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This file contains:
"Imported Shoes Create Problem" in The New York Times. 1 pg. Not scanned. [Newspaper], 12/1/1969
"Income and Spending Part III" in The Journal of Commerce. 1 pg. Not scanned. [Newspaper], 5/29/1968
"Income and Spending Part II" in The Journal of Commerce. 1 pg. Not scanned. [Newspaper], 5/28/1968
"Five Year Trade Bill Is Sent to Congress" by Richard Lawrence in the Journal of Commerce. 2 pgs. Not scanned. [Newspaper], 5/28/1968
"Travel Industry Upset by New Try by Administration for Tourist Tax" in the Journal of Commerce. 1 pg. Not scanned. [Newspaper], 6/26/1968
Republican Coordinating Committee Housing and Urban Development Task Force on the Functions of Federal, State and Local Governments. 12 pgs. Only cover scanned. [Newsletter], 6/1/1966
Statement by Henry Fowler, Secretary of the Treasury before the Senate Finance Committee on H.R. 16241. 49 pgs. [Report], 6/25/1968
Technical explanation of the foreign travel tax and technical explanation of the proposed changes in customs rules relating to tourist exemptions. 25 pgs. Attached to previous. [Report], 6/1/1968
Remarks by Frederick Deming, Under Secretary for Monetary Affairs, Department of the Treasury, at the 6th international program of the Instituto de Estudios Superiores de la Empresa. 15 pgs. [Report], 6/17/1968
"US Foreign Trade Commission Urged" by Richard Lawrence in the Journal of Commerce. 2 pgs. Not scanned. [Newspaper], 6/13/1968
The Impact of US Controls on Foreign Investment in the Congessional Record- Extensions of Remarks. 3 pgs. [Report], 6/6/1968
Tax Policy Research Study Number One: Overseas Manufacturing Investment and the Balance of Payments by G.C. Hufbaur (Univ. of NM) and F.M. Adler (Univ. of Penn). US Treasury Department. 92 pgs. Only cover scanned. [Book], n.d.
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26126405
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WHSF: Returned, 17-8
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26126405
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WHSF: Returned, 17-8
description
This file contains:
"Imported Shoes Create Problem" in The New York Times. 1 pg. Not scanned. [Newspaper], 12/1/1969
"Income and Spending Part III" in The Journal of Commerce. 1 pg. Not scanned. [Newspaper], 5/29/1968
"Income and Spending Part II" in The Journal of Commerce. 1 pg. Not scanned. [Newspaper], 5/28/1968
"Five Year Trade Bill Is Sent to Congress" by Richard Lawrence in the Journal of Commerce. 2 pgs. Not scanned. [Newspaper], 5/28/1968
"Travel Industry Upset by New Try by Administration for Tourist Tax" in the Journal of Commerce. 1 pg. Not scanned. [Newspaper], 6/26/1968
Republican Coordinating Committee Housing and Urban Development Task Force on the Functions of Federal, State and Local Governments. 12 pgs. Only cover scanned. [Newsletter], 6/1/1966
Statement by Henry Fowler, Secretary of the Treasury before the Senate Finance Committee on H.R. 16241. 49 pgs. [Report], 6/25/1968
Technical explanation of the foreign travel tax and technical explanation of the proposed changes in customs rules relating to tourist exemptions. 25 pgs. Attached to previous. [Report], 6/1/1968
Remarks by Frederick Deming, Under Secretary for Monetary Affairs, Department of the Treasury, at the 6th international program of the Instituto de Estudios Superiores de la Empresa. 15 pgs. [Report], 6/17/1968
"US Foreign Trade Commission Urged" by Richard Lawrence in the Journal of Commerce. 2 pgs. Not scanned. [Newspaper], 6/13/1968
The Impact of US Controls on Foreign Investment in the Congessional Record- Extensions of Remarks. 3 pgs. [Report], 6/6/1968
Tax Policy Research Study Number One: Overseas Manufacturing Investment and the Balance of Payments by G.C. Hufbaur (Univ. of NM) and F.M. Adler (Univ. of Penn). US Treasury Department. 92 pgs. Only cover scanned. [Book], n.d.
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Richard M. Nixon's Returned Materials Collection
Returned White House Special Files
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Richard Nixon Presidential Library
White House Special Files Collection
Folder List
Box Number
Folder Number
Document Date
Document Type
Document Description
17
8
12/01/1969
Newspaper
"Imported Shoes Create Problem" in The
New York Times. 1 pg. Not scanned.
17
8
05/29/1968
Newspaper
"Income and Spending Part III" in The
Journal of Commerce. 1 pg. Not scanned.
17
8
05/28/1968
Newspaper
"Income and Spending Part II" in The
Journal of Commerce. 1 pg. Not scanned.
17
8
05/28/1968
Newspaper
"Five Year Trade Bill Is Sent to Congress"
by Richard Lawrence in the Journal of
Commerce. 2 pgs. Not scanned.
17
8
06/26/1968
Newspaper
"Travel Industry Upset by New Try by
Administration for Tourist Tax" in the
Journal of Commerce. 1 pg. Not scanned.
17
8
06/1966
Newsletter
Republican Coordinating Committee
Housing and Urban Development Task Force
on the Functions of Federal, State and Local
Governments. 12 pgs. Only cover scanned.
Tuesday, May 19, 2009
Page 1 of 2
Box Number Folder Number Document Date
Document Type
Document Description
17
8
06/25/1968
Report
Statement by Henry Fowler, Secretary of the
Treasury before the Senate Finance
Committee on H.R. 16241. 49 pgs.
17
8
06/1968
Report
Technical explanation of the foreign travel
tax and technical explanation of the proposed
changes in customs rules relating to tourist
exemptions. 25 pgs. Attached to previous.
17
8
06/17/1968
Report
Remarks by Frederick Deming, Under
Secretary for Monetary Affairs, Department
of the Treasury, at the 6th international
program of the Instituto de Estudios
Superiores de la Empresa. 15 pgs.
17
8
06/13/1968
Newspaper
"US Foreign Trade Commission Urged" by
Richard Lawrence in the Journal of
Commerce. 2 pgs. Not scanned.
17
8
06/06/1968
Report
The Impact of US Controls on Foreign
Investment in the Congessional Record-
Extensions of Remarks. 3 pgs.
17
8
n.d.
Book
Tax Policy Research Study Number One:
Overseas Manufacturing Investment and the
Balance of Payments by G.C. Hufbaur (Univ.
of NM) and F.M. Adler (Univ. of Penn). US
Treasury Department. 92 pgs. Only cover
scanned.
Tuesday, May 19, 2009
Page 2 of 2
REPUBLICAN
ATING CORRDIN
REPUBLICAN
HOUSING
AND URBAN
DEVELOPMENT
Additional copies may be obtained from Fon-
Prepared under the direction of the
tana Lithographers. 1937 47th Avenue, N.E.,
Washington 27. D. C. for (amount per 100,
Republican National Committee
$10.00; 500, $35.00).
1625 Eye Street, N.W.
Washington, D.C. 20006
Check must accompany order.
STATEMENT BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
Boz Payments
BEFORE THE
SENATE FINANCE COMMITTEE
ON
H. R. 16241
TUESDAY, JUNE 25, 1968, 10:00 A.M.
Thank you for giving me the opportunity to discuss with you
H. R. 16241, a bill containing a portion of the Administration's
recommendations for dealing with our foreign travel payments deficit.
These recommendations are a part of the overall program set forth
by the President in his January 1st Message on balance of payments.
Before discussing the details of this legislation and our recom-
mendations in this area, let me place this measure in perspective
by reviewing with you our overall balance of payments program and
how it is progressing.
I. The Balance of Payments Program.
I think it unnecessary to detail the conditions which led to
the President's balance of payments message. You are all familiar,
I am sure, with the fact that our balance of payments deficit for the
F-1284
- 2 -
year 1967 was almost $3.6 billion, and in the final quarter of the
year exceeded $1.8 billion, which would represent a deficit of over
$7 billion on an annual basis. These deficits, together with the
devaluation and difficulties of the British pound, the other reserve
currency, have led to intense gold speculation and doubt about the
survival of the international monetary system as we know it.
On January 1st, President Johnson set forth an Action Program
to deal with our balance of payments problem, as a national and
international responsibility of the highest priority. This pro-
gram stressed, as the first order of business, the urgent need for
enactment of a tax surcharge which, coupled with expenditure controls,
would help to stem the inflationary pressures threatening both our
economic prosperity and our trade surplus. This fiscal package, now
happily becoming law this week, is the keystone of our program to
correct the balance of payments problem.
- 3 -
In any discussions of the balance of payments problem, we
cannot overlook the other features of the President's "first line
of defense of the dollar." It is of unquestioned importance that
business and labor work together to make effective the voluntary
program of wage-price restraint and to prevent work stoppages
that will adversely affect our foreign trade.
In addition, the President's program called for a number of
both temporary and long-range measures directed at the improvement
of specific sectors of our international payments accounts.
These specific measures included a five-part program designed to
achieve near equilibrium in our balance of payments deficit this
year by calling upon each major segment of our economy importantly
involved in the balance of payments to make a contribution to this
savings target. This program asked:
-- American business to reduce its outlays for direct investment
abroad by $1 billion, under a new mandatory program to be administered
by the Commerce Department;
- 4 -
-- Banks and other financial institutions to reduce foreign
lending by $500 million, through a tightening of the voluntary restraint
program administered by the Federal Reserve Board;
-- The American people to reduce their overseas travel expenditures
by $500 million, on the basis of the President's request for voluntary
deferral of nonessential travel plus legislation to help achieve a
reduction in travel expenditures by those who do travel;
-- Government to reduce or offset its expenditures overseas by $500
million, through specific action programs assigned to the Secretaries
of State, Treasury, and Defense and the Director of the Budget; and
-- For prompt cooperative action through consultations with our
trading partners to minimize disadvantages to our trade, or appropriate
legislative measures, to realize a $500 million improvement in our trade
surplus.
It is the travel portion of this immediate direct action program which
at this time requires legislation. In the other sectors, the measures
called for have been instituted and are underway.
- 5 -
Thus, for business, the mandatory restraints on direct invest-
ment have been in operation under Commerce Department regulations
since January 1st and have, during the first quarter of 1968, al-
ready had a sizeable favorable impact on our balance of payments.
For banking, the Federal Reserve Board restraints on foreign
lending were, similarly, issued and effective on January lst. Major
progress has already been made toward achievement of the goal under
this program, with a decline of about $350 million (seasonally
adjusted) during the first quarter of this year in commercial bank
claims on foreigners.
The government has taken action on each of the three
specific steps to reduce expenditures abroad listed by the President
in his January 1st Message:
- 6 -
-- Discussions with a number of countries in both Europe and
Asia to find various ways to reduce the foreign exchange costs of
maintaining our troops abroad are already well underway.
-- An initial program for a 12 percent reduction of over-
seas staffs by the end of 1969, together with a further tightening
of Government travel abroad, was put into effect on March 30; and
a second-stage effort to achieve even further reductions, primarily
in the larger overseas missions, is underway.
-- The Department of Defense is examining a series of
possible specific measures to reduce further the foreign exchange
impact of personal spending by U.S. military personnel and their
dependents in Europe, which are importantly related to civilian
tourist travel.
In addition, the President, on January 11, directed AID to
reduce overseas expenditures in 1968 by a minimum of $100 million
below the 1967 level.
- 7 -
For trade, the President's Special Trade Representative,
Ambassador Roth, has headed an effort by many of our overseas
missions to explore actively with our major trading partners
possible immediate as well as longer-term cooperative actions to
contribute toward improvement in our trade surplus. Ambassador
Roth has reported on these discussions in the current hearings
before the House Ways and Means Committee.
A Working Party in the GATT has been instituted at U.S.
initiative and is now engaged in an examination of existing pro-
visions dealing with border-tax adjustments and their effects on
trade, looking to the development of a program designed to remove
or minimize any significant disadvantage to U.S. trade that results
from the existing GATT provisions and the tax systems of our principal
trading partners.
In other words, action on each of these parts of the President's
balance of payments program is well underway. The one remaining
- 8 -
aspect of the program is the travel area where the goal is to reduce
the balance of payments deficit by $500 million. H. R. 16241 represents
a beginning -- modest as it may be -- of the action required to effect
an immediate reduction in the outflow of dollars. A long-range pro-
gram of a different direction, to increase foreign travel to the U.S.,
is already well underway, having as its cornerstone the recommendations
of a Task Force headed by Ambassador McKinney. I should like to file
a copy of the Report of that Task Force which undertook this work
early this year and submitted its report to the President on February 15,
1968.
II. The Continuing Need for a Full Implementation
of the January 1 Program.
Events since the beginning of the year have confirmed that
the President's full Action Program is needed to help bring our
balance of payments to equilibrium, to maintain confidence in the
dollar, and to stabilize the international monetary system.
- 9 -
Our balance of payments deficit, sorely affected by the fall-off
in our trade surplus, ran at too high a rate in the first quarter.
The first-quarter results released on May 14 show a liquidity
deficit of $600 million, seasonally adjusted, equivalent to an
annual rate of $2.4 billion.
This does show, I am happy to say, a quick and quite substantial
recovery from the extremely high and totally unsustainable rate of
deficit which we suffered in the last three months of last year.
However, continued effort is necessary to advance us further
toward our vital goal of sustainable equilibrium. Although we made
notable gains in the first quarter, these were mainly due to a
number of factors in our capital accounts. These included:
(1) A sharp reduction in bank lending and large
sales of special corporate bonds to foreigners, in connection with
the Federal Reserve and Commerce programs;
(2) Foreign net purchases of U.S. corporate stocks which
amounted to about $275 million, approximately maintaining the
- 10 -
same post-war record rate averaged during the last half
of 1967; and
(3) One large known transaction, classified as foreign
direct investment in the United States, involving an inflow
of slightly over $200 million.
We certainly cannot rely only on improvement in
the capital accounts to restore equilibrium in our balance of
payments -- we must look to the achievement and maintenance of a
substantial merchandise trade surplus as an essential cornerstone
of our balance of payments. However, during March, in particular,
and for the first quarter of this year, as a whole, our performance
on trade account has been very poor --- reflecting the crucial importance
of the tax increase-expenditure reduction measure to curb domestic
inflationary pressures and the excessive increase in imports that
- 11 -
characteristically accompanies an excessive rate of growth in our
economy. Our trade surplus for the first quarter fell to an annual
rate, after seasonal adjustment, of only slightly over $400 million --
compared with a $1.3 billion annual rate based on the final quarter
of 1967, and a $4.2 billion annual rate based on the three preceding
quarters of last year.
On other fronts also, events during the interim since January 1st,
have further underlined the reality of the threat to our dollar which
was feared at the beginning of the year. From February 7 to March 20,
1968, we experienced a period of intense speculation in the foreign ex-
change and gold markets of the world. During this period, the Treasury
Department transferred a total of $1-1/2 billion in gold to the
Exchange Stabilization Fund in order to replenish its working
balances and complete the settlement of the United States' share
of the losses experienced by the gold pool.
- 12 -
These gold losses clearly indicated the concern held
by foreigners as to this country's persistent balance of
payments deficit. The situation threatened to bring about
serious difficulties for the world's entire financial structure,
with accelerating interest rates and the choking off of credit
availabilities beginning to spread from the international
money markets into domestic markets.
The impact of this monetary crisis was felt not only by
bankers and finance ministries of the world. The American
traveler also was directly affected. For example, over the
period of March 14 through March 18, many American travelers
experienced considerable difficulty spending or converting
their dollars at the hotels, restaurants, and banks of Europe.
