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Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

DEPARTMENT OF THE TREASURY

DOCUMENT NO. 3282

Secretary

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402


4 ^ THE SECRETARY OF THE TREASURY

WASHINGTON

January 15, 1981

Dear Sirs:

I have the honor td submit to you

a report on the state of the finances

of the United States Government for the

fiscal year ended September 30, 1980.

This submission is in accordance with

31 U.S.C. 1027.

Sincerely, i

V1V V ^ ^ > ^ -William Miller

President of the Senate

Speaker of the House of Representatives


/o

C O N T E N T S Page

Introduction XIX

REVIEW OF TREASURY OPERATIONS

Financial Operations 3 Domestic Finance 9 Economic Policy ; 25 General Counsel, Office of the 30 Enforcement and Operations 36 Tax Policy 42 Intemational Affairs 49

ADMINISTRATIVE REPORTS

Adniinistrative Management 103 Alcohol, Tobacco and Firearms, Bureau of 114 Comptroller of the Currency, Office of the 127 Computer Science, Office of 130 Director of Practice, Office of 131 Engraving and Printing, Bureau of 133 Equal Opportunity Program, Office of 141 Federal Law Enforcement Training Center 142 Fiscal Service:

Govemment Financial Operations, Bureau of 148 Public Debt, Bureau of the 160

Foreign Assets Control, Office of 164 Intemal Revenue Service 166 Mint, Bureau of the 188 Revenue Sharing, Office of 195 United States Customs Service 200 United States Savings Bonds Division 212 United States Secret Service 217

EXfflBITS

Public Debt Operations, Regulations, and Legislation 1. Treasury notes , 227 2. Treasury bonds 233 3. Treasury bills.. . 238 4. Department Circular No. 1-80, offering of United States savings bonds.

Series EE 243 5. Department Circular No. 2-80, offering of United States savings bonds.

Series HH 249 6. Department Circular No. 4-67, First Revision, regulations goveming

agencies for issue of United States savings bonds 257 7. Department Circular No. 3-80, regulations goveming United States savings

bonds. Series EE and HH 260 8. Department Circular No. 26-76, regulations goveming book-entry

Treasury bills, First Amendment 286 9. Department Circular No. 905, Seventh Revision, offering of United States

savings bonds, Series H 288 V


VI CONTENTS

10. Department Circular No. 653, Tenth Revision, offering of United States ^^ ^ savings bonds. Series E 292

11. Department Circular No. 3-67, Revised, Third Amendment, offering of United States savings notes 303

12. Notice of requirement that social security numbers be fumished by owners at time of redemption of United States savings bonds and savings notes . 304

13. Department Circular No. 750, Third Revision, regulations goveming payments by banks and other financial institutions of United States savings bonds and United States savings notes 305

14. Department Circular No. 888, Fourth Revision, regulations goveming payment under special endorsement of United States savings bonds and United States savings notes ; 314

15. Department Circular No. 1-63, regulations governing U.S. retirement plan bonds. Fifth Amendment 318

16. Department Circular No. 1-75, regulations goveming U.S. individual retirement bonds, Second Amendment 320

17. Department Circular No. 530, regulations governing U.S. savings bonds. Series A, B, C, D, E, F, G, H, J, and K, and U.S. savings notes, l l th Revision 321

Domestic Finance 18. Statement of Assistant Secretan^ Altman, October 22, 1979, before the

Subcommittee on Economic Stabilization of the House Committee on Banking, Finance and Urban Affairs, on Federal credit programs 348

19. Statement of Secretary Miller, November 14, 1979, before the Senate Committee on Banking, Housing and Urban Aifairs, on Federal loan guarantees for the benefit of Chrysler Corp 351

20. Statement of Assistant Secretary Altman, January 28, 1980, before the Senate Committee on Banking, Housing and Urban Aifairs, on Treasury activities under the New York City Loan Guarantee Act of 1978 358

21. Statement of Secretary Miller, April 16, 1980, before the Subcommittee on Taxation and Debt Management of the Senate Committee on Finance, on financing requirements, bond authority, and interest rate on savings bonds 367

22. Statement of Secretary Miller, April 17, 1980, before the Subcommittee on Intergovemmental Relations and Human Resources of the House Committee on Govemment Operations, on the President's proposal for a new revenue sharing program 373

23. Testimony of Deputy Secretary Carswell, May 1, 1980, before the Subcommittee on Agricultural Research and General Legislation of the Senate Agriculture Comniittee, on commodity futures markets 378

Economic Policy 24. Remarks by Secretary Miller, October 8, 1979, before the American

Bankers Association, New Orleans, La., on challenges facing the economy and fmancial institutions 380

25. Testimony of Secretary Miller, October 16, 1979, before the Subcommittee on Fiscal and Intergovemmental Pohcy of the Joint Economic Committee, on the economic outlook, the regional impact of a recession, and counter-cycUcal fiscal assistance 385

26. Remarks by Secretary Miller, November 29, 1979, before the New England Council at the New Englander of the Year Awards Dinner, Boston, Mass., on a national energy program 391

27. Testimony of Secretary Miller, February 1, 1980, before the Joint Economic Conimittee, on the administration's 1981 budget and economic program 396

28. Statement of Secretary Miller, May 28, 1980, before the Joint Economic Committee, on the state of the economy 397


CONTENTS V I I

29. Statement of Secretary Miller, September 9, 1980, before the House Budget ^^ ^ Comniittee, on the President's proposed economic revitalization program 401

Banking and Related Matters

30. Remarks by Under Secretary Anderson, Noveniber 1, 1979, before the 10th annual Intermountain Banking Seminar, Utah State University, Logan, Utah, on the challenges of competition and deregulation facing bankers and regulators 410

31. Remarks by Under Secretary Anderson, February 26, 1980, at the BGFO 1980 Direct Deposit Conference, regarding the direct deposit/EFT program ; 412

32. Remarks by Under Secretary Anderson, September 23, 1980, at the 10th Intemational Fellows Conference, Johns Hopkins University, Baltimore, Md., on cooperation and communication between Govemment and business 414

Mint Operations

33. An act authorizing the President of the United States to present a gold medal to the American Red Cross 416

34. An act to authorize the President of the United States to present on behalf of the Congress a specially struck gold medal to Ambassador Kenneth Taylor 416

35. Titles II, V, and VI of an act to provide for the transfer of the Foreign Claims Settlement Conimission of the United States to the United States Department of JUstice as a separate agency; *** and for other purposes (abolition of the Annual Assay Commission) 417

36. An act to authorize the President of the United States to present on behalf of the Congress a specially struck gold medal to Simon Wiesenthal 418

Enforcement and Operations 37. Address of Assistant Secretary Davis, October 9, 1979, before the Federal

Interagency Polygraph Seminar, FBI Academy, Quantico, Va., on the use of polygraph examinations in criminal investigations and in employment screening 418

38. Press release, October 29, 1979, guidelines for determining which Presidential candidate should be recommended for Secret Service protection 420

39. Statement of Assistant Secretary Davis, February 13, 1980, before the Subcommittee on MonopoUes and Commercial Law of the House Committee on the Judiciary, in support of the Customs Act of 1980 422

40. Statement of Assistant Secretary Davis, May 8, 1980, before the House Subcommittees on International Ecomonic Policy and Trade, and Europe and the Middle East, of the House Committee on Foreign Affairs, on actions taken by the administration to deal with events in Iran 425

41. Remark by Secretary Miller, May 12, 1980, at dedication of plaque for Treasury officers killed in line of duty, in the Treasury Exhibit Hall, Washington, D.C 428

42. Press release. May 20, 1980, U.S. Customs announces increased duty on unfinished trucks 428

43. Excerpt from statement of Assistant Secretary Davis, June 5, 1980, before the Senate Coinmittee on Banking, Housing and Urban Affairs, on the Bank Secrecy Act 429

44. Press release, June 3, 1980, Treasury Department tightens regulations on reporting of unusual currency transactions 433


V I I I , CONTENTS

45. Statement of Assistant Secretary Davis, September 15, 1980, before the ^^ ^ Subcommittee on Constitution of the Senate Conimittee on the Judiciary, on enforcement operations ofthe Bureau of Alcohol, Tobacco and Firearms 433

Tax Policy

46 Statement of Secretary Miller, October 22, 1979, before the Subcommittee on Taxation and Debt Management of the Senate Finance Conimittee, on restructuring the system of depreciation allowances 435

47. Statement of Secretary Miller, November 8, 1979, before the House Ways and Means Conimittee, on a Federal value added tax 452

48. Statement of Assistant Secretary Lubick January 29, 1980, before the House Ways and Means Committee, on tax incentives for saving 462

49. Statement of Intemational Tax Counsel Rosenbloom, April 29, 1980, before the Subcommittee on Oversight of the House Ways and Means Committee, on the tax treaty policy of the United States 470

50. Statement of Secretary Miller, April 30, 1980, before the House Ways and Means Committee, on President's proposal for withholding on interest and dividends 490

51. Statement of Deputy Assistant Secretary Sunley, August 5, 1980, before the Subcommittee on Taxation and Debt Management of the Senate Finance Comniittee, on the tax treatment of married and single taxpayers 494

Trade and Investment 52. Statement of Under Secretary Solomon, November 1, 1979, before the

