtaining supplementary resources reflect the large expansion of
international financing needs in recent years, past difficulties

-40and delays in negotiating and implementing IMF quota increases,
and concern about oossible concentration of IMF borrowing from a
limited number of members. The IMF is authorized by Article VII,
Section 1 of the Fund's Articles of Agreement, to borrow to
replenish its holdings of currencies. Thus far, the IMF has used
that authority to borrow from official sources only. The IMF
Executive Board has examined the possibility of private market
borrowing, but has not reached firm conclusions. While the
Executive Board will keep this matter under careful review, it is
not likely to come to a decision unless a clear IMF need to
borrow arises, which is not expected at this time. Views on the
desirability and feasibility of private market borrowings by the
IMF differ substantially.
Proponents have made a number of arguments in support of
private market borrowing.
Impact on IMF resources. An IMF approach to the market would
provide a flexible means of supplementing IMF resources at a time
of growing official financing needs, while reducing the need for
difficult and time consuming negotiations on quota increases
and/or excessive reliance on a small group of official lenders.
Relationship of IMF to the market. Private market borrowing
would also establish a secondary market in IMF securities, thus
improving the liquidity of official claims on the IMF and promoting the use of the SDR. Furthermore, it would provide greater
stability to the financial system by having the IMF absorb some
of the risks and recycling responsibilities now undertaken by the
banking system.
IMF charges and conditionality. Finally, it would subject
the IMF to the discipline of the market, providing additional encouragement for the IMF to insist on sound financial programs on
the part of member countries in order to assure the timely repayment needed to maintain the IMF's market creditworthiness.
However, proposals for IMF private market borrowing raise
serious questions about their potential impact on the character
of the IMF as a cooperative international monetary institution,
and raise important operational and legal questions as well.
Impact on IMF resources. There is broad international agreement that, as a practical matter, quotas should remain the basic
source of IMF resources. IMF recourse to private market borrowing, however limited, might undermine prospects for future
quota increases. Moreover, governments that are now prepared to
lend directly to the IMF might instead divert funds to private
market purchases of IMF obligations in an effort to obtain higher
yields, anonymity, and greater liquidity. In short, the IMF
might find that increasing the number of channels for obtaining
resources does not necessarily increase, and could decrease, the
amount of resources available to it.

-41-

Relationship of IMF to the market. The IMF serves as the
official institutional underpinning for the international
monetary system, both as an "overseer" of the system's operations
and as "lender of last resort." There are questions whether the
IMF's effectiveness in these roles would be impaired by substantial relilance on the private markets — which might be least
receptive at times of international financial strain — rather
than reliance on its member countries; and whether, for example,
concerns about maintaining IMF market creditworthiness would
unduly influence decisions about IMF terms, conditions and
lending programs. In short, would the official monetary
character of the institution be impaired by making the IMF more
like a banking intermediary?
Competition with other borrowers and impact on U.S. and other
capital markets. On balance, it is unlikely that any forseeable
IMF borrowing would have more than a marginal impact on U.S. capital markets in view of their depth and breadth. It is conceivable, however, that IMF securities could take a non-negligible
share of the markets of some other countries, competing with the
securities of other international institutions, and exerting
pressure on yields and prices. Moreover, countries with access
to private financing have raised concerns that the IMF might
compete unduly with their own efforts to obtain financing, by
raising their borrowing costs or by absorbing private financing
they could have obtained in the absence of IMF borrowing.
Operational Considerations
Amounts
The IMF has never borrowed in private markets and, therefore,
has no track record on which to base an assessment of possible
success with respect to the amounts or terms on which it could
borrow. In the case of other multilateral financial institutions, such as the IBRD, private investors have focused on the
ability of the borrower to call upon the callable capital
subscriptions of members — particularly countries with strong
financial positions — to meet any debt service obligations.
The IMF Articles of Agreement do not provide for callable or
guarantee capital, and members have no legal obligation to make
resources available to the IMF beyond their quota subscriptions.
Consequently, the Fund's access to additional resources in
private markets would depend upon the market's assessment of the
IMF's ability to mobilize its assets to meet debt obligations.
Although the IMF's total gold and foreign currency assets are
substantial, a number of factors could tend to limit the ability
of the Fund to attract additional financing from the private
market.

-42-

(i) Foreign currency: A large part of the IMF's foreign
currency assets (approximately SDR 100 billion at the end of IMF
fiscal year 1984) represents claims on countries with weak
balance of payments and reserve positions In fact, when the
Fund's borrowing needs are greatest, its holdings of the
currencies of countries in a strong financial position will be at
their lowest. Although the Fund could use its holdings of weaker
currencies to meet debt service requirements, it is questionable
whether private investors would give much weight to such assets
in assessing the Fund's credit rating. Moreover, to the extent
that the IMF had to maintain holdings of strong currencies for
debt servicing purposes, these assets could not be used in its
operations and there would be no net improvement in its overall
lending capacity.
(ii) Gold: The IMF's gold stock has a current market
value of about $31 billion. The availability of this gold to
meet IMF obligations would enhance the Fund's credit rating.
However, the extent to which the IMF could rely on its gold
holdings to back its borrowing is uncertain. The price of gold
is volatile, gold markets are thin, and substantial sales could
require an extended period, raising questions about the IMF's
ability to mobilize gold promptly. Further, a decision to sell
IMF gold requires an 85 percent majority vote, and past experience suggests that prolonged negotiations would be required to
reach an agreement to sell gold, as needed, to meet IMF debt.
In view of the uncertainties regarding the market's assessment of the IMF's borrowing capacity, it is likely that, at least
initially, the Fund would be able to obtain only limited amounts
of additional financing through market borrowings.
Type of Borrowing
The financing provided by the IMF differs sharply from that
provided by the development banks, and thus the type of borrowing
compatible with each institution's needs will vary. The development banks provide loans for long-term development projects and
thus rely primarily on medium- and long-term borrowings of funds.
The IMF provides relatively short-term balance of payments
financing, with the currencies drawn from the Fund used
essentially for foreign exchange transactions Consequently, the
IMF may not have have a need for particularly long-term
financing. However, it must have funds available on extremely
short notice to meet members' needs to moblilize reserve claims
on the IMF due to adverse exchange market developments and to
finance drawings under standby credit lines.
The IMF has developed procedures which enable it to provide
foreign exchange to a member within three days of a request. In
order to maintain this ability under a private borrowing, the IMF
either would have to borrow and hold relatively large currency
balances and/or develop standby credit lines with commercial
banks. Each technique poses some difficult Problems

-43-

Under the IMF's financial structure, certain rights and
obligations of an IMF member are determined by the amount of the
Fund's holdings of its currency. For example, the position of a
member in terms of access to Fund resources, payment of charges,
repurchase obligations, and remuneration, is determined by the
Fund's holdings of the member's currency in relation to quota.
If the IMF held the proceeds of a borrowing prior to disbursement
of those additional funds, the IMF position of the member whose
currency was being held would be affected. For example, a borrowing of dollars by the IMF would increase the IMF's holdings of
U.S. currency and have the same effect as a U.S. drawing on the
IMF. This could reduce the U.S. reserve position in the IMF
and/or result in a repurchase obligation and the imposition of
charges on the United States.
In its borrowing arrangements with official entities, the
IMF has typically handled this problem by providing that the
borrowed currencies are to be available on a standby basis, and
when needed passed simultaneously to the IMF member drawing from
the Fund, thus leaving the rights and obligations of other
members unaffected. The IMF's ability to undertake such passthrough operations through use of standby lines of credit with
private lenders is probably limited. Private lenders acquire
funds from the market as needed, and normally would not hold
large amounts of currencies available for immediate call.
SDR Denomination
The IMF's unit of account is the SDR, and all Fund transactions are denominated in SDR. There has been little experience
to date with SDR-denominated issues on the private markets, and
there is no assurance at this time that the IMF could borrow on
an SDR basis on a significant scale.
Legal Considerations
Several areas of United States law would need to be considered in determining the manner in which the IMF could borrow
in U.S. markets, the amount that could be borrowed, and the time
required to arrange any such borrowing.
U.S. securities laws
U.S. securities laws (in particular, the Securities Acts of
1933 and 1934) establish strict regulations (including regulations on the registration of a security with the SEC and issuance
of a prospectus) governing any sale of a security in the United
States.
However, certain transactions and certain securities are
exempted from such regulations (except for the fraud and criminal
liability provisions of the Securities Acts). If the IMF were to
arrange a private placement of securities, it would not be sub-

-44ject to the Securities Acts' provisions. Because there is a good
deal of ambiguity as to what constitutes a "public offering"
under the securities laws, the particular manner of selling the
securities would have to be examined closely to determine whether
the transactions in fact were exempted. In addition to transactions exempted from the securities regulations, there are types
of securities exempted by statute
Thus, for example, specific
statutory exemptions apply to World Bank and regional MDB
securities. It might be desirable to amend U.S. law to obtain
such exemption for the IMF as well, should it seek to borrow in
U.S. private markets. In addition to U.S. Federal law regarding
the sale of securities in the United States, applicable state
securities laws also would have to be complied with by the IMF.
Local investment laws
Potential purchasers of IMF obligations may be subject to
government regulation, and thus U.S. Federal and state laws may
affect the extent of the market for such obligations. The basic
question arises as to which institutions would be legally
authorized to purchase and sell securities issued by the IMF.
At least one major group of purchasers of IMF obligations
would be commercial banks. However, both Federal and state laws
prescribe the securities that nationally and state-chartered
banks may acquire, as well as the extent to which they may be
acquired.
Further, Federal and state laws prescribe limitations and
restrictions on the extent to which commercial banks can deal in
and underwrite investment securities. ' The international development banks have obtained a specific statutory exemption from such
limitations as prescribed by the Comptroller for national banks
and state bank members of the Federal Reserve System. If the IMF
were to borrow in U.S. capital markets, using distribution techniques such as those used by the MDBs, a similar statutory exemption would be desirable. Moreover, in order to enhance the
marketability of IMF-issued securities, amendments to state laws
governing the lawful investments of, for example, commercial
banks, insurance companies, pensions funds, and other stateregulated entities, may be desirable. The MDBs have obtained
such state law amendments in a number of states, a process which
took the World Bank several years.
Laws Governing Bank Loans
If IMF borrowing is accomplished by means of loans from commercial banks rather than by the issuance of investment securities, then Federal and state laws governing loans by national and
state-cnartered banks apply. m the case of national banks,
there is a limit on loans by such institutions to any single
J n H 1 ^ l n . e x ^ e s s °J 1 5 Percent of the bank's unimpaired capital
and unimpaired surplus. Limitations on loans may also apply to
banking 1
***** t h e P r o v i s i ° n s of various state