When they were permitted to convert, it was frequently at a
large discount. Thus, some American travelers were getting
only --
- 13 -
-- 94 cents for a dollar in Paris
-- 96 cents for a dollar in Italy
-- 80 cents for a dollar in Germany
I would venture to say that these Americans who experienced the direct
effect of a lack of confidence in the dollar would welcome, if not
insist upon, immediate measures to insure that their dollars are not
so threatened again.
Fortunately, as a result of the meeting, on March 16-17, of the
gold pool central bank governors in Washington, decisions were made
and action was taken to restore order to the financial markets. How-
ever, the cost of those six weeks of speculative activity in terms
of our loss of gold and in terms of the strain on the international
monetary system was severe. The steps that have been taken --
while representing an effective solution for the immediate prob-
lem -- will not guarantee against a repeat performance in the
future. We can only protect against further attacks on the
dollar -- and, through it, the world monetary system -- by striking
at the root of the problem -- the persistent imbalance in world pay-
ments, with a deficit in the United States and a surplus in Europe.
- 14 -
III. Foreign Travel and the U. S. Balance of Payments.
Foreign travel expenditures are a major contributor to the
balance of payments deficit and a comprehensive program to close the
deficit would be incomplete and out of balance were travel omitted.
In 1967 alone, a record number of Americans traveling outside the
United States spent $4-3/4 billion, an increase of 17 percent over
the previous year. These expenditures involved a foreign exchange
cost of $4 billion. Receipts from foreign visitors to the U. S.
came to only $1.9 billion leaving a deficit of about $2.1 billion.
In fact, for the period 1961 through 1967, the total foreign
payments for international travel (about $21 billion) were nearly as
great as the total foreign exchange costs ($22.9 billion) of our
military expenditures abroad, including the foreign exchange costs
of the war in Southeast Asia. In other words, the balance of pay-
ments costs of our foreign travel have been equivalent to the balance
of payments costs of our national security to the extent it depends
upon the operations or presence of our military forces outside the
United States.
- 15 -
We hear a great deal in some quarters about ending the war in
Southeast Asia or bringing United States military forces home as a
means of reducing our balance of payments deficit. We also hear a
great deal about reducing our forces in Western Europe because of
their foreign exchange costs. I am not here today to debate these
issues. I am here to say that the government which adopts a program
of doing whatever it can, consistent with national security, to reduce
or neutralize the foreign exchange costs of our military operations
overseas, must similarly tackle the problem of travel expenditures
when our balance of payments is still in a serious state of chronic
deficit.
The net foreign exchange impact of this level of foreign travel
spending can be measured by offsetting against it the spending in
the U. S. by foreign travelers. For the same 1961 through 1967
period, the net deficit in foreign exchange payments arising from
tourism amounted to a little over $11 billion, as compared to about
- 16 -
$17.4 billion net foreign exchange deficit for military expenditures
abroad after offsetting the foreign purchases of military equipment
in the U.S. Moreover, unless effective measures are undertaken, the
situation with regard to travel can only get worse in the future.
In this regard, the Chase Manhattan Bank recently published
in its June, 1968, "Business in Brief" a summary review of how
travel figures in the United States Balance of Payments. This
summary states, "Travel is a fast growing element in United States
international financial accounts. Outlays far exceed receipts,
helping to create payments deficits." The bank points out that
foreign travel is among the major causes of dollar outflows; the
$4 billion of foreign travel payments in 1967 being almost as large
as military spending of $4.3 billion.
The bank presentation also calls attention to the fact that
expenditures abroad by Americans and expenditures in the United
States by foreigners have both been increasing, and indeed the latter
rate of increase on a much smaller base has been somewhat greater.
- 17 -
The important point clearly indicated by these figures however is
that "if recent rates of growth in travel persist, the dollar gap
between outlays and receipts will continue to widen." Thus the bank
summary shows that under a continuation of growth patterns that
have been exhibited in the past few years, the $2 billion of deficit
in 1967 will widen to $3 billion by 1975. Other estimates, taking
into account the greatly increased travel which will flow from the
new hugh passenger "air-busses," place the travel deficit in 1975
at much higher figures.
All of the economic and social forces at play within our
economy will inevitably lead to more Americans traveling abroad
in the future and spending more. First, it is anticipated that
disposable income will increase year by year. Thus, even if the
percentage of disposable income which is spent on foreign travel
remains constant, the year-by-year increase in disposable income
will automatically lead to a year-by-year increase in amounts spent
on foreign travel.
- 18 -
In fact, however, it is reasonable to expect that the per-
centage of disposable income spent on foreign travel will also
increase, thereby further increasing the foreign travel payments.
One factor which leads to this conclusion is the rising level of educa-
tion in this country which should lead to more and more people
wanting to travel to foreign countries for its educational value.
Second, as per capita income rises, a larger percentage is available
for less-essential spending which would undoubtedly include travel.
Furthermore, the anticipated introduction of airplanes with much
larger capacities brings the prospect of lower air fares which
should encourage more people to travel abroad.
In other words, the economic and social trends in this country
can lead to no other conclusion than that our foreign travel payments
will increase year by year. This situation, present and future,
presents a problem that cannot be dismissed or laughed off or put
under the rug.
- 19 -
The long-term solution to moderating our travel deficit lies
in a strong program to encourage travel by foreigners to the United
States. A Task Force under Ambassador McKinney has examined ways
to achieve this goal and has made a series of recommendations, some
of which are already in effect. This represents a significant step
towards a long-term solution.
It cannot be expected, however, that travel by foreigners to
the United States will serve to moderate sufficiently the projected
United States foreign payments abroad, at least over the near future
while the recommendations of the Travel Task Force are being put
into effect and their results assessed. The major problem is that
the present disposable income base from which travel by foreigners
can be financed is much smaller than the United States disposable
income base from which our foreign travel is financed. Moreover,
there are fewer Europeans than Americans with sufficient income
to finance travel overseas.
- 20 -
If one looks at the principal travel expenditure potential as
located in people with incomes over $10,000, there are about five
times as many of these travel spenders in the U. S. as there are
in the principal countries of Western Europe.
Moreover, for 1965, U. S. disposable income was about $470 bil-
lion while the disposable income of the major Western European
countries was around $275 billion. Thus, even though some Europeans
may put a heavier emphasis on travel in their budget priorities
than do Americans, and even if there were an immediate significant
increase in the percentage of disposable income spent by Europeans
in travel to the U. S., the absolute dollar gap between their spending
in the U. S. and our spending abroad could still grow over the short
run. Therefore, remedial measures of a less pleasant and a more
restraining nature are necessary.
- 21 -
The travel program which we proposed to the House Ways
and Means Committee contained three elements:
1. Permanent elimination of the exemption of international
flights from the 5 percent tax on airline tickets.
2. Permanent reductions in the duty-free allowance for
articles brought into the United States by returning travelers
and for gifts sent by mail.
3. A temporary tax based on expenditures made by travelers abroad.
The bill before you, H. R. 16241, essentially carries out
the first two of these recommendations but contains no provisions
regarding the third.
Our total travel program was estimated to yield an improvement in
our travel deficit of $500 million. The legislation before you, it is
estimated, will improve our balance of payments position by $140 million,
less than a third of the needed $500 million. As I have already indicated,
there has been no lessening in the need for a savings nearer the proposed
- 22 -
$500 million level. Therefore, I urge your Committee to add to H.R. 16241
a tax, along the generallines we have proposed, to restrain spending in
connection with foreign travel.
More specifically, we propose that a progressive tax be
imposed on foreign travel expenditures. Under the rate schedule, the
-
first $15.00 per-day of expenditures (computed on an average basis over
the entire trip) would be exempt from tax; the total of expenditures in
excess of that basic exemption would be taxed at a 30 percent
rate. The tax is structured in this manner in order to achieve
the necessary balance of payments effect by encouraging travelers to
keep their spending to a modest level rather than to cancel their trips.
In this way it offers the greatest opportunity for foreign exchange
savings with the minimum interference with travel.
This proposal differs in only one major respect from that which we
presented to the Ways and Means Committee. Under our original proposal,
only the first $7.00 of average daily expenditures would have been
- 23 -
completely exempt from tax; the next $8.00 would have been taxed at a
15 percent rate and the excess at the 30 percent rate. Thus, while
practically all travelers would have been subject to at least some tax,
it would have been very modest for those who traveled modestly and
generally would not have required people to cancel their trips.
Nevertheless, some of those who commented on our original
proposal indicated that even a modest tax would force cancellation
of some desirable trips, especially those made by students
and others on very strict budgets. As revised, our proposal
would avoid this possibility in that a student or other traveler
could completely avoid the expenditure tax by keeping his average
daily expenditures below $15.00. This level of daily expenditures
would seem completely realistic, especially for the type of
trips taken by students and others traveling on modest budgets.
Moreover, the elimination of one of the tax brackets will
simplify the tax computation.
- 24 -
It has been suggested that the per diem exemption be replaced
by a flat per-trip or per-year exemption. This alternative
presents certain problems. First, it would graduate the
degree of spending restraint by the length of the trip, and, by
so doing, would favor shorter trips over longer trips. The avail-
able statistics show that in income groups below $20,000 the total
expenditures per trip are relatively the same, but the less
affluent spend less per day and stay longer. This latter group
is heavily weighted with students, teachers, and individuals
visiting foreign relatives, all of whom are likely to need extended
trips in order to meet their objectives. A per diem exclusion recognizes
this trend by allowing a basic exemption based on the number of days of travel.
Thus, even those whose travel objectives require a trip of above average length
will be able to take the trip at a modest spending level without undue
concern for the tax. A flat exemption per trip would, on the other
hand, favor those who take shorter trips by allowing them a higher average
- 25 -
per-day rate of expenditures subject to the exemption. This group consists
generally of the more affluent, where the so-called big spending is
more likely.
Furthermore, if the exemption were on a per-trip basis, it would
unfairly favor frequent short trips over a single trip of the same
total duration. For example, a person who took four 20-day trips
would be entitled to four times the amount of exemption as a person
who took one 80-day trip. Again, in this respect, a per-trip exemption
would favor the wealthy who are more able to take many trips abroad.
If some provision were added to limit the multiple trip problem,
such as no more than one exemption per year, an undesirable degree of
rigidity would be interjected into the tax structure. For example, a business-
man may honestly believe that he is going to take only one trip during a
year and, accordingly, use up his whole exemption on that trip. If
a business emergency were to require a second trip, each dollar
would be subject to the full 30 percent tax no matter how modest the
- 26 -
spending by the individual. This could result in an unreasonable
burden. Thus, we recommend retaining the per-diem approach.
By structuring the tax in the manner we have, there is no
necessity for providing a list of exemptions for specific types of
travel which might be considered especially important, either from
a business or a cultural standpoint. Instead, the traveler can avoid or
minimize the impact of the tax by keeping his spending to a modest level.
It would seem clear that specific exemptions are undesirable as they
require arbitrary distinctions and administrative complexities.
On the other hand, our proposal does draw a distinction
between individuals who are traveling and those who have
essentially shifted their residence abroad. The tax would not
apply to this latter category, which includes businessmen trans-
ferred abroad for a substantial period and students and teachers
who are either studying or teaching abroad. In these situations,
the individual is likely to have substantial expenses in setting
up his household with the result that the imposition of a tax
- 27 -
might cause considerable hardship. These exemptions, as well
as the other details of our proposal, are explained in the attached
technical explanation.
We estimate that the balance of payments savings from this
expenditure tax would be about $115 to $140 million per year.
This travel tax has been criticized on several different levels
and, at the risk of appearing defensive, I would like to catalogue
these criticisms and give you the other side. This seems particularly
required in view of the general lack of balance in the testimony
which has been presented to date.
There are those who argue that there is no balance of payments
problem. I have already discussed this in some detail and am sure
you are as well aware as I am that this is just not the fact.
In this regard, it has been contended that we have overstated
the travel deficit by not including the purchase of airplanes by
foreign airlines as an offsetting expenditure in the U. S. First,
- 28 -
certainly not all foreign airplanes are used solely to transport
travelers to and from the United States. Second, moving airplane
sales from the trade account to the travel account will not alter
the overall balance of payments deficit or the fact that Americans
spend about $4 billion each year in connection with foreign travel --
which is almost 10 percent of this country's total foreign payments.
Thus, a mere bookkeeping change will not eliminate the immediate
need for reducing our foreign travel payments.
It has frequently been stated that the travel tax would interfere
with the inalienable right to travel. While the value of travel is
unquestionable, the fact nevertheless remains that a family must
budget for its travel outlays and so must the nation budget its
international expenditures to the foreign exchange available. As
I have already indicated, we have structured the travel tax to accomplish
this national budgeting with as little interference with travel plans
- 29 -
as possible. The bulk of the foreign exchange savings will come from reduced
spending while on a trip, and not through cancellation of the trip.
Other critics claim that an affirmative program restraining our travel
expenditures abroad will be ineffective because of the retaliation it will
evoke. An area of retaliation frequently pointed to by these critics is
a reduction in foreign orders for United States aircraft. Close exam-
ination does not lend credence to this fear. The travel program is
specifically designed to have the least impact on the number of people
traveling abroad. This effect should be even more pronounced with our
proposed modification in that there would be no expenditure tax imposed --
and, therefore, no motive to cancel the trip -- where spending is below
$15 per day. The tax should thus have the least effect on the airline
business, and therefore on aircraft orders, of any form of restraint
on travel expenditures.
The next group of critics focuses directly on the structure of
the travel tax and takesthe position that it is unworkable, unenforceable,
unfair and ill-conceived -- to say the least.
- 30 -
They say that the tax will fall heavily on teachers, students, and
other low income people; that it will have little effect on "jet-
setters;' that it will involve mountains of red tape; and that it
will encourage Prohibition-type evasion.
The proposed tax clearly cannot be faulted on equity grounds. The
tax is progressive according to expenditures, which, after all, is the
factor contributing to the balance of payments problem.
It is designed so that one traveling modestly will incur little or
no tax. On the other hand, the 30 percent rate on expenditures over
$15 per day is a significant continuing deterrent to marginal expenditures
even by the most affluent traveler.
A substantial tax on tickets, such as 30 percent, or a tax on each traveler
in a fixed amount, or a tax graduated by the number of days of travel would fall
equally on the modest traveler and on the lavish traveler. Such taxes
would therefore represent a far greater proportion of the expenditures
of the less affluent and would be no continuing deterrent to the more
affluent. In other words, they would be grossly inequitable.
- 31 -
As to enforcement, just as one can argue that there are ways to evade the
travel tax, one can argue that there are ways to evade the income tax --
and some people try it. Out of 100 million returns filed in the
United States, however, and out of 3 million returns examined, there
were about 1,000 fraud indictments last year. This clearly demon-
strates that the great mass of American taxpayers accept their
responsibility to pay taxes -- if not happily, at least honestly.
There is no reason to believe the travel tax would not be accepted
in the same way.
Much of the criticism based on complexity and evasion involves
a misconception of the tax. The tax does not involve the itemization
of any expenditures. Therefore the picture presented by some critics
of European hotel clerks busily grinding out $3 receipts for $25 suites
would not materialize. The tax is based on the difference between the
amount of money and traveler's checks a traveler leaves the United
States with and the amount left when he returns. This will be the
extent of the computation for most travelers. For those who use
credit cards and personal checks, these amounts would be added.
- 32 -
But no one need carry pencils and pads -- or take his accountant --
with him on his trip to Europe.
The final level of criticism is that, even accepting the
need for a travel tax and the structure of this proposal, it cannot
do the job of effecting the anticipated balance of payments savings.