Subcommittee on Trade of the House Ways and Means Committee, in support of the trade agreement between the United States and the People's Repubhc of China 506

53. Press release, December 20, 1979, entitled "Treasury Announces Contract for Solar Electric System" 508

54. Excerpts from remarks by Assistant Secretary Bergsten, February 28, 1980, before the American Law Institute/American Bar Association, New York, NY., entitled "Toward Greater Cooperation in Intemational Investment PoUcies" 508

55. Excerpts from remarks by Assistant Secretary Bergsten, March 18, 1980, before the American-Arab Association for Commerce and Industry, New York, N.Y., entitled "United States-Saudi Economic Interests" 512

56. Excerpts from Joint Communique of the Fifth Session of the United States-Saudi Arabian Joint Commission on Economic Cooperation, April 1-2, 1980, Washington, D.C. , 514

57. Excerpts from statement by Assistant Secretary Bergsten, May 22, 1980, before the Subcommittee on Intemational Finance of the Senate Committee on Banking, Housing, and Urban Aifairs, on the Competitive Export Financing Act of 1980 (S. 2339) and the Export Expansion FaciUties Amendment ofl980(S. 2340) 515

58. Excerpt from remarks by Assistant Secretary Bergsten, July 9, 1980, before the National Foreign Trade Council, New York, N.Y., entitled "The Growing Intemational Competitiveness of the U.S. Economy" 520

59. Excerpts from statement by Assistant Secretary Bergsten, September 9, 1980, before the Subcommittee on Consumer Protecetion and Finance of the House Committee on Interstate and Foreign Commerce, regarding the administration's views on H.R. 7791, the Reciprocity in Foreign Investment Act 524

60. Opening remarks by Secretary Miller, September 16, 1980, at the first meeeting of the U.S.-China Joint Economic Committee, Washington, D.C. 527


CONTENTS I X

Commodities and Natural Resources Page

61. Statement of Assistant Secretary Bergsten, March 4, 1980, before the Subcommittee on Treasury, Post Office and General Govemment of the House Committee on Appropriations, entitled "Appropriation of the U.S. Contribution to the Intemational Natural Rubber Agreement" . . . . . 528

Intemational Monetary Affairs 62. Communique of the Interim Committee of the Board of Govemors of the

International Monetary Fund on the Intemational Monetary System, October 1, 1979, issued after its 13th meeting in Belgrade, Yugoslavia . . . . 533

63. Press release, October 16, 1979, conceming the requirement that future sales of Treasury gold be subject to variations in amounts and dates of offering 535

64. Remarks by Assistant Secretary Bergsten, November 13, 1979, before the World Affairs Council, Boston, Mass., entitled "The Intemational Monetary System: Current Situation and Future Prospects" 535

65. Statement of Secretary MiUer, March 10, 1980, before the Senate Committee on Foreign Relations, in support of S.2271, legislation to strengthen the IMF and to provide for maintenance of the U.S. role in the IMF 540

66. Communique of the Interim Committee of the Board of Govemors of the International Monetary Fund on the Intemational Monetary System, April 25, 1980, issued after its Hth meeting in Hamburg, Germany 547

67. Remarks by Secretary MiUer, June 4, 1980, before the Intemational Monetary Conference, New Orleans, La., regarding challenges in the world ecomonic and monetary system in the 1980's 549

68. Text of declaration issued following the meeting of heads of state and government of Canada, the Federal RepubUc of Germany, France, Italy, Japan, the United Kingdom of Great Britain and Northem Ireland, and the United States of America, June 23, 1980, in Venice Italy 555

69. Press Communique of the Ministerial Meeting of the Group of Ten, September 27, 1980,in Washington, D.C 559

70. Communique of the Interim Committee of the Board of Govemors of the International Monetary Fund on the Intemational Monetary System, September 29, 1980, issued after its 15th meeting in Washington, D.C. ... 560

71. Statement by Secretary MUler as Govemor for the United States, October 1, 1980, at the joint annual meetings of the Boards fo Govemors of the International Monetary Fund and the Intemational Bank for Reconstruction and Development and its affUiates, Washington, D.C. ... 563

Developing Nations 72. Text of announcement made by the Department of the Treasury,

November 14, 1979, concerning the blocking of official Iranian assets ... 569 73. Remarks by Assistant Secretary Bergsten, January 29, 1980, before the

Center for Inter-American Relations, New York, N.Y., entitled "North/South Relations: A Candid Appraisal" 569

74. Remarks by Assistant Secretary Beresten, February 25, 1980, before the Brazil-U.S. Business Council, Washington, D.C, entitled "The United States and Brazil: A Framework for future Economic Relations" 575

75. Excerpts from statement by Secretary MiUer, Febmary 26, 1980, before the Subcommittee on Foreign Operations of the Senate Committee on Appropriations, on the administration's requests for the intemational financial institutions 579

76. Excerpts from remarks by Deputy Secretary CarsweU, AprU 15, 1980, before the 21st annual meeting of the Inter-American Development Bank, Rio de Janeiro, BrazU, regarding U.S. support for the Inter-American Development Bank 585


X CONTENTS

77. Excerpts from remarks by Secretary MiUer, May 14, 1980, before the ^^ ^ Chicago CouncU on Foreign Relations, Chicago, III, entitled "The International Financial Institutions: A Critical Role for the 1980's" 588

78. Excerpts from remarks by Secretary Miller, September 4, 1980, before the Economic Club of New York, New York, N.Y., entitled "The Intemational Financial Institutions: A Time to Recognize U.S. Self-interest" 592

Intemational Economic Analysis

79. Excerpt from remarks by Deputy Assistant Secretary Karlik, December 6, 1979, before the Conference Board, New York, N.Y., entitled "Trends in U.S. Intemational Economic Policy" 593

Testimony on Intemational Matters

80. Other Treasury testimony in hearings before congressional committees 597

Organization and Procedure

81. Department of the Treasury orders relating to organization and procedure 598

INDEX 61 li

NOTE.Details of figures may not add to totals due to rounding.

The tables to this Annual Report will be published in the separate Statistical Appendix.


Secretaries, Deputy Secretaries, Under Secretaries, General Counsel, Assistant Secretaries, and Treasurer of the United States serving in the Department of the Treasury from January 21,1977, through September 30,1979^

Term of service ^ ^ . , Officials From To

Secretaries of the Treasury: Jan. 23, 1977 Aug. 4, 1979 W. Michael Blumenthal, Michigan. Aug. 7, 1979 G. WiUiam MiUer, CaUfornia.

Deputy Secretaries: Mar. 3, 1976 Jan. 23, 1977 George H. Dixon, Minnesota. May 3, 1977 Robert Carswell, New York.

Under Secretary for Monetary Affairs: Mar. 30, 1977 Feb. 23, 1980 Anthony M. Solomon, Virginia.

Under Secretary (Counselor): Mar. 30, 1977 Bette B. Anderson, Georgia.

General Counsel: Aug. 4, 1977 Aug. 29, 1980 Robert H. Mundheim, Pennsylvania.

Assistant Secretaries: 1972 Apr. 28, 1977 Warren F. Brecht, Connecticut. 1977 Dec. 7, 1977 Laurence N. Woodworth, Maryland. 1977 Gene E. Godley, District of Columbia.^ 1977 C. Fred Bergsten, New York.2 1977 Roger C. Altman, New York. 1977 Nov. 15, 1978 WilUam J. Beckham, Jr., Michigan. 1977 Joseph Laitin, Maryland. 1977 Sept. 30, 1979 Daniel H. BriU, Maryland. 1978 Richard J. Davis, New York. 1978 Donald C. Lubick, Maryland. 1979 W . J . McDonald, District of Columbia. 1980 Curtis A. Hessler, District of Columbia.

Fiscal Assistant Secretaries: 1975 Dec. 31, 1977 David Mosso, Virginia. 1978 Paul H. Taylor, Maryland.

Treasurer of the United States: Aug. 3, 1977 Azie T. Morton, Virginia.

1 For officials from Sept. 11, 1789, to Jan. 20, 1977, see exhibit 62, 1977 Annual Report. 2 Act of May 18, 1972, provided for two Deputy Under Secretaries, to be designated Assistant Secretaries by

the President as desired.

Apr. Feb. Mar. Mar. Apr. Apr. Apr. May Jan. June July Apr.