-45-

Bank examinations
Virtually all commercial banks in the United States are subject to examination by each or all of the following Federal
regulatory agencies the Comptroller of the Currency; the Federal
Reserve Board of Governors; and, the Federal Deposit Insurance
Corporation. The examinations are for the purpose of assuring
that U.S. banks have not engaged or are not engaging in any
unauthorized, unsafe or unsound practices in conducting their
business. Thus the marketability of IMF obligations (whether in
the form of investment securities or bank loans) will be affected
by the IMF's own financial soundness. Moreover, the IMF's
immunity from suit on its obligations, or its waiver of such immunity, could affect such an^assessment.
Legal and policy limitations on SDR-denomination of IMF
obligations
Legal restrictions on the SDR-denomination of obligations
payable in national currency continue to be in effect in several
countries that are IMF members and whose national currency the
IMF might wish to borrow.
b) Proposals for Use of IMF Gold
During the 1.983 debate on the increase in IMF resources,
proposals were advanced to mobilize the IMF's gold stock as an
alternative to the quota increase, an understandable temptation
at a time of budget constraints and domestic economic difficulties. However, there are pitfalls and costs that make such an
alternative impractical and undesirable.
Historical Perspective
In the Bretton Woods monetary arrangements, gold played a
central role in the IMF and in the international monetary system.
Each nation undertook under the IMF Articles of Agreement to
maintain a "par value" for its currency, expressed in terms of
gold, and to maintain its currency within a small margin around
the parity. As the system developed in practice, most countries
maintained the par values for their currencies through intervention in the foreign exchange market by buying and selling their
currencies for dollars, and the United States met its par value
obligations by undertaking freely to buy and sell gold for
officially held dollar balances at the official price of gold —
the dollar's par value. Thus, a system of fixed exchange rates
and gold convertibility was established and maintained, with gold
serving as the unit of account and the central reserve asset.
The central role of gold was also reflected in the IMF
Articles relating to IMF transactions with its member countries,
which provided for use of gold for payment of 25 percent of quota
subscriptions, for repayment of IMF drawings, and for payment of

-46-

charges to the IMF. By the early 1970s, the IMF's gold holdings
had reached a level of 153 million ounces as a result of all
transactions, but primarily reflecting the quota subscriptions of
its members.
The role of gold and the future disposition of the IMF's gold
holdings became major issues during the discussions on reform of
the international monetary system which culminated in agreements
reached in August 1975 and January 1976. Those agreements
specified a number of steps designed to codify the flexible
exchange rate arrangements that had evolved in practice and to
phase out the central role of gold in the IMF's legal provisions
and operations. They included amendments to the IMF Articles of
Agreement which:
— eliminated the par value and gold convertibility
provisions;
— abolished the official price of gold and the use of gold
as the IMF's "numeraire," or common denominator for
currencies;
— eliminated gold as an important instrument for IMF
transactions and prohibited the Fund from acquiring gold
unless approved by an 85 percent majority vote; and,
— empowered the IMF to sell its gold holdings by decisions
requiring an 85 percent majority vote.
In addition to these amendments, it was agreed to sell, under
IMF authority existing at the time, 50 million ounces of gold
held by the IMF, about one-third of its total holdings. Of this
amount, 25 million ounces were sold to member countries in proportion to their IMF quotas in August 1975, at the official price
of SDR 35 per ounce, in exchange for currency. The United States
purchased 5.7 million ounces. The remaining 25 million ounces
were sold at public auction over a four-year period, and the
proceeds in excess of the official price were used for the
benefit of developing countries, including establishment of a
Trust Fund for balance of payments financing on highly
concessional terms to the poorest countries.
These agreements reflected a balance between diverse and
strongly-held views about the proper role of gold in the international monetary system, the desirability of retaining gold as a
sort of ultimate IMF reserve, and the distribution of the
proceeds of any IMF gold sales. Beyond the sale of the 50
million ounces, which could be and was decided by a simple
majority vote under the IMF Articles in effect at that time, the
agreements included provisions, subsequently reflected in
amendments to the Articles of Agreement, that no future sales
would be possible except on the basis of an 85 percent majority
vote.

-47-

These agreed sales, completed in 1980, reduced the IMF's
holdings to their current level of 103 million ounces. Under the
amended IMF Articles of Agreement, this gold can be sold under
two basic provisions:
— First, the Fund may sell gold at prices based on market
prices.
— Second, the Fund may sell gold to countries that were
members on August 31, 1975, in proportion to their quotas
on that date, at a price of SDR 35 per ounce, in exchange
for their currencies.
As noted above, any decision to sell IMF gold requires an
85 percent majority vote; subsequent decisions on use of the proceeds of sales by the IMF require a 70 percent majority vote for
regular IMF operations and an 85 percent majority vote for all
other purposes. There is no authority in the IMF Articles for
the Fund to lend gold to member countries. Because of Congressional concerns with the Trust Fund element of the agreements
reached in 1975 and 1976, prior Congressional authorization is
now required for U.S. support for any additional Trust Fund
lending under which IMF resources would be used for the special
benefit of a single member or of a segment of the IMF membership.
The various proposals for use of IMF gold vary, in their
specifics, but generally envisage:
— sales to the private market, with the proceeds used to
finance regular IMF operations;
— sales to members at the old official price of SDR 35 per
ounce (now about $35)' in proportion to August 1975
quotas, under the so-called "restitution" provisions;
— loans of gold to members, against which they could borrow,
or;
— use of gold as collateral for IMF borrowing.
The proponents of these proposals argue that they might
eliminate the domestic financial market effects of increasing IMF
resources or, through "restitution," compensate members for their
increasedof subscriptions
and help
developing
meet
their^
balance
payments financing
needs.
While countries
the effects
vary
with
each proposal, in general these approaches pose serious practical
ficulties; could have major adverse consequences for U.S.
nomic, financial and political interests; and could undermine
IMF's ability to deal with current economic and financial

-48-

Impact on IMF
Gold represents the IMF's basic reserve, available to
satisfy creditors' claims on the Fund m the event of liquidation
and to reolenish the IMF's currency holdings. Unlike the quota
increase/sales of IMF gold do not expand the Fund's resources,
but mobilize an existing asset. Sale of the IMF's entire gold
stock at current market prices would generate much less than the
$42 billion agreed for the quota and GAB increases.
However, this outcome would be unlikely. The gold markets
are extremely thin and volatile, and the IMF would not be able to
sell 103 million ounces over the next few years without depressing the gold price in a major way, perhaps drastically. In
recent years, the annual supply of gold from mine production
reaching the market has amounted to about 30 million ounces, less
than a third of the total IMF gold stock. In 1975-1976, uncertainty about what would be done and later announcement of
comparatively modest IMF sales were a contributing factor to a
significant drop in gold prices.
The magnitudes involved here are enormous. An effort to
stretch out IMF sales over an extended period, in order to minimize the price effects, would yield only small amounts for use in
financing'Fund lending. The previous IMF sales of 25 million
ounces were stretched over a four year period, from 1976 to 1980,
in an attempt to avoid disrupting the market. However, the price
dropped by about one third during the year following the gold
agreement, as the market positioned itself to absorb 25 million
ounces. Sales of 103 million ounces would probably have to take
place over a very extended period in order to avoid sharp price
decreases and a major reduction in proceeds to the IMF.
Similarly, proposals to "restitute" IMF gold through sales to
members at the old official price, would effectively deplete the
IMF's resources. Such sales would not strengthen the IMF's
ability to deal with current problems, nor would they help solve
the problems of the IMF's members in greatest difficulty.
The effect of the restitution would be that, in total, members would obtain gold worth at present prices about $31 billion
at a cost of $4 billion. Moreover, the countries experiencing
the greatest financial problems would receive no significant
benefit; indeed, in terms of overall access to financial
resources from the Fund, they would be significantly worse off.
The 110 non-oil developing country members of the IMF would
receive about 25 percent of the total sale of gold. Even the
largest LDC debtors — Mexico, Brazil and Argentina — would each
receive only about $500 million worth of gold at present prices.
This compares in the Mexican case, for example, with an IMF
program totaling the equivalent of nearly $4 billion over three
years.

-49-

The point is that the amounts individual developing countries
might be able to receive through "restitution" would be far less
than they would be "eligible to borrow from the IMF — on a
conditional basis — if the IMF continues to function and if they
continue to meet the economic adjustment objectives set out in
their IMF programs. Restitution is not a way of strengthening
the IMF and would not contribute to the resolution of world
financial problems. In essence, it is a "get rich quick" scheme
for the wealthier countries. In this connection, the U.S. Gold
Commission established by Congress specifically considered and
rejected restitution of IMF gold to member countries.
At present, all IMF assets, including the Fund's gold, serve
as backing for creditors' claims on the IMF. These claims arise
from use of members' quota subscriptions and from loans by
members to the Fund, and are liquid reserve assets which may be
used automatically, and on short notice, to acquire currencies
from the IMF to meet a balance of payments need. Such claims on
the IMF currently total about $40 billion, substantially greater
than the value of the IMF gold at current market prices.
In the event creditors sought to encash their claims to meet
balance of payments financing needs, and the IMF's available
usable currency resources proved inadequate, the Fund would be
able as a last resort to mobilize the gold to acquire the necessary currencies. Moreover, in the event of liquidation of the
IMF, the creditors would have first claim on the gold should
other resources be insufficient. It is extremely unlikely that
current IMF creditors would be willing to have the ultimate
security for their claims eliminated as a result of IMF gold
sales, or subordinated by the Fund pledging the gold as security
for additional borrowing from governments or the markets, or
lending the gold to member countries as security against their
market borrowings. Such action could induce current lenders to
seek alternative safeguards which would limit the IMF's ability
to provide financing, and might well even lead some creditors to
encash their liquid claims on the IMF.
Loans of IMF gold to member countries as security for market
borrowing would be inadvisable on other grounds as well: the
best security for the repayment of loans is the pursuit by borrowing countries of appropriate policies to restore a sustainable
balance of payments position under the auspices of an IMF
program. The "seal of approval" of a Fund program is a proven
incentive to private market lending. A decision to pledge the
IMF's gold against member country borrowing, in lieu of an
increase in members' commitment to the Fund through a quota
increase, might suggest some unfounded uncertainty about the
effectiveness of Fund-sponsored adjustment which could lead to a
loss of confidence in the financial markets and a contraction in
lending on U.S. and foreign markets.