These critics point to the fact that the tax is applicable only
to travelers outside the Western Hemisphere and, moreover, that
large groups of such travelers, such as businessmen, persons
visiting relatives in Europe, teachers and students, will travel
to Europe despite the tax. They claim that it will have no effect
on the wealthy. They therefore contend that the base on which
the tax can operate is only vacation travel outside the Western
Hemisphere by middle income people and that a base so limited is
insufficient to yield the balance of payments savings we are seeking.
This criticism ignores the structure of the tax. The tax
indeed assumes that most travelers to Europe will not cancel
their trips. On the other hand, it is fair to assume that all
types of travelers will respond in some degree to the tax, either
- 33 -
by keeping their spending below the exemption level, by shortening
their stay by a few days, or by eliminating some marginal expenses.
Indeed, a traveler contemplating spending $25 a day could absorb
the entire tax, including the ticket tax, by cutting only 4 days
from a 30-day trip. If the $25 a day traveler wanted to spend his
full 30 days in Europe, he could offset the tax by reducing his
expenditures to about $22 a day. It is therefore reasonable
to believe that travelers of all types will examine their spending
plans with the tax in mind. On this basis, a $115 to $140 million balance
of payments savings out of the almost $1.5 billion in contemplated
travel expenditures for travel outside the Western Hemisphere
seems clearly attainable.
It is also reasonable to expect that this would be a real savings
and not produce just a transfer of the travel to countries in the
Western Hemisphere. There may, of course, be a certain number of
travelers who will revise their plans. But it is clear that the
existing tourist facilities in the Western Hemisphere outside of
the United States will not accommodate a large amount of additional tourism.
- 34 -
In other words, the tax is designed to meet equitably the need
for temporary restraint on foreign travel spending, with due regard
to the varying types of travelers. Its mechanics for the vast
majority of travelers are uncomplicated and can be readily under-
stood and satisfied. The tax, thus, offers an essential and feasible
bridge to the time when our longer-range programs to increase
tourism to the United States take hold.
If no measure is enacted to deal directly with expenditures by
U. S. travelers, the overall improvement required in our balance
of payments position can be achieved only if other sectors of the
economy contribute more than their fair share.
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Thus, I consider the foreign travel tax today, as I did on
February 5, as essential part of our balance of payments program.
The confidence of the rest of the world in our dollar depends, in
part, upon the resolve we demonstrate to put our financial house in
order. The bill before you today is a step in the right direction
as well as a solid structural revision in our tax and Customs laws.
But the dramatic demonstration of our resolve and a sizable reduction
in our travel deficit rests upon the absent portion of the Administration's
program -- the foreign travel tax.
III. Substance of H. R. 16241
1. Ticket Tax. Present law imposes a 5 percent tax on the
amount paid for an airline ticket purchased in the United States.
International flights are, however, exempt from this tax. This
- 36 -
exemption was enacted in 1947 for the purpose of stimulating overseas travel
by Americans and thereby to increase the flow of dollars to Europe. Obviously,
this exemption is no longer justified and this bill eliminates it by perma-
nently extending the existing air ticket tax to all amounts paid for air
transportation where the tickets are purchased within the United States.
The bill, in addition, eliminates most of the present exemptions from
the ticket tax. The basic domestic airline ticket tax is in the nature of
a user charge in that the revenues derived from it are considered as pay-
ments in return for the activities of the Federal Aviation Administration
in providing services principally concerned with air navigation and safety.
Viewed this way, exemptions from the tax are unjustified. Therefore,
exemptions previously accorded state and local governments, colleges and
universities, and U.S. government travelers have been eliminated as a per-
manent structural improvement in the law. These entities certainly have
no less an interest in the safety of their employees who travel by air than
do other employers. Equally, they have no less an obligation to help meet
the costs of insuring this safety.
- 37 -
The changes made by the bill in the existing air transportation
tax would apply to amounts paid for tickets sold on or after 10 days
after enactment of the bill for transportation which begins on or
after that date. It is estimated that this tax will improve our
balance of payments by $50 million per year and raise $95 million
in revenue each year.
We are in basic agreement with the provisions in the bill as
they affect the ticket tax. *
*
The Treasury Department suggests two changes in the ticket
tax provisions of H. R. 16241:
(1) The House bill, while eliminating most exemptions,
retains the present exemption for domestic flights by small air-
craft on nonestablished lines (sec. 4263(a)). The retention of
this exemption is inconsistent with the user charge nature of the
domestic ticket tax and it is recommended that it be deleted.
(2) The Treasury Department recommends excluding from the
ticket tax flights completely within Puerto Rico (or, consistently,
within one of the possessions) in that this is more in the nature
of an internal matter of concern to Puerto Rico under its Common-
wealth status.
- 38 -
2.
Customs Measures
a.
Balance of Payments Impact of Present $100 Duty-Free
Tourist Exemption
The estimated value of articles acquired abroad and brought
into the United States during 1967 by United States residents
returning from countries other than Mexico and Canada, and the
Caribbean area totaled approximately $200 million. Of this amount,
$100 million was brought in under the present $100 customs duty-
free exemption granted to returning residents. A substantial reduc-
tion in this duty-free exemption would achieve a significant reduc-
tion in the value of articles brought into the United States by
returning United States residents.
b.
Balance of Payments Impact of $10 Gift Exemption for
Parcels Arriving by Mail
An estimated 11 million packages arriving by mail during 1967
were admitted duty free under the existing exemption for gifts valued
at less than $10. In addition, many other parcels presently being
admitted without payment of duty would have duty owing if there were
adequate customs manpower available to assess the duty. The elimination
- 39 -
of the $10 gift exemption, and a more intensive processing by
Customs of packages arriving from abroad by mail would bring about
a decline in the shipment of such parcels to the United States.
Since many such parcels are purchased by United States residents,
this would result in a significant balance of payments saving.
C.
Reduction of Returning Resident Exemption
I. Introduction
I have set forth below, for purposes of convenience and of
clarity, a table indicating customs exemptions for returning residents:
(1) under present law; (2) under H. R. 16241; and (3) under the pro-
posal that I am now about to make to you. During the rest of my
statement, you may find it useful to refer back to this table.
*****
- 40 -
RETURNING RESIDENT EXEMPTION
Location
Present Law
House Action
Treasury Proposal
Temporary (until
Permanent
Temporary (until
Permanent
10/15/69)
10/15/69)
Canada & Mexico
$100
$100
$100
$100
$100
Caribbean Area
100
10
50
100
100
Virgin Islands,
American Samoa
and Guam
200
100
200
200
200
Elsewhere
100
10
50
10
50
- 41 -
II. House Action
In order to reduce foreign expenditures by returning United
States residents and thereby achieve a balance of payments savings,
we had proposed legislation to the House of Representatives which
would permanently reduce the present $100 duty-free exemption granted
to returning United States residents to $10 for persons returning
from countries other than Canada, Mexico and the Caribbean area.
The House agreed that a reduction to the $10 level was presently
warranted in view of the current United States balance of payments
problems. However, the House concluded that on a permanent basis,
commencing in October, 1969, the United States should adopt an exemp-
tion of $50, which is the exemption which the Organization for
Economic Cooperation and Development has recommended that all
countries grant to their returning residents.
III. Proposed Changes in House Action
A.
Exemption for Canada and Mexico
The House left a permanent exemption for Canada and Mexico
of $100. We basically agree with this decision because of the special
relationship between the United States and those countries.
- 42 -
B.
Exemption for Caribbean
The House reduced the exemption proposed by the Treasury
for persons returning from the Caribbean area, from $100 to $10
on a temporary basis, and provided that it would be established
at $50 on a permanent basis. I believe the Senate will wish to
weigh carefully the desirability of a $10 exemption for the
Caribbean area, even on a temporary basis. The economies of these
small islands are largely dependent on United States tourism and
a drastic reduction in the customs exemption will adversely affect
their economies and their overall trade with the United States.
Moreover, we have a special relationship with the Caribbean area
similar to that which exists with our contiguous neighbors of
Canada and Mexico and this makes it reasonable for all these areas
to be given the same treatment. We propose, in short, that the
exemption for residents returning from the Caribbean area be re-
tained at the present $100 level.
- 43 -
C.
Exemption for Virgin Islands, Guam and American Samoa
The House bill provides that the present $200 exemption for
residents returning from the Virgin Islands and certain other United
States insular possessions be temporarily reduced to $100 and returned
to the present $200 exemption level in October, 1969.
In order not to disadvantage the Virgin Islands economy, it
would be desirable to continue the $100 differential in customs exemp-
tions between the Virgin Islands and the Caribbean area. Following
this approach we recommend that the exemption for the Virgin Islands
be retained at the present $200 level permanently.
D. Summary of Proposed Changes
In summary, with regard to returning United States residents,
we propose that the present $100 exemption be retained for the
Caribbean area as well as for Canada and Mexico. For United States
residents returning from the Virgin Islands, and certain other United
States insular possessions, the present $200 exemption should be
retained permanently. For returning residents from other areas of
the world, the present $100 exemption should be reduced to $10 now,
but increased on a permanent basis to $50 in October, 1969, as in
the House bill.
- 44 -
d.
Modification of Gift Exemption for Parcels Arriving
by Mail
We also proposed, and the House Report concurs, that the
$10 duty-free gift provision for articles arriving in the mail
from abroad should be reduced to $1. This will be accomplished
administratively under existing law. No change is proposed in the
$50 gift exemption applicable to gift parcels arriving from the
United States servicemen serving in combat zones. Moreover, we
do not plan to make a change in the $10 gift exemption level for
servicemen in non-combat zones.
e.
Modification of Duty Assessment Procedures
In order to minimize the increased customs workload implicit
in the changes described above, we recommend simplification of
duty assessment procedures applicable to returning United States
residents and to certain non-commercial mail parcels.
I.
House Action
The House bill provides that for returning United States
residents a 10 percent flat rate of duty should be assessed on the
fair retail value of all dutiable articles accompanying arriving
travelers, provided their aggregate value, exclusive of any duty-free
articles, does not exceed $500 wholesale.
45 -
The flat 10 percent rate of duty would also be applied on
the fair retail value of non-commercial importations of dutiable
articles, arriving by mail, express, and other means of trans-
portation, which are valued at more than $10 retail but not over
$250 wholesale, exclusive of duty-free articles. A $1 charge
would be made on dutiable non-commercial parcels arriving by mail
valued at between $1 and $10.
II. Proposed Changes in House Action
We believe the following modifications of these simplified
duty assessment procedures are desirable in order to foreclose
their becoming a possible avenue for substantial importations of
high duty items. The intent of these modifications is to circum-
scribe the situations where the simplified procedures may be used.
A.
Ceiling on Use of Flat Rate by Arriving Travelers
1. General
The flat 10 percent rate would not apply if the
aggregate retail value of articles brought in by returning
residents exceeds $100. Under this proposal, the flat rate
would not be applicable to persons arriving from areas
benefiting from an exemption of $100 or more. Under the
Treasury proposal, these areas are Canada, Mexico, the
Caribbean Islands area, and the Virgin Islands and certain
other United States insular possessions.
- 46 -
2. Operation of Flat Rate
This is how the flat rate will work. If the tourist has more
than $100 worth of purchases with him, the flat rate will not be
applicable to any of his purchases, and he will have to pay duty on
the dutiable articles at the Tariff Schedule rates, due allowance
being made for the duty-free exemption to which he is entitled. In
totaling the tourist's purchases to determine whether the $100
ceiling has been exceeded, all dutiable articles would be counted,
including those articles falling within the tourist exemption.
If the purchases of the returning resident do not exceed the $100
ceiling, when calculated in this manner, he will pay duty at the
flat 10 percent rate on all his dutiable purchases, due allowance
being made for his duty-free exemption.
The same basic rule would apply in cases where the returning
resident exemption becomes $50 permanently.
- 47 -
In other words, the flat rate would continue to apply to dutiable
purchases between $50 and $100. If the dutiable purchases exceed
the $100 ceiling, then all purchases above the $50 exemption become subject
to duty at the Tariff Schedule rates.
B. Applicability of Flat Rate for Noncommercial Shipments
1. Increase in Flat Rate
For noncommercial articles arriving in the mail or by other
means of transportation, we propose that the flat rate of duty be
increased from 10 percent, as provided in the House bill, to 15 percent.
In the absence of such increase, travelers desiring to avoid the
impact previously described of the $100 tourist ceiling on the use
of the flat rate, would be tempted to arrange for some of their
purchases to be separately shipped. The increase proposed would help
to discourage such separate shipments.
2. Ceiling on Use of Flat Rate
The flat 15 percent rate for noncommercial mail parcels would not
apply to shipments exceeding $50 in retail value. Where the $50
limitation is exceeded, the Tariff Schedule rates would be applicable
to all dutiable items in the parcel.
3. Charge on Small Value Parcels
To coincide with the 15 percent flat rate, we propose that the
charge on dutiable parcels valued at $10 or less
- 48 -
retail, be increased from $1 to $1.50. Articles valued at $1 or
less, would continue to be free of any duty or charge.
f. Resulting Balance of Payments Savings
It is estimated that implementation of all of the above
recommendations will achieve a balance of payments savings of about
$100 million during the first year after enactment. This saving
would be reduced to $75 million, on an annual basis, after October 1969
when the basic tourist exemption is scheduled, under the House bill,
to be increased from $10 to $50.
g. Increased Administrative Costs for Customs and Post Office
Department
Implementation of the above measures will entail increased
administrative costs for the Customs Service, and also for the
Post Office Department to the extent its expense in collecting the
duty on parcels arriving by mail cannot be covered by postal handling
charges because of the ceiling set under the Universal Postal Union
Convention. Their ability to execute thèse measures is dependent upon
adequate increased appropriations to implement the changes. However,
I should point out that any increased cost will be offset by significantly
increased revenues.
- 49 -
IV. Conclusion
In conclusion, I urge that this Committee take immediate
and affirmative action to narrow the balance of payments deficit
in our foreign travel account. The first step is to approve,
subject to the revisions we have recommended, the extension of
the air ticket tax and the customs measures included in H.R. 16241.
The second is to add to this bill the tax we have proposed to
encourage restraint in foreign travel spending. In this form,
H.R. 16241 would represent a balanced and effective program for
dealing with the important balance of payments problem in the travel
area. Solution of this problem, in turn, is critical if we are
to improve our overall balance of payments deficit -- an improve-
ment that is so necessary to maintain strength and confidence in
the dollar.
TECHNICAL EXPLANATION
FOREIGN TRAVEL TAX
The following is a technical explanation of the Treasury Department's
proposed foreign travel (expenditure) tax.
In General. Under this proposal, a temporary tax would be imposed
on certain expenditures in connection with a trip outside the nontaxable
area (generally the Western Hemisphere and possessions of the United
States) by a United States person. The tax base would include both expendi-
tures made by him and those made by another United States person on his
behalf. The tax schedule would be as follows: The first $15 of daily
expenditures (computed on the basis of an average over the whole trip)
would be exempt from tax. All expenditures over this level would be taxed
at a 30 percent rate.
The cost of sea or air transportation to and from the traveler's
foreign destination would be taxed at a 5 percent rate--either as part
of the expanded air transportation tax proposed by H.R. 16241, or as
part of the expenditure tax. In addition, all air transportation while
abroad would be taxed at a 5 percent rate, either under H.R. 16241, or,
if that is not applicable, as a. part of the expenditure tax but at a
5 percent rate. The use of the lower ticket tax rate removes the
possibility of hardship in the case of persons whose purposes
of travel can only be accomplished with numerous flights and frequent
- 2 -
stopovers, as, for example, symphony orchestras on tour. The use of
this rate also eliminates the possibility of discrimination between
intra-European trips (where the flights tend to be short and therefore
relatively inexpensive) and trips in other parts of the world where
flights tend to be longer and therefore more expensive.
