NAC Files

Extract From National Advisory Council Document No. 1081


Subject: Financial Policy Questions Re Foreign Assistance Programs Proposed for Fiscal Year 1952

The National Advisory Council Staff Committee submits the following conclusions and recommendations for the consideration of the Council:

Conclusions and Recommendations

(1) Gold and Dollar Reserves of Recipient Countries

(a) U.S. foreign assistance under present conditions should be dictated primarily by considerations of mutual defense. The present policy of not extending grant assistance to European countries for the purpose of increasing gold and dollar reserves should be continued. Where an increase in reserves occurs or where such an increase seems probable the situation will require the most critical examination.

(b) Where in the opinion of the US failure to provide dollar aid would prejudice the defense effort, such aid should not be withheld merely because the US anticipates that one of the effects of such aid would be to increase the reserves of the recipient country.

(c) In general countries participating in the defense effort should not be required to reduce the present level of reserves as a prerequisite for receiving US aid. Where the country is making the maximum contribution to mutual defense an unanticipated accumulation of reserves occurring as a result of the vigorous application of appropriate economic and financial policies should not automatically result in the reduction of aid.

(d) Underdeveloped Areas. In view of the amounts currently contemplated for grant assistance to underdeveloped countries, it is [Page 829] not expected that such assistance is likely to influence appreciably the levels of gold and dollar reserves of the individual recipient countries. Therefore, the programs for these areas would not appear to raise any serious problems relating to reserves at this time.

(2) Counterpart Policy

(a) For End-Use Military Items. It is recommended that, as in the past, counterpart deposits should not be required by recipient countries for end-use military items given on a grant basis. This policy would also appear appropriate for other areas.

(b) For General Economic Assistance. (Alternative Positions)

Alternative A—It is recommended that a mandatory requirement of counterpart funds for economic assistance should be discontinued in fiscal year 1952.

Alternative B—It is recommended that counterpart deposits should be required for all direct grant assistance. It is also recommended that appropriate legislative steps be taken to permit counterpart funds to be used directly for military expenditures where such use would most advantageously facilitate the defense effort.

(c) For Grant Assistance to Underdeveloped Areas

1. In view of the diverse nature of the programs and the varying political and economic circumstances in such areas as the Middle East, South Asia, and Southeast Asia, it is recommended that the administering agencies of grant assistance economic programs should have substantial discretion in determining the extent to which counterpart funds may be appropriately required country-by-country and on the terms and conditions under which counterpart may be expended.

2. In general, it is recommended that counterpart deposits for grant assistance be required at least in those cases where the goods supplied are to be sold through private commercial channels either directly or by the recipient government. In some instances a policy of requiring counterpart deposits for the full amounts of goods supplied may be desirable if in fact this policy should be of value as a means of influencing general monetary and economic policies.

3. Generally, it would appear desirable that where counterpart deposits are required the amounts should be commensurate in value to the dollar costs of the goods supplied. It is suggested that commensurate value be determined by the existing official exchange rates. If, in some of the countries substantial inflation takes place and the existing official exchange rates are out of line, it would be necessary to re-examine in individual cases the appropriate basis for calculating commensurate value of the goods supplied.

4. It is suggested that counterpart deposits be made available to meet the United States local costs of administering the programs but that no fixed percentage of proceeds be assigned for such costs nor that [Page 830] the United States attempt to use such funds for general administrative expenditures of this Government.

3. Loan-Grant Policy

(a) Europe

For the last two years the Council has recommended that extraordinary assistance to Europe should be on a grant basis. There appears to be no reason for changing this policy during the coming year.

(b) Underdeveloped Countries

(1) The basic justification for the magnitude and tempo of the economic assistance programs in Asia, the Middle East and Africa, must rest primarily on political considerations. It is proposed to foster economic development programs in these areas insofar as physical availabilities will permit at a rate faster than the countries might undertake exclusively on a loan basis.

(2) The programs for the fiscal year 1952 are to be regarded as initial steps in a longer-range program whose precise magnitude and form can not be determined at the present time. Moreover, the physical availability of supplies makes it difficult to determine to what extent such programs will be feasible. Under these circumstances it is difficult at this time to arrive at a good judgment as to the appropriate part of any such long-term programs which might be financed on a loan basis.

(3) Where a country is in a position to service a loan and the projects are of the appropriate type, they should be financed by the established lending institutions under their usual terms and conditions. The Executive Branch should not request authority from Congress or appropriations for special categories of loans under this program.

(4) In the 1952 program grants should be made so far as possible for programs which are appropriate for grant financing because of their inherent character, such as technical assistance, STEM, and related projects.

4. Increase in Export-Import Bank Lending Authority

The National Advisory Council recommends an increase of $1.5 billion in the lending authority of the Export-Import Bank as an integral part of the legislative program for foreign financing proposed to be presented by the Administration to the next Congress.

[Here follow 24 pages of detailed exposition and analysis on the four subjects indicated in the recommendations.1]

  1. At its meeting on December 26 (No. 168) the National Advisory Council took action to approve the Staff Committee’s recommendations as set forth here. In the case of (2) Counterpart Policy, the Council chose Alternative B. (Lot 60D137, Box 362)