July July

11, 28, 30, 31, 29, 29, 29, 16, 30, 26,

3, 4,

29, 5,

XI


PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS OF THE DEPARTMENT OF THE TREASURY AS OF SEPTEMBER 30, 1980

Secretary of the Treasury G. William Miller Deputy Secretary of the Treasury Robert CarsweU Under Secretary for Monetary Affairs (Vacancy) Under Secretary Bette B. Anderson General Counsel David R. Brennan (acting) Office, Secretary of the Treasury:

Executive Assistant to the Secretary Randall K. C. Kau Special Assistant to the Secretary Jeffiey J. Rosen Confidential Assistant to the Secretary Lisa Astudillo

Office, Deputy Secretary of the Treasury: Inspector General Leon Wigrizer Director, Office of Audit Eugene H. Essner Executive Assistant to the Deputy Secretary ... WiUiam A. Anawaty Executive Secretary Steven L. Skancke (acting)

Deputy Executive Secretary Steven L. Skancke Special Assistant to the Secretary (National

Security) J. Foster CoUins Special Assistant to the Secretary (Consum-

er Affairs) Sally Vogel Director of Small and Disadvantaged Busi-

ness Utilization Linda L. Coffin

Office, Under Secretary for Monetaiy Affairs: Assistant Secretary (Intemational Aifairs) C. Fred Bergsten

Deputy Assistant Secretary (Trade and In-vestment Policy) Robert Cornell

Deputy Assistant Secretary (Commodities and Natural Resources) Charles Schotta

Deputy Assistant Secretary (Intemational Monetary Affairs) Thomas B. Leddy

Deputy Assistant Secretary (Developing Nations) Amold Nachmanoff

Deputy Assistant Secretary (Intemational Economic Analysis) John R. KarUk

Deputy to the Assistant Secretary (Saudi Arabian Affairs) (Vacancy)

Deputy to the Assistant Secretary and Sec-retary of IMG (International Monetary Group) (Vacancy)

Inspector General (Vacancy) Fiscal Assistant Secretary Paul H. Taylor

Deputy Fiscal Assistant Secretary Gerald Murphy Assistant Fiscal Assistant Secretary (Bank-

ing) John A. Kilcoyne Assistant Fiscal Assistant Secretary (Fi-

nancing) Philip J. Fitzpatrick Office, Under Secretary:

Special Assistant to the Under Secretary .. Faye P. Hewlett Special Projects Officer Felix S. Williams

XII


PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS X I I I

Assistant Secretary (Administration) W. J. McDonald Deputy Assistant Secretary (Administration) Martha A. Thompson Director, Office of Administrative Programs Edward W. BrooKs Director, Office of Budget and Program

Analysis Arthur D. Kallen Director, Office of Computer Science James F. Kerrigan (acting) Director, Office of Equal Opportunity Pro-

gram (Vacancy) Director, Office of Management and Orga-

nization WilUam J. Rhodes Director, Office of Personnel Henry C. DeSeeuirant Director, Office of Procurement Thomas P. O'Malley

Assistant Secretary (Enforcement and Opera-tions) Richard J. Davis

Deputy Assistant Secretary (Operations) ... John P. Simpson Deputy (Regulatory and Trade Affairs) (Vacancy) Director, Office of^ Operations John W. Mangels

Deputy Assistant Secretary (Enforcement) . WilUam W. Nickerson Director, Foreign Assets Control . . . . . . . Dennis O'ConneU Special Assistant to the Assistant Sec-retary (Enforcement and Operations) . Catherine H. MUton

Treasurer of the United States Azie T. Morton Assistant to the Treasurer of the United

States Darryl H. Fagin

Office, General Counsel: Deputy General Counsel David R. Brennan

Assistant General Counsel and Chief Coun-sel, Intemal Revenue Service N. Jer old Cohen

Assistant General Counsel Amold Intrater Assistant General Counsel Russell L. Munk Assistant General Counsel Jordan A. Luke Assistant General Counsel Luke D. Lynch Counselor to the General Counsel Wolf Haber Director of Practice LesUe S. Shapiro

Assistant Secretary (Tax PoUcy) Donald C. Lubick . Deputy Assistant Secretary (Tax Legislation) ... Daniel I. Halperin Deputy Assistant Secretary (Tax Analysis) EmU M. Sunley

Director, Office of Tax Analysis Harvey Galper Tax Legislative Counsel John M. Samuels Intemational Tax Counsel H. David Rosenbloom Director, Office of Industrial Economics (Vacancy)

Assistant Secretary (Legislative Affairs) Gene E. Godley Deputy Assistant Secretary (Legislative Affairs). (Vacancy) Deputy Assistant Secretary (Legislative Affairs). Robert E. Moss Special Assistant to Assistant Secretary Geoffiey G. Peterson Special Assistant to Assistant Secretary E. Douglas Frost Special Assistant to Assistant Secretary Donald F. Terry

Assistant Secretary (Economic Policy) Curtis A. Hessler Special Assistant to Assistant Secretary (Eco-

nomic Policy) Roeer H. Bezdek Deputy Assistant Secretary (Economic PoUcy) . Richard F. Syron

Director, Office of Financial Analysis John H. Auten Director, Office of Special Studies Maynard S. Comiez

Assistant Secretary (Domestic Finance) Roger C. Altman Deputy Assistant Secretary (Financial Institu-

tions and Capital Markets Policy) John J. Mingo


X I V PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS

Director, Office of Securities Markets Poli-cy Philip C. Loomis

Director, Office of Capital Markets Legisla-tion Gordon Eastbum

Deputy Assistant Secretary (Corporate Finance) Brian M. Freeman Deputy Assistant Secretary (State and Local Fi-

nance) Robert W. Rafuse, Jr. Director, Office of New York Finance .... John J. McLaughlin

Deputy Assistant Secretary (Federal Finance) .. John Schmidt Director, Office of Govemment Financing Francis X. Cavanaugh Director, Office of Market Analysis and Agen-

cy Finance Roland H. Cook Director, Office of Revenue Sharing Jose P. Lucero

Assistant Secretary (Public Affairs) Joseph Laitin Deputy Assistant Secretary Everard Munsey

BUREAU OF ALCOHOL, TOBACCO AND FIREARMS

Director G. R. Dickerson Deputy Director Stephen E. Higgins Assistant Director (Administration) Barbara Pomeroy Assistant Director (Planning and Evaluation) Michael H. Lane Assistant Director (Criminal Enforcement) John Krogman (acting) Assistant Director (Internal Aifairs) Donald Zimmerman Assistant Director (Regulatory Enforcement) WilUam T. Drake Assistant Director (Technical and Scientific Services) Michael Hoffman Chief Counsel Marvin J. Dessler

OFFICE OF THE COMPTROLLER OF THE CURRENCY

Comptroller of the Currency John G. Heimann Executive Assistant to the Comptroller James W. Montanari Senior Advisor to the ComptroUer Charles E. Lord Senior Deputy Comptroller Lewis G. Odom Senior Deputy Comptroller for Operations H. Joe Selby Senior Deputy Comptroller for Policy Planning Cantwell F. Muckenfuss Senior Deputy Comptroller for Bank Supervision ... Paul M. Homan Deputy Comptroller (Special Surveillance) William E. Martin Deputy Comptroller (Administration) James T. Keefe Deputy Comptroller (Specialized Examinations) .. . . . Dean E. Miller Deputy Comptroller (Research and Economic Pro-

grams) WilUam A. Longbrake Deputy ComptroUer (Intelagency Coordination) David C. Motter Deputy Comptroller (Multinational Banking) BUly C. Wood Deputy Director ComptroUer (Customer and Com-

munity Programs) Jo-Ann Barefoot Chief National Bank Examiner ." Edmund Zito Special Assistant to the Comptroller George A. Cincotta Special Assistant to the Comptroller Susan Wagner Special Assistant to the Comptroller Richard M. KovarUc Special Assistant to the Comptroller Stuart J. Gordon Special Assistant to the Comptroller (Congressional

Affairs) Donald A. Melbye Director, Communications Leonora S. Cross Director, Bank Organization and Structure James V. Elliott

UNITED STATES CUSTOMS SERVICE

Commissioner of Customs Robert Chasen Deputy Commissioner WilUam T. Archey Assistant Commissioner (Border Operations) Charles C. Hackett, Jr.


PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS X V

Assistant Commissioner (Office of Commercial Op-erations) Alfred R. DeAngelus

Director (Office of Regulations and RuUngs) Donald W. Lewis ComptroUer Jack Lacy Director (Office of Investigations) Martin White (acting) Assistant Commissioner (Office of Management In-

tegrity) George C. Corcoran, Jr. Chief Counsel Richard H. Abbey

BUREAU OF ENGRAVING AND PRINTING

Director Harry R. Clements Deputy Director Larry E. Rolufs (acting) Assistant Director (Administration) Robert J. Leuver Assistant Director (Operations) Larry E. Rolufs Assistant Director (Research and Engineering) MUton J. Seidel

FEDERAL LAW ENFORCEMENT TRAINING CENTER I

Director Arthur F. Brandstatter Deputy Director David W. McKinley Assistant Director for Resource Management WilUam M. Kelso Assistant Director for Faculty Management David G. Epstein Assistant Director for Program Management Ray M. Price Assistant Director Special Training Division John J. O'Sullivan Assistant Director (Washington Liaison Office) John C. Dooher Chief, Training Support Division John Osbome

BUREAU OF GOVERNMENT FINANCIAL OPERATIONS

Commissioner WilUam E. Douglas Deputy Commissioner (Vacancy) Assistant Commissioner, Administration (Vacancy) Assistant Commissioner, ComptroUer (Vacancy) Assistant Commissioner, Banking and Cash Man-

agement , RusseU D. Morris Assistant Commissioner, Disbursements and Claims Michael D. Serlin Assistant Commissioner, Govemment-wide Account-

ing John O. Turner Associate Conimissioner Lester Plumley

INTERNAL REVENUE SERVICE

Commissioner Jerome Kurtz Deputy Commissioner William E. Williams Assistant Commissioner (Taxpayer Service and Re-

tums Processing) M. Eddie Heironimus Assistant Commissioner (Resources Management) .. Joseph T. Davis Assistant Commissioner (Compliance) P. E. Coates Assistant Commissioner (Employee Plans and Ex-

empt Organizations) S. Allen Winbome Assistant Commissioner (Inspection) Robert L. Rebein Assistant Commissioner (Planning and Research) ... Russell E. Dyke Assistant Commissioner (Technical) Gerald G. Portney Assistant Commissioner (Data Services) Donald J. Porter Chief Counsel N. Jerold Cohen