The application of the rate schedule in the case of families traveling
together is discussed in a subsequent part of this memorandum.
United States Person. -- The tax applies to expenditures made in
connection with a taxable trip of a United States person. Except as
noted below, the traveler would be liable for the tax on all expenditures
in connection with his trip, which he himself makes or which are made
on his behalf by another U.S. person. Amounts paid directly by an
employer for meals and lodging of an employee while on a taxable trip
would be taxable foreign travel expenditures of the employee as would
the expenditures made directly by the employee (whether or not reimbursed).
If a student travels abroad during the summer on funds given to him by
his parents, he is taxable on the expenditures of his trip, whether he
pays them or whether his father pays them directly. It is consistent
with the nature of the tax -- which is to tax the value of
facilities and services received on a foreign trip -- to tax the traveler
on the entire value of his trip.
Where a United States person on a taxable trip makes expenditures for
another person in the taxable area such as entertainment of a friend
- 3 -
(whether or not a U.S. person) or payment of the family expenses of those
accompanying him, the expenditures would be taxed to the person making
them.
A United States person means:
(a) Any individual who is a resident in the United States,
other than certain employees of international organizations or
foreign governments and their staffs and families,
(b) A corporation or a partnership engaged in trade or
business in the United States,
(c) An estate or trust which is considered a United States
person within the meaning of section 4920(a)(4) (relating to the
Interest Equalization Tax),
(d) The United States or any agency or instrumentality
thereof,
(e) A State, including the District of Columbia, Puerto Rico
and the possessions, or a political subdivision or any agency
or instrumentality thereof, and
- 4 -
(f) A foreign corporation not engaged in trade or business
in the United States 50 percent or more of the voting stock of
which is owned by a United States person.
United States. - For this purpose, the United States includes the
States, the District of Columbia, the Commonwealth of Puerto Rico and
all possessions. Thus, residents of Puerto Rico, the Virgin Islands,
Guam, and American Samoa, will be subject to the expenditure tax on
their travel outside the nontaxable area. A tax on expenditures
by such residents while traveling abroad is consistent with the fact
that the foreign expenditures of these areas are considered in United
States balance of payments. On the other hand, there would be no tax
imposed upon expenditures made while traveling in any of these areas.
Thus, these areas would be treated in the same manner as the conti-
nental United States. Any revenue collected under the expenditure tax
from residents of Puerto Rico, the Virgin Islands, or Guam will be
covered into the treasuries of those areas.
Taxable Trip. Only those expenditures in connection with a
"taxable trip" would be subject to the expenditure tax.
Commencement and Conclusion of a Taxable Trip. --A taxable trip of
an individual shall in general commence with the individual's depar-
ture from a port or station in the United States, including the pos-
sessions and Puerto Rico. However, since trips within the specified
- 5 -
nontaxable area, primarily the Western Hemisphere, are not subject to the expendi-
ture tax, if the individual after leaving the United States stops at a port or
station in the nontaxable area for a scheduled interval of more than twelve hours,
the taxable trip shall not begin until his departure from the last such port or
station in the nontaxable area. The taxable trip shall end when the individual
returns to a port or station in the United States; or, if he makes a prior stop
at a port within the nontaxable area at that time, provided the stop is for a
scheduled interval of more than twelve hours.
The tax will only be applicable to taxable trips beginning more than 20 days
after the date of enactment of the legislation. The tax will terminate on
October 15, 1969, which marks the end of the European travel season for 1969.
If a person is on a trip on the termination date, he would pay tax only on the part
of his trip falling within the term of the tax.
Nontaxable area The nontaxable area means the area lying west of the 30th
meridian west of Greenwich, and east of the 130th meridian west of Greenwich, and
all of Canada, the United States, its possessions and the Trust Territory of the
Pacific Islands.
Certain Trips Excepted
Individuals establishing foreign residence An individual who, after his
departure from the United States, establishes his residence in a foreign country
would be considered on a nontaxable trip,
Students and Teachers. An individual (and his dependents) would be considered
on a nontaxable trip if he is enrolled at and attending, or employed as a member
of the faculty at, a foreign school or university for a normal school term of at
least one quarter. In the case of the student, he would have to be studying
for a degree at the foreign school or would have to receive credit for such
schooling towards a degree at a domestic school in order to qualify.
- 6 -
Trade or Business. An individual (and his dependents) shall be con-
sidered on a nontaxable trip if he is outside the nontaxable area for at
least 120 consecutive days while engaged on a full-time basis in a trade
or business or profession. This category of exceptions will cover, for
example, an employee transferred abroad by his employer for more than 120
days, or a professor on sabbatical leave abroad doing research on a full-
time basis in connection with his trade or business. In addition, a
resident (and his dependents) of the United States who is an employee
of an international organization traveling on business would be considered
on a nontaxable trip, regardless of the length of stay. Moreover, such
an employee (and his dependents) present in the United States on nonresident
immigrant status would not be subject to the tax whether his trip was
business or pleasure.
Partial Vacation Trips and Early Return to the U.S. If the student,
teacher, employee, or businessman meets the time qualifications for exemption
described above and does not spend a total of more than 14 days outside the
nontaxable area before and after the period he is carrying on exempt
activities, his entire trip would be exempt. If he stays longer than
14 days, thus converting his trip to a partial vacation trip, he (and
his dependents) would be considered on a taxable trip, but would be per-
mitted to exclude all expenses incurred during the period he is engaged
in the exempt activities.
If the student, teacher, employee, or businessman does not stay
abroad for the prerequisite time period, his trip would be taxable
unless he could not have reasonably foreseen the circumstances which
caused him to cut his trip short.
- 7 -
Military. A member of the armed services (and his dependents)
who is serving on active duty and is assigned to duty in the taxable
area would be considered on a nontaxable trip during his tour of
duty at that duty station. Any trips he makes back and forth to the
nontaxable area during that tour would also be exempt.
Crew Members of Ships or Airlines. An individual would not be
considered on a taxable trip while he is serving as a member of a crew
of'a facility providing transportation to or from a port or ports
outside the nontaxable area provided that the portion of the trip outside
the nontaxable area does not include any period of layover longer than
normally provided in similar situations.
Taxable Foreign Travel Expenditures. -- In general, unless specifically
excluded, the tax applies to all expenditures in connection with the tax-
able trip of a United States person made by him or another United States
person. They include not only the traveler's own living expenses, but
also the cost of any entertaining he may do and the cost of most
tangible personal property he may purchase while abroad. Expenditures
for the use or maintenance of property while on a taxable trip, such as
rent for an apartment or automobile, are taxable foreign travel expendi-
tures. In the case of an automobile, boat, other vehicle, or housing
accommodation purchased or owned by the traveler, or furnished free of
charge by another United States person, a special rule would tax the
value of the use of that item during the taxable trip. Consistent with
this rule, the purchase price of such property would not be subject to tax.
- 8 -
The value of the use of the article while traveling appears to be a more
appropriate tax base than the full purchase price, since this treatment
will put the person who purchases or borrows a vehicle or housing accom-
modation in the same position as one who rents one.
Only expenditures made for facilities or services to be provided
on the taxable trip would be considered made in connection with the
trip. Thus, any expenditures for pre-trip facilities or services, such
as taxi fares to the airport in the United States; costs incurred during
the trip for facilities and services not provided on the trip, such as
in connection with the traveler's house in the United States while he
is gone; or the cost of work done after the traveler's return, such as
to repair damages occurring on the trip, would not be taxable foreign
travel expenditures.
Expenditures of a taxable trip are taxable whether paid before,
during or after the trip. For example, hotel bills are taxable foreign
travel expenditures whether prepaid to a travel agent, paid in cash
or by check while on the trip, or charged and paid for after return.
Consistent with the rules on deductibility for income tax purposes
of ordinary and necessary business expenses, the expenditure tax imposed
on amounts deductible as business expenses would itself be deductible.
- 9 -
Purchase of Property. -- In general, amounts spent while on a taxable
trip for the purchase of tangible personal property (other than property
held for investment or purchased for use or sale in carrying on a trade
or business, or by an organization exempt from income tax) would be
taxable. Moreover, the cost of property purchased for delivery to an
individual on a taxable trip would be taxable. Thus, for example, if a
person purchases a European suit of clothes (whether before leaving or
while on a taxable trip) and takes physical delivery while on a taxable
trip, the purchase price would be a taxable foreign travel expenditure.
Or conversely, if a person purchases the suit while in the taxable area
for delivery after his return to the United States, the purchase price
would be subject to this tax. As mentioned above, in the case of the pur-
chase of automobiles, boats, or other vehicles, there would be imposed, in
lieu of a tax on the purchase price, a tax on the value of the use of the
article during the taxable trip. The tax in all these cases would be in
addition to any applicable customs duty.
Business Expenses. -- In the case of an individual traveling on a
taxable business trip or on a taxable trip on behalf of an organization
exempt from income tax, his business expenses, or expenses incurred in
carrying out the purpose of the exempt organization, other than for trans-
portation, meals, lodging, gifts and entertainment, would be excluded
from the tax base.
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Rate of Tax
The taxable foreign travel expenditures made in connection with
a taxable trip of a United States person shall be subject to tax at
the following rates:
Air Transportation in Connection with Foreign Travel The expen-
diture tax will not apply to the cost of any air transportation paid
for in the United States. That transportation will be subject to
the expanded ticket tax under H.R. 16241 at a 5 percent rate. If
the air ticket is not subject to the ticket tax in H.R. 16241, because
it is purchased outside the United States or before the effective
date of the expanded air transportation tax, the expenditure tax will
apply but only at a 5 percent rate. The cost of transportation exempt
from the ticket tax under a specific exemption (e.g., transportation
furnished to international organizations) would not be subject to the
expenditure tax.
Sea Transportation in Connection with Foreign Travel. The expen-
diture tax will apply to the cost of all sea transportation in con-
nection with foreign travel in the taxable area. In the case of sea
transportation to the first and from the last scheduled stop in the
taxable area of more than 12 hours, the rate of tax will be 5 percent.
The cost of other sea transportation in the taxable area will be sub-
ject to the regular expenditure tax schedule, in the same manner as the
cost of land transportation.
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Amounts paid for food and services (where no separate charge is
made), and seating or sleeping accommodations, during the period trans-
portation is subject to the 5 percent tax rate shall also be taxed at the
lower 5 percent rate. Thus, if a United States person takes a 30-day
cruise leaving from the U.S. which makes no stops within the non-taxable
area and which makes its first stop in the taxable area of more than 12
hours on the 5th day and makes the last such stop on the 25th day, one-third
of the cruise fare plus any separate charge for sleeping accommodations
will be subject to tax at a 5 percent rate under the expenditure tax.
The remaining two-thirds of the cruise fare and separate sleeping
accommodations charge and any additional expenditures (such as for
sightseeing or food) not covered by the basic fare will be subject to the
expenditure tax at the regular rate.
All Other Taxable Expenditures. - All other taxable expenditures
will be taxed on the following basis:
(a) Exclusion from tax. Each traveler is entitled to a $15
daily exclusion from the expenditure tax base. The amount excludable
under this provision for a taxable trip shall be computed by multiplying
the number of days during any part of which the individual was on such
taxable trip by $15 to arrive at the total exemption.
(b) 30 Percent Rate. The remaining expenditures shall be subject
to tax at the rate of 30 percent.
- 12 -
For example, if a corporate employee goes to London on business for 10
days and spends $200 for taxable expenditures (whether or not he is reimbursed
by his employer) he would pay a tax of $15 computed as follows:
Tax Rate
Tax
Exclusion
$15
X
10 days
=
$150
0
10-
Remainder -
30% rate
50
30%
$15
Total:
$200
$15
If in addition to his plane fare to London, the employer directly paid
for the employee's hotel bill of $200, the employee would also include
this amount in his tax computation. Under the above example, his tax
would be increased by $60 (to a total of $75).
Computation of the Tax
In order to preclude the necessity of travelers having to keep detailed
records of their expenses, taxable foreign travel expenditures would be
computed, to the greatest extent possible, by a travel net worth method.
For many people this would involve merely subtracting the money and
traveler's checks with which they returned from the money and traveler's
checks with which they left and adding this to the amounts paid before the
trip began.
More specifically, the first step in the computation for all travelers
would be to determine the cash expenses of the trip. To do this, the amount
of money (including traveler's checks) with which a person returns from a
taxable trip would be subtracted from the sum of the amount of money
(including traveler's checks) with which he departed plus all amounts
received while on the taxable trip. Amounts received while on the trip
- 13 -
must be included regardless of their origin. Thus, withdrawals from domestic
or foreign banks, money sent from home, compensation for services received
while abroad or money received from the sale of property would be included.
The second step in the computation would be to add to the cash expenditure
figure, the amounts of expenditures in connection with the taxable trip paid
before the taxable trip began, the amounts charged while on the taxable trip,
and the amount of checks written while on the taxable trip. These are all
amounts of which the traveler will have a record, e.g., credit card statements,
personal check stubs. The resultant figure would represent the tax base for
most travelers, and would be taxed according to the per day exemption and
30 percent rate, or in the case of certain transportation, the 5 percent
rate of tax. For others, a further reduction would be made for expenses
specifically excludible from taxable foreign travel expenditures (such as
the cost of business inventory). The figure resulting from these reductions
would represent their taxable foreign travel expenditures.
Estimated Tax
Every individual, at his point of departure from the United States
for a period during which he reasonably expects to be on E taxable trip,
and whether or not he plans to make a stopover in the nontaxable areas,
would be required to make a declaration of his estimated tax with respect to
that taxable trip and pay the amount of the estimate to the Internal Revenue
Service. He would include in his declaration a statement of the amount of cash
(and traveler's checks) he is taking on the taxable trip. This figure is
necessary in order to utilize the travel net worth method for computing cash
- 14
expenditures. Appropriate procedures will be developed for filing the
declaration SO that compliance with the requirement may be verified before
the traveler's departure. The accuracy of the cash statement would be
subject to verification at the point of departure by customs officials
or other Treasury officials.
If a United States person departs on a taxable trip from a port in
the nontaxable area outside the United States, and he did not make the
required declaration and statement upon leaving the United States,
he will be subject to penalty unless he can show such departure was not
expected. In any event, the declaration or statement, if not previously
filed, would be filed at this time.
Any individual returning from a taxable trip would be required
to make a statement of his incoming cash (and traveler's checks)
at the time he is processed through United States Customs. This
statement would provide the incoming cash balance from which the
travel net worth would be computed, and the accuracy would be subject
to verification by a customs official.
Returns and Payment of Tax
A tax return for a taxable trip, together with payment of any
balance due would be required to be filed with the Internal Revenue
Service by the traveler within 60 days after his return. This will
allow the taxpayer adequate time to receive all necessary credit card
and banking records for preparation of the return. Of course,
the return may be filed immediately upon arrival. A husband, wife,
- 15 -
and any of their dependent children who travel together on a taxable
trip may make a single taxable trip return jointly with respect to
such trip. Such a return may be filed even though one or more of
such individuals has no taxable foreign travel expenditures. A joint
return would allow a family to utilize the full per diem exemption
available to each traveling member without requiring that each have
separate expenditures to absorb them.
Administration and Procedure
Generally the administrative and procedural requirements applicable
to other excise taxes would be applicable to this expenditure tax. Thus,
for example, the general provision for penalties for failure to file returns,
requirements for claims for refund, assessment and collection procedures,
and statutes of limitations would apply to the administration and procedure
of this tax.
