Foreign Relations of the United States, Diplomatic Papers, 1945, The British Commonwealth, The Far East, Volume VI

611.4131/5–146

Minutes of a Meeting of the United States Financial Committee

[Washington,] October 11, 1945—2:30 p.m.

Present:	Secretary Vinson (in the Chair)
	Secretary Wallace	Mr. A Taylor
	Mr. Clayton	Mr. Collado
	Mr. Eccles	Mr. Angell
	Mr. McCabe	Mr. Gardner
	Mr. White	Mr. Knapp
	Mr. Glasser–Chairman of Technical Subcommittee
	Mr. Coe } Secretaries Mr. Hebbard
	Mr. Kindleberger–Secretary General

Summary of Tentative Agreements

The Chairman called the attention of the Committee to the agenda prepared by the Technical Subcommittee (U.S./Tech. Fin–4).⁸¹ He suggested that agenda items (a), (b), and (c), under No. 1, be left for later discussion. Tentative agreement on other items of the agenda was reached as follows:

1. Loan vs. Line of Credit

(d) Financial assistance should take the form of a line of credit which could be drawn upon as needed, and available for 5 years.

2. Interest Rates

(a) The line of credit should not be interest-free.

(d) The obligation would be serviced in equal annual installments, combining interest at 2 percent and amortization over 50 years. Thus, the amount of the annual payment on a $1 billion obligation would be $31,800,000 per year.

3. Other Provisions Involving Interest Rates and Maturities

(a) An initial period of grace of 5 years would be granted before interest and amortization payments would begin.

(b) There was agreement in principle that there should be a clause providing for the waiver of interest and the postponement of amortization payments during years when the British balance of payments was especially difficult. The Technical Subcommittee was asked to prepare various types of objective criteria by which this principle might be implemented.

(c) No provision for review of the interest rate during the period of the credit would be proposed.

4. Maturity and Amortization

The tentative acceptance of 2(d) precluded the necessity of discussing possible provisions for other than straight-line amortization.

Loan vs. Credit

In answer to a question from Mr. Vinson, Mr. Clayton stated that he believed the Committee was thinking in terms of a credit, rather than a loan. Mr. White agreed that a credit would be better, but pointed out that a large loan would permit the British to show a very strong reserve position and might build up confidence in sterling. He hoped that it was agreed that if a credit were granted it would not be offered only for the purchase of U.S. products. There was general agreement with this. Mr White then transmitted a suggestion of Mr. Glosser’s that the credit could be granted in the manner of a banking overdraft: the British could repay and later draw again up to the limit of the credit which had not already been amortized, and thus limit the amount of their obligation outstanding at any time to the amount actually needed. In answer to a question from Mr. Vinson, Mr. White and Mr. Clayton agreed that the longer the period granted to the British within which to draw against the credit, the less likelihood there would be that they would feel it necessary to draw the whole amount made available, since if the period of time was short, they would be unable to measure the contingencies of the transition period. At Mr. Clayton’s suggestion, the Committee registered its tentative agreement on agenda item No. 1(d): a credit would be made available for a period of 5 years.

Interest Bates

Mr. Vinson, Mr. Eccles and Mr. McCabe pointed out the difficulty of obtaining public acceptance of an interest-free loan. Mr. Angell stated that a very good case could be put forward for an interest-free loan, considering the close relationship to the war and the huge sums spent upon the war. The United Kingdom presented a special case. Another possibility was to limit the interest to the lowest rate at which the U.S. Treasury could borrow funds, such as the short-term rate at which funds were obtained. Mr. Vinson observed that a 50–year credit would indicate a higher rate than 2 percent if based upon the rates paid by the Treasury. Mr. Eccles thought that it would be as easy politically to obtain approval of an interest-free credit as to lend money at the lowest short-term rate available to the Treasury.

Mr. White pointed out two corollaries to the provision that the U.S. credit should carry an interest charge. If the U.S. charged interest, it would be more difficult for the U.K. to arrange interest-free loans from other countries such as Canada and the Union of South Africa. Secondly, if the U.S. justified a low rate of interest to the U.K. on the basis of not wishing to make a profit out of the transaction, this was tantamount to admitting that the U.S. was attempting to making a profit on loans to other nations which were associated with the U.S. in the war, and which would presumably be charged a higher rate.