BUREAU OF THE MINT

Director : Stella Hackel Sims Deputy Director Allen J. Goldman Assistant Director for Budget and Finance Joseph M. Wagner Assistant Director for Marketing Francis B. Frere


X V I PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS

Assistant Director for Production Galen D. Dawson Assistant Director for Personnel James J. Mulcahy Assistant Director for Technology Alan J. Goldman Assistant Director for Management Services Judith L. Wagner

BUREAU OF THE PUBLIC DEBT

Commissioner H. J. Hintgen Deputy Conimissioner WilUam M. Gregg Assistant Commissioner (Washington) Kenneth W. Rath Assistant Commissioner (Field) Martin French Chief Counsel , Calvin Ninomiya

UNITED STATES SAVINGS BONDS DIVISION

National Director Azie T. Morton Deputy National Director Jesse L. Adams, Jr. Director of Sales Walter R. NUes Director of Advertising and Promotion Louis F. Perrinello

UNITED STATES SECRET SERVICE

Director H. Stuart Knight Deputy Director Myron I. Weinstein Assistant Director (Protective Research) Robert E. Burke Assistant Director (Investigations) Robert E. Powis Assistant Director (Protective Operations) John R. Simpson Assistant Director (Inspection) Horace Gibbs Assistant Director (Administration) Fred N. White, Jr.


ORGANIZATION OF THE DEPARTMENT OF THE TREASURY

DEPUTY SECRETARY

Office ol SmaU an

Deputy O ^ ^

Deouty ASSI. Sec

Legolalive Counsel

I I Shaded areas indicate bureaus

Assistant Srtary Domsstic Finance)

Oepuly Assi Sec (Feaeol Finance)

Deputy Asst Sec FmancBl InsMutons

" and Capital Markets Pobcy)

Deputy to the Assi Sec

Oltce ol Chryslei Finance

Deouty Asst Sec (Slate ana Local

" Revenue Sharing

UNDER SECRETARY FOR MONETARY

AFFAIRS

< =rr=

Deputy Asst Sec. " [Developing Nations

Deouty ASSI. Sec

Monetary Alfaifs)

Deputy Asst. Sec. (Trade and

investmenl Pobcyl

Deputy Asst. Sec.

Natural Resources)

Deouty Asst. Sec . (Internatonal

Econ Ana^SlSI

Deputy 10 Ihe Asst. Sec

(Saudi Araban Allairs)

Deputy lo the Asst. Sec and Sec o the Intemational

Monetary Group

Otfice ol the Inspectoi Genetal

UNDER SECRETARY

8uraupf

Pnnttng

Oftice ol

Office ol Eoual Opportunity

OS Equal

Opportunity

Assistant Secretary (Entorcement and

Operations) General Counsel

Deputy Asst Sec

Bureau o l Alcohol. Tobacco and

Fe

INTRODUCTION This introduction reviews major domestic and intemational developments

which affected areas of Treasury interest and responsibility during fiscal 1980. Detailed information on the operating and administrative activities of the Department is provided in the text of the report and supporting exhibits. Statistical information may be found in the separate Statistical Appendix.

DOMESTIC DEVELOPMENTS

Economic Activity

The economic expansion which began in early 1975 was finally interrupted during 1980. An extremely brief period of contraction, reflected in only a single quarter of decline in real output, took place during the fiscal year. By the end ofthe fiscal.year, real growth had resumed, and the shortest recession of the postwar period had apparently drawn to a close. However, interest rates were rising rapidly at an early stage of the expansion and the near-term outlook for the economy remained somewhat uncertain.

During the fiscal year, real gross national product declined by 1.5 percent, and prices, as measured by the fixed-weight GNP deflator, rose by 9.8 percent. The output pattem during the year was rather uneven. Real GNP grew slowly during the first half of the fiscal year, at about a 1 V2-percent annual rate, and then dropped sharply at a 9.6-percent annual rate in the spring and early summer, before resuming growth at about a 1-percent annual rate in the final quarter ofthe fiscal year. Inflation was running at about a 9V2-percent annual rate early in the fiscal year. It rose to an 11-percent annual rate in the early months of calendar 1980, when consumer prices rose temporarily at even higher rates, and then fell back close to the 9V2-percent range again by the end of the fiscal year.

Domestic economic developments were strongly affected by a second oil price shock, analagous to that experienced in 1974. By early January 1980, the world price of oil had reached about $28 per barrel, more than double the level of a year earlier. As the effect of higher oil prices fed through to the domestic price level in the early months of 1980, the rate of inflation worsened substantially. In January and February, there were also some signs that inflation was beginning to spread beyond the energy and home financing areas. The annual rate of inflation as measured by the CPI, which many consider a flawed indicator of price change, rose temporarily to 18 percent, and inflationary expectations intensified greatly. Serious disturbances in domestic financial markets developed in February and early March. Interest rates rose sharply, and the functioning of some long-term private financial markets seemed to be threatened.

In response to these developments, the adniinistration announced new actions for intensified fiscal and credit poHcies, reinforcing the programs of restraint already in place. In the fiscal area, fiscal 1981 budget proposals were

XIX


X X 1980 REPORT OF THE SECRETARY OF THE TREASURY

revised after extensive consultation with congressional leadership. The revisions were designed to eliminate some $17 billion in programmatic expenditures and to bring the budget into balance. In addition, various measures to improve tax collections and conserve energy were proposed or initiated.

Strong steps were taken in the monetary area. Under the terms of the Credit Control Act of 1969, the President authorized the Federal Reserve to exercise new, temporary power to slow the growth of consumer and business borrowing. In the consumer credit area, the Federal Reserve imposed a special deposit requirement of 15 percent on any expansion of credit provided by credit cards, other forms of unsecured revolving credit, and personal loans. In addition, the Federal Reserve took further steps to restrain domestic credit expansion, including an increase in the marginal reserve requirement on managed liabihties and a surcharge for large banks on borrowings through the Federal Reserve discount window.

The actions taken at mid-March were extremely powerful. Indeed, the controls on consumer credit quickly led to a drastic reduction of consumer borrowing and spending. Outstanding consumer credit was reduced by $9.5 billion between March and July when the credit control program was lifted. Consumer spending in real terms declined at a 10.6-percent annual rate in the March-June periodthe largest such quarterly decline in the postwar period. The resulting economic adjustment was sharp but exceedingly brief. Real GNP fell at a 9.6-percent annual rate in the second quarter of the calendar year, but growth then resumed at a modest pace in the final quarter of the fiscalyear.

The automobile and housing sectors were particularly hard hit. Domestic auto sales peaked at an 8.6-minion-unit annual rate in January and hit a low of 5.2 milhon units by June. Production was cut sharply to keep inventories in line with falling sales, and indefinite layoffs in the auto industry reached 250,000 by midsummer. Housing activity was already declining in response to rising interest rates at the beginning of the fiscal year, and mortgage markets virtually ceased to function temporarily in the spring as mortgage rates reached 16 percent and higher in some sections ofthe country. Housing starts fell to an annual rate of 906,000 units in May, a decline of more than 45 percent from the level of starts at the beginning of the fiscal year.

With the economy falling rapidly in the period following the mid-March actions, many private forecasts shifted in the direction of deep recession. The unemployment rate was expected by many observers to reach the 9-percent level experienced in 1975. The unemployment rate did rise sharply from 6.2 percent in March to 7.8 percent in May but then drifted down and reached 7.5 percent by the end of the fiscal year. Following the mid-March credit measures, interest rates fell very sharply, and normal flows of credit were quickly restored. The 3-month Treasury bill was I5V4 percent just prior to the announcement of the budget cuts and new credit restraints. By mid-June, the 3-month bill auctioned below 6V4 percent. The bank prime lending rate which


INTRODUCTION X X I

peaked at 20 percent fell to 11 percent by late summer and mortgage rates fell back to the 12V2-percent range.

The recovery of consumer and other spending sensitive to interest rates was a major factor in the economic turnaround which began in the summer and was readily apparent in a range of statistics by the end of the fiscal year. Domestic auto sales were running about 30 percent above their midsummer lows, housing starts were up 73 percent, and a general economic recovery was underway.

Despite the effectiveness of the measures taken in mid-March and the ensuing economic rebound, there were still some major uncertainties regarding the economic outlook at the close of the fiscal year. Inflation was relatively undiminished with the fixed-weight GNP deflator growing at a 9V2-percent annual rate, about the same as at the beginning of the fiscal year. Interest rates were rising again with the 3-month bill rate above 11 percent and the prime rate at 13 V2 percent. The monetary aggregates were growing rapidly and threatening to run above target despite determined efforts by the Federal Reserve. The prospects for a sustained economic expansion were somewhat clouded in the face of these financial developments, although the economy was still showing considerable forward momentum.

Late in the fiscal year, the administration proposed an economic revitaliza-tion program to deal with longer run economic problems. The administration intended to seek legislative action on the program in early 1981. The proposals included enlarged incentives to spur private capital formation; public investment in the energy area; formation of an Economic Revitalization Board with representatives from industry, labor, and the public; transitional aid to regions and groups; and selective tax reduction for individuals.