Two new provisions would be added to insure compliance with the require-
ments for declaration and payment of estimated tax.
A flat penalty of $200 would be imposed for failure to make a declaration
of estimated tax and statement as to cash on hand, as required at the time
of departure from the United States unless it were shown that such failure
was due to reasonable causes. Thus, if an individual flew from New York
to Europe without making a declaration and statement, a $200 penalty
would be imposed for failure to make the declaration in New York. A
significant penalty is necessary because of the importance of having an
individual establish his outgoing cash figure for purposes of computing
- 16 -
the tax base. An underestimation penalty would be imposed of 10 percent
of the underpayment of estimated tax. The amount of the underpayment
would be the difference between the estimated tax payment and the amount
of tax shown on the taxable trip return.
TECHNICAL EXPLANATION
PROPOSED CHANGES IN CUSTOMS RULES RELATING TO TOURIST
EXEMPTIONS AND PROCESSING OF CERTAIN NONCOMMERCIAL
IMPORTATIONS
The proposal is intended to reduce noncommercial expenditures
of dollars abroad where such expenditures adversely affect our
balance of payments. It would do this by lowering the duty-free
exemptions allowed returning U.S. residents. In order to ease
the administrative burden of processing millions of dutiable non-
commercial foreign acquisitions brought back to this country by
returning U.S. residents and millions of dutiable noncommercial
mail shipments, it would provide for a flat rate of duty on such
articles within certain monetary limits.
At the same time, since the proposal deals only with noncom-
mercial imports, it would not interfere with the favorable balance of
payments aspects of our trade account or the legitimate business
interests of American businessmen in the import trade.
The proposal would not assess any duty or charge on articles
which are themselves free of duty under existing provisions of the
Tariff Act. Most of such articles would be works of art, books,
American goods returned, United States origin personal effects of
residents abroad and similar items.
The Reduced Tourist Exemptions
A. Present Practice.
The present tourist exemptions granted to returning U.S. residents
permit the duty-free importation of foreign acquisitions not exceeding
- 2 -
a total retail value of $100. This exemption is granted to
American residents who have been abroad for not less than
48 hours and may be used only once each 31 days (in the case
of persons arriving from Mexico the 48-hour time limit is waived).
The resident is permitted to include within this exemption one
quart of alcoholic beverages. This exemption is applicable to
residents returning from any area or country. However a special
exemption is granted to residents arriving from the Virgin Islands
and certain other U.S. insular possessions. This special exemption
permits the importation of acquisitions up to a value of $200
retail, of which not more than $100 may be acquired outside the
Virgin Islands or other insular U.S. possessions, and may cover
not more than one gallon of alcoholic beverages of which not
more than one quart may be acquired outside the Virgin Islands
or other insular possessions.
B. House Bill.
The House bill contains the following exemption structure (com-
puted on retail values as under existing law): (1) The exemption for
U.S. residents returning to the United States from any place other
than Canada, Mexico and certain United States insular possessions
would be $10 on a temporary basis and $50 on a permanent basis after
October 15, 1969; (2) the exemption for residents returning directly
from Canada and Mexico would be $100 permanently and (3) the exemption
for residents returning directly or indirectly from the Virgin Islands
- 3 -
and certain of our other insular possessions would be $100 temporarily
until October 15, 1969, when it would be restored to the present $200
level.
As under existing law, exemptions in excess of the minimum
exemption would be restricted so that goods acquired would be exempt
only to the extent of the exemption applicable to the area of acquisi-
tion. For example, the exemption for a tourist returning from the
Virgin Islands after October 15, 1969 (when the $200 exemption would
be in effect) would be limited to $100 in Canada or Mexico no more than
$50 of which were acquired in Europe. Goods in excess of these amounts
acquired in these areas would be dutiable, even though, in the aggregate,
they did not exceed $200.
Foreign acquisitions accompanying the returning U.S. resident
valued in excess of the exemption would be dutiable at a flat 10
percent of the fair retail value. The 10 percent rate would be
applied on such articles up to an aggregate value of $500 wholesale.
If dutiable acquisitions above the exemption level exceed $500 in
wholesale value, all dutiable articles would be assessed duty at regular
Tariff Schedule rates. In addition to any customs duties, articles
such as liquor and tobacco would, of course, be subject to any applica-
ble Internal Revenue taxes.
C. Current Treasury Proposals.
For the reasons set forth in the Statement by the Secretary of
the Treasury, the current Treasury proposals would modify the House
bill by:
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1. Extending the exemption level of $100 for Canada
and Mexico to the Caribbean Island Area.
2. Retaining the present $200 exemption for U.S. residents
arriving directly or indirectly from the U.S. Virgin Islands
and certain other insular possessions. The same limitations
on the exemptions for goods acquired in other areas would be
provided, but at the changed exemption levels that would be
applicable to those areas of acquisition.
3. Reducing the $500 wholesale ceiling on applicability
of the flat rate to $100 retail.
4. Including acquisitions exempt from duty solely by
virtue of the tourist exemption within the $100 ceiling for
purposes of determining applicability of the flat rate.
Articles Not Accompanying Returning Travelers.
A.
Present Practice.
At present, low value items (under $1) such as newspapers are
"passed free." The same "passed free" status is given to mail parcels
The Caribbean Island Area would be defined as the Bahama Islands,
the Turks and Caicos Islands, the Bermuda Islands, and all the is-
lands in the Caribbean Sea except those belonging to Central and
South American countries, Cuba and its offshore islands and Puerto
Rico, the Virgin Islands of the United States and all other islands
of United States sovereignty.
- 5 -
identified as gifts valued at up to $10 retail and to gifts (whether
imported by mail or otherwise) valued up to $50 retail from service-
men in combat areas.
All other dutiable articles, whether imported by mail or other-
wise, are subject to the Tariff Schedule rates.
B.
House Bill.
The $10 exemption for all mailed gift parcels, with the exception
of those orginating in noncombat areas, would be reduced to $1
retail administratively by a change of regulation. The statutory
exemption of $50 for gifts from servicemen in combat areas would
also be retained as would the $10 exemption for servicemen in non-
combat areas.
C. House Bill.
Dutiable mail shipments valued at over $1 and not over $10
retail would be assessed $1 in lieu of any other duty or tax.
Dutiable mail shipments valued at over $10, and dutiable ship-
ments by other means, containing more than one article and valued
at not over $250 wholesale, would be assessed duty at a flat rate
of 10 percent of the fair retail value.
Shipments containing one article or exceeding the $250 ceiling
would be assessed duty at regular Tariff Schedule rates.
D.
Current Treasury Proposels.
For the reasons set forth in the Secretary's Statement, the
current Treasury proposals would modify the House bill by:
1. Increasing the flat charge for mail packages valued at
over $1 and not over $10 retail, to $1.50.
- 6 -
2. Reducing the $250 wholesale ceiling on applicability
of the flat rate to $50 retail.
3. Increasing the flat rate from 10 to 15 percent.
4. Extending the flat rate to single article packages.
Estimated Foreign Expenditure Reductions
A. Changes in Tourist Exemptions.
During 1967, the total value of foreign acquisitions made by
returning U.S. residents arriving from all foreign countries was
estimated to be in excess of $362 million. Of this total, persons
arriving from Canada, Mexico and the Caribbean countries (including
Caribbean cruise passengers) accounted for slightly over $162
million. Therefore, the value of articles acquired by returning
U.S. residents arriving from other countries was approximately $200
million. Approximately $110 million was brought in by persons
whose purchases totaled less than $100 per person, while approximately
$90 million was brought in by persons whose foreign acquisitions
exceeded the present duty-free exemption.
We estimate that the value of foreign acquisitions by persons
now bringing in less than $100 each will be reduced by $45 million
or approximately 40 percent of the total purchases made by this group.
The effect on foreign acquisitions made by the approximately
300,000 persons who now exceed our duty-free exemption and pay duty
- 7 -
would be somewhat less.
If we can assume that the foreign ac-
quisitions by these persons will be reduced by an amount roughly
equivalent to the additional duty which they would have to
pay, the total reduction in foreign acquisitions by this group of
returning U.S. residents would be about $5 million.
Thus, the total reduction in foreign acquisitions to be achieved
by reducing the tourist exemption to $10 is estimated to be approxi-
mately $50 million on an annual basis through October 15, 1969. After
that date, when the increased exemption for most of the world applies,
the total reduction will approximate $30 million on an annual basis.
B. Mail Shipments.
It is estimated that the total value of the 55 million mail
parcels which arrived in the U.S. during 1967 was approximately $500
million. Of this 55 million total, an estimated 11 million parcels
were gifts or purported gifts said to be valued at less than $10;
4 million were gifts valued $50 or less from servicemen in combat
areas; and 25 million were "flats", newspapers, periodicals, samples
and shipments of insignificant value. Of the remaining 15 million
parcels duty was assessed on 1,600,000 parcels. However, our studies
indicate that approximately one-third of the 15 million parcel total
would have been dutiable if adequate manpower was available to properly
handle them.
- 8 -
Certain parcels now included in the present $10 gift exemption
are bona fide gifts mailed from nationals of foreign countries to
persons in the United States. While elimination of this privilege
with respect to such parcels will not affect expenditures of U.S.
dollars abroad, it is nevertheless believed necessary to eliminate
this free-gift privilege entirely because it is subject to widespread
abuse and because, in practice, it would be exceedingly difficult to
distinguish between gifts from foreign nationals and those from
U.S. tourists.
Of the 11 million gift parcels under $10 we estimate approximately
4 million from U.S. tourists would be discouraged if the existing gift
exemption were eliminated. The average value of these parcels is
estimated to be $7. Therefore, foreign expenditure curtailment
of approximately $28 million would be achieved. The application
of a flat rate of duty to the remaining noncommercial shipments
would simplify Customs' administrative task. Customs would be
able to assess duty on an appreciable number of packages which now
escape duty simply because Customs manpower cannot cope adequately
with the number of packages involved. Closing this loophole will
probably deter the sending of a number of these packages. It is
a conservative estimate that approximately an additional $12 million
reduction in foreign acquisitions, for a total of about $40 million,
will result from the above-proposed changes in the Customs processing
of foreign mail parcels.
- 9 -
Estimated Additional Revenue Collections
It is estimated that revenue collections will increase by about
$10 million by reason of changes in the tourist exemptions, and by
an additional $15 million on mail shipments, for a total additional
revenue collection of $25 million.
TREASURY DEPARTMENT
Washington
Bal.9/ay
For.
FOR RELEASE ON DELIVERY
REMARKS BY THE HONORABLE FREDERICK L. DEMING
UNDER SECRETARY FOR MONETARY AFFAIRS
DEPARTMENT OF THE UNITED STATES TREASURY
AT THE SIXTH INTERNATIONAL PROGRAM
OF THE
INSTITUTO DE ESTUDIOS SUPERIORES DE LA EMPRESA
UNIVERSIDAD DE NAVARRA
BARCELONA, SPAIN
MONDAY, JUNE 17, 1968, 11:00 A.M. (BARCELONA TIME)
INTERNATIONAL INVESTMENT
AND THE INTERNATIONAL MONETARY SYSTEM
This lecture is divided into three parts -- not mutually
exclusive -- in which I consider:
1. Cyclical or short-term balance of payments adjustment,
with particular reference to the United States.
2. Secular or longer-term problems of the United States
international payments position, with particular
reference to the scope for capital investment.
3. The relationship between adequate growth in
international reserves and international investment.
First, let us look at the short-run balance of payments
adjustment problem. This is the area on which most current
attention centers. Here, I believe, two important points
should be made.
Point 1 is a very simple one. Every major payments
imbalance has two sides. If one abstracts from the input of
new monetary reserves into the world's monetary system, the
deficit of one country or group of countries will have its
counterpart in the surplus of another country or group of
countries. Adjustments, therefore, must be made and permitted
by both groups -- deficit countries and surplus countries -- to
eliminate their respective imbalances, if a healthy world
economy is to be maintained.
F-1276
- 2 -
Point 2 is that the adjustment process in today's world
is a more complex process than it was in the earlier years
of this century, and, in many cases, adjustment cannot be
achieved satisfactorily solely by the application of broad
and general economic policies. I There are two primary reasons
for this.
One is that the sharp deflationary policies are no longer
acceptable -- either on political or economic grounds. Even
assuming that sharp deflation may conceivably cure a payments
deficit, it may SO depress the deficit country's economy that
it is unacceptable as a domestic policy and has adverse
economic effects on the country's trading partners and,
consequently, is unacceptable to them also. It is now generally
recognized that deflation was carried too far by some major
countries in the 1920's and early 1930's. And it is now
recognized that this resulted not only in reduced growth in
deficit countries but in the world as a whole. Such a policy
is not acceptable today in any country or in the world.
The second reason is that -- at least in many cases --
broad and general deflationary policies can not completely
cure a deficit, because important elements in the imbalance
are not much affected by such policies. I want to make quite
clear that proper fiscal and monetary policies are still the
most important elements in achieving both domestic and
international payments stability. My point is that, in the
modern world, they often need supplementary help to achieve
balance of payments equilibrium. In other words, these
policies are vital but not necessarily sufficient to do the
job.
Let me illustrate by considering the United States. In
the United States, general fiscal and monetary restraints
appear to have much greater impact on the balance of payments
when their effect is to dampen a cyclical boom than when they
are applied to stimulate an economy which has much unused
capacity. Imports appear to be much more sensitive to a rise
in GNP at a rate exceeding 6 percent in monetary terms and much
less sensitive when GNP is growing more slowly. Exports show
less sensitivity to the domestic growth rate, appearing to be
mainly unfluenced in the short-run by the level of activity
in foreign markets.
- 3 -
In the United States, general policies of fiscal and
monetary restraint are badly needed on both domestic and
external grounds. Since late last year, monetary policy has
moved, by successive stages, to a much more restraining posture.
The accompanying fiscal restraint has, unfortunately, been
conspicuous by its absence. But there is now reasonable
certainty that the long-sought Congressional approval of a tax
increase and expenditure cuts will soon be forthcoming. The
favorable impact of the scheduled fiscal measures on the
domestic economy and our balance of payments should be clearly
registered during the second half of this year -- and in 1969.
From a domestic standpoint, the fiscal restraint will be
welcome, indeed. In the first quarter of this year, GNP grew
at an unsustainably rapid annual rate of 10 percent. Too
much of this fast advance is being reflected in rising costs
and prices. Fiscal restraint will hold the advance of the
economy to a much safer, less inflationary, pace. Without
fiscal restraint, the Federal budget deficit on the new,
unified basis would exceed $20 billion next fiscal year --
for the second time in a row. With fiscal restraint, the
deficit will shrink rapidly.
The U. S. economy and the financial markets have been
under considerable strain. For example, unemployment rates,
while still too high for some disadvantaged groups, are very
low by historical standards in some key categories. In the
financial markets, some interest rates have reached levels
not experienced in the United States for many decades. In
such a situation, the persistence of large federal budget
deficits is clearly inappropriate, and the long-sought
application of fiscal restraint will place the economy's
advance on a much sounder basis.
We are in the process of learning how to use fiscal policy
more effectively. It is already evident that the use of
fiscal policy must allow for political tolerances that can
seriously affect both the scope and timing of fiscal action.
It is a powerful tool of cyclical policy but not, perhaps,
as flexible as may have been assumed by some. This seems to
be particularly true when it is to be applied as a restraining
factor rather than a stimulus.
- 4 -
Over the longer run, the effects of general economic
policies certainly will be felt in the trend of costs and prices.