-50-

For these reasons, any discussion of IMF gold sales or borrowing against gold collateral would be contentious and
protracted. It is extremely unlikely that the 85 percent
majority vote needed could be obtained for a decision to sell all
or substantially all of the IMF's gold in lieu of, or even along
with, a quota increase. The major IMF creditors would not want
to see the security for their claims eliminated or eroded. The
borrowers would not agree to a restitution which would primarily
benefit the strongest members. From the perspective of creditors
and debtors alike, use of IMF gold is not a viable alternative to
the any future increase in IMF resources. And, apart from the
impossibility of negotiation, such proposals are clearly not in
our own interests.
U.S. economic and financial interests
U.S. transactions with the IMF do not affect net budget outlays or the Federal budget deficit. Transfers to and from the
IMF do affect the Treasury's cash position and borrowing requirements. The budget results are affected by the net cost or gains
resulting from financing these transfers and from exchange gains
and losses due to changes, in the dollar value of our SDR-denominated reserve position in the IMF. From the beginning of FY 1970
to the end of calendar 1982, it is estimated that the annual
average net budget cost to the United States of participation in
the IMF amounted to about $107 million.
Moreover, to the extent that net dollar transfers to the IMF
raise the Treasury's borrowing requirements, this affects
domestic money and capital markets by absorbing savings that
would otherwise be available to finance private domestic
consumption and investment.
It is not possible to project reliably the magnitude of U.S.
cash transfers to and from the IMF or their impact on U.S. financial markets. These effects will depend upon the magnitude of
IMF financing, the proportion reflected in use of dollars,
whether the United States itself drew from the IMF, and
conditions in financial markets. However, the amount of
increased Treasury borrowing, and thus the economic impact, is
likely to be quite limited, because any drawdowns on the U.S.
quota will be stretched out over time. For example, even full
commitment of the $5.8 billion increase in the U.S. quota in 1984
—- a highly unlikely assumption — would likely result in additional Treasury borrowing requirements amounting only to about
$1-1.5 billion annually over FY 1984-87. This compares with net
new Treasury borrowing requirements in FY 1984 in excess of $200
billion, and total outstanding U.S. debt of $1.2 trillion as of
April 30, 1983.

-51-

The impact of the minor increase in annual Treasury borrowing
arising from the quota increase is what the orooonents of IMF
gold sales sought to avert. Yet, the economic and financial
effects of IMF gold sales on the U.S. could far outweigh any
costs associated with these borrowings.
The following considerations are relevant
— First, the United States is one of the largest IMF
creditors, with claims on the IMF totaling $7.7 billion.
Sale of the gold and use of the proceeds for IMF loans
would remove the ultimate security for our claims.
— Second, major IMF gold sales could lead to a dramatic
drop in gold prices and reduce the potential value of
our own gold holdings, currently amounting to 263
million ounces ($81 billion at current market prices).
A larger price drop, which seems likely in the face of
large-scale IMF gold sales, would have serious adverse
consequences for domestic gold producers and precipitate
large losses on the gold stocks of the United States and
other countries with gold reserves.
— Third, the sale of gold does not eliminate the financial
market effects that concerned some in connection with the
quota increase and potential Treasury borrowing. The gold
would be acquired primarily for investment purposes and
transactions in the gold market would be largely in terms
of dollars. When IMF gold is sold, the purchasers will
pay for the gold by selling dollar securities such as
corporate or U.S. Treasury securities. This would tend to
put upward pressure on interest rates and have an impact
upon financial markets similar to, and possibly greater
than, those arising from any U.S. borrowing in connection
with the quota increase.
These direct economic and financial costs would far exceed
the potential savings that would have been achieved in foregoing
the 1983 quota increase.
IMF Charges and Remuneration - Status of Implementation of
Section 48 of the Bretton Woods Agreement Act
The IMF levies interest charges on members' use of IMF
resources and pays remuneration to members whose currency is used
by the Fund to finance loans to other members.
Charges. IMF loans made in support of approved economic
adjustment programs may be financed with the Fund's own quotabased resources, with borrowed resources, or, as is often the
case, with a combination of the two. The interest rate charged
by the Fund is determined accordingly. Loans financed with
quota-based resources currently carry a basic rate of charge

-52-

equal to 7.0 percent, as well as a flat service charge assessed
by the Fund to help defray the administrative costs asssociated
with its loan agreements. The basic rate of charge is established annually — and reviewed semi-annually — by the IMF
Executive Board in order to produce income sufficient to raise
the Fund's reserves by 3 percent per year.
A portion of the IMF's lending is also financed by drawings
upon credit lines which have been established for this purpose by
a number of official creditors. The Fund pays these official
creditors a market determined rate of interest on credit line
drawdowns and, accordingly, charges the ultimate borrowers of
these funds a rate equal to its own borrowing costs plus a small
margin.
In many cases, the IMF's financing arrangement with a particular borrower calls for use of both quota-based and borrowed
resources; in these circumstances, the overall rate of interest
charged by the Fund is a blend of the basic rate of charge and
the prevailing market interest rate.
Remuneration. IMF loan operations basically consist of an
exchange of currencies between the Fund and the borrowing member.
Borrowers use their own currency to purchase from the IMF an
approved amount of another, more useful, currency. Loan transactions thus result in an increase in the Fund's holdings of the
borrower's currency and a reduction in its holdings of the other
currency.
Members whose currency is being "sold" by the Fund receive
remuneration based on the extent to which such transactions
reduce the IMF's holdings of its currency below its quota; that
is, the extent to which their currency is being used to finance
IMF loans. The United States is paid remuneration on the amount
by which the IMF's holdings of U.S. dollars (which are often
purchased by borrowers) falls below 91 percent of its quota.
The rate of remuneration is determined as a percentage of the
SDR interest rate (a weighted average of the interest rates on
short-term instruments denominated in each of the 5 currencies
that comprise the SDR), and is currently set at 88.33 percent of
the SDR rate.
The United States has strongly advocated, pursuant to the
provisions of Section 48 of the Bretton Woods Agreement Act, that
the IMF allow both the rate of charge and the rate of remuneration to be more closely determined by market interest rates.
In our view, there is no persuasive case for the extension of IMF
credit at below market rates. The IMF is not a development
institution, and its limited resources should neither be
committed to long-term structural projects nor provided at
excessively concessional rates.

-53-

The IMF is the cornerstone of the international monetary
system, and as such it is essential that it conduct its
operations so as to ensure the continued confidence and financial
support of the creditor countries, as well as the confidence of
the international financial community in general. In this regard
we have argued that it is important for the Fund to levy charges
that reflect the true cost of its financial resources and which
will protect its own financial integrity, as well as to provide
adequate remuneration to the creditor countries upon which its
financial operations depend.
Progress has been made toward achieving these objectives.
The basic rate of charge was recently increased from 6.6 percent
to 7.0 percent, and the United States intends to press for
further increases in order to both close the gap between charges
and market rates and to improve the Fund's own reserves and
income. Additionally, at strong U.S. urging the Executive Board
recently agreed to take steps to unify the rate of remuneration
and the SDR rate by raising the remuneration rate as a percentage.
of the SDR rate by 3-1/3 percentage points per year for three
years beginning May 1, 1984. Further, a formula has been adopted
which would permit larger increases during a year in the event of
a decline in the SDR rate. Beyond May 1, 1987 a complex formula
linking further increases in the rate of remuneration to declines
in the SDR interest rate could result in a remuneration rate
equal to the full SDR rate.
Strengthening the IMF: The IMF as a Catalyst and Enhanced and
Intensified Surveillance
The IMF has played the key role in the cooperative international strategy to resolve the debt crisis. The IMF's financing
activities in support of economic adjustment programs, made possible at the appropriate scale by the 1983 quota increase and
official borrowing arrangements, are an essential component of
that successful strategy. However, the IMF's role in the resolution of the debt problem extends significantly beyond its own
financing. The pursuit of an IMF program by a debtor country
demonstrates a willingness to pursue sound economic policies,
helps reverse the loss of confidence of the financial community
that contributed to the financial crisis in the first place, and
encourages both the extension of debt relief and the provision of
new private and official financing. Typically, financing provided by sources other than the IMF is a multiple of the IMF's
funding.
As more countries demonstrate solid progress in bringing
about economic adjustment, and in some cases complete IMF programs, it is essential that they continue to pursue sound
policies to avoid a recurrence of problems and to ensure the
continuing participation of the financial community. In recognition of the extension of the IMF's role beyond the provision of
its own financing, the concept of enhanced IMF surveillance of

-54-

economic policies to accompany multi-year debt reschedulings was
developed'and applied for the first time in the case of Mexico.
It is likely that this approach will be applied to some
additional countries where conditions are favorable.
Similarly, the Group of Ten countries is considering ways in
which the surveillance role of the Fund may be intensified in
cases where countries have made prolonged use of IMF resources
but have not achieved adjustment, perhaps because of entrenched
structural problems. In such situations, a process of intensified IMF surveillance in cooperation with the World Bank may
succeed actual IMF financial involvement.
Through such initiatives, the international community is
addressing the issues of how to ensure that progress will
continue to be achieved in the resolution of the debt crisis,
that similar problems will not recurr, and that limits on the use
of IMF resources will be respected.