Despite the economic adjustment occurring during fiscal 1980, substantial economic gains had been made during the 4 fiscal years, 1977-80. During that period, real GNP rose IOV2 percent, real disposable income per capita was up 7.2 percent, corporate profits after inventory valuation and capital consump-tion adjustments were 24.7 percent higher, and 9.3 million more Americans were employed. Inflation remained a major problem, however, to which a final solution had not yet been found.

Inflation

The general pattern of price developments during the fiscal year was a pronounced acceleration of inflation up to the time of the imposition of the credit control measures at mid-March followed by some deceleration during the brief period of the economic decline. By the end of the fiscal year, however, inflation was apparently beginning to speed up again. The consumer and producer price indexes followed a roughly siniilar course during the fiscal year. By 3-month periods, the annual rates of increase in consumer prices were: 13.7, 18.1, 11.6, and 7 percent. For producer prices, the comparable rates of increase were: 13.3, 19.3, 6.7, and 12.2 percent. Both series are somewhat more volatile on a short-term basis than the fixed-weight GNP deflator which


XXII 1980 REPORT OF THE SECRETARY OF THE TREASURY

began and ended the fiscal year at about a 9 V2-percent annual rate of increase, after reaching a peak quarterly rate during the fiscal year of about an 11-percent annual rate.

A discouraging feature of inflationary developments, aside from short-term upswings, was the steady upward drift in the, inflation rate over time. The fixed-weight GNP deflatora comprehensive and relatively stable measure has risen steadily over the 4 most recent fiscal years, from 6V2 percent at the beginning of the period to about 9 /^4 percent during fiscal 1980. By yearend, most economic estimates of the underlying or "core" rate of inflation had reached the 9-percent range with no immediate prospects in view for dramatic improvement.

The inflationary process had become deeply imbedded in economywide compensation and costs. During fiscal 1980, total compensation per hour in the private nonfarm business sector rose 9.9 percent. Productivity actually fell by 0.7 percent; and, as a result, unit labor costs rose by 10.7 percent.

Productivity performance has become a problem in its own right, not only because of a short-term impact on inflation, but also because of a deteriora-tion in longer term performance. Between 1948 and 1968, productivity in the private nonfarm business sector rose at a 2.6-percent annual rate. In the 1968-73 period, productivity grew at a 1.7-percent annual rate, before falling off further to only a 0.5-percent rate of advance between 1973 and 1979. The reasons for this decline are complex and the subject of continuing inquiry, but a slowdown in growth of the net capital stock appears to have been an important contributing factor. Therefore, there is general agreement that steps to increase the incentives for saving and capital formation are probably an important element in any long-term effort to contain inflation and raise productive potential.

The Budget and Fiscal Developments

The budget estimates for fiscal 1980 presented in January 1980 called for outlays of $563.6 billion and receipts of $523.8 billion, leaving a deficit of $39.8 billion. A reestimate was made in March, taking account of the mid-March fiscal measures, which lowered the deficit estimate to $36.5 billion. By the time of the midsession budget review in July, the budgetary outlook had deteriorated noticeably. Receipts and outlays were affected by the short but sharp recession, and a range of legislative and other developments had also affected the situation. Outlays were reestimated at $578.8 billion and receipts at $517.9 billion, yielding a deficit of $60.9 billion. The final results for the fiscal year were fairly close to the midsession estimates: outlays of $579 billion and receipts of $520 bilhon resulting in a deficit of $59 billion.

Off-budget net outlays for fiscal 1980 were somewhat smaller than anticipated. In the January budget submission, such outlays were estimated at $16.8 billion. The actual figure was $14.2 billion. The smaller than expected outlays were largely attributable to Federal Financing Bank outlays nearly $2


INTRODUCTION XXIII

bilhon below the January estimate, and a swing in the Postal Service from an expected deficit of $0.2 bilHon to a surplus of $0.4 billion.

Domestic Finance

The volume of funds raised in the U.S. credit markets declined substantially in fiscal 1980 as the result of the recession, credit controls, and high interest rates. With the budget deficit increasing. Federal demands for credit about doubled from the 1979 level, but the rise was far outweighed by the significant reduction in non-Federal borrowings.

At the start ofthe fiscal year, after the adoption by the Federal Reserve of a restrictive credit pohcy in October 1979, total credit demands slackened noticeably. A subsequent leveling off in interest rates brought a strong revival of credit demands in the winter months, but the imposition of tighter conditions along with a credit restraint program in February and March, together with the steep recession which ensued, drastically curtailed the expansion of credit in the spring quarter. In the summer, however, with the economy recovering and interest rates sharply lower, credit demands strength-ened materially, even though credit was tightened again toward the end of the fiscal year.

The expansions and contractions of credit demands during 1980 mirrored, and were reflected in, developments in money supply growth and interest rates as well as in economic activity. Money supply growth slowed appreciably in the final calendar quarter of 1979 and remained relatively subdued through the first calendar quarter of 1980. This slowdown was followed by sharp reductions in the measures of transaction balances, Ml -A and Ml-B, in the second calendar quarter in response to the abrupt declines in economic activity and credit demands. In the final quarter of the fiscal year, however, the growth of the money supply measures accelerated to record proportions, thereby triggering additional credit-tightening measures. For the fiscal year as a whole, the rate of growth of Ml -A (currency and demand deposits), at 4.9 percent, was about the same as in the prior fiscal year. Ml-B, which includes, in addition, other checkable deposits (ATS and NOW accounts), grew at a somewhat slower pace than in the year before^6.4 percent versus 8 percent as transfers from savings accounts to ATS checkable accounts were somewhat smaller than during the initial rapid rush when such accounts were permitted in 1979.

Wide movements in interest rates also characterized fiscal 1980. In the opening quarter, sharp increases in interest rates accompanied the tighter credit pohcy imposed in October. By the end of December, however, the markets had settled down and interest rates had subsided somewhat. As the first calendar quarter progressed and credit demands strengthened, the even more drastically restrictive credit measures imposed, including credit controls, raised interest rates to unprecedented levels. The Federal funds rate, which had been fluctuating around 11V2 percent at the opening of the fiscal year and had reached a weekly average of over I5V2 percent in October before falling


XXIV 1980 REPORT OF THE SECRETARY OF THE TREASURY

back to about 13 V2 percent at the tum of the year, soared to a peak of around I9V2 percent. Money market rates fluctuated in a similar pattern, at somewhat lower levels, and the prime rate, which had started the fiscal year at I3V4 percent, peaked at 20 percent in early April. The subsequent decline in interest rates, from early April through mid-June, carried them down precipitously to around 9 percent for Federal funds, 11 percent for the prime rate, and 7 to 8 V2 percent for other money market rates. By the final quarter of the fiscal year, another round of tightening had once again resulted in a swift rise in interest rates, which carried over beyond the close of the fiscal year. At the end of September 1980, Federal funds were trading at around I3V4 percent, the prime rate stood at 13 percent, and other money market rates were fluctuating around 11V2 to I2V2 percent.

The sharp changes in credit conditions in fiscal 1980 entailed considerable uncertainty for long-term borrowers in both the mortgage and the bond markets. As mortgage rates pushed up in the fall of 1979 and winter of 1980, from around 11 percent to 16 percent, mortgage funds for home sales and construction virtually dried up. The subsequent loosening of credit and improvement in savings flows brought mortgage rates down to a low of around 12 percent in July-August. By the end of the fiscal year, the consequent recovery which had taken hold in the housing market early in the July-September quarter was being threatened by further credit tightening and rising mortgage rates.

The bond markets were also severely affected by the runup in bond yields in February and March, so much so that some market commentators felt that it would be virtually impossible to sell long-term bonds in the foreseeable future. Bond yields rose from around 9-9V2 percent at the start of the fiscal year to peaks of around 13-14V2 percent in the February-March period. As the level of bond yields subsided thereafter reaching lows of around 9V2-11 percent in June, corporate bond financing mounted to record proportions in the second calendar quarter. At the end of the final quarter of the fiscal year, the sharp rise in the yield on new Aa corporate utility issues from 11V2 percent at the end of June to 14 percent at the end of September was already inducing another severe curtailment of new issue activity and an atmosphere in which it was again becoming difficult to sell long-term bonds.

In particular sectors. Treasury borrowing from the public through Treasury securities increased from $35.2 biUion in fiscal 1979 to $71 billion in fiscal 1980. The $87.4 bilhon increase in interest-bearing marketable debt was much larger than the total increase in 1980 because of a sharp ($13.9 bilhon) reduction in nonmarketable debt outstanding. Savings bonds and notes declined by $7.8 bilhon, foreign nonmarketable issues by $5.2 biUion, and State and local issues by $0.9 biUion. Most of the Treasury net marketable borrowings were of shorter term in 1980, compared with the preponderance of bonds (68 percent) in 1979. The Treasury's authority to issue bonds had been enlarged at the start of the fiscal year, but the sharp step-up in requirements, together with the uncertain state of the bond markets, served to hold the net


INTRODUCTION X X V

increase in bonds in 1980 to $12.7 billion compared with $14.7 bUlion in 1979. Offerings in the 15-year and 30-year maturity categories continued to be made on a quarterly basis. Marketable Treasury notes (with maturities of as long as 10 years) accounted for $36.7 billion, or 41.7 percent, of the net increase in interest-bearing marketable debt, while marketable Treasury bills (with maturities of 3 months to 1 year) accounted for $38.5 billion, or 43.8 percent of the total.

