Foreign Relations of the United States, 1946, General; the United Nations, Volume I

Department of State National Advisory Council Files

Memorandum Prepared by the Staff Committee of the National Advisory Council

NAC–37

[Washington,] January 8, 1946.

Preliminary Draft

The Foreign Lending Program of the U.S. Government

1. It is expected that the International Bank will begin lending operations in the latter half of 1946 and that the Bank will assume the primary responsibility for meeting the world’s international capital requirements which cannot be derived from private sources. With its present membership, the Bank will be able to lend approximately $7.5 billion, the bulk of which probably will be raised in the private capital market of this country. It is expected that loans made during 1946 will constitute only a small proportion of the total lending power of the Bank.

The operation of the International Monetary Fund is important for assuring the conditions favorable to the servicing of international investments and to the encouragement of a free flow of private capital.

2. In July 1945, the Congress, for the purpose of making loans to war-devastated areas during the period prior to the inauguration of the International Bank and for the promotion of American exports and other special purposes, increased the lending power of the Export-Import Bank by $2.8 billion, making its total lending power $3.5 billion. Up to the end of 1945 about $1.6 billion of these funds were loaned or committed and there remained on January 1, 1946, $1.9 billion for making additional loans. [These figures should be revised as of the date this memorandum is used.]²⁷ In addition to the $1.9 billion there will be available during 1946 about $50 million from repayment of principal and an additional sum (possibly $100 million) from the cancellation of earlier commitments.

3. The policy of this Government has been to make Export-Import Bank loans to war-devastated countries only with the greatest care and after careful study of the immediate and minimum needs of the borrower. Among the factors taken into consideration by the Export-Import Bank in making loans of this character are: (1) the urgency of the need of the borrower; (2) the borrower’s own resources; (3) the possibility of obtaining the loan from private sources or from the International Bank; (4) the ability of the borrower to make effective use of the funds; (5) the capacity of the borrower to repay; and (6) the impact of the loan on our domestic economy.

The use of Export-Import Bank loans for financing American exports will be coordinated with the disposal of U.S. surplus military property abroad. Complete coordination of the lending programs of this Government is secured through the National Advisory Council. The NAC will also secure coordination between the foreign lending programs of this Government and the activities of the International Bank insofar as they relate to loans made with American capital.

The Export-Import Bank had by January 1, 1946, committed to European countries only $900 million, practically all for the purpose of permitting Allied Governments to obtain from the United States essential imports which had been going to them on lend-lease. Of these funds $550 million have been committed to France and $100 million each to Belgium and Holland. [Table showing Export-Import Bank commitments.]²⁸

4. A large volume of additional requests for loans have been received by the Export-Import Bank particularly from the war-devastated countries. With the present resources of the Export-Import Bank it is obvious that only the most urgent of these requests can be granted. [Table showing requests for loans.]²⁹

As far as we can see ahead at the present time, the urgent requirements for immediate loan commitments to foreign countries during calendar year 1946 which cannot be met by the International Bank will probably total about $3.5 billion, exclusive of the proposed credit to Britain. To meet these needs the Export-Import Bank will have available during 1946 about $2 billion of uncommitted funds. It is, of course, possible that some of the prospective loans included in the $3.5 billion figure may not materialize in 1946. Whether a large credit to China will materialize during 1946 is not at all certain in view of current political and economic conditions in China. There is some question whether a large credit to the U.S.S.R. will materialize in 1946. Similarly, loans to other countries which now appear likely may not materialize or may be taken by private investors.

Also uncertain is the extent to which private investors in the United States (institutional and other) will be disposed to undertake foreign investments during 1946 without the guarantee of either the International Bank or the Export-Import Bank. Both of these institutions operate on the principle that private capital markets should be protected from undue incursion by Government competition and, in developing their loan projects, both will seek to encourage participation by private investors acting on their own account and risk.

On the basis of these figures the Administration feels that it may be necessary to ask the Congress for an increase of lending power of $1–½ billion for the Export-Import Bank during the calendar year 1946. Although it is too early to make a final decision on this question, it is clear that any increase in lending power that may be requested will not be in excess of the figure mentioned above unless a loan of more than $1 billion is made to the U.S.S.R. Whether it will be necessary to apply to the Congress for a further increase in funds for use in years after 1946 depends entirely upon developments in the world situation which cannot now be foreseen and upon the ability of private investors and the International Bank to meet the world’s urgent requirements for reconstruction and development capital.

It should be pointed out that the figure of $3.5 billion in loan requirements for 1946 represent commitments and not actual amounts loaned or spent. For example, on January 1, 1946, the net outstanding loans of the Export-Import Bank amounted to only $252 million although the total amount committed and loaned was $1.6 billion. Some of the $3.5 billion in commitments contemplated for 1946 will not be made available until 1947 or thereafter. For example, China probably will not be in a position to make large expenditures for reconstruction until well into 1947 although it may be desirable to make a substantial commitment in 1946.