- 55 The International Monetary System
and the International Debt Problem
The mounting debt problems of developing countries placed
severe strains on the international financial system and led many
to question whether existing mechanisms were adequate to deal
with the situation. Since the inception of the problem in 1982,
a great deal of progress has been achieved in dealing with the
immediate financial effects and laying the basis for resumption
of sustainable growth and external stability. However, the
economic, financial and human costs have been substantial and
serious problems still remain. This chapter reviews the origins
of the debt problem, describes the coordinated strategy that has
been developed to resolve ongoing financial problems, examines
proposals for alternative approaches, and describes steps being
taken to develop an early warning system to deal with potential
problems before a crisis develops.
Origins of the Problem
The international debt 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; large transfers of real income and wealth to oil
exporting countries; and, deterioration of current account
balances. For the oil-importing less developed countries - the
LDCs - this process was further compounded by the decline of
their export earnings when the commodity boom ended.
Rather than allowing their economies to adjust to the oil
shocks, many governments tried to maintain real incomes through
stimulative economic policies, and to protect jobs in uncompetitive industries through controls and subsidies. Inflationary
policies did at times bring a short-run boost to real growth, 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 effort ultimately necessary grew
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 oil-exporting countries also
borrowed heavily abroad, in effect relying on increasing future
oil revenues to finance ambitious development plans.

- 56 In the inflationary environment of the 1970s, it was fairly
easy for most nations to borrow abroad, even in large amounts,
and their debts accumulated rapidly. Most of the increased
foreign debt reflected borrowing from commercial banks in
industrialized countries. By mid-1982 (just before the Mexican
debt crisis), the total foreign debt of non-OPEC developing
countries was 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 about half of that
was owed by only three Latin American countries - Argentina,
Brazil, and Mexico. New net lending to non-OPEC countries by
banks in the industrial countries continued to grow - by about
$37 billion in 1979, $43 billion in 1980, and $47 billion in 1981
- with most of the increase continuing to go to Latin America.
The environment of the 1970s could not continue forever, and
the 1980s brought rapid and dramatic changes. One of the most
important was the strong shift to anti-inflationary policies in
most industrial countries, which has had a major impact on market
expectations about inflation. In fact, inflation rates declined
dramatically. Consumer price indices in the United States and
other OECD nations fell from 13 percent in 1980 to 3.3 percent in
the United States and about 5 percent for the OECD in 1984. Oil
prices declined significantly. Nominal interest rates fell,
although the real rate of interest rose from negative levels in
the 1970s to roughly 5.5 percent in late-1984. Countries that
had borrowed on the assumption of continued negative real interest rates rapidly came to bear the full burden of their debts.
Furthermore, the world suffered the longest and deepest
recession since World War II, causing LDC commodity export
earnings to fall dramatically. Non-fuel commodity prices dropped
20 percent during the 1980 to 1982 period, while volume also
decreased or stagnated. Thus, at the very time when debt service
burdens were escalating, one of the developing countries*
principal sources of hard currency was declining.
In sum, the situation for many LDCs was untenable, and the
international debt problem became inevitable. By late 1981,
signs of impending crisis were becoming evident. Mexico's
reserves were effectively depleted by mid-1982, and Argentina's
economy continued to be crippled in the wake of the war in the
South Atlantic. Brazil, which had been making sporadic attempts
at adjustment in 1981, faced a rapid and debilitating deterioration in its terms of trade and a collapse of newer markets for
ZPrZf Xn A f ^ c a ' thce M i d d l e East, Latin America, and Eastern
Europe. Brazil was forced to increase its dependence on shortterm finance, particularly in the interbank market.
1982^ !JXiC° f°U2d itSSlf Unable to service its debt by midUnited q ^ ^ " 9 e n C y f i n a n c i a l Package was put together by the
United
States,
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- 57 Moreover, creditors became increasingly concerned about
Brazil, and the interbank market for Brazil began to collapse by
August 1982. Interbank funding volumes contracted from over $10
billion at the end of June to around $5.5 billion 5 months later.
Once again, the United States, among other countries, undertook a
major short-term financial rescue effort for that country, providing more than $1.2 billion in short-term rescue finance in a
period of less than three months.
The International Debt Strategy
In response to the Mexican and Brazilian debt problems, the
United States, with the cooperation of other industrial countries, formulated a strategy to deal with a problem that had
become the worst threat to the international financial system in
fifty years. The strategy was endorsed by the seven heads of
state at the Williamsburg Summit in 1983, and has wide support
throughout the international financial community. It was reaffirmed at the London Summit in June 1984.
The debt strategy consisted of five interrelated elements:
(1) economic adjustment by the debtor countries; (2) economic
recovery, sustained growth and open markets in the industrialized
countries; (3) adequate resources for the International Monetary
Fund; (4) continued commercial bank lending for countries making
determined adjustment efforts; and (5) readiness to provide
emergency or bridge financing, as necessary, from central banks
and governments, on a case-by-case basis, in support of
adjustment efforts.
The first, and indeed central, element of the strategy is
that debtor countries in financial difficulty promptly adopt comprehensive, credible and effective programs to strengthen their
balance of payments and stabilize their economies. Generally,
these are policies that reduce internal and external imbalances
commonly associated with excessive government spending, rapid
monetary creation, inadequate savings and investment, and lack of
competitiveness on international markets due to unrealistic
exchange rates.
The second element is that the industrial countries follow
policies leading to sustainable, non-inflationary economic
growth. At the same time, they must keep their markets open to
exports from developing countries. Growth in export markets is
essential to provide debtor countries the opportunity to increase
their foreign exchange earnings.
The third element is maintenance of an adequate IMF resource
base. The resources of the Fund were increased substantially in
1983 to assure that it has adequate funds to play its central
role in both helping debtor countries formulate adjustment
programs to address their economic problems and encouraging
creditors to provide more financial support. As described in the
previous chapter, these additional resources were provided

- 58 through the general quota increase, ^ e enlargement and modification of the General Arrangements to Borrow (GAB), and
addi?iontl borrowing arrangements between the IMF and certain
official creditors.
The fourth element is continued commercial bank lending to
countries making determined adjustment efforts. Commercial banks
generally have shown a willingness to reschedule existing debts
and continue lending to these countries, and to do so on better
terms in cases where the debtor is making clear progress in its
adjustment program.
The fifth element concerns the readiness of creditor governments to provide emergency financing on a selective basis when
appropriate. This financing generally fills the gap between the
time when a program has been worked out with the IMF and actual
disbursement of IMF and commercial loans .
At the London Summit, the heads of state reviewed the debt
situation in view of both the much more favorable outlook for
world growth and the evidence of considerable progress toward
adjustment in some debtor countries. After two years, it had
become clear that certain countries had successfully weathered
the initial stages of readjusting their economies to the
realities of the international economy and had restructured their
debts. However, many rescheduling agreements had grace periods
that would be running out in 1985 and 1986, after which amortization payments would rise steeply.
Therefore, the London Summit participants considered what
might be done, within the framework of the agreed debt strategy,
to help resolve the debt problem. The Summit Communique
reaffirmed the central role of the IMF and its cooperative
relationship with the World Bank, and the strengthening of the
latter's function in the area of medium- and long-term development. In addition, private banks were encouraged to make more
extensive use of multi-year reschedulings in cases where
effective adjustment is underway, and the Summit participants
expressed their willingness to do the same regarding their
official credits. Further, the heads of state emphasized the
potential importance of direct investment. By making multi-year
commitments, bankers and governments signal that they have
increased confidence in the performance of the debtor and are
prepared to relax the close surveillance of economic performance
that was necessary in a crisis situation and revert to less
intensive monitoring through the regular IMF consultation procedures. Mexico was the first country to benefit from a private
sector multi-year rescheduling agreement. Several additional
countries have concluded similar agreements, and others are
are in the negotiation stage.

- 59 Progress to Date
The international debt strategy met with considerable early
success as the crisis atmosphere that had paralyzed the financial
markets abated somewhat and debtor countries, private financial
institutions and creditor governments proceeded in a businesslike, cooperative fashion to negotiate new financing oackages and
reschedulings. At the same time, debtor governments and the IMF
worked out the details of the economic adjustment programs
crucial to the success of the strategy. By the end of 1984,
nearly all the major debtor countries were implementing adjustment programs either independently or under IMF supervision.
Two years of adjustment and financing efforts, coupled with
the stimulus provided by the international recovery, have
resulted in clear progress toward the resolution of the debt
problem. Between 1982 and 1984, the combined current account
deficits of non-OPEC LDC countries fell from $82 billion to $43
billion. For the 24 major LDCs, the deficit fell from $61
billion to $27 billion. The rate of debt accumulation has slowed
markedly, and because of the recent and projected high growth
rates for real exports, the ratio of debt to exports of goods and
services should decline almost 15 percentage points from the 1983
level to about 139 percent in 1985. The debt service ratio is
estimated to have declined from 24.4 percent in 1982 to 21.5
percent in 1984, although some increase is possible in 1985.
Partly in reflection of debt restructuring, the maturity
structure of LDC debt has improved substantially - the ratio of
short-term debt to total non-oil developing country exports is
estimated to have declined from 30 percent in 1982 to about 20
percent in 1934.
The banks have contributed to this progress by providing
both new finance and debt restructuring where appropriate. The
frequency of restructuring has increased sharply since the advent
of widespread debt servicing difficulties in the latter part of
1982. Twenty-five agreements involving medium and long-term debt
owed to private banks were signed during the period January 1983
to June 1984, covering 21 countries, all but two of which are
members of the IMF. The amounts restructured under these
agreements totalled $40.9 billion, representing 20.9 percent of
total bank claims on these countries outstanding as of end-1983
($195.4 billion). Agreements to maintain or roll over existing
short-term debt also helped reduce debt-servicing problems.
A total of 31 rescheduling agreements were reached in the
period January 1983 through June 1984 covering debt owed by
non-OPEC developing countries to official creditors. The
agreements covered 24 countries, only one of which was not a
member of the IMF. The amount rescheduled under these agreements
was over $11.4 billion.