The competitive position may be impaired in a lasting way if
costs and prices rise faster than in competing areas.
Controlling inflation for some countries seems to be as difficult
as dieting. Progress is painful and slow, a brief lapse can
quickly lose the progress made by long periods of discipline.
For other countries, the reverse seems to be true. They put
on weight only by gross indulgence and quickly drop it by a
return to a normal diet.
Something like this distinction seems to prevail in the
balance of payments field. We have had some persistent
deficit countries that have had recurrent inflationary problems,
and we have had persistent surplus countries.
Important as fiscal and monetary policies are to promote
sustainable economic growth with price stability and to help
achieve balance of payments equilibrium, there are some
important aspects of the U.S. deficit that are not influenced
much by such policies. Thus, we have turned to some selective
measures. Similarly, surplus countries have found it necessary
to employ new and selective measures to help their adjustment.
Let me cite three important areas where general policies
have little or no effect on payments imbalances -- military
expenditures, tourism, and some capital flows.
The gross foreign exchange costs of U.S. military
expenditures now run about $4.5 billion a year. Even
abstracting from Vietnam, these gross foreign exchange costs --
incurred largely as the United States' contribution to the
common defense of the Free World -- run approximately $3 billion
per year. On a net basis -- after allowance for sales of
military equipment to our allies and other neutralizing
measures and not counting Vietnam -- they have run between
$1.5 and $2 billion per year.
This heavy drain on our balance of payments is in no
sense susceptible to reduction through the application of
general fiscal and monetary policies. Nor is it influenced
by selective economic policies. Here the solution must be
found in international cooperation. Thus, in the NATO Alliance,
for example, the principle that foreign exchange costs of
common security should be effectively neutralized needs to be
implemented in more effective ways.
- 5 -
Our gross expenditures on tourism (including fares to
foreign carriers) were about $4 billion in 1967, and our net
outpayments, after allowing for tourist receipts, were around
$2 billion. The foreign expenditures of our tourists have been
rising at an average rate of nearly 10 percent a year for the
past ten years. This steeply rising trend is related to the
growing number of people with higher monetary incomes and to
various other causes and would not be appreciably reduced by
a slowdown in the general rate of economic expansion in the
economy. Here we have used some mild special measures, but
look over the long pull toward increasing our tourist receipts
rather than reducing our tourist expenditures.
A third important factor is the flow of capital investment
from the United States to industrialized countries in
Europe, Japan, and elsewhere, Earlier in this century,
economists thought of capital investment as flowing from
advanced countries to developing countries, largely in the
form of goods, rather than money, But, today, we have a
tendency for capital to flow in growing volume to Western
Europe, without a corresponding outflow of goods and services
from the United States.
We have tried to deal with this area through some selective
devices -- the Interest Equalization Tax and the Department
of Commerce program on direct investment, and the Federal
Reserve programs dealing with banks and nonbank financial
institutions.
On the whole, these programs have worked well -- they
have not stopped capital outflow; that was not their purpose.
They have, however, reduced the rate of increase and, thereby,
reduced the problem for the time being. They also have had
the positive effect of stimulating the growth of European
capital markets, which now provide more funds for foreign
borrowers than they did in the past,
It is hard to say whether or not the selective U.S.
programs have had the tendency to raise interest rates abroad.
This is partly because European countries, in the past two
years or so, have been running economies with some slack, and
their domestic monetary policies have tended to ease -- which
is responsible conduct for surplus countries. It is partly
because selective policies followed by European central banks
have diverted funds from capital inflow back toward inter-
national money markets. These steps have eased liquidity and
tended to lower interest rates in international markets without
- 6 -
further easing in domestic markets. They probably have led
to some domestic borrowers going abroad for funds and perhaps
have diverted some short-term funds into long-term capital market
channels.
II.
I turn now to the second area I wish to discuss -- the
longer term aspect of the U.S. international payments position.
Here I want to take two perspectives -- a very broad and long-
term one for the period 1941 through 1967, and a more detailed
and medium-term one for the last six years, 1961 - 1967.
In the broad and long-term overview I combine all of the
balance of payments flows into three broad accounts. First,
is the trade and service account. Here I exclude military
transactions and investment income, but I include exports
financed by Government and pensions and remittances. Second,
is the capital account which includes capital outflows, net
capital transactions of foreigners and errors and omissions
and also includes income flows -- normally included in the
service account -- repatriated earnings on investments and loans,
both private and Government, and fees and royalties. Third, is
the Government and military account which includes sales of
military goods and services and Government loan repayments --
in other words, it is net.
For the 17 years from 1941 through 1957, the United
States had a cumulative surplus on trade and service account
of $85 billion, or $5 billion per year. Capital and income
investments in that period gave us a plus of $17 billion, or
$1 billion per year, on the average. On Government and military
account we had a cumulative deficit of $112 billion, or
$6.6 billion per year, on the average. Between 1946 and 1957,
we extended economic assistance in grants and loans of $42
billion net.
The net effect of these results was a cumulative deficit
in our payments balance of less than $10 billion, or an
annual average of less than $600 million. And we gained gold
reserves -- at the close of 1957 our gold reserve was larger
than at the beginning of 1941. We financed our small deficit
completely -- and more -- by increasing our dollar liabilities
to foreign official and private holders.
Throughout this period, the U.S. was in fundamental surplus,
but, through its deliberate policy of massive untied grant and
loan assistance and its absorption of most of the costs of
insuring Free World security, we incurred minor balance of
payments deficits.
- 7 -
This was enlightened policy -- it encouraged world trade
and economic growth. But it had two unfortunate results. It
was carried on too long after basic conditions had changed.
The deficits got larger and had to be financed both with
increased dollar outflows and a reduction of $11 billion in
our gold reserves from 1958 through 1967. Also, it got some
of the rest of the world -- particularly Western Europe --
into the bad habit of enjoying chronic surpluses, even after
Europe's reserves had been rebuilt. The net result was that
both the U.S. and the world got worried about the American
deficits, but it took some time for worry to be expressed
about the big European surpluses.
From 1958 through 1967, the U.S. had a cumulative deficit
of $27 billion, or $2.7 billion annual average -- more than
four times the average of the previous 17 years. The
Government and military account deficit was reduced to $5.5
billion per year, on the average. That is still a big figure;
after mid-1965, it was, of course, affected by Vietnam.
On capital account we stayed about the same -- $1 billion
surplus per year on the average. Capital outflows -- direct
investment, portfolio and bank loans -- rose sharply; enough
so that the steadily rising income factor just about -- not
quite -- kept it in about the same position as in the previous
17 years. But this occurred only after the outflow had been
somewhat contained and only after various special transactions.
The big difference is found in the trade and service
account. The surplus dropped sharply -- to less than
$2 billion per year, on the average. Exports grew, but,
particularly in later years -- imports grew faster. And we
had a rapidly increasing deficit on tourist account.
Now, let us take another fix -- medium-term on the U.S.
balance of payments. Table A (attached) gives somewhat mcre
detail for the years 1961 and 1967 and shows the net change
between them. The data are arranged in somewhat more
conventional fashion, with the top half of the table showing
essentially the current account and the bottom half the
capital flows.
I want to concentrate first on lines 2 through 5 --
net investment income, net services (other than military),
net military account and Government grants and credits.
- 8 -
Government grants and credits, net (line 5) grew from
$2.8 billion to $4.3 billion over the six years. But almost
half of the increase was mainly statistical -- there were big
debt prepayments in 1961 and virtually none in 1967.
Adjusting for this, the adverse change was about $762 million
or 22 percent. Items in this account include, among others,
AID disbursements and drawdowns of Export-Import Bank credits.
Some $400 million of the increase is represented by Export-
Import Bank loans outstanding. A very large part of the AID
disbursements were transferred in kind, in the form of goods
and services, thus equalling and offsetting a corresponding
amount of exports.
The services account (line 3) which excludes investment
income and fees and royalties, but includes pensions and
remittances, shows a net outpayment of $1.5 billion in 1961
and $2.6 billion in 1967, an adverse change of $1.1 billion or
73 percent. This account is heavily influenced by tourist
expenditures, which, as noted earlier, cost us, net, in 1967
about $2 billion.
The third account, net investment income (line 2)
includes fees and royalties, but also net outpayments of
interest and other income to foreigners on their private and
public investments in the U.S. Here the figures are positive
and the trend advantageous to the U.S. In 1961, the net
receipts were $3.4 billion, and in 1967, they were $5.6 billion,
a gain of 66 percent.
The military account, net, (line 4) shows a deterioration
of $700 million over the six years -- from an outflow of
$2.6 billion in 1961 to one of $3.3 billion in 1967.
The bottom half of the table shows capital flows.
Line 7 shows the capital flows net of "official capital
inflow," and line 8 includes such capital inflow. The
difference represents mainly investment of official reserves
in non-liquid form in the U.S. Part of this figure reflects
military neutralization financial transactions, part
represents the pull of high interest rates on such investments.
Even excluding these investments, it is evident that there was
some reduction in capital outflow from 1961 to 1967, reflecting
primarily selective capital measures -- the Interest
Equalization Tax and the direct investment and financial
institutions control programs of the Department of Commerce
and the Federal Reserve.
- 9 -
Finally, the first line in the table shows the trade
account and its deterioration between 1961 and 1967. Now, let
us pull some conclusions out of these figures.
(1) The rise in investment income more than offset the
declines in non-military services and Government grants
and capital, if allowance is made for the special debt
prepayments of 1961. These three accounts combined
showed a net gain of $400 million from 1961 to 1967.
Certainly it is not unduly optimistic to expect further
improvements over the future.
(2) It also is not unduly optimistic to conclude that the
net military account should improve over the next few
years. Gross expenditures should be reduced when peace
comes to Vietnam. And net outflow should be reduced as
we and our allies move forward to implement the accepted
principle that foreign exchange costs of common defense
efforts should be neutralized.
(3) Real effort must be made to improve the trade account.
Gains here can be translated into rising capital
exports -- deterioration in the trade account almost
automatically leads to capital curbs.
(4) Capital inflow from abroad can be an important factor
in contributing to balance of payments equilibrium
for the United States and in permitting additional
capital exports from the U.S. The role of the U.S.
as a finarcial intermediary needs further exploration.
The detailed examination of the recent six-year period
tends to confirm the broad conclusion to be drawn from the
long-term picture. The U.S. payments position is strong
when its trade position is strong. Without a trade position
stronger than that of 1967, the United States would have no
margin of real resources to use in net capital exports.
III.
I come now to the last part of my remarks -- the relationship
between the growth of international reserves and the flow of
international investment over the longer run.
In a sense, one may think of countries as investing part of
their national savings in reserves, when they acquire growing
amounts of gold and foreign exchange. Resources in goods or
securities are being spent to acquire reserves rather than
investments abroad or a larger volume of imports.
- 10 -
Almost continuously since 1950 the industrial countries
of Continental Western Europe have invested substantial amounts
in additions to their reserves. Between 1950 and 1967 the
European Community countries added an average of $1.3 billion
to their reserves annually. This is equivalent to 92 percent
of the growth in world reserves in that period. Between
1961 and 1967, additions to reserves by this group of countries
averaged $1.4 billion, or about 1 percent of the average
increase in their combined Gross National Product.
But even with the investment of considerable amounts in
reserves, reserve growth in the European industrial countries
in the last ten years has fallen short of expansion in their
international trade. And since 1962, in these countries,
reserves have declined in relation to GNP.
These facts give rise to several interesting questions.
What has determined the proportion of the current account
surpluses going into reserves as against capital investment
in other countries? Will there be continuing need for reserve
additions in Europe at about the previous rate, or at some
lower rate? Are the Common Market countries now finding
alternative uses for their foreign exchange receipts in
capital outflow and will they in the future channel smaller
amounts into additions to reserves? If so, what does this
signify as to the future pattern of international investment?
A look at what has been happening in the EC countries
is instructive. I have attached a table to these remarks
showing current surpluses, net capital flow, and overall
balances of payments in recent years, 1961-67. The table
also shows the percentage increase in official reserves in
each of the years 1961-67.
Apart from 1962, when a high level of debt prepayments
combined with a declining current account surplus to hold
down the increase, the annual rise in official reserves of
these countries ranged but narrowly between $1.3 billion and
$1.9 billion. These fairly regular increases in reserves
were achieved in a period when the current account position
varied by some $4-1/2 billion, and the capital account balances
by about the same amount.
- 11 -
The table seems to indicate a relative preference for
reserve increases as against capital exports -- investments --
even in the face of some capital inflows that were represented
as unwelcome. Note that the period 1961-65 was characterized
by persistent net capital inflows -- moderate in 1961-63 and
substantial in 1964-65.
In 1966-67 there was a marked shift -- the Six invested
substantially more abroad than they received in capital
inflow. The turnabout in the period was due to the convergence
of a number of factors. Undoubtedly the most important was
the series of measures taken to slow down capital outflows
from the U. S. The period since mid-1963 and particularly
since the February 1965 program of the United States has been
one of increasingly stronger actions of this type. A related
development has been the rapid growth of the Euro-bond market
from about $0.5 billion as recently as 1963 to $2 billion plus
last year. While the identity of purchasers of securities in
that market remains veiled, indications are that residents of
the Common Market became substantial investors in these
securities during the period. Another factor, of course, has
been the change in relationships between U. S. and European
interest rates. Finally, the change in the pattern of payments
surpluses within the Six may have contributed to the emergence
as a net capital exporter. The principal development in this
respect has been the erosion of the surpluses in Germany and
Italy, both of which have demonstrated a praiseworthy propensity
to export capital even in the face of some handicaps.
The development in recent years of large European sources
of capital for international investment is gratifying. It is
one of the most promising signs that progress is being made in
achieving a better adjustment in one aspect of the problem of
international adjustment -- namely, the relationship between
current and capital accounts.
As already noted, 1967 was a year of abnormally large
current account surplus for the Continental European countries.
What will happen when the current account returns to a lower
level, as it must do if the United Kingdom and the United States
are to improve their own current account totals? Will Europe
continue to export capital and permit reserve growth to skrink,
or vice versa? The answer to this question will determine how
international investment is to be financed in the future, and
may indeed affect the actual physical volume of investment.
- 12 -
However, if Europe countinues as a capital exporter,
as we hope, even in the face of a declining current account
surplus, we should come a long way toward a much better
adjusted pattern of international payments. Moreover, this
would have been achieved with a minimum amount of frictional
strain on the individual economies or slowdown of world
investment.
In the absence of new reserve creation, this could mean
a substantial decline in the past rate of reserve accumulation
on the Continent. It is important that such a leveling off
in reserve growth not lead to an excess of caution in monetary
and economic policies. Fortunately, the new facility for
creating Special Drawing Rights can counter such tendencies,
and makes possible both a continued upward movement of
European reserves, as well as a continuation of European foreign
investment.
To the extent that reserves of the European countries
rise as a result of their own allocations of newly-created
Special Drawing Rights, they will receive credits on the books
of the International Monetary Fund without having exported
goods and services or imported capital to acquire these reserves.
These reserves can remain passive or can be used. It is largely
through the channel of monetary policy, interest rates, and a
generally better environment for investment that the new
Special Drawing Rights should over time exert their influence,
insofar as these reserves are created for countries persistently
in equilibrium or surplus.
Countries with a tendency towards a deficit are likely to
borrow capital or reserves from abroad. The provision of
Special Drawing Rights reduces the need to borrow reserves. To
this extent, it should moderate one form of international
borrowing. Allocations of Special Drawing Rights would substitute
for borrowing and this should decrease demands that might
otherwise fall upon international money and capital markets.