Business demands for credit dropped by 17 percent in the fiscal year to a total of $130.9 billion, ofwhich $37.8 billion took the form of securities, $40 biUion represented mortgages, and $53.1 biUion short-term credit. Bond borrowings were considerably larger than in fiscal 1979 because of the huge total of bonds sold in the second quarter of the calendar year when interest rates had subsided. Mortgage borrowings by business receded materially, while funds raised through short-term debt were down even more substantial-ly. Bank loans increased strongly in the first and third calendar quarters but were paid down in the second, while open market paper was paid down in the third. Over the fiscal year as a whole, however, short-term business borrowings were almost evenly divided between bank loans and other types of borrowings.

State and local govemment bond borrowings increased by 11 percent in fiscal 1980 to reach $18.1 billion. The total would have dropped but for an enhanced issuance of tax-exempt housing bonds, which totaled $12.6 biUion, compared with the previous year's total of $7 biUion. Foreign borrowings by governments and business feU off sharply to $21.6 bUUon from the $37.6 biUion of the previous year. A drastic cut in bank lending was accompanied by reduced net issuance of both bankers' acceptances and bonds.

The remaining category of nonfinaincial credit demands, consumer borrow-ing, plummeted in 1980, as consumers tightened their budgets, cutting back severely on mortgages and installment credit in response to credit controls and high interest rates. Net new home mortgages issued dropped from $110.1 biUion in fiscal 1979 to $80 billion in 1980, or by 27.4 percent, while net consumer credit extended dwindled from $48.3 bUHon in 1979 to $2.9 biUion in 1980. All told, consumer borrowing, comprising home mortgages, install-ment, and misceUaneous borrowing, totaled $168.4 biUion in 1980, down by over one-third from the 1979 total.

In sum, credit demands from the four major groups of nonfinancial non-Federal borrowers were greatly reduced in fiscal 1980. The total of $278.1 biUion represented a decline of 27 percent from the 1979 total of $379.7 billion. In addition, credit demands from financial borrowers as a group (Federal agencies, finance companies, savings and loan associations, fire and casualty insurance companies, and commercial banks) were substantially curtailed, dropping by 35 percent to $74.3 billion. As a result, even with the increase in Federal borrowings, the total volume of funds raised in the credit markets in fiscal 1980, at $423.4 biUion, was $106.2 billion smaller than the fiscal 1979 total.


XXVI 1980 REPORT OF THE SECRETARY OF THE TREASURY

The corresponding large reduction in the sources of funds was most extreme for the banking and household sectors, although savings and loan associations, mutual savings banks, and credit unions also provided signifi-cantly fewer funds for the purchase of credit instruments in 1979. The new 2V2-year certificates permitted to be offered by thrift institutions and commercial banks in January 1980 attracted $75.5 biUion of funds, but money market certificates (in denominations of $10,000) increased by a smaller amount, $142.2 biUion, than the $170.7 billion increase of 1979, with the result that the cushion against the drain on savings inflows from regular accounts provided thereby was smaller. On the other hand, the net increase in money market funds of $42.5 biUion was considerably larger than the $26.5 biUion of the prior year.

Taxation Developments

Tax policy during fiscal 1980 reflected the simultaneous needs to reduce U.S. reliance on uncertain foreign energy sources, contain inflation, and maintain employment.

The Crude OU WindfaU Profit Tax Act of 1980 (Public Law 96-223, proposed April 26, 1979) was enacted April 2, 1980. The windfaU profit tax is a graduated set of taxes applied to domestically produced oil that wiU be used to finance the burden of higher energy costs of low-income individuals, to finance programs to encourage energy conservation, and to reduce income taxes. As part of the act, increased solar and business tax subsidies are provided for conservation investments and the production of fuels from renewable and exotic sources. Included in the act were three income tax provisions: A $200 exclusion for interest and dividends ($400 for married couples), repeal of carryover basis, and changes to LIFO accounting rules. The tax is to phase out when net receipts reach $227.3 billion, but beginning no later than January 1, 1991, or earher than January 1, 1988.

Reduction in inflation was the first priority of domestic economic policy during 1980. The budget for fiscal 1981, presented in January 1980, proposed a tight fiscal policy coupled with programs to alleviate structural causes of inflation. The tax-related measures provided for increased receipts of $6.4 biUion in fiscal 1980 and $26 billion in fiscal 1981.

The cash management initiatives in the budget balanced the benefits of collecting taxes closer to the time when tax liabilities accrue against the higher administrative costs. Overall, these initiatives would have increased receipts and decreased Government borrowing costs by $5.1 biUion in fiscal 1981 and $6.7 biUion in fiscal 1982. Two ofthe four proposals that can be implemented administratively were scheduled to become effective by January 1981.

In March 1980, as part of his anti-inflation program, the President announced two revenue-increasing measures: A gasoline conservation fee of $4.62/barrel on imported crude oil and a proposal to withhold income tax on interest and dividends. These measures would have increased receipts in fiscal 1981 by approximately $13 billion. No new tax would have been imposed


INTRODUCTION XXVII

upon dividend and interest income. The proposal was designed primarily to avoid the inequities and higher tax rates that occur when some taxpayers do not report all their income. Taxpayers were estimated to have underreported interest and dividend income in 1979 by about $16 biUion and thereby underpaid taxes by approximately $3.6 biUion.

In August, the President announced the details of his economic revitaliza-tion program. This program was designed to create half a million jobs by the end of 1981 and a total of 1 million jobs by the end ofthe following year. Cost-reducing and productivity-enhancing provisions were incorporated to boost investment and speed the recovery of the faltering economy. The tax provisions included: Liberalization and simplification of depreciation, making the investment tax credit partially refundable, providing an individual tax credit to offset social security tax increases, liberalization of the earned income credit, a targeted investment credit to assist depressed areas, rapid amortiza-tion of startup costs for small business, and some rehef from the marriage penalty. These provisions altogether would have reduced tax liability by $27.6 billion in calendar 1981, rising to $58.3 billion in 1985.

INTERNATIONAL AFFAIRS

The Year in World Finance

During fiscal 1980, rates of inflation in consumer prices in industrial countries rose, reaching a year-on-year average increase of about 11V2 percent in September 1980. This rise occurred despite a marked decline in the pace of real economic growth. Payments positions worsened for most industrial and developing countries as the combined current account surpluses of the oil-exporting countries rose sharply as a result of increases of about 75 percent in prices for crude petroleum. With lower real growth, the U.S. position was expected to move from near balance in calendar 1979 to a current account surplus ofabout $5 biUion in calendar 1980. Despite somewhat slower growth rates in 1980, large current account deficits were anticipated for the Federal Repubhc of Germany (about $15 biUion), Japan (more than $10 billion), Italy (about $9 bUhon), and France (about $9 billion), as these countries absorbed a large share of the payments impact of higher prices for oil. Although exchange rates showed considerable movement at times during the fiscal year, the dollar's average level in terms of major foreign currencies at the end of the year was about the same as at the beginning.

During the year, short-term interest rates for the U.S. dollar were extremely volatile. In London, EurodoUar rates rose about 3 percent in the fourth quarter of 1979, to 143/4 percent, and averaged nearly 20 percent in March 1980, before declining to 9 /^4 percent in June 1980. In August, this key international rate rose again and averaged nearly 14 percent in September 1980. Rates in other leading currencies moved more slowly to moderately higher levels, ending the fiscal year in a broad range from about 9 percent in Germany to 17 percent in Italy.


X X V I I I 1980 REPORT OF THE SECRETARY OF THE TREASURY

The sharp swings in doUar interest rates were related to rapidly changing expectations as to future inflation rates; to rapid changes in the pace of real economic activity in the United States; and to the adoption early in October 1979 of new criteria for monetary pohcy by the Federal Reserve. These criteria placed primary emphasis on the rate of growth of monetary aggregates and thus led to wider fluctuations in U.S. short-term interest rates than did previous policies.

In fiscal 1980, net changes in the U.S. trade balance and the U.S. current account were small as compared with the previous year. Although petroleum imports rose by over $25 billion to nearly $80 biUion, due to a year-over-year increase in average oil import prices of about 75 percent, the trade deficit worsened only by about $3 billion, to a level of about $30 bUUon. An increased surplus on net invisibles (international services and transfer payments) offset part of this, leaving a deficit in the current account of about $2 bUhon. Recorded net capital outflows of private capital nearly doubled and were almost offset by inflows in the categories of recorded official capital and the statistical discrepancy, which is believed to include unrecorded capital movements.

Large increases in the current account deficits of most other industrial countries and changing relationships among interest rates in the United States and major countries were two of the many factors affecting the foreign exchange markets. A pronounced dip in the dollar value of the deutshe mark (DM) and the Swiss franc occurred during the first 4 months of 1980 when doUar interest rates rose sharply, followed by a subsequent recovery when dollar rates declined. During the fiscal year as a whole, the doUar appreciated by 4 percent in terms of DM and depreciated by nearly 8 percent in terms of British sterling and by about 6 percent in terms of Japanese yen. On a trade-weighted basis, the dollar rose very slightly over the 12-month period in terms of the currencies of the members of the Organization for Economic Cooperation and Development (OECD) and likewise in terms of special drawing rights (SDR's).

The Federal Reserve and the Treasury intervened to counter disorderly conditions in the exchange market, making net purchases of nearly $4 billion equivalent of foreign currencies during the fiscal year. These acquisitions were used to restore balances drawn down in earlier periods and to repay swap debts incurred in earher interventions. [By the end of October, aU outstanding swap debts had been repaid.]

The price ofgold was highly volatile, rising during the year from about $400 per ounce to about $670, after reaching a peak of about $850 per ounce early in 1980.

During the fiscal year, much attention was given to the problems of recychng funds from the capital surplus oil exporters to the deficit countries, particularly to those developing nations that have been borrowing heavily from the commercial banking system. The current account surplus of the oil-


INTRODUCTION X X I X

exporting countries was projected to rise about $50 bUlion in calendar 1980, to a total of about $110 billion.

Over the 2-year period 1979-80, about two-thirds of the offsetting deficits corresponding to the $170 billion combined current account surpluses ofthe members of the Organization of Petroleum Exporting Countries (OPEC) fell upon the industrial countries as a group; no less than a quarter of the OPEC surpluses was financed by deficits of the Federal Repubhc of Germany and Japan.

The combined current account deficits of non-OPEC developing nations as a group (after allowing for unrequited inward transfers of official funds) were expected to rise from the calendar 1979 figure of about $40 biUion to a Httle more than $60 biUion in calendar 1980. Most of this calendar 1980 deficit was expected to be financed by private capital flows, but the cost of servicing foreign borrowing was rising and in some cases bank credits were more difficult to obtain at the end of the fiscal year. Some countries have encountered difficult financial problems, and a growing number of countries have had recourse to the International Monetary Fund (IMF) for financing to support their adjustment efforts.

Real rates of growth declined in the OECD countries from an estimated 3V2 percent per annum in calendar 1979 to about IV2 percent in calendar 1980. Among major industrial countries, calendar 1980 estimated real growth rates range widely: A negative 3 percent in the United Kingdom, zero in the United States, a positive 2 percent in Germany, and more than 5 percent in Japan. The non-OPEC developing nations as a group were expected to grow by about 5 percent in 1980, an average rate that has been maintained since 1976.

Inflation continued to resist poHcies of restraint, but a somewhat slower pace was achieved in the July-September quarter, after the year-over-year rise of consumer prices in the industrial countries as a group had gone from an average rate of about 9V2 percent in the third quarter of 1979. to about 12V2 percent in the second quarter of 1980. Germany, Japan, Benelux, and Switzerland continued to record substantially lower than average rates of advance in consumer prices.

International reserves of countries, excluding gold but including European currency units (ECU's) and SDR's, rose by about 17 percent during the fiscal year to a total of $405 billion. This was about the same percentage rate of growth as in the previous fiscal year. In value terms, yearend reserves were equivalent to about 22 percent of the value of annual global imports (excluding figures for the centrally managed economies of Eastern Europe and China). Gold reserves are valued at different doUar prices by major holders and change very little in physical quantity. Accordingly, the total excluding gold seems the most appropriate figure to use in measuring changes in reserves.


x x x 1980 REPORT OF THE SECRETARY OF THE TREASURY

International Monetary Afi'airs

As the U.S. member of the Board of Governors of the IMF, Secretary MUler headed the U.S. delegations to the semiannual meetings of the Interim Committee of the Board of Governors of the Intemational Monetary Fund, held in Hamburg in April and in September in Washington, and to the annual meeting of the full Board of Governors in Washington in September 1980. In its April meeting, the Interim Committee was especially concerned with the dramatic and widespread rise in rates of inflation and also with the prospective increases in the level of payments deficits of the nonoU developing coimtries caused by sharply higher oil prices. Despite the slowdown in growth, particularly in the industrial countries, the Committee agreed that top priority should continue to be given to the fight against inflation. Great importance was attached to avoiding secondary repercussions of the oU price increases on wages, incomes, and prices. On the recycling issue, the Interim Comniittee agreed that the IMF should stand ready to play a major role in the adjustment and financing of payments imbalances. Although the Fund was relatively liquid at the time, the Committee encouraged the Managing Director of the IMF to start discussions with potential lenders to supplement its resources. The Committee discussed but did not resolve important outstanding issues that had emerged from the work of the Executive Board of the IMF on a plan for a "substitution account," in which countries wishing to diversify their reserves might place part of their reserves against claims on the account.

In September, the Governors again emphasized the same two monetary problemsinflationary expectations and recycling. They cautioned against any premature shift to expansionary monetary and fiscal policies. They also welcomed the IMF Executive Board approach of making available larger amounts of financing than in the past to members making strong efforts to correct their payments problems. While agreeing on the need for IMF borrowing during the next few years, the Committee stressed its view that the Fund should continue to place primary reliance on quota subscriptions as a source of financing. The Committee also noted the work of the Executive Board on a subsidy to low-income borrowers from the IMF and on future allocations of SDR's. The decision to redefine the SDR as a basket of 5 major currencies, instead of 16 currencies, as of January 1, 1981, was welcomed. It was expected to help promote the use of SDR-denominated claims by private as well as pubhc holders. The proposal for a substitution account in the Fund was not actively pursued, but the Committee reiterated its intention to continue to study that subject.

Legislation authorizing participation by the United States in the seventh annual review of quotas was completed, but the requisite appropriation of SDR 4.2 billion was still pending at the end of the fiscal year. [In December, the necessary legislative action on this appropriation was completed, and the United States formally consented to the quota increase.]

The Treasury continued to cooperate with the Federal Reserve in intervening as necessary to counter disorderly conditions in the exchange


INTRODUCTION X X X I

market. The Treasury also added to its foreign exchange resources for this purpose by borrowing DM 4,025 million ($2,287 million) in DM-denominated notes issued in the German market in November 1979 and January 1980. In October 1979, Treasury gold sales were made flexible in amounts and timing, and under this more flexible policy the last sale held during the fiscai year was carried out on November 1, 1979. In July 1980, the Treasury commenced sales to the public of commemorative gold medaUions pursuant to the American Arts Gold MedaUion Act of 1978.

The International Monetary Group

This interagency group met from time to time at the caU of the Under Secretary for Monetary Affairs or, after that position became vacant in February 1980, the Assistant Secretary (International Affairs), to review current and prospective problems of the international monetary system and to help establish positions to be taken by U.S. representatives in the IMF and in other fora for discussing and negotiating international monetary matters.

Developing Nations

Treasury has taken the lead in negotiating U.S. participation in increases in capital for the Inter-American Development Bank (IDB) and in replenish-ments of the concessional lending resources for the International Development Association (IDA) and the concessional loan windows of the IDB, the Asian Development Bank (ADB), and the African Development Fund (AFDF).

During 1980, Congress approved authorizing legislation for U.S. subscrip-tions and contributions to the regional banks, but at levels 10 and 15 percent below the negotiated amounts for the IDB and the ADF, respectively. Although legislation for U.S. subscriptions to the sixth replenishment of IDA (IDA VI) was submitted to Congress during 1980, it was not approved.

The Congress also approved a continuing resolution providing a total of $1.5 biUion for U.S. subscriptions and contributions to these multUateral development banks (MDB's) through use of budget authority and program limitations. As part of this resolution, proposals for enacting "program Hmitations on caUable capital" for IBRD and ADB capital were also approved. These have the effect of placing congressional limits on the loan programs of those MDB's that are supported by market borrowings related to their callable capital rather than actually appropriating such capital.

At the annual meetings of the World Bank group and the IMF at the end of September 1980, Secretary MiUer gave U.S. support to implementation of a new World Bank lending program to provide about $14 bilHon in loans through 1985 in support of energy development projects totaling approximate-ly $56 bUHon. This program could potentially add the equivalent of 2.5 miUion barrels of oil per day to world energy supplies. The Secretary also encouraged the Bank's new program to support medium-term structural adjustment programs in member countries through lending designed for this purpose and


X X X I I 1980 REPORT OF THE SECRETARY OF THE TREASURY

coordinated closely with the IMF. It is hoped that such loans will help in coping with increasingly difficult recycling problems of developing nations. In addition. Secretary MiUer also approved the Bank's continuing efforts in the sphere of population and urged that the Bank continue emphasizing projects in which benefits more directly reach the poor and that the Bank allocate a larger share of its lending to the poorer borrowing countries.

In other aspects of U.S. relations with developing nations. Treasury took part in international debt rescheduling negotiations with four countries-Sierra Leone, Sudan, Turkey, and Zaire. These countries faced critical payments problems and had sought assistance from the IMF in carrying out adjustment programs. In the case of Turkey, a consortium of members of the OECD also pledged about $1.2 billion of assistance during Turkish fiscal year 1980-81 to meet the severe financial crisis in that country.

Following the seizure of the Americans in Iran and threats by that Government that it would not honor its financial obligations to U.S. citizens and entities, the U.S. Government responded with a series of actions iricluding the blocking of Iranian assets on November 14, 1979.