- 60 Role of Global Recovery in Resolving the Debt Crisis
The global recovery, led by the United States and Canada, is
having a significantly positive impact on the debt problems of
the non-oil developing countries, primarily through increased
industrial country imports. The decline in oil prices since 1982
has eased the financial pressure on oil importing countries, but
at the same time has put new financial pressure on oil exporters.
Interest rates have declined overall since 1981, easing debt
service burdens. The rise in interest rates in the first half of
1984 caused concern, although rates did not reach the 1980-82
levels. However, in the second Half of 1984, rates declined
significantly. Overall, it is estimated that the rise in LDC
export earnings in 1984 greatly exceeded the increase in their
debt service payments arising from interest rate charges.
The export earnings of developing countries are highly
sensitive to economic conditions in the industrial countries,
which affect both LDC export volumes and primary commodity
prices. Non-oil developing country exports increased about 150
percent during the 1975-80 period, reflecting the economic
expansion in the industrial countries during 1976-79 and the
continued rise in primary commodity prices in 1980. However, in
the face of slack growth in the industrialized countries, non-oil
developing country exports remained roughly steady during
1980-82, as a rising volume of exports was offset by declining
commodity prices. The pattern of exports for the oil producers,
relative to that of the industrial countries, showed a larger
increase in the 1975-80 period, reflecting the extremely large
oil price increases in 1979-80, followed by a sharper decline
during 1980-83, due to the drop in oil trade volume during the
world recession.
During 1983, recovery in the industrial countries had a small
positive impact on non-oil developing country exports, which rose
slightly in value as the volume increase more than offset falling
commodity prices. Export earnings of the oil exporters continued
to decline in 1983 as the result of continued declines in both
volume and price.
In 1984, the impact of the industrial country recovery was
significantly positive. Real GDP in the OECD area rose almost
five percent, more than double the rate of the orevious year.
The United States, with real GNP growth of 6.7 percent, led the
industrialized world's recovery; growth in the rest of the OECD
was 3.4 percent, still considerably faster than the orevious
year. Exports of the 24 major LDCs rose an estimated 13.5 percent in value in 1984, more than twice as fast as in 1983, and
the volume of exports rose a very healthy 9.2 percent. Real
growth in non-OPEC LDCs picked up to about 4 percent in 1984,
rhJn c a C l O U r t m e S t h e r a t e i n 1 9 8 3 « T h e substantial impact of
recovery may be read in the $15 billion, 23.6 percent
r ' l
D
i? w h f ^
"!- i m P ° r t s f r o m the non-OPEC LDCs, a good portion
of wnicn came from Latin America. For the first ten mon?hs of

- 61 the year, exports from the region were up 15 percent. The region
least affected by the recovery to date has been Africa. This can
be explained in part by the slower pace of recovery in Europe,
the major trading partner for most African countries.
Rising export earnings in 1984 outweighed the negative
effects on non-OPEC LDCs of a higher average level of interest
rates. Although rates (measured by the London Interbank Offer
Rate - LIBOR) rose to nearly 13 percent in July 1984, they were
still well below the average rates of 1980-82, and they declined
substantially in the second half of the year. It is estimated
that a one percentage point rise in international borrowing rates
that persisted one year would increase the net interest payments
for the non-OPEC developing countries during the following year
by about $2.5 billion. However, in the first ten months of this
year, U.S. imports from those countries increased more than $15
billion compared with the amount in the same 1983 period.
Proposals for an Alternative Debt Strategy: A Global
Approach to Debt Relief
At the outset of the debt problem, many argued for a
generalized system of debt relief rather than the case-by-case
approach that was adopted. Proposals for a global approach to
the problem were motivated in large part by a concern that the
problem was too serious to be managed with existing institutions,
and that without such generalized relief massive default was
likely.
The significant progress achieved in the last two years with
the assistance of the case-by-case approach has proven those
original doom-sayers wrong. However, some continue to advocate a
systemic approach to rescheduling for the present circumstances
because of'concern that a "hump" in debt service payments expected in 1985-86, as debt reschedulings negotiated previously
expire, will increase the threat of new financial problems and
possible default. This section will address the issue of
generalized debt relief, after an examination of the current
process of international debt restructuring.
Present Debt Restructuring Process
A basic principle underlying the cooperative international
debt strategy is the rejection of a systematic or formula
approach to rescheduling. Rather, creditor governments and
private banks have relied fundamentally upon existing institutions to meet the problems of individual countries as they arose.
Bank creditors often negotiate restructurings in what is _
known as the "London Club." The pattern developed since 1982 is
the establishment by a "lead bank" of a bank advisory committee
to represent banks with major interests in the debtor country
The rescheduling procedure includes the gathering of data on tne
specific credits outstanding, a presentation by the debtor coun-

- 62 try on its economic and financial position and its policies,
including the status of its relationship with the IMF, and the
negotiation of an amount of debt restructuring that both parties
are prepared to accept as consistent with the deotor s aoility to
qenerate foreign exchange. Banks generally condition the
agreement on compliance by the debtor with an IMF adjustment
program. They have avoided the inclusion of interest payments in
the restructuring package. There is also often a parallel
negotiation to arrange new credits from the same group of banks
that hold bulk of the country's outstanding debt.
Government creditors generally negotiate in a forum known as
the "Paris Club," using broadly similar procedures. Unlike the
banks, governments are prepared to reschedule interest as well as
principal. However, the Paris Club does not provide new credits.
Multilateral institutions do not reschedule their own credits but
do participate as observers in the Paris Club and are prepared to
lend their good offices in both the Paris Club and commercial
bank restructurings when requested to do so by the direct
participants. Since they are unaffected by rescheduling, the
multilateral organization lending programs continue and may even
expand as the debtor country adopts effective adjustment
measures.
Private non-bank institutions, e.g., bondholders and suppliers, do not generally reach restructuring agreements because
of the difficulty in forming a representative group. Debtors may
continue to meet obligations to such creditors in order to retain
good will and avoid the need for negotiations on individually
small amounts, or may propose an alternative rescheduling formula
where the amounts outstanding are important.
While both private bank and official creditors seek to
maintain certain common principles in each negotiation, the
substantial increase in the number of restructurings has led to
some evolution. Steering committees of banks established at the
time of an initial restructuring negotiation have in many cases
maintained close contact with debtor governments in order to
complement initial agreements with new money agreements and
follow-up restructurings. Further, there has been increasingly
close linkage with IMF-supported adjustment programs. Banks have
shown greater flexibility toward those debtor countries that have
demonstrated success in implementing adjustment policies and have
granted improved terms (lower interest rate spreads and longer
maturities) in nearly all cases since late 1983 for countries
which had previously negotiated restructurings. In the cases of
Mexico and Venezuela, agreement in principle has been reached to
consolidate principal due over 5-6 years for relatively long repayment periods. Banks have recently concluded a similar multiyear arrangement with Ecuador. These agreements reflect a substantial evolution relative to previous rescheduling practices.

- 63 In the Paris Club, creditor governments adjust rescheduling
terms in light of the balance of payments prospects for the
rescheduling country. In recent years, the generally weak
balance of payments prospects for many developing countries have
led, in individual cases, to an increase in the amount of debt
relief provided by consolidation of larger percentages of debt
and the extension of longer grace and repayment periods. In
addition, the Paris Club creditors have included "goodwill
clauses" in cases where the country is expected to need future
debt restructuring to indicate the willingness of creditor
governments to consider a future rescheduling, provided Paris
Club conditions are met, e.g., implementation of an approved IMF
standby arrangement. The clauses provide some assurance of
future debt relief to countries with long-term problems while
maintaining Paris Club conditionality.
For the Future: A Differentiated Strategy Remains the Best Approach
At the outset of severe debt problems in 1982, the
Administration rejected a formula or global approach to the
crisis in favor of the case-by-case strategy on which the
international community has relied thus far. The judgement that
a global approach was not the correct one was based largely on
the great diversity of the debtor countries. The more than 100
countries in the developing world are very different with respect
to their stages of development, their adaptation to global
economic trends and their relationships to the international
public and private credit systems. Debtors vary with regard to
financial need, capacity for adjustment, and potential for
sustainable long-term growth. Creditors, both public and
private, operate from many different countries under varying
constraints, with differing missions, obligations, and limits to
their ability to adapt to debtor problems and demands. Political
situations are uniform only in their diversity, while international markets for finance and trade are equally complex and
not subject to easy regulations or controls. These realities are
the true obstacles to a comprehensive, uniform approach to the
debt problem.
Furthermore, it was and is apparent that a global approach
could weaken the incentives for debtor countries to bring about
the economic adjustment essential to any durable resolution of
the debt problem, and could weaken the incentives for participation by financial institutions. A global approach could
benefit countries and financial institutions that had acted
unwisely, and penalize those that had not. The five-part
international debt strategy is not based on a formula but on
the implementation of a set of conditions, which, if fulfilled
over the medium-term, can lead to a basic improvement in the
creditworthiness of many of the heavily indebted countries.

- 64 ~o,.a af(-pr the onset of the problem, a global
More than two v e a ^ a f ^ *he °ns
pragmatic,
e ual
1
most
approach remains 9
Jy J ™ * * " ? * ^ the
Practicable.
case-by-case J P ^ f ^ ^ ^ ^ ^ ^ t ' t h e case-by-case strategy has
There is now clear evidence ^
f i n a r i c ial situation of the
brought about an ^ m P r o v ^ e n ^ . ^ ^ recovery of both economic
debtor countries while allowing a recovey
^
coSoerative^rategy a" been aole tolerate with enough
cohesion to sustai^negotiations and implementation over long
periods and, in response to changing circumstances, nave been
able to bring about an evolution of the process when advisable.
The evolution of Paris and London Club practices, the London
Summit's support for multi-year reschedulings as appropriate for
countries which have demonstrated their ability and determination
to adjust, and the banking community's successful implementation
of that principle in the case of Mexico are convincing evidence
that the case-by-case debt strategy remains an effective and
flexible instrument to organize the still substantial international efforts that will be required to achieve sustainaole
progress on the debt problem.
Avoiding Similar Problems in the Future - Improving Data on
International Indebtedness
The international community is currently working on ways to
improve the process of resolving the debt problem. At the same
time, countries are working within the IMF and in other fora to
identify ways to avoid the recurrence of similar problems in the
future. For example, as discussed in the previous chapter, the
Group of Ten countries is considering ways to strengthen the
IMF's surveillance function to contribute to that purpose.
An important part of the effort to avoid a recurrence is the
work under way in the IMF and other international institutions to
improve the collection and usefulness of data on international
debt. In fact, efforts in this area have been in process for
some time. This concluding section describes that work.
Compilation and Dissemination of International Bank Data
A principal feature of the international financial system in
the past decade was the rapid growth of credits by private banks
to residents of other countries, particularly the developing
countries with large current account deficits. The Bank for
International Settlements (BIS) pioneered the creation of data
systems focussing on credit extension and deposit-taking through
the international banking system, including a country-by-country
disaggregation of bank positions. These systems are based on
reports provided by industrialized countries with internationally
active private banks. Eighteen countries are now reporting data
which are published in aggregated form in the quarterly "International Banking Developments." Fifteen countries are now
reporting data which are published in aggregated form in the
semiannual "The Maturity Distribution of International Bank
Lending."