Mr. Vinson stated that the payment of a fixed rate of interest and amortization per year would be more easily understood and therefore more readily acceptable. Mr. Wallace suggested that the interest and amortization payments, whether begun immediately or after a period of grace, might begin with a low figure, gradually working up to a fixed amount. Mr. Vinson thought the relative simplicity of the fixed-payment formula gave it a considerable advantage; in addition, if a period of grace of about 5 years was granted, the U.K. would presumably have had two years after balancing its international payments in which to prepare for meeting the first installment.

At Mr. Clayton’s suggestion, the Committee recorded its tentative agreement upon fixed annual payments combining interest and amortization, with an initial period of grace of 5 years before payments were begun. Mr. White called attention to the Technical Committee’s calculation that an initial period of grace of 5 years would reduce the effective interest rate on a 2 percent loan to about 1.63 percent, and Mr. Taylor⁸² and Mr. Collado pointed out that if waivers of interest were in fact found to be advisable the rate of interest would be even lower.

The Committee recorded its tentative agreement not to consider a clause providing for the review of interest rates during the period of the credit.

Waiver of Interest and Postponement of Amortization

Mr. Eccles emphasized the necessity of avoiding those difficult default situations which had characterized previous loans, when both creditor and debtor were agreed that some waiver of service charges might be advisable, but were prevented from acting by the terms of the loan contract. It might be advisable to include a clause giving the British the privilege of requesting the deferment or waiver of the annual service charge, with the U.S. reserving the right to waive or defer the interest and amortization charges. Mr. White agreed that the provision for a waiver should be granted in the Act of Congress which provided funds for the credit, but he would hesitate to make such a provision a part of the contract with the U.K., because of the difficulties inherent in such a provision. He pointed out that the decision to waive interest or postpone amortization would fall upon some administrative official, and in view of the differences in opinion which always arose when the future financial position of the U.K. was being considered, that official would be placed in a difficult position. He agreed with Mr. Eccles that some method of obtaining flexibility was advisable, but stressed that both the technical problem of ascertaining the future position of the U.K. balance of payments and the administrative problem of deciding whether conditions merited a waiver or postponement, were very difficult. It would be helpful if some relatively objective criterion could be developed for determining whether the waiver clause should be put into effect in any given year. Mr. Clayton suggested that one guide might be the degree to which the previous year’s balance of payments position of the U.K. had presented difficulties. Mr. Gardner⁸³ suggested that the gold and foreign exchange reserve of the British would indicate the extent to which there was pressure on sterling because of the balance of payments situation.

After some discussion, it was tentatively agreed that the waiver of interest and postponement of amortization in difficult years was accepted in principle, and that the Technical Subcommittee would be asked to suggest various types of objective criteria by which the principle might be implemented.

Seniority of U.S. Obligation

Mr. Vinson said that although in conversations with the British he had strongly pressed for priority on the U.S. credit, he nevertheless understood the British position that they had a fiduciary responsibility to the creditors which were also members of British Empire. He thought that the American position on the matter required further consideration. Mr. Clayton said that he felt similarly, and Mr. Eccles agreed.

Amount of the Credit

Mr. Vinson observed that time would not permit the Committee to reach a decision with respect to the amount of the credit to be granted, but asked Mr. White to clarify the estimates of the Technical Subcommittee and point out their relation to the amount of financing required by the U.K. Mr. White stated that if the Technical Committee had correctly estimated the size of the three-year deficit at $3.3 billion, the amount of assistance required from the U.S. to meet a part of this deficit was relatively small. It was to be presumed that about $1.0 billion of the deficit would be met out of borrowings from other countries, primarily the Union of South Africa and Canada. Of the remaining $2.3 billion, about $1.5 billion was to be added to the sterling balances remaining after the reductions mentioned by Lord Keynes, and estimated by him at about $7.2 billion. This meant that less than $1.0 billion would be required from the U.S., if the only purpose of the credit was to cover the transition deficit of the U.K. Mr. Clayton felt that this analysis should be modified on two points: The reduction of the sterling balances as outlined by Lord Keynes presumably entailed some drain on the gold and dollar balances of the U.K.; in addition, the British had estimated the deficit at $5.0 to $6.0 billion, rather than the $3.3 billion suggested by the Technical Committee.

Mr. Eccles gave the Chairman a memorandum regarding the proposed credits.⁸⁴ Mr. Vinson stated that the time and place of the next meeting would be announced at a later time.

81. Not printed.
82. Amos E. Taylor, Director, Bureau of Foreign and Domestic Commerce, Department of Commerce.
83. Walter R. Gardner, Federal Reserve Board.
84. Not found in Department files.