Thus, whether looked at from the aspect of surplus
countries or deficit countries, the provision of an adequate
growth of reserves through Special Drawing Rights should over
time act as a stimulus to the level of international and
domestic investment. It should help to avoid, or mitigate,
tendencies to competitive escalation of interest rates that
might otherwise occur as countries seek to build up or protect
their reserves, when there is no way to increase the reserves of
the world as a whole.
- 13 -
We have found that there has been a substantial shift
of the sources of international capital investment from the
United States to the EC countries of Europe, corresponding
to the shift in the current account surplus, since 1961. At
the same time the EC countries have continued to add substantially
to their reserves out of the proceeds of the current surplus.
We now hopefully expect some decline in the abnormally large
trade surplus in Continental Europe, and a recovery of trading
position on the part of the United Kingdom and the United States.
It will be most constructive if the EC countries can accept
adjustment in current account while maintaining the outflow of
capital. This would bring all the major countries much closer
to equilibrium and it would demonstrate a proper and positive
functioning of the adjustment process.
The need for further reserve gains can be supplied by
activating the special Drawing Rights facility, without needing
to invest current foreign exchange in reserves.
I suggest that this could be a pattern of progress,
to the benefit of the world as a whole and especially to
countries such as Spain, which have a vital interest in the
continued flow of investment funds from the surplus countries
to the rest of the world.
o0o
Attachment: Tables A and B
- 14 -
Table A
Selected Groupings of Items from U.S. Balance of Payments
1961 and 1967
($ mil.)
1961
1967
Change
Current Account (incl. U.S. Gov't capital
outflow)
1. Trade Balance
5,444
3,483
-1,961
2. Net investment income
3,397
5,632
2,235
3. Net other non-military services
-1,475
-2,554
-1,079
4. Net military (cashreceipts basis)
-2,564
-3,271
-707
Expenditures
-2,981
-4,319
-1,338
Military cash receipts (incl.
mil. adv. payments & repayments
on mil. credits)
417
1,048
/631
5. Government grants and capital, net
-2,805
-4,257
-1,452
Gross outflows
-4,054
-5,129
-1,075
Scheduled repayments (excl. mil.
credits)
553
866
/313
Advance repayments
696
6
-690
Subtotal (items 2-5)
-3,447
-4,450
-1,003
Total
/1,997
-967
-2,964
Capital Flows (excl.U.S.Gov't
capital outflow)
6. Private U.S. and Foreign Capital
(incl.errors & omissions)
-4,462
-4,235
t
227
Special U.S. Gov't liabilities
other than military advance
payments
t 95
t 353
t
258
7. Net (excl. "official foreign
capital inflow")
-4,367
-3,882
t 485
Official foreign capital inflow
-
/1,274
/1.274
8. Net capital outflow
-4,367
-2,608
/1,759
Liquidity Balance
-2,370
-3,575
-1,205
Table B
BALANCE OF PAYMENTS OF THE EC COUNTRIES, 1961-67
(Billions of Dollars)
Average
1961
1962
1963
1964
1965
1966
1967*
1961-67
Current Account Balance
+2.4
+0.8
-0.2
+0.5
+1.3
+2.1
+4.2
+1.6
Capital Account Balance**
+0.4
+0.3
+0.6
+1.6
+1.1
-0.6
-2.7
+0.1
Overall Balance
+2.8
+1.1
+0.4
+2.1
+2.4
+1.5
+1.5
+1.7
Overall Surplus Used to:
(i)
Increase Net Official Reserves
1.9
0.6
1.3
1.8
1.5
1.1
1.4
1.4
(ii) Increase Net Commercial Bank
Foreign Assets
-0.4
-0.3
-1.2
0.2
0.7
0.1
0.1
-0.1
15
(iii) Prepay Official Debt
1.2
0.8
0.4
--
0.2
0.3
--
0.4
Memorandum Item:
Percentage Change in
Net Official Reserves
13.1
3.8
6.8
8.5
6.9
4.1
5.3
6.9
Note: Components may not add to totals because of founding.
*Partially estimated.
*Includes errors and omissions and net settlements by France on account of Overseas Franc Area.
Sources: IMF and OECD statistics, adapted.
June 6, 1968
CONGRESSIONAL RECORD Extensions of Remarks
FOR.INV.
Far.
E5077
the Nation. Frustration comes easy in
cess of Government outflows over pri-
But how much evidence do we have that we
the Congress, and cynicism is never very
vate inflows-must be attacked.
have tightened the belt in the management
far behind. But no frustration was ever
As Mr. Powers concludes:
of these huge outflows so as to minimize the
great enough to lead Joe Martin to
heavy burden on our payments position?
We must return to a freer flow of invest-
Why should the emphasis rest so heavily on
cynicism.
ment and trade which, in an era of unre-
expedients affecting the private sector, which
The Republican Party is justly proud
lieved political crisis, has been perhaps our
is to such a large extent responsible for the
of Joe Martin, but what is even more
brightest international achievement-and
inflow of dollars? Indeed, in the past several
important, the country is proud of him,
more than that, a necessary basis for ulti-
years there have been proposals for or use
and the better for having had his long
mate peace in the world.
of expedients such as the interest equaliza-
and faithful dedication to it.
The speech follows:
tion tax, restriction of bank loans, tourist
THE IMPACT OF U.S. CONTROLS ON FOREIGN
taxes, reduction of free entry allowances,
INVESTMENT
buy-American purchase policies, import sur-
charges, border taxes and border tax rebates.
(A speech by John J. Powers, Jr., at an Amer-
THE IMPACT OF U.S. CONTROLS
There are two expedients in particular upon
ican Management Association special brief-
which special stress has been laid. They are
ON FOREIGN INVESTMENT
ing, New York City, April 10, 1968)
the restriction of direct investments abroad
The balance of payments of the United
and the strong promotion of exports. These
HON. THOMAS B CURTIS
States has been in deficit every year but one
two are related and are the subject of my
since 1950. From 1950 to 1956 the deficits
particular interest in this paper.
OF MISSOURI
averaged $1.5 billion. 1957 was a year of sur-
WHAT ARE DIRECT INVESTMENTS?
IN THE HOUSE OF REPRESENTATIVES
plus. But in 1958 the deficit appeared again
and increased substantially, and from that
First, direct investments. What do we mean
Thursday, June 6, 1968
year to the present the deficits have aver-
by direct investments? Not portfolio invest-
Mr. CURTIS. Mr. Speaker, Mr. John
aged $2.6 billion. Despite their persistence,
ments nor bank deposits. But rather plant,
there seems to be no general agreement as
equipment, inventories, warehouses, accounts
J. Power, Jr., president of Chas. Pfizer
& Co., Inc., recently made a speech before
to the causes nor as to the cures, leaving this
receivable, and people, skilled and unskilled,
important part of our foreign economic pol-
of all colors, religions and languages. Direct
the American Management Association
icy in a continuing state of uncertainty.
investments are prosperous and productive
on the subject "The Impact of U.S. Con-
Let us examine for a moment one very
business enterprises providing goods and
trols on Foreign Investment." His anal-
important area of disagreement which has
services, giving employment, upgrading in-
ysis is as clear and compelling as any I
persisted throughout the last eight years of
dustrial skills, paying taxes, and in many
have yet seen.
debate on this subject. First let us look at
cases giving a major stimulus to industrial
the overall picture. Between 1950 and 1966
and sociological development in a commu-
Mr. Powers makes the following main
points:
the United States Government paid out net
nity or even in a nation.
in military expenditures, grants, loans and
The significance of such investments is now
First. Between 1950 and 1966 the Gov-
for various services $87.6 billion. During the
substantial. Since 1950 they have been grow-
ernment sector has been continuously in
same period, corporations and private citi-
ing at a rate of 10% per year. The average
deficit in the total amount of $87.6 billion.
zens brought into the country $59.0 billion
rate of worldwide growth of GNP is about
During the same period the private sector
in excess of all private dollar outflows. In
5% a year, so that such investments are
has been continuously in surplus in the
short, during this period the government sec-
growing at twice the rate of production. It is
total net amount of $59 billion. But to
tor has been continuously in deficit, and the
estimated that deliveries to markets from the
cope with its balance-of-payments defi-
private sector continuously in surplus. But
foreign facilities of U.S. companies amount to
the surplus has not been sufficient to cover
$110 billion or about four times the value of
cit, the Government is increasingly cur-
the public sector deficit.
exports delivered to those markets (value of
tailing private sector investments, not
The U.S. Government, however, has sought
exports: 1965, $26 billion; 1966, $29 billion).
governmental expenditures. Why should
to grapple with the problem not SO much by
It has been aptly pointed out that U.S. com-
the burden fall so heavily on the private
curtailing its own expenditures but by cur-
panies are creating a third economy in mark-
sector-the sector largely responsible for
tailing private sector investments and espe-
ets abroad. There is the U.S. domestic eco-
the inflow of dollars?
cially the direct investments of American
nomy, the Soviet economy, and next in order
Second. From 1950 to 1966 the return
business in production and marketing facil-
of magnitude, U.S. business abroad.
ities abroad. Businessmen have reacted to
I have already referred to the contribu-
on U.S. direct investments abroad re-
turned more than $20 billion in divi-
this policy with astonishment. From their
tion of direct investments to the balance of
own experience they know that their direct
payments. It is important to note that from
dends, royalties, and fees alone. In
investments have returned substantial in-
1950 to 1966 these investments returned in
addition direct investments encouraged
come to their companies in the United States,
dividends and royalties and fees alone $20
U.S. exports as parents exported to affili-
far greater than the direct investment out-
billion in excess of all outflows. But as every
ates abroad. But the Government is now
flows; indeed, that is the whole point of mak-
individual company knows, the returns were
curtailing direct investments overseas-
ing the investment. And a look at the sta-
much greater than this. They included also
thus reducing return on investment and
tistics for all industry confirms the experi-
the net inflows resulting from the trade of
U.S. exports.
ence of the individual companies. In the
parent companies with their affiliates, that is,
Third. The payback period for outflows
overall national accounts, direct investments
the surplus of exports to affiliates over im-
are seen to be a star performer in the bal-
ports from affiliates.
of U.S. dollars for manufacturing invest-
ance of payments, as I am sure most of you
In highlighting the contribution of direct
ment abroad is about 2½ years on the
have found in your own examination of the
investments to the balance of payments, I
average. Every investment curtailed
record. If then such an examination suggests
do not intend to deprecate the importance
today will hurt the balance of payments
so clearly that the primary reason for a con-
of exports, or rather what is commonly called
in the very near future. The voluntary
tinuing deficit lies in government disburse-
the trade surplus, that is, the surplus of ex-
ments, why is so little done to reduce them?
ports over imports. I am saying, however, that
program begun in 1965 is already now in
in order to obtain a just and useful compari-
1968 curtailing net inflows to the United
NATIONAL POLICIES AFFECTED
son of the relative contributions to the bal-
States from investments that would
To begin with, whether and to what extent
ance of payments of direct investments and
otherwise have been made in 1965, 1966,
we can reduce these disbursements present
the trade surplus, it is necessary to make
and 1967.
difficult questions affecting basic national
some key adjustments. We must, as already
Fourth. Direct investment is not an
policies. And after two decades, vast global
suggested, reduce the trade surplus by the
alternative to exports, but rather an ab-
commitments have been built into our politi-
amount of the net inflow due to trade of par-
cal system. Though the seeds of crisis have
ent companies with affiliates, and also it is
solute necessity to build markets abroad.
been contained in these policies, the crisis
necessary for fair comparison to eliminate
Fifth. The mandatory program now in
has developed slowly. And now that it is here,
those supported exports which were financed
effect introduces distortions into a busi-
our approaches to issues of foreign policy
by the U.S. Government, particularly under
ness and weakens it immediately.
have become ingrained habits, and the budg-
the AID program.
ets involved somewhat sacrosanct. It is true
CONTRASTS IN OFFICIAL POLICIES
Sixth. The mandatory program upsets
some effort has been made to hold down for-
foreign governments by showing that the
Making these adjustments for the years
eign aid or tie it to U.S. exports, but this
U.S. Government has the right to decide
1964, 1965, and 1966 (the only three consec-
has been due to Congressional pressure.
utive years for which figures are available),
how earnings are to be distributed de-
Rather than face the disagreeable necessity
we find that the trade surplus for these years
spite local stockholders, national sensi-
of revising our commitments further, the
cumulatively was $5.7 billion and the direct
tivities, and efforts on local capital mar-
whole thrust has been to look for alternatives,
investment surplus was $6.1 billion. There are
kets.
for expedients that is, that will permit us to
thus two major contributors to the balance
Seventh. The mandatory program
continue the current level of government ex-
of payments, the trade surplus and the sur-
penditures. I am not so unrealistic as to
should be continued no longer than 1968.
plus derived from direct investment, but in-
suggest the elimination or near elimination
terestingly the public policy towards each of
The basic cause of our problem-the ex-
of military disbursements and AID programs.
these contributors is not the same as one
E 5078
CONGRESSIONAL RECORD Extensions of Remarks
June 6, 1968
might expect, but quite different. Every effort
illusion-the illusion that American inter-
is, however, many companies will be obliged
is directed by the government to increasing
national business is still what is used to be
to borrow solely in order to fulfill the re-
exports while restrictions are placed on direct
30 years ago-largely a matter of swapping
quirements to remit a proportion of earn-
investments.
exports and imports. While the textbooks
ings, in many cases over 90% from Schedule
What is the justification for such different
on international economics still labor to ex-
C countries. And some will have to borrow
treatment of the two star performers? Direct
pound in great detail the nature and causes
again in order to repay the loan. And the
investments, it is now conceded, make a sub-
of trade, the world has moved on.
introduction of such distortions into a busi-
stantial net contribution to the balance of
It is simply not possible in this decade of
ness is not in the future. The business is
payments, but it is pointed out the inflows
the 20th Century to establish a business ef-
weakened immediately-in the short run. It
in any one year are the result of investments
fectively in most world markets in most
is surprising that it is difficult to convince
made in earlier years; and similarly, the ac-
products by exporting. I say most markets
some of this fact, though I suspect if the
cumulated inflows are the results of the in-
and most products because there are always
larger companies of the United States were
vestments of the years prior to those included
some exceptions. By constant stress on ex-
asked to withdraw from operations 90% of
in any selected period of years. Looking at
ports, we perhaps obscure the facts of life
their United States earnings this year, there
the matter from the point of view of the
of business abroad, or more specifically, the
would be a tremendous outcry, and the charge
short run then, it is argued that the returns
fact that successful market penetration us-
would rightly be made that we were drastical-
from previous investments can be regarded,
ually requires building warehouse, creating
ly distorting the structure of the economy.
so to speak, as vested. Therefore, the argu-
and training and organization; it requires
By the same token, we are distorting by
ment continues, we can cut down current
local sales promotion, and very likely, in the
the current Mandatory Program the struc-
outflows while still preserving the previous
end building plants or assembly lines to back
ture of that important third economy, Amer-
rate of inflows and thus gain a short-term
up the marketing effort; in short, it requires
ican business abroad.
advantage, even admitting there will be a
direct investment.
"SEED CORN" PARALLEL
long-term disadvantage.