- 65 More recently, the IMF staff has developed a similar but more
comprehensive system, drawing on existing data reports from over
100 member countries and on newly developed separate reports akin
to those provided to the BIS but covering a larger number of
banking centers. Some data are provided on a monthly basis and
others on a quarterly basis.
While the basic methodology of the Fund's system has been
established and publication of aggregated reports has begun (see
below), the system is still evolving with respect to the
coverage, accuracy and timeliness of reporting by members.
Refinements such as increased detail on the currency composition
of banks' positions and a maturity analysis are being considered.
Descriptions of the system are publicly available in the IMF
Survey (see, e.g., June 18, 1984); in Appendix 1 to Occasional
Paper 31, "International Capital Markets: Developments and
Prospects, 1984;" in "International Banking Statistics"
(IMF/PIFS/84/11); and in the introduction to the monthly issues
of International Monetary Statistics (IFS).
Dissemination of the collected data in aggregated form takes
place regularly through several channels. Publication commenced
in the January 1934 issue of IFS. The most recent IMF annual
report on international capital markets, Occasional Paper 31
cited above, bases its discussion of international banking flows
largely on Fund data. It is envisioned that further articles may
be published in the biweekly IMF Survey and possibly in other
publications. Also, the Executive Board is informed directly of
developments in international capital markets and reviews them at
Board meetings.
Other Information on External Indebtedness
The Fund collects "flow" data on external transactions of
member countries and publishes them in a summary form in the
monthly IFS and in greater detail in Balance of Payments
Statistics. A long-term goal of the Fund is to develop a similar
categorization of "stock" positions of member countries, the
liablility side of which would constitute a comprehensive picture
of a country's external liabilities. (Stock positions differ
from cumulations of flow data largely because of valuation
changes. For instance, fluctuations in exchange rates can significantly affect the valuation of a stock position, depending
on which currency is chosen as a unit of account, as well as the
extent to which liabilities are denominated in other currencies.)
At present only a very few countries, including the United
States, estimate stock positions.
In addition to its own data systems, the Fund utilizes
information collected by other international organizations.
Considerable information on medium- and long-term indebtedness
extended to or guaranteed by the official sector of reporting
countries is available through the World Bank's "Debtor Reporting

- 66 Svstem" (DRS). The Bank has recently augmented the system to
provide some information on non-guaranteed debt or private
residents, and the gap represented by noncoverage of short-term
indebtedness can be partly covered by estimates provided by the
Fund. The DRS constitutes a major source for Fund country
specialist estimates of debt profiles, which are subsequently
integrated into aggregated positions published in the Fund's
semiannual World Economic Outlook.
The Organization for Economic Cooperation and Development
(OECD) maintains a "Creditor Reporting System" (CRS), based on
reports by participating creditor countries, which produces data
on flows to developing countries (and some stock positions)
involving direct credit or guarantees by the creditor countries.
Data and analyses are published in the OECD's annual Review of
Development Cooperation. The OECD recently joined with the BIS
to develop a system to estimate the portion of bank claims on
individual countries which are guaranteed by OECD member countries. This estimate, which is published, lessens difficulties
encountered in constructuring a comprehensive debt profile from
data from different systems, particularly the problem of doublecounting. Both systems are available to the Fund's country
specialists.
It should also be noted that the BIS is in the process of
shifting the basis of its semiannual report, "The Maturity
Distribution of International Bank Lending", to one in which much
of the data are collected on a "consolidated" reporting method,
i.e., aggregating the positions of parent banks with those of
their foreign affiliates. Although the Fund will probably not
make use of data on a consolidated as opposed to a balance of
payments basis, the availability of consolidated data will extend
the coverage of the BIS reporting system and represents considerable progress from the perspective of bank supervision and
other analytical purposes.
Cooperation Among Compilers of External Debt Statistics
Cooperation among the above-mentioned organizations is
receiving increased emphasis. The Fund has convened, and acts as
the Secretariat for, a working group of statistical experts from
those^international organizations and the Berne Union. The
group's initial meeting took place in March 1984, at which time
the representatives discussed the objectives of the various
systems, classification and accounting practices, greater
exchange of information, and possible future action to intensify
cooperation.

- 67 Information on Unused Lines of Credit
In addition to producing data on outstanding loans to private
and public entities in developing countries, some of the systems
described above collect information on commitments and disbursements. To the extent information is available on a commitment as
well as a disbursed basis, it is possible to deduce the volume of
unused credits. Data on claims and liabilities of banks are
typically collected only with respect to outstanding loans. However, one of the BIS systems does collect and publish undisbursed
credit commitments of reporting banks vis-a-vis residents of
certain individual countries. Moreover, considerable information
is available on commitments in the form of large publicized bank
loans, e.g., from the OECD' s Financial Statistics".
Role of the United States Executive Director of the Fund
Given the existence of widespread agreement on the need for
improving information on external indebtedness, as well as the
initiatives already undertaken by the Fund, the U.S. Executive
Director of the Fund has encountered no difficulty in carrying
out the responsibilities set forth in the new Section 42 of the
Bretton Woods Agreement Act (BWAA). In April 1983, the Executive
Board discussed and approved the general direction of the Fund's
work on debt statistics, and specifically the establishment of a
new system on international banking statistics. At an Executive
Board seminar following passage of P.L. 98-181, the U.S.
Executive Director made comments consistent with the provisions
of the legislation.
In 1984, the Executive Board received a further progress
report on the Fund's work, as well as a report on the meeting
of the Working Group on External Debt Statistics, and periodic
analytical reports on financial developments drawn from the
international banking statistics. The Board also discussed the
adequacy and timeliness of statistics on domestic economic
developments and key international financial indicators for
individual countries.
The office of the U.S Executive Director, assisted by the
staffs of the Treasury Department and the Federal Reserve System,
will continue to monitor the work of the Fund in the area of
external debt statistics and, as necessary, will provide impetus
to this work in order to achieve the objectives of Section 42 of
the BWAA.

Potential Impact
of International Monetary Fund Quota Expansion
On World Oil Prices
The Congress has asked for an assessment of the potential
impact of expansion of International Monetary Fund (Fund or IMF)
quotas on world oil prices.
Since 1970, two IMF general quota expansions have occurred
~ in 1980 and in 1983 (Table I ) . Increases in the aggregate
total of IMF quotas have occurred in other years to accommodate
the admission of new members and, in 1981, selective increases
in the quotas of two established members — Saudi Arabia and
Oman.
Member quotas are the basic source of operating capital for
the IMF. The resources of the IMF are available to provide
temporary balance of payments financing in support of members'
efforts to implement sound economic adjustment programs. The
economic policy conditions associated with use of IMF resources
are designed to ensure that the adjustment measures are both
effective in strengthening borrowers' external positions and
internationally responsible. The "seal of approval" associated
with IMF programs serves as the catalyst for continued flows of
official and private financing which permit maintenance of economic activity and imports in borrowing countries while corrective policies take effect and lay the basis for sustained
economic growth in the medium-term.
Thus, the IMF's potential for influencing world oil prices
is limited to situations where member countries are experiencing
external financial imbalances. For a quota expansion to affect
world oil prices, the Fund's provision of resources to members
would have to affect the balance between world oil supply and
demand. Tables II and III provide a profile of world oil production, consumption, and trade and identify the respective oil
importing and oil exporting countries. We conclude that the
potential for quota expansion to directly affect world oil prices
is extremely limited in the short-run, while the long-term,
indirect effects are diffuse and of indeterminant direction and
magnitude.
Direct Impacts
The direct impact of an IMF quota expansion on world petroleum demand is difficult to measure as any funds provided by the
IMF are merged with other funds available to the recipient and
oil imports are only one of many uses for total available resources, including debt repayment. A quota increase does add to
resources potentially availahle to countries in payments difficulties, but the resources, if provided a country, are used to
sustain economic activity in general. At most, the effect of IMF
disbursements is to sustain present or to reduce petroleum demand
levels, not to increase them.

- 2 The potential for a guota expansion to directly affect world
oil supplies in the short-term is most likely to be an issue in
situations where a potential borrowing member has unutilized oil
productive capacity but is seeking to maximize its foreign exchange earnings through production constraints in a market characterized by weak demand and soft oil prices. Under the IMF's
uniform conditions and criteria guidelines, however, conditional
Fund facilities would not be available to substitute for potential foreign exchange earnings from marketable exports. Any
attempt to circumvent these guidelines would be subject to close
scrutiny by the Executive Directors of the Fund.
Drawing resources from the Fund in amounts exceeding a
country's reserve tranche (basically, its quota contribution of
reserve assets) is contingent upon acceptance of an economic
program, including austerity measures, designed to eliminate the
external financial imbalance. These programs are predicated on
market-oriented demand projections for a borrower's exports.
Thus, guota expansion is not likely to reduce the short-run
availability of oil supplies.
Further, the historical record of IMF resource use (Table
IV) demonstrates that material oil supply cutbacks have not been
observed following recent quota expansions. This record shows
that IMF resources have been drawn by fifteen net oil exporters
over the last five years.
.„„„ The, Peoples Republic of China drew IMF resources in both
In nnanw 198 n b u t i n c r e a s e d its oil exports by approximately
50,000 barrels per day. Malaysia drew in 1981 under the
Compensatory Financing Facility, but that was due to declining
export receipts on other primary commodities and not related to
its oil exports.
Seven oil exporters drew IMF resources in 1982 — Araentina
countHeSE9YPA' Me?iC°' Nlgeria' PerU' and S^ia Four of these
e
, " jrgentma, Egypt, Mexico, and Peru - increased oil
two" - EcuLor T c 1 ° ' 0 0 0 b / d a n d a s m u c h a s 3 5 0 '000 b/d), and
While N e
, ? S J r X V ~ k S p t ° U e x p o r t s r o u g h l y constant.
barrel? S r S / 0 ! 6 3 - 0 1 } e x P ° r t s t 0 decline about 200,000
e
t P a r ' J! " J * 1 7 w i ^ h d r e w its reserve tranche, which
pe o e m L S L
E ^ n C e ° f a " I M F P r ° g ^ - On balance, net