5. The proposed loan to Britain requiring Congressional authorization is a special case but one which is an integral part of the foreign economic program of this Government. The realization of the objectives of the Bretton Woods program, including the early elimination of exchange restrictions and other barriers to world trade and investment,³⁰ requires an immediate solution to Britain’s financial problem. It should be made clear, however, that the proposed loan to Britain in no way sets a precedent for similar loans to other countries.

6. In making foreign loans, it is the policy of this Government to give careful consideration to the effects of our lending programs on our domestic economy. Wherever possible, we discourage the employment of loan proceeds for the purchase of commodities in scarce supply and encourage the purchases of surplus commodities, such as cotton, and commodities in long supply, such as a number of capital goods. Plant capacity and trained labor are now available in many of the war-expanded machinery and equipment industries to handle large foreign orders in addition to all demands of the domestic market.

7. The continuation of our domestic economic controls and export controls during 1946 will prevent purchases financed by foreign loans from exerting undue pressures on scarce items in our economy. It is believed that a foreign lending program adequate to meet the minimum needs of foreign countries need not interfere with our reconversion program or create significant inflationary pressure. The major portion of the loans made in 1946 will be spent over a period of several years. A substantial part of the proceeds of these loans will undoubtedly be spent on capital goods including specialized machinery, the placing and execution of orders for which will consume a considerable amount of time. Actual foreign expenditures financed by loans therefore will represent only a small fraction of the value of cutbacks in government expenditures between V–J Day and the middle of 1946; and insofar as they are for surplus goods or for capital goods for which the plants are already tooled up, they will help maintain markets and employment in the United States during the reconversion period.

8. A basic question to be considered is whether foreign countries will be able to service large American loans and investments. There is little doubt regarding the ability of debtor countries to produce a sufficient export surplus to handle the service charges on American loans and investments after their economies have been fully reconstructed, providing an undue part of national income of borrowing countries is not diverted to military expenditures. Ten years from now production in the debtor countries should be 25 to 50 percent greater than before the war. This increase can be brought about through the modernization of economically backward areas, increased employment, and the utilization of new productive techniques.

The ability of borrowing countries to develop an export surplus sufficient to meet service charges on foreign loans will depend in large measure upon the level of world trade. A high level of world trade will in turn depend upon the maintenance of a high level of world income and a reduction of the barriers to international trade which have grown up in the past. It is expected that the proposed International Trade Organization will play an important role in securing the international economic environment necessary for the maintenance of high levels of world trade. There must also be a world system of multilateral payments if debtor countries are to be able to convert their export surplus with any country into the currency in terms of which their debt obligations must be discharged. It is the purpose of the International Monetary Fund to assure the orderly operation of a system of multilateral payments.

9. The ability of foreign countries to transfer interest and amortization on foreign loans to the United States is very largely a question of our capacity to absorb exports of goods and services from the rest of the world. The problem of meeting service requirements on American foreign loans and investments is not likely to be serious for foreign countries during the next few years while new American investment exceeds interest and amortization on outstanding investments. In the period during which our foreign loans and investments are expanding most rapidly, the additional exports resulting from our foreign investment will be an important factor in maintaining a high level of production and employment. This may well be a period during which the problem of maintaining employment will be acute. At a later stage, when the payment of interest and amortization on outstanding investments exceeds new investments, the American economy will have to adjust itself to receive larger imports of goods and services.

10. The readjustment of the United States economy to receive the service payments resulting from larger foreign investment will depend upon our ability to maintain a high and stable level of employment. On the basis of past relationships between United States national income and foreign payments, our imports of goods and services ten years from now would amount to $9 to $10 billion a year, assuming reasonably full employment and the present level of prices. Furthermore, the natural increase in our population will be an important factor in expanding imports and the depletion of certain domestic resources, if not offset by domestic synthetics, would have the effect of increasing the relation of imports to our national income. It is conceivable that after a time the income from our foreign investment may be necessary to provide us with the raw materials that have become relatively scarce in this country.

27. Brackets appear in the source text.
28. Table not found appended to file copy. Actually the amounts received by Belgium and the Netherlands for lend-lease credits had been $55 million and $50 million, respectively. These countries had also received $45 million and $50 million, respectively, in general reconstruction credits. In 1945 the Export-Import Bank had also authorized loans of $50 million to Norway, $20 million to Denmark, and $100 million in miscellaneous (cotton) credits to certain European countries In addition the Bank had commitments of $105 million to various Latin American countries, and $8 million to Asian nations. These are tabulated in the Export-Import Bank’s First Semiannual Report to Congress for the Period July–December 1945, p. 16.
29. Table not found appended to file copy.
30. For documentation regarding United States proposals regarding the expansion of world trade and employment on a multilateral non-discriminatory basis through the establishment of an International Trade Organization under the auspices of the United Nations, see pp. 1263 herein; Foreign Relations, 1945, vol. ii pp. 1328 ff.; and ibid., vol. vi, pp. 1 ff.