Memorandum by the Director of the Office of Financial and Development Policy (Luthringer) to the Director of the Office of Near Eastern and African Affairs (Henderson)12

Subject: Your Memorandum of June 413 on $120 Million Eximbank Line of Credit for Near Eastern Countries.

This office has reviewed carefully your memorandum, and heartily agrees with your desire to further economic development in the Middle East and to strengthen American prestige there through appropriate economic measures. We would support Export-Import Bank credits in moderate amounts to finance specific and fairly urgent development projects in Near Eastern countries to the extent consistent with the Bank’s limited resources and with other high priority claims upon them. We feel, however, that for the Export-Import Bank to set aside $120 million in the form that you suggest, and for the Department to use this lending power in discussions with Near Eastern diplomatic representatives in the manner suggested in your memorandum, is undesirable, and that the proper agency for the longer range development of Near Eastern countries is the International Bank. These conclusions are based on two main grounds.

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In the first place, your proposal calls for a loan procedure in the Middle East that is different than has been followed in Latin America and in other areas, and different from the Export-Import Bank policy that is now contemplated for the post-war period. It also involves a unilateral approach to economic development which, I believe, is not in line with the economic foreign policy that this Government has been supporting to further economic reconstruction and development in the post-war period.

I am giving below in more detail the reasons why this office feels that your suggested approach to economic development in the Middle East is not feasible within the existing authority of the Export-Import Bank, or within the existing foreign economic policy of this country.

The earmarking that you request for the Near Eastern countries would be an abnormal procedure that has no precedent in operations in other areas. I fear that in the discussion in Mr. Collado’s14 office on May 9, to which you refer, you received a misleading impression as to the nature of the provision of Export-Import Bank funds for credits to the American Republics. This figure simply indicated a rough estimate by the Bank of the total credits for Latin America, if the other responsibilities of the Bank, the nature of the loan proposals presented, and the general financial situations in the individual country, justified the extension of a credit. There was no idea of an assignment as between individual Latin American countries and there was no idea that the State Department would tell individual Latin American countries that so much in the way of loans had been reserved for them.
In several places in your memorandum you state or suggest that loans to Middle Eastern countries should be made without too exacting requirements as to the probabilities of repayment. I realize that the question as to what risks the Export-Import Bank may appropriately make involves drawing a fine line, that may shift from country to country and from time to time depending upon economic and political considerations, but in view of the plain intent of Congress as expressed in the Export-Import Bank legislation, neither the Export-Import Bank, nor the Department of State as a member of the Bank Board, could justify to Congress a general policy of loans to Middle Eastern countries that did not conform to the Congressional mandate of offering “reasonable assurances of repayment” (section 2(b) of the Export-Import Bank Act of 1945).
You refer to the use of Export-Import Bank credit in connection with diplomatic negotiations with France, the Netherlands, Czechoslovakia, China and other countries, and suggest these loans are a [Page 12]precedent for your suggested loan policy in the Middle East. I feel, however, that there is a very important distinction between the political aspect of these credits, and the type of political lending in the Middle East suggested by your memorandum, in which you state that “NEA could gain important diplomatic objectives through the judicious use of credits to countries deserving the goodwill and support of the U.S. and of the U.N.” The countries you mention suffered great physical destruction during the war, and in most cases their present holdings of gold and foreign assets are far below what they were in 1939. To raise economic activity within the next couple of years to anywhere near the level of 1939 requires substantial outside assistance, which pending the establishment of the International Bank, has had to come in large part from the Export-Import Bank. This was explained in detail to Congress in the summer of 1945 when the request was made for an increase of $2–¾ billion in the Bank’s, lending power. Without this Export-Import Bank assistance there seemed little hope for the early economic reconstruction or the attainment of political stability. Our objective was not to buy the support of these countries, but to restore economic activity in those countries in the belief that only by the restoration of normal economic conditions could Democratic governments of western or neutral orientation be expected to survive, or could there be an early realization of the American program of restoring international trade on a multilateral basis. My feeling is that your memorandum tends to exaggerate and over-emphasize the immediate diplomatic and psychological impact of an Eximbank loan in the borrowing country, which is, in any case, of a largely transitory nature and would certainly not have justified credits of the magnitude which we have been making. Our policy in making the reconstruction loans to which you refer has rather been based on the assumption that long-term political benefits would accrue to the United States from the economic recovery and political stabilization which would result from the loan.
It has been the announced policy of this Government for some time past that the reconstruction loans of the Export-Import Bank were in large part to be of an interim nature to meet the most urgent needs up to the time when the International Bank had begun operations. This Government played a leading part in the establishment of the International Bank, and the operations of this Bank are an integral part of our foreign economic policy.
In a report of the NAC submitted to President Truman on February 21, 1946, and transmitted to Congress by the President on March 1, 1946, with his endorsement, the following statements were made:

“The International Bank will be the principal agency to make foreign loans for reconstruction and development which private [Page 13]capital cannot furnish on reasonable terms. It provides a means by which the risks as well as the benefits from international lending will be shared by all of its members. It is expected that the International Bank will begin lending operations in the latter half of 1946 and that during the calendar year 1947 the International Bank will assume the primary responsibility for meeting the world’s international capital requirements that cannot be met by private investors on their own account and risk.”

“It is the established policy of the United States Government carefully to scrutinize each loan application to determine that the need is urgent and that the funds can be obtained from no other source than the Export-Import Bank.”

In line with this policy it has been the position of this office, which is supported by Assistant Secretary Clayton, that the Export-Import Bank should get out of the field of long-term developmental credits as soon as possible, leaving that business to the International Bank, and should make the larger part of its loans in the form of exporters credits which presumably would run in most cases not over ten years, and generally would be for a shorter period.
This office questions whether the unilateral approach of your memorandum to economic development in the Middle East is in accord with the policy of this Government of seeking world economic development through international action Statements on page 7 of your memorandum suggest that Export-Import Bank loans should be used as political weapons to compete with both Great Britain and the U.S.S.R. in the Middle East. It is of course possible that the U.S. may ultimately be forced to such an approach to Middle Eastern problems, particularly as regards the U.S.S.R., but as long as the present policy of this Government is maintained of seeking international action, to offer credits to the Middle East with the idea of competing with British and Soviet influence appears to this office to be out of accord with our foreign policy. Until we have come to the conclusion that that policy is not workable, it would seem to this office that it would be quite inappropriate to adopt a loan policy along the lines that you suggest. Even if the international approach with Soviet cooperation proves unsuccessful, it is our belief the most appropriate means of stimulating economic development in the Middle East, of strengthening the economies of those countries, and of improving the ties between them and the western world, would also be through the International Bank, in which Great Britain and this country are the principal contributors, rather than through a unilateral approach.
We recommend that in discussions with Middle Eastern countries Department officials explain the limited lending authority of the Export-Import Bank, and the primary responsibility of the Bank for meeting the urgent reconstruction needs of devastated countries and of countries that have had serious losses of gold and foreign exchange [Page 14]in recent years. We should also point out that the International Bank was established in large part through American initiative, that most of the lending power of the Bank will probably come from the U.S., and that through that Bank the major part of the development capital of the world, not available from private sources, is to be sought. Such an approach will indicate the interest of the U.S. in economic development in the Middle East, will make clear the economic power of this country to finance such development, and at the same time will make clear that our approach to world economic problems is on an international basis involving collaboration with other great powers.
George Luthringer

[Mr. Henderson set forth various observations on the Near and Middle East in an address delivered at Los Angeles on September 19; for text, see Department of State Bulletin, September 29, 1946, pages 590, 593.]

  1. Approved by the Assistant Secretary of State for Economic Affairs (Clayton) on June 24.
  2. Not printed, but see bracketed note, supra.
  3. Emilio G. Collado, Deputy on Financial Affairs to Mr. Clayton.