NAC files, lot 60 D 137, “Minutes”

Minutes of the 198th Meeting of the National Advisory Council on International Monetary and Financial Problems, Held at Washington, May 18, 1953


Secretary G. M. Humphrey (Chairman), Treasury Department

Mr. W. Randolph Burgess, Treasury Department

  • Mr. Andrew N. Overby, Treasury Dept. (and International Bank)

Mr. Herman L. Phleger, State Department

  • Mr. Jack C. Corbett, State Department

Secretary Sinclair Weeks, Commerce Department

  • Mr. Samuel W. Anderson, Commerce Department

Mr. William McC. Martin, Jr., Board of Governors, Federal Reserve System

Mr. Arthur W. Marget, Board of Governors, Federal Reserve System

General Glen E. Edgerton, Export-Import Bank

  • Mr. Walter C. Sauer, Export-Import Bank

Mr. Melville E. Locker, Mutual Security Agency

Mr. Frank A. Southard, Jr., International Monetary Fund

Mr. John S. Hooker, International Bank and International Monetary Fund

Mr. George H. Willis (Acting Secretary)

  • Mr. C. L. Callander (NAC Secretariat)

[Here follows a table of contents.]

1. Interest Rates on U.S. Government Foreign Loans

The Chairman introduced the subject of the meeting and asked Mr. Burgess to outline the problem for the members of the Council.

Mr. Burgess stated that interest rates have been rising for some time, fundamentally because of conditions of supply and demand in the money market. He described the very heavy demand for funds so far in the first half of 1953 and pointed out that even taking into account the recent rise, the level of interest rates in the market is still low historically. He felt that the level of U.S. Government foreign lending rates had not yet fully adjusted to the conditions of the current tight money market. He noted that the Administration has a philosophy on Government lending different from that of the previous Administration—namely that there should be as little Government lending as possible. Government lending should be restricted to really marginal loans that would not be taken by private [Page 322] lenders. Obviously, if Government interest rates are lower than interest rates in the private market the Government will be making more loans than it ought to make.

Mr. Burgess said that the Staff Committee had explored the problem thoroughly, and as a result of its work, is presenting to the Council two alternative actions with respect to medium and long-term loans to foreign governments or guaranteed by foreign governments or central banks. The first alternative would fix rates on loans of more than two years maturity at 2 percent above the current yield of Government securities of comparable terminal maturities, and would result in a rate at the present time of about 5 percent on 20-year loans. The second alternative, which would be a continuation of past policy, would increase rates to cover the recent increase in the cost of money to the Government, and would result in a current rate of about 4¼ percent on 20-year loans.

Mr. Overby noted that the differences of opinion in the Staff Committee related only to paragraph 1 (a) and 1 (b) of the recommended action. He understood that some agency representatives in the Staff Committee had preferred alternative 1. (b) rather than 1 (a), but he was not sure whether these staff views represented the opinions of the Council members. There was no disagreement in the Staff Committee with respect to paragraphs 2 and 3.

The Chairman stated that the question before the Council was the adoption of either 1 (a) or 1 (b), in addition to paragraphs 2 and 3, with the thought that the rate would be adjusted from time to time if necessary.

General Edgerton commented that there was some difference of opinion within the Export-Import Bank on the matter, but that he preferred alternative 1 (b), on the understanding that it would provide a floor for interest rates and would not preclude higher rates than indicated by the formula. He observed that Export-Import Bank loans are made with varying objectives in mind, and