Sr S i H u S r S e ^ r l " ^

lnc

™"< a b ° U t 200'000ba"els

Indonesia' Ira1qeX^iraysrL"a^gMntina' Cameroon< Congo, Ecuador,
1983.
Available data ™ IQ!S
^ C ° ~" t U r n e d t o t h e I M F i n
W rld
indicate that oil e ™ r ? «
°
P e t r o l e u m trade patterns
6 8U8 al
borrower exc'p? for I n d o n ^ f
J ned at 1982 levels by each
under the'co^ens^LrTpL'n^ng'FaSlitv'b d™ln9\°CCU"ed .
timber, natural rubber, tin and llhtl Y
-? d °" s h o r t f a l l s i n
ln
and other
'
'
non-oil exports and under

- 3 the Buffer Stock Financing Facility for contributions to tin and
rubber stock funds.
Indirect Effects
The provision of IMF resources to member countries could
affect world petroleum markets indirectly in a number of ways.
For example, economic policy conditions associated with the provision of those resources frequently require countries to adjust
regulated prices. Such requirements, if they raise domestic
petroleum prices, would dampen energy demand (possibly increasing
supplies available for export in oil exporting countries) and
could stimulate investment in new energy supplies if producer
revenues are allowed to increase. On the other hand, implementation of IMF programs should improve prospects for sustained
economic growth and development, which would promote energy
demand growth and could also stimulate development of new energy
supplies. Thus, the impact of quota expansion on the balance
between petroleum supply and demand is unpredictable and we
conclude that the long-term effects of quota expansion on oil
prices are of indeterminant direction and magnitude.

Table I
International Monetary Fund Quotas
Country/Region
WORLD

Dec.
Dec.
Dec.
Dec.
1980
1981
1983
1932
(SDR mill ions)
39,016.5 59,595.5 60,674.0 61,059.8 89,240.8
Apr .
1980

OIL IMPORTING COUNTRIES 29,371.5 44,215.8 44,224.4 44,610.2 65,731.6
Industrial Countries
21,720.0 32,580.0 32,580.0 32,580.0 49,196.0
Developing Countries
7,651.5 11,635.8 11,644.4 12,030.2 16,535.6
in Africa
1,857.3 2,912.1 2,912.1 2,912.1 3,903.2
in Asia
2,623.0 3,956.9 3,965.5 3,965.5 5,265.8
in Europe
1,133.0 1,699.5 1,699.5 2,074.5 2,987.5
in Middle East
301.0
461.4
461-4
719.7
461.4
in Western Hemisphere 1,737.2 2,605.9 2,605.9 2,616.7 3,659.4
OIL EXPORTING COUNTRIES

10,642.0 16,873.8 17,943.7 17,943.7 25,872.4

IMF Group of oil exp.
Indonesi a
Iraq
Nigeri a

3 ,786.0
480.0
141.0
360.0

5 ,592.2
720.0
234.1
540.0

6 ,662.1
720.0
234.1
540.0

Other oil exporters
Norway
United Kingdom
Cameroon
Congo
Gabon
Tunisi a
China, People's Rep.
Malaysi a
Bahrai n
Egypt
Syrian Arab Rep.
Argentina
Ecuador
Mexico
Peru
Trinidad & Tobago

5 ,875.0
295.0
2 ,925.0
45.0
17.0
30.0
63.0
550 .0
253.0
20.0
228.0
63.0
535.0
70.0
535.0
164.0
82.0

9 ,787.5
442.5
4 ,387.5
67.5
25.5
45.0
94.5
1 ,800.0
379.5
30.0
342.0
94.5
802.5
105.0
802.5
246.0
123.0

9 ,787.5 13,757.4
442.5
699.0
4 ,387.5 6,194.0
67.5
92.7
25.5
37.3
45.0
73.1
94.5
138.2
1 ,800.0 2,390.9
379.5
550.6
30.0
48.9
342.0
463.4
94.5
139.1
802.5 1,113.0
105.0
150.7
802.5 1,165.5
246.0
330.9
123.0
170.1

9,751.8
1,009.7
504.0
849.5

(In percent)
OIL IMPORTING COUNTRIES
Industrial Countries
Developing Countries
in Africa
in Asia
in Europe
in Middle East
in Western Hemisphere
OIL EXPORTING COUNTRIES
IMF Group of oil exp.
Other oil exporters

75.3%
55.7%
19.6%
4.3%
6.7%
2.9%
0.8%
4.5%

74.2%
54.7%
19.5%
4.9%
6.6%
2.9%
0.8%
4.4%

72.9%
53.7%
19.2%
4.8%
6.5%
2.8%
0.8%
4.3%

73.1%
53.4%
19.7%
4.8%
6.5%
3.4%
0.8%
4.3%

73.7%
55.1%
18.5%
4.4%
5.9%
3.3%
0.8%
4.1%

27.3%
9.7%
15.1%

28.3%
9.4%
16.4%

29.6%
11.0%
16.1%

29.4%
10.9%
16.0%

29.0%
10.9%
15.4%

Table II
World Petroleum Supply and Disposition, 1981
(Thousand barrels per day and percent)

Region and Country

Apparent Consumption
World
Barrels *
Share

WORLD TOTAL

60705

NORTH AMERICA
Canada
Mexico
United States
Other
CENTRAL & SOUTH AMERICA
Argen tina
Bahama Islands
Brazil
Chile
Colombia
Cuba
Ecuador
Netherlands Antilles
Panama Republic
Peru
Puerto Rico
Trinidad and Tobago
Venezuela
Virgin Islands
Other
WESTERN EUROPE
Austri a
Belgi urn
Denmark
Fi nland
France
Germany, West
Greece
Ireland
Italy
Luxembourg
Netherlands
Norway
Portugal
Spai n
Sweden
Swi tzerland
Turkey
Uni ted Kingdom
Yugoslavia
Other

19169
1836
1267
16058
8
3637
483
75
1022
97
172
207
88
137
84
137
281
45
433
111
265
12766
225
481
243
241
2023
2449
254
104
1906
22
657
185
140
941
471
251
280
1590
285
18

Crude
Production #

Implied Crude &
Product trade A
Imports
Exports

60329

27999

-27625

3.0%
2.1%
26.5%
0.0%

14903
1610
2554
10739
0

5553
226
0
5319
8

-1287
0
-1287
0
0

0.8%
0.1%
1.7%
0.2%
0.3%
0.3%
0.1%
0.2%
0.1%
0.2%
0.5%
0.1%
0.7%
0.2%
0-4%

3776
508
0
240
51
131
3
213
0
0
197
0
245
2157
0
31

1995
0
75
782
46
41
204
0
137
84
0
281
0
0
111
234

-2134
-25
0
0
0
0
0
-125
0
0
-60
0
-200
-1724
0
0

0.4%
0.8%
0.4%
0.4%
3.3%
4.0%
0.4%
0.2%
3.1%
0.0%
1.1%
0.3%
0.2%
1.6%
0.8%
0.4%
0.5%
2.6%
0.5%
0.0%

2841
26
0
15
0
61
89
8
0
38
0
33
551
0
25
0
0
46
1861
88
0

10562
199
481
228
241
1962
2360
246
104
1868
22
624
0
140
916
471
251
234
0
197
13

(

-637
0
0
0
0
0
0
0
0
0
0
0
-366
0
0
0
0
0
-271
0
0

Table II - Continued
World Petroleum Supply and Disposition, 1981
(Thousand barrels per day and percent)

Region and Country

Apparent Consumption
World
Barrels *
Share

Crude
Product i on #

Implied Crude &
Product trade A
Imports
Export!

EASTERN EUROPE AND USSR
Albania
Bulgaria
Cz echo sio v ak i a
Germany, East
Hungary
Poland
Roman i a
U. S. S. R.

11006
44
294
381
355
236
346
323
9027

0.1%
0.5%
0.6%
0.6%
0.4%
0.6%
0.5%
14.9%

12630
44
6
2
1
58
8
255
12256

1605
0
238
379
354
178
338
68
0

-3229
0
0
0
0
0
0
0
-3229

MIDDLE EAST
Bahrai n
Iran
Iraq
Israel
Kuwai t
Oman
Qatar
Saudi Arabia
Syr i a
United Arab Emirates
Other

2059
35
633
214
163
116
6
10
486
120
126
150

0.1%
1.0%
0.4%
0.3%
0.2%
0.0%
0.0%
0.8%
0.2%
0.2%
0.2%

16330
54
1389
1005
1
1185
319
429
10248
166
1534
0

312
0
0
0
162
0
0
0
0
0
0
150

-14583
-19
-756
-791
0
-1069
-313
-419
-9762
-46
-1408
0

AFRICA
Algeri a
Angola
Egypt
Gabon
Kenya
Li by a
Morocco
Ni ger i a
South Africa
Tunsi a
Other

1496
127
20
276
12
39
115
93
156
324
57
277

0.2%
0.0%
0.5%
0.0%
0.1%
0.2%
0.2%
0.3%
0.5%
0.1%
0.5%

4840
1018
130
615
151
0
1175
1
1433
0
118
199

533
0
0
0
0
39
0
92
0
324
0
78

-3377
-891
-110
-339
-139
0
-1060
0
-1277
0
-61
0

Table II - continued
World Petroleum Supply and Disposition, 1981
(Thousand barrels per day and percent)

Region and Country
FAR EAST AND OCEANIA
Australi a
Brunei
China
Hong Kong
India
Indonesi a
Japan
Korea, South
Malaysi a
New Zealand
Pakistan
Philipp i nes
Singapore
Taiwan
Thailand
Other

Apparent Consumption
t ion
lorld
Barrels *
ihare
10570
584
5
1675
128
729
441
4848
536
165
85
107
212
214
377
214
250

1.0%
0.0%
2.8%
0.2%
1.2%
0.7%
8.0%
0.9%
0.3%
0.1%
0.2%
0.3%
0.4%
0.6%
0.4%
0.4%

Crude
Production #
5009
454
188
2012
0
325
1700
3
0
264
11
10
2
0
8
27

Implied Crude &
Product trade A
Imports
Exports
7439
130
0
0
128
404
0
4840
536
0
74
97
210
214
369
214
223

-1878
0
-133
-337
0
0
-1259
0
0
-99
0
0
0
0
0
0
0

Source: International Energy Annual, (Energy Information Administration,
Washington, D . C ) , Table 14. World Petroleum Supply and Disposition
* Data include inland consumption, refinery fuel and loss, and bunkering.
Apparent consumption is either an antual figure or is derived from the
components of refined product output, plus imports minus exports with no
allowance for stock changes. Also includes, where available, liquefied
petroleum gases sold directly for fuel and chemical uses from natural gasprocessing plants.
# Data include natural gas plant liquids for the following countries:
Canada, Mexico, United States, Argentina, Bolivia, Brazil, Chile,
Colombia, Cuba, Ecuador, Peru, Trinidad and Tobago, Venezuela, Austria,
France, Italy, Netherlands, Norway, Spain, United Kingdom, Yugoslavia,
Czechoslovakia, Hungary, Poland, Romania, U.S.S.R., Iran, Iraq, Kuwait,
Qatar, Saudi Arabia, United Arab Emirates, Algeria, Egypt, Libya,
Australia, Brunei, Indonesia, Japan, Malaysia, Pakistan, New Zealand,
and Taiwan. Figures for the United States also include refinery
processing gain and other hydrocarbon inputs to refineries. Ethyl
alcohol fuel is also included in data on Brazil.
A

Includes stock changes. Trade figures derived as difference between
apparent consumption and crude production.

Table III
World Petroleum Supply and Disposition, 1982
(Thousand barrels per day and percent)

Region and Country

Apparent Consumption
World
Barrels *
Share

Crude
Production #

Implied Crude &
Product trade A
Imports
Exports

57956

26327

-23541

30.61%
2.71%
2.28%
25.60%
0.02%

15478
1692
3003
10733
0

4527
0
0
4513
14

-1718
-75
-1643
0
0

3672
468
41
1082
88
183
230
95
150
83
119
251
40
427
120
295

6.15%
0.78%
0.07%
1.81%
0.15%
0.31%
0.39%
0.16%
0.25%
0.14%
0.20%
0.42%
0.07%
0.71%
0.20%
0.49%

3628
503
0
331
54
147
11
213
0
0
199
0
183
1955
0
32

1948
0
41
751
34
36
219
0
150
83
0
251
0
0
120
263

-1904
-35
0
0
0
0
0
-118
0
0
-80
0
-143
-1528
0
0

12390
209
444
233
226
1939
2324
242
91
1783
22
639
174
189
1009
406
239
327
1585
286
23

20.74%
0.35%
0.74%
0.39%
0.33%
3.25%
3.89%
0.41%
0.15%
2.98%
0.04%
1.07%
0.29%
0.32%
1.69%
0.68%
0.40%
0.55%
2.65%
0.48%
0.04%

3203
27
0
35
0
54
84
21
0
36
0
44
590
0
30
0
0
50
2143
89
0

10161
182
444
198
226
1835
2240
221
91
1747
22
595
0
189
979
406
239
277
0
197
23

WORLD TOTAL

59739

NORTH AMERICA
Canada
Mexico
Uni ted States
Other
CENTRAL & SOUTH AMERICA
Argentina
Bahama IslandsBrazil
Chile
Colombi a
Cuba
Ecuador
Netherlands Antilles
Panama Republic
Peru
Puerto Rico
Trinidad and Tobago
Venezuela
Virgin Islands
Other
WESTERN EUROPE
Austria
Belgium
Denmark
Fi nland
France
Germany, West
Greece
Ireland
I taly
Luxembourg
Netherlands
Norway
Por tugal
Spai n
Sweden
Swi tzerland
Turkey
United Kingdom
Yugoslavia
Other

18287
1617
1360
15296
14

-974
0
0
0
0
0
0
0
0
0
0
0
-416
0
0
0
0
0
-558
0
0

Table III - Continued
World Petroleum Supply and Disposition, 1982
(Thousand barrels per day and percent)

Region and Country

Apparent Con surnpt i on
World
Share
Barrels *

Crude
Production #

I rnp 1 i e d Crude &

Product trade A
Irnpor ts
Exports

EASTERN EUROPE AND USSR
Albani a
Bulgaria
Cz echo sio v ak i a
Germany , East
Hungary
Poland
Romani a
U.S.S.R.

11188
64
295
327
371
223
318
337
9253

18.73%
0.11%
0.49%
0 .55%
0.62%
0.37%
0.53%
0.56%
15.49%

12815
64
3
2
1
61
6
248
12430

1550
0
292
325
370
162
312
39
0

-3177
0
0
0
0
0
0
0
-3177

MIDDLE EAST
Bahrain
I ran
Iraq
Israel
Kuwai t
Oman
Qatar
Saudi Ar abi a
Syr i a
Uni ted A rab Emirates
Other

3205
31
1675
205
162
98
16
11
606
121
126
154

5.37%
0.05%
2.80%
0 .34%
0.27%
0.16%
0.03%
0.02%
1.01%
0.20%
0.21%
0.26%

13253
52
2223
1017
1
863
324
360
6913
160
1340
0

315
0
0
0
161
0
0
0
0
0
0
154

-10363
-21
-548
-812
0
-765
-308
-349
-6307
-39
-1214
0

AFRICA
Algeria
Angola
Egypt
Gabon
Kenya
Libya
Morocco
Ni ger i a
South Africa
Tunsi a
Other

1655
143
21
313
11
30
124
88
228
349
49
299

2.77%
0.24%
0.04%
0.52%
0.02%
0.05%
0.21%
0.15%
0.38%
0.58%
0.08%
0.50%

4736
910
122
690
156
0
1190
1
1295
20
120
232

699
0
0
0
0
30
0
37
0
329
0
253

-3780
-767
-101
-377
-145
0
-1066
0
-1067
0
-71
-186

Table III - Continued
World Petroleum Supply and Disposition, 1982
(Thousand barrels per day and percent)

Region and Country
FAR EAST AND OCEANIA
Australi a
Brunei
China
Hong Kong
Indi a
Indonesi a
Japan
Korea, South
Malaysi a
New Zealand
Pakistan
Phili ppi nes
Singapore
Taiwan
Thailand
Other

Apparent Consumption
mption
World
Barrels *
Share
10346
659
4
1661
125
710
479
4554
534
180
82
104
224
222
330
199
279

17.32%
1.10%
0.01%
2.78%
0.21%
1.19%
0.80%
7.62%
0.89%
0.30%
0.14%
0.17%
0.37%
0.37%
0.55%
0.33%
0.47%

Crude
Production #
4844
422
179
2045
0
390
1419
10
0
306
16
13
8
0
6
0
30

Implied Crude &
Product trade A
Imports
Exports
7127
237
0
0
125
320
0
4544
534
0
66
91
216
222
324
199
249

-1625
0
-175
-384
0
0
-940
0
0
-126
0
0
0
0
0
0
0

Source: International Energy Annual, (Energy Information Administration,
Washington, D . C ) , Table 14. World Petroleum Supply and Disposition
* Data include inland consumption, refinery fuel and loss, and bunkering.
Apparent consumption is either an antual figure or is derived from the
components of refined product output, plus imports minus exports with no
allowance for stock changes. Also includes, where available, liquefied
petroleum gases sold directly for fuel and chemical uses from natural gas
processing plants.
# Data include natural gas plant liquids for the following countries:
Canada, Mexico, United States, Argentina, Bolivia, Brazil, Chile,
Colombia, Cuba, Ecuador, Peru, Trinidad and Tobago, Venezuela, Austria,
France, Italy, Netherlands, Norway, Spain, United Kingdom, Yugoslavia,
Czechoslovakia, Hungary, Poland, Romania, U.S.S.R., Iran, Iraq, Kuwait,
Qatar, Saudi Arabia, United Arab Emirates, Algeria, Egypt, Libya,
Australia, Brunei, Indonesia, Japan, Malaysia, Pakistan, New Zealand,
and Taiwan. Figures for the United States also include refinery
processing gain and other hydrocarbon inputs to refineries. Ethyl
alcohol fuel is also included in data on Brazil.
A

Includes stock changes. Trade figures derived as difference between
apparent consumption and crude production.

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
MARCH 25, 198 5

Brien Benson

(202) 566-2041

HEALEY RESIGNS AS DOMESTIC FINANCE ASSISTANT SECRETARY
The Department of the Treasury announced today that
Thomas J. Healey has resigned as Assistant Secretary of
the Treasury for Domestic Finance, effective March 31, 1985.
John J. Niehenke, currently Deputy Assistant Secretary for
Federal Finance, will become Acting Assistant Secretary
upon Mr. Healey"s departure.
As Treasury's "investment banker", Mr. Healey's
principal responsibilities include managing the Federal
debt and advising and assisting the Secretary of the
Treasury on matters of Federal finance, state and local
finance, and financial institutions policy and deregulation.
In this latter capacity, he recently chaired the interdepartmental study of the federal deposit insurance system.
Mr. Healey said he "had told then-Secretary Donald T.
Regan of his intention to return to the private sector
after the President's re-election." Mr. Healey delayed
his departure to complete the FDIC study and help in the
transition resulting from Mr. Regan's departure.
Secretary of the Treasury, James A. Baker III,
said, "Treasury was fortunate to have Tom's skills. He
has guided notable debt management accomplishments including
the repeal of withholding tax on interest paid to foreigners
and the Treasury STRIPS program of registration of individual coupons on Treasury Securities to enhance trading of
Treasury securities. I have particularly appreciated
his willingness to remain during my transition to Treasury."
Before joining the Treasury Department, Mr. Healey was
Managing Director of Dean Witter Reynolds Capital Markets.

B-56

U.S. TREASURY LIBRARY

1 0031636

Full text of Press Releases of the United States Department of the Treasury : Volume 264

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