During the year, the Secretary took part in two meetings of th^ Development Committee, a group consisting of Governors ofthe IMF and the World Bank. The April meeting reviewed proposals in the "Program of Immediate Action" prepared by the Group of 24 leading developing countries. In addition, there was a preliminary discussion of the extensive report on development financing made by the Brandt Comniission that had been initiated by the President of the World Bank. The Development Committee urged increased public and private financing to meet payments deficits swollen by oil price increases and mounting debt service charges.

In September 1980, the Committee foresaw a further increase in the current account deficits of the oU-importing developing countries in calendar 1981 over the calendar 1980 level. It recognized that, along with strong support from industrialized countries and oil exporters, vigorous adjustment efforts were necessary by the developing countries. These efforts should include expansion of exports, new energy production, economy in energy use, and more efficient use of capital, human resources, and imports. The Conimittee also welcomed the Bank's intention to examine the possibUity of an energy affiliate or facility to expand lending operations in the energy sector. The Committee asked the Bank Board to explore promptly ways of enlarging the Bank's lending capacity to take account of world inflation, which has reduced the real value of previously planned lending, as well as to meet prospective new requirements for structural adjustment and energy loans.

Natural Resources and Commodities

Recession, improved conservation, and higher prices for oU brought a 6-percent reduction in the rate of consumption of oU by OECD members at the end of the fiscal year as compared with a year earlier. The average OPEC price rose from about $20 per barrel in September 1979 to about $32 per barrel in


INTRODUCTION XXXIII

September 1980. Treasury policies and programs concentrated on the effects of OPEC price and supply decisions on the U.S. economy; on demand restraint and alternative energy production in the context of U.S. commit-ments under the International Energy Agency (lEA) and the Venice economic summit; and on energy exploration and development in developing countries. The economic summit emphasized longer term programs to conserve energy and agreements to develop policies for increased production of coal, nuclear, synthetic, and renewable energy resources.

Treasury participated in the Governing Board and subordinate groups of the lEA. Major achievements ofthe year were the setting of industrial country oil import targets for 1980 and 1985 and a procedure for fixing politically binding ceihngs to meet a short-term market disruption. Subordinate groups dealt with emergency questions, consultations on and information gathering cri imports and stocks, and long-term cooperation and needs for structural changes in use of oU and coal.

In the sphere of international commodities, further progress was made within the framework of the International Program for Commodities, which was developed at the fourth United Nations Conference on Trade and Development (UNCTAD IV) in 1976 and reaffirmed at UNCTAD V in 1979. The Treasury took an active part in the financial aspects of the Common Fund, for which Articles of Agreement were completed after 4 years of intensive negotiations. The First Account of the Common Fund wiU facUitate the financing of the buffer stocking operations of the intemational commodity agreements associated with the Fund. The primary resources derived from associated commodity agreements wUl be supplemented by up to $400 million in capital contributed by Common Fund members. A Second Account will be funded by voluntary contributions and used to promote marketing, research, and development; the United States does not plan to contribute to this account in the foreseeable future.

Several significant developments took place in discussions on individual commodities which are likely to mark the cresting of international attention toward new price stabilization agreements. A Natural Rubber Commodity Agreement was negotiated which the United States joined provisionally until such time as Congress completes the appropriations process. Coffee-consum-ing countries, led by the United States, persuaded the producing countries to end their collusive price arrangement in retum for a pledge to activate the ecoriomic provisions of the Intemational Coffee Agreement. Also, the United States actively participated in riegotiation of new tin and cocoa agreements, although progress in them was disappointing.

In the related field of seabed mineral exploitation, legislation was enacted providing for orderly development of a domestic deep seabed mining industry in a manner consistent with the U.S. position at the Law ofthe Sea Conference under U.N. auspices.


XXXIV 1980 REPORT OF THE SECRETARY OF THE TREASURY

Trade and Investment Policy

Treasury took an active part in the implementation of the Tokyo Round of multilateral trade negotiations (MTN), for which an agreement was signed in April 1979. Within the MTN, it had played a key role in the negotiation of the new Agreement on Subsidies and Countervailing Measures and took a special interest in encouraging developing countries to sign this agreement, as well as other codes of conduct on government procurement, import licensing, technical barriers to trade, antidumping, and customs valuation.

A permanent Declaration on Trade Policy by the members of the OECD was negotiated. Members pledged avoidance of protectionist action and declared their intention to facilitate positive adjustment to structural changes in world demand and production.

Treasury participated in interagency discussions on steel imports. Follow-ing those discussions and consultations with industry and foreign government officials, the administration suspended and then reinstated the trigger price mechanism for steel imports.

Treasury continued to play a leading role in the normalization of economic relations with the People's Republic of China. Over the past year, trade and banking relations have continued to expand very rapidly and agreements have been signed pertaining to textiles, civil aviation, maritime relations, consumer affairs, grain, and the Overseas Private Investment Corporation. The first formal meeting of the U.S.-China Joint Economic Committee was held in Washington in September 1980 under the chairmanship of Secretary Miller and Vice Premier Bo Yibo to review the entire range of bilateral economic issues, including especially business facilitation, trade expansion, finance, and investment.

In the sphere of export policy, the Treasury took a leading role in developing a legislative proposal to encourage the formation of export trading companies which would promote exports by small- and medium-sized firms. It also contributed to two studies mandated by Congress on U.S. competi-tiveness in international trade and on U.S. export promotion and disincen-tives. In the face of increasing export credit competition among exporting nations, Treasury officials continued to press negotiations to improve the International Arrangement on Export Credits, in order to reduce official export credit subsidies. Treasury also encouraged increased funding of the U.S. Export-Import Bank. Treasury assisted the Department of Agriculture in making a smooth transition from the use of direct Commodity Credit Corporation credits to guarantee programs, thereby encouraging greater participation by private financial entities in financing agricultural exports.

In the sphere of international investment, Assistant Secretary Bergsten chaired the Task Force on Private Foreign Investment which reported to the World Bank-IMF Development Committee. The report endorsed the objective of seeking an international understanding to limit the distorting effect of government investment incentives and recommended that the World Bank


INTRODUCTION XXXV

group undertake a study of these incentive measures. The International Finance Corporation, an affiliate of the World Bank, is planning such a study.

Saudi Arabian Affairs

In November 1979, the Secretary visited Saudi Arabia and signed a 5-year extension of the original United States-Saudi Arabian Technical Cooperation Agreement.

The United States-Saudi Arabian Joint Commission on Economic Cooper-ation met in Washington in April 1980, and reviewed 19 ongoing technical cooperation agreements. Plans for the future stress, even more than in the past, the training and development of Saudi Arabian professional and technical manpower. Projects include research in agriculture and water, desalination and solar energy, government statistics and administration, highways and transportation, and vocational training.

Arrangements were completed for the first United States-Saudi Arabian private sector dialogue to be held October 1-3, 1980, under the joint chairmanship of the Secretary and the Saudi Arabian Minister of Finance and National Economy.

International Economic Analysis

Research studies on a number of subjects were completed, including (a) the role of State development agencies in U.S. adjustment to changing trade patterns, (b) the effect of "less than fair value" complaints and findings on U.S. import growth, 1975-79, (c) an empirical investigation of the effect of import penetration on domestic prices for U.S. manufactured goods, (d) an assessment of the competitive positions of U.S. industries, and (e) an appraisal of intervention practices in the foreign exchange market.

The task of processing, editing, and tabulating data from a survey of foreign portfolio investment in the United States as of December 31, 1978, was completed during the year. The survey had been required by the International Investment Survey Act of 1976. This act also requires a survey of U.S. portfolio investment abroad; a study of the need for, cost, and feasibility of surveying U.S. residents' portfolio abroad was submitted to Congress.


REVIEW OF TREASURY OPERATIONS


FINANCIAL OPERATIONS Summary

On the unified budget basis the deficit for fiscal 1980 was $59.0 billion. Net receipts for fiscal 1980 amounted to $520.1 billion ($54.1 bUlion over fiscal 1979), and outlays totaled $579.0 biUion ($85.4 biUion over fiscal 1979).

Fiscal 1980 borrowing from the public amounted to $70.5 bUlion as a result of (1) the $59.0 bilHon deficit, (2) a $0.4 bUlion increase in cash and monetary assets, and (3) an $11.2 billion decrease in other means of financing.

As of September 30, 1980, Federal securities outstanding totaled $914.3 bUlion, comprised of $907.7 billion in public debt securities and $6.6 bUlion in agency securities. Ofthe $914.3 billion, $715.1 billion represented borrowing from the public.

The Government's fiscal operations for 1979 and 1980 are summarized as follows:

[In billions of dollars] 1979 1980

Budget receipts and outlays: Receipts Outlays

Budget deficit (-) Means of financing:

Borrowing from the public (-) Increase in cash and other monetary assets Other means:

Increment on gold and seigniorage Profit on sale of gold Outlays of off-budget Federal agencies Other Total budget financing ' 27.7 59.0

466.0 493.6 -27.7

33.6 -.4

1.0 2.4

-12.4 3.5

520.1 579.0 -59.0

70.5 -.4

.7

.9 -14.2

1.4


1980 REPORT OF THE SECRETARY OF THE TREASURY

THE BUDGET $Bil.

5 0 0 -

4 0 0 -

3 0 0 -

ar treasury 1980

Documents

department circular

united states government

treasury bonds

federal reserve bank

united states secret

united states customs

fraser http

savings notes