DIRECT INVESTMENT A MUST
There is no doubt that every businessman
PAYBACK ON DIRECT INVESTMENTS
To those who argue that direct investment
would wish to cooperate with the Admin-
But what is the short term? There has been
is an alternative to exports, or that the proc-
istration in a short-term emergency. It is
much discussion on this point since this ra-
ess damages our international position be-
always possible to conduct an "efficiency
tionale of restriction of direct investment
cause it involves export substitution, I would
campaign" in business, to squeeze for a
was first advanced some seven years ago. Re-
say that we would like nothing better than
while, cut costs, postpone some investments
cently, Professor Behrman argued before the
to sit in New York and manage an export
in order to provide larger immediate returns,
Joint Economic Committee that the payback
operation. How very much simpler it would be
all on the assumption that other measures
period for outflows of U.S. dollars for manu-
to do that than to put down roots abroad,
will be taken promptly in the time thus
facturing investment abroad is about 2½
establish local organizations, build plants,
bought, to permit the momentum of the busi-
years on the average. If this is right-and I
negotiate with governments, and manage as-
ness to be resumed before opportunities are
must say, this estimate comes close to my
sets in foreign countries. Why don't we do it?
lost or competition moves ahead. But we
own experience-this is a very short term in-
Are we wrong? Is this a vast management
cannot forget that in restraining direct in-
deed. In fact, 2½ years have already elapsed
error? I do not think so. We have not gone
vestment we are economizing on seed corn.
since the Voluntary Program was first intro-
the exporting route because we can't get the
I suppose one could conceive of circum-
duced as an emergency measure. By now,
business that way. Wherever we put a plant,
stances severe enough to warrant eating
therefore, we are experiencing a loss as a
where before we were exporting, it is because
some of the seed corn. But obviously the
result of many investments that were not
it was necessary to maintain and expand our
emergency must be both serious and brief,
made and which would now be returning net
business. If we had not done it in most cases,
and it is crucial that effective plans for
inflows to the United States.
we would have lost the exports anyway and
finally correcting the imbalance in our pay-
Isn't the short term too short to justify
not gained more business through local pro-
ments position meanwhile be implemented.
this course? And beyond that, is there really
duction and distribution.
Though various programs have been
such a clearcut advantage in the short term
As Mr. Charles Stewart of the Machinery
initiated in the past seven years, they have
when we restrict direct investments? There
and Allied Products Institute recently point-
focused on temporary benefits, ignored root
are two distinct approaches to this last ques-
ed out so well, there is one central fact
causes, and therefore have not been effective.
tion. The economist who often has the ear
about international business that cannot be
Once again in the Mandatory Program, atten-
of government tends to apply a marginal
ignored, neither by an individual company
tion is focused on temporary improvements
analysis, thinking in terms of an additional
nor by government. To obtain, hold and im-
in order to buy time. The alarming thing is
increment of investment outflow and the
prove market position abroad requires an
that, as you remember, this same approach
returns to be ascribed to that additional
integrated approach in terms of direct in-
has been used in various ways ince 1961. (At
increment. He tends to think of a new proj-
vestment in local plants, exports, licensing,
that time, the official view was that equilib-
ect more as if it were merely an invest-
and so on, operating throughout the world,
rium would be reached in 1963). In 1965, in
ment than part of a gradually growing and
in both developed and developing countries.
1966, in 1967, and now in 1968 with the
developing business organism. He asks what
CENTRAL POLICY ERROR
tightening of restrictions over direct invest-
is the rate of return, with the implication
The central error of current policy is the
ment, we have had a repetition of assurances
that investments will always seek the high-
effort to segment and splinter international
that each new stage was only temporary. It is
est rate of return at any moment in time,
business operations-approving exports, dis-
surely relevant to ask, however, after seven
regardless of other factors. The businessman,
couraging direct investments, varying the
years, what have we bought with these re-
on the other hand, asks what is the market
permitted outflows and the required inflows
peated short-term measures? And to ques-
opportunity. Above and beyond the rate of
between groups of countries, and to apply
tion whether present policy has the elements
return or payback on a single project he
these highly distorting and detailed controls
to correct the basic problem of the deficit.
asks what is the relation of the investment
to the delicate structure of international
Since the regulations were announced,
to the whole operation. In short, he makes
trade and investment in the belief that the
companies have been bombared with in-
a basic judgment as to the potential of the
effects will be temporary and that there will
quiries as to how the regulations are affect-
market and the need, for example, to move
not be serious economic and political re-
ing them and will affect them and, as you all
now to establish, expand or protect market
percussions.
well know, it has been difficult to give a
position. The economist sees restriction on
Now-what of the Mandatory Program?
precise answer. For one thing, we have had
direct investment as yielding a statistical
What can we say of a more specific nature
to spend many man hours examining the
advantage in the short run. The business-
about it? With this program we have moved
regulations and interpreting them with re-
man sees it as an immediate infringement
into a new phase in the process of increasing
spect to our business. After three months, it
on the effectiveness of a going business op-
restriction, it is no longer a question of
is still difficult to be precise about the im-
eration resulting not later but now in loss
holding down outflows and bringing back
pact of the program. It appears that the
of market share, financial strength or such
earnings to the extent possible while main-
policy is to grant few or no exemptions until
intangibles as morale of personnel.
taining the health of the business and the
a company has proved it cannot make avail-
GOVERNMENT EXPORT PROMOTIONS
necessary momentum of growth. In Western
able funds from any other part of its world-
I will come back later to this question of
Europe, the Mandatory Program requires
wide operations and has exhausted all its bor-
the short and long run in connection with
that many companies actually remove from
rowing resources. Relief, it seems, will only be
the discussion of the Mandatory Program.
their overseas businesses, earnings required
granted when credit can no longer be ob-
Meanwhile, it is important to say a word
for their health and growth.
tained. I say that it is difficult to be
about the other expedient for improving the
Most companies seem to pay out in divi-
precise about the impact of the regulations
balance of payments which is of special sig-
dends in the neighborhood of 50% of their
on the operations of the company, but per-
nificance to business, namely government
earnings SO that it would not be unreason-
haps that was not quite an accurate state-
promotion of exports. For years, successive
able to insist on the return of earnings to
ment because this policy in effect seems to
administrations have exhorted businessmen
the United States of this amount or even
suggest that a company will get relief only
to export and save the country. These exhor-
somewhat more, at least for companies that
when it is in serious financial condition.
tations are being heard again. They have
are relatively mature in international busi-
The regulations in short will be forcing it
not brought substantial results in the past.
ness. Certainly in this emergency, no com-
to expand its borrowings to the limit of its
They will not now, because government ex-
pany should be allowed to hold dividends
credit and then it must hope and trust it can
port promotion programs are founded on an
back in order to earn interest abroad. As it
secure the necessary relief to permit its grave
June 6, 1968
CONGRESSIONAL RECORD Extensions of Remarks
E 5079
financial position to be alleviated. It is not
DANGERS OF INDIFFERENCE
today. We believe after listening to the facts
necessary to underline before an audience of
I recognize that most of those present at
of our case you will realize our plight is,
this kind the difficulties and dangers of mak-
this meeting are concerned with the prob-
indeed, a serious one, that there is great
ing any plans under such conditions. More-
lem of interpreting the regulations, seeking
merit to our cause, and that remedial action
over, it would appear that in many cases it
relief, if possible, and bringing about the best
would be fair, equitable and proper and,
is not so much an exemption that is granted,
possible adaptation of the company to the
moreover, should undoubtedly be taken
as a delay, with the understanding that
hard circumstances imposed upon it. This, of
quickly.
anything conceded must be returned in the
course, is an important objective. At the
The facts are simple. All other domestic
near future. On these points, we will prob-
same time, we cannot be indifferent to the
sugar producing areas, both cane and beet,
ably be able to speak with more certainty
longer term problem of bringing about a
are operating today completely without acre-
as patterns of decisions begin to emrge from
change in the policy. It is difficult for busi-
age restrictions. The sugar cane farmers of
the Office of Foreign Direct Investments.
ness leaders to criticize government policy
the Mainland Cane Sugar Area have meticu-
OTHER IMPACTS ASSESSED
at a time of emergency and run the risk of
lously complied with all of the acreage re-
There are other impacts of the program.
appearing unpatriotic. And yet we must speak
strictions and requirements imposed under
There is no doubt, for example, that to a sig-
the truth of the matter as we see it. Cer-
the Sugar Act of 1948. Nevertheless, the in-
nificant degree, though difficult to measure,
tainly, if we do not discuss these crucial is-
ventories of sugar in our Mainland Cane
companies with little or no current activity
sues in terms of our experience and discuss
Sugar Area have increased to the point where
abroad have been discouraged or prevented
them publicly, then we cannot expect our
it is presently contemplated that a 22.5%
from taking advantage of rapidly growing
views to be considered in the making of pol-
acreage reduction will be imposed for the
world markets, with permanent effects on the
icy. The fact is, these are complex matters,
1969 crop. This reduction will be on top
competitive position of the United States in
and no one has a monopoly on economic wis-
of two reductions already imposed since 1964
those markets and permanent losses to the
dom with respect to them.
which aggregated approximately 15%, or a
balance of payments. There is another im-
Businessmen must continue, therefore, day
total average cumulative reduction begin-
pact also of great significance. I have in
in and day out, to explain their operations
ning in 1969 of about 35%. Some farmers
mind the effect of the program on the rela-
abroad and relate them to major current is-
would suffer a reduction as high as 40%.
tions of U.S. companies with local govern-
sues such as the balance of payments and
The prospective 1969 acreage reduction of
ments and communities and their efforts to
world economic growth and development.
an additional 22.5%, in the absence of reme-
be accepted as corporate citizens seeking to
They must, at the very least, urge on the
dial legislation, is not a figment of our
serve the interests of the country of which
United States Government, policies that
imagination nor is it an exaggerated predic-
they are residents. It has not always been
make economic sense, that harness the dol-
tion with a self-serving purpose. You will
easy, but most U.S. companies abroad have
lar-earning power of business operations
find attached to my prepared statement, as
won a high degree of local acceptance be-
abroad to the needs of U.S. foreign policy,
"Exhibit A", a copy of a letter dated April
cause they have become sensitive, if they
without weakening those operations. They
16, 1968 from Mr. Tom O. Murphy, Director,
were not so at the outset, to the policies
must reassert the priority, now being lost, of
Sugar Policy Staff, A.S.C.S., United States
and attitudes of host countries.
the freer flow of investment and trade which,
Department of Agriculture, addressed to Hon-
The Voluntary Program to a degree, and
in an era of unrelieved political crisis, has
the Mandatory Program decisively, cry to the
been perhaps our brightest international
orable Edwin E. Willis, Congressman from
the Third Louisiana District. It is the Direc-
high heavens that such companies are in
a hievement-and more than that, a neces-
sary basis for ultimate peace in the world.
tor of the Sugar Policy Staff, who states,
fact American companies and that the U.S.
based upon the assumptions contained in his
Government has the right to reach in and
letter, that an additional 22.5% reduction can
direct how the earnings are to be distributed
be expected in the Mainland Cane Sugar
despite local stockholders, despite national
Area for the 1969 crop.
sensitivities and in Europe, despite the sec-
THE SUGARCANE FARMERS' PLIGHT
At this point let me say to you, so that we
ondary effects on local capital markets. At a
will be ever mindful, that for the most part
time of rising nationalism these programs
HON. JOHN R. RARICK
our sugar cane farmers are engaged in one-
unfortunately confirm the worst fears of the
crop agriculture. They have no profitable
host country that the affiliates of U.S. com-
OF LOUISIANA
substitute crop to which they can turn. Their
panies are in fact aliens in the national econ-
IN THE HOUSE OF REPRESENTATIVES
sugar cane crops, planted at substantial
omy, subject to laws and regulations of a
costs, represent at least a three year invest-
foreign state. I would predict that this new
Thursday, June 6, 1968
ment. Their expensive, highly specialized
and radical extraterritorial claim will cause
Mr. RARICK. Mr. Speaker, the Ameri-
machinery and equipment has no other use.
reactions and affect our operations abroad
for years to come.
can cane farmers-like many other agri-
It is very pertinent that we closely ex-
cultural producers-face a serious finan-
amine the conception, birth and growth of
FUTURE DIRECT INVESTMENTS POLICY
cial crisis as a result of a nonflexible, con-
our problem in order to understand why and
What then should be the policy towards
trolled production quota.
how this problem developed. Such exainina-
direct investments? The logic of the matter
tion and understanding is critcial to your
seems clear. In the relatively short period
They are a part of the U.S. economy-
final conclusions. They will indicate that
since the early 1950's, U.S. international
their dollars stay in our country. Their
our present excessive inventories of sugar
business has built up dollar-earning assets
crisis is our problem-they seek relief-
did not result from any farmer exceeding his
which have become the major contributor to
we must come to their aid.
production quota, nor did they result from
our balance of payments. Why not continue
I include the statement of Mr. William
any action by the Mainland Cane Area farm-
the process? It is working. It will continue
ers or processors in prevailing upon the Secre-
to work if we do not ourselves kill it. It has
S. Chadwick of New Orleans, La., given
tary of Agriculture to temporarily remove
been argued that all segments of the economy
before an informal meeting of the House
production quotas. We particularly desire to
must make a sacrifice in the common cause
Agriculture Committee and interested
negate any statement or implication that we
and that therefore the private sector, far
parties in full text:
are endeavoring to have the Congress ex-
from expanding its operations abroad, must
STATEMENT OF WILLIAM S. CHADWICK, REPRE-
tricate us from a position of peril that we
also take a cut. But such an argument makes
SENTING LOUISIANA AND FLORIDA SUGAR CANE
brought upon ourselves. Nothing could be
no sense if the cut is counter-productive, if
FARMERS AND PROCESSORS, INFORMAL AGRI-
further from the truth.
the so-called sacrifice is, in fact, a sacrifice
of the end we are seeking, namely, an im-
CULTURE COMMITTEE MEETING, HOUSE OF
The records of the Department of Agri-
REPRESENTATIVES, MAY 14, 1968
culture will show that every pound of the
provement in the balance of payments. And,
Mr. Chairman and members of the com-
sugar comprising our excessive inventory was
unhesitatingly, I say that it is on this point
that I rest my case.
mittee: My name is William S. Chadwick. I
produced from sugar cane grown on acreage
As to the Mandatory Program, I can see no
reside at New Orleans, Louisiana, and I am
authorized in conformity with the provi-
sions of the Sugar Act and the restrictive
basis for continuing it beyond 1968, and its
President of Southdown, Inc., a sugar cane
regulations and orders issued thereunder.
administration in the remaining months of
farmer and processor of the Mainland Cane
Sugar Area. I appear here today as a repre-
On May 17, 1963 because of the threatened
this year should be on a more flexible and
realistic basis, obtaining whatever belt-
sentative of all of the approximate 5,000
world shortage of sugar and spiraling sugar
prices, the Department of Agriculture an-
tightening gains there may be in it without
sugar cane farmers and the 49 sugar cane
diminishing valuable Amercan assets abroad.
processors of the State of Louisiana and the
nounced that the maximum production of
Most important, we must attack the basic
State of Florida, who collectively comprise
sugar in the United States was needed, and
causes of our problem, and I mean the ex-
what is designated in the Sugar Act of 1948
that no acreage restrictions would apply to
the 1964 crop in our area. We do not desire
cess of government outflows over private in-
as the Mainland Cane Sugar Area.
to be critical of the Department and realize
flows, and also, though time does not permit
We are deeply appreciative of this opportu-
the tremendous pressure on it brought about
more than a mention of it here, bring about
nity you have granted us to appear before you
by the prospects of a sugar shortage. The
changes in our international monetary sys-
in this informal meeting and explain, to the
Department has had a very difficult job, and
tem that would improve the overall adjust-
best of our ability, the critical situation that
in most instances should be highly com-
ment process.
faces our sugar cane farmers and processors
mended. However, in self-defense, let us point
U.S. TREASURY DEPA RTMENT Washington, D.C.
30
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