Foreign Relations of the United States, 1951, National Security Affairs; Foreign Economic Policy, Volume I

NAC Files, Lot 60 D 137

Memorandum by the NAC Staff Committee to the National Advisory Council

secret

[ Washington ,] April 18, 1951.

NAC Doc. No. 1127

Subject: Financing Foreign Procurement and Development of Strategic and Critical Materials¹

1. The Problem

The division of authority among several agencies for foreign procurement and development of strategic and critical materials has presented the likelihood of a variety of loan programs with diversity of financial policy in this field, and suggests the desirability of a reexamination of the role of various agencies in this field with a view to the proper coordination of the international financial policies of the United States. It is likely that foreign procurement of such materials will constitute an increasingly significant part of the defense program. Furthermore, experience indicates that the search for additional sources of strategic and critical materials often requires expansion or development of supporting services such as transportation, power, housing, etc. The situations range from simple procurement contracts to comprehensive development programs. Presentation of the financial problems will require some description of the statutory and administrative arrangements now prevailing in the field.

2. Statutory Authority

Present activities in this field stem from at least four separate major statutory sources, and a variety of more specialized authorizations:

(a) The stockpile program administered by the General Services Administration under general programs developed by the Munitions Board,^* is essentially directed toward the accumulation in the national stockpile of specified quantities of particular materials as a reserve for war. Authority to make loans in this program stems from Section 305 of the Federal Property and Administrative Services Act of 1949, which authorizes the GSA to make advance payments “only upon adequate security”.

(b) Title III of Defense Production Act, “Expansion of Productive Capacity and Supply”, available for foreign as well as domestic operations, provides for guaranteeing by procurement agencies of loans made by public or private financing institutions (Section 301),^† for direct Government loans to private business enterprises (Section 302), and for “encouragement of exploration, development, and mining of critical and strategic minerals and metals” (Section 303). Power to guarantee domestic loans under Section 301 has been granted to the Federal Reserve Banks under the supervision of the Federal Reserve Board (V-Loan Program), and authority to make direct domestic loans has been given the RFC, both under the general supervision of ODM. There has been no specific delegation of authority under Sections 301–303 in the foreign field, but they are encompassed by the general authority delegated to ODM.

(c) The ECA is authorized under its legislation to promote the production of materials of which the United States is deficient in participating countries, and for this purpose may use the 5 percent counterpart funds.

(d) The general authority of the Export–Import Bank to make loans to promote United States imports makes its funds available for financing the procurement and development of strategic and critical materials.

(e) In addition to these general authorizations, there are a variety of statutory sources of special authority for foreign credits in this field, such as the authority of the RFC in promoting Western Hemisphere abaca (Public Law 683, 81st Congress), the authority of the Atomic Energy Commission to make advance payments, the authority of the CCC to finance various agricultural operations, etc.

3. Discussion

(a) Requirements: The determination of requirements is at present assigned to the Munitions Board with respect to the stockpile program, and to the Departments of the Interior, Commerce and Agriculture under the direction of ODM, with respect to currently required materials. Some discussions have been under way within the Government to clarify the allocation of functions in determining requirements from foreign sources, and in arranging for foreign procurement. The activities of these agencies are supplemented abroad by GSA representatives and by the regular foreign missions (particularly the specialized attachés in the fields of interest of Commerce, Interior and Agriculture). The ECA is planning a sharp expansion of activity in this field, primarily in the form of loans repayable in strategic materials, to be turned over to GSA for the stockpile.

(b) Lending Activities: As noted above, GSA can make loans in the form of advance payments on procurement contracts. The ODM authority cited above has probably not been used as yet to extend foreign credits, and has been limited by a recent decision in the Administration that the statutory authority for direct loans does not extend either to Government-to-Government loans or to the development of ancillary services such as transportation, power, etc. The Export–Import Bank has made and is making development loans for strategic materials projects, typically tied in with GSA procurement contracts. The Defense Production Act authority to guarantee public lending institutions is available, but has not been used in favor of Export–Import Bank. The pattern of ECA financing now emerging is based essentially upon loans in dollars and in local currencies (derived from 5 percent counterpart) repayable by the delivery of strategic materials to the stockpile, such deliveries to be credited on the loan at market prices at the time of delivery.

(c) Available Credit Techniques: The various statutory authorizations overlap, on the one hand, and contain limitations on kinds of financing, on the other hand. Thus, GSA, which can only lend by making advance payments is hardly in a position to finance transportation or other ancillary facilities where the ownership of the ancillary facilities is different from the ownership from the enterprise selling the strategic materials. The ODM authority to make foreign loans is in aid of direct procurement operations, and apparently cannot be used to finance ancillary development under its present legislative authority. GSA’s objective is directed toward the accumulating of stockpile, while ODM’s is toward supplying current industry requirements. The ECA program is limited to activities in participating countries, and to materials for the stockpile, rather than for current use; on the other hand, ECA alone has access to 5 percent counterpart funds without debit to its appropriations. The Export–Import Bank has the widest authority under the law, and is in the best position to carry out direct banking functions such as making payments against shipments of capital equipment, etc., and to service long term loans. However, serious questions would arise whenever a prospective loan is not “bankable” in terms of the Export-Import Bank’s accepted standards.

4. Alternative Lending Arrangements

In broad outline, the following would appear to be the principal alternative arrangements for extending credit for strategic materials. However, it should be borne in mind that the financial techniques used might reasonably vary depending on the allocation of administrative responsibility for determining requirements and carrying out foreign operations in this field.

(1) The Export–Import Bank might act as exclusive loan agents for whatever agencies are administratively responsible for the development or procurement of strategic materials programs in extending foreign credits to finance the production, transportation and storage of strategic materials, utilizing funds available to such agencies, [such credits to be extended on the certification of the programming agency]² [such credits to be subject to review and concurrency by the Bank], in a manner similar to the domestic operations of the RFC under Section 302 of the Defense Production Act.

(2) The Export–Import Bank might act as the exclusive loan agency for the procurement and development of foreign strategic materials, using its own funds for such purposes, but having recourse to guarantees of the type provided for in Section 301 of the Defense Production Act, where risks appear to be greater than those which the Export–Import Bank ordinarily accepts. The Bank would undertake to extend the credit in every case when the programming agency provides a guarantee.

(3) The ECA, GSA, and such other agencies as may make advance payments for the foreign production of strategic materials (including the production of all types of goods and services which may be required to bring such materials to American industry or the national stockpile) should restrict their credit activities to advances repayable in specific commodities in a [relatively] short period of time, [say 6–9 months] [say 3–5 years]. The Export–Import Bank would act as the exclusive lending agency for all other foreign loans.

(4) The present arrangement might be continued under which ECA, GSA, the Export–Import Bank, and such other agencies as may be administratively designated in this field would have authority to extend foreign credits, in a variety of ways, for the procurement of strategic materials and for the development of production and of necessary ancillary services.

Under any of these alternatives, it would appear appropriate that the financial terms and conditions be coordinated in the National Advisory Council.

1. A cover sheet by the NAC Secretary noted that this paper had been prepared “for initial Council discussion,” but had not been cleared with all interested agencies because NAC discussion was scheduled for the April 20 meeting.
2. “A proposal to transfer this responsibility to the Defense Production Administration is under consideration in the Bureau of the Budget. [Footnote in the source text.]
3. The Bureau of the Budget has an amendment under consideration which would substitute a certification procedure (allocation of defense funds, for use under certificates of ODM) for the guarantee procedure with public financial institutions. [Footnote in the source text.]
2. All brackets in this document are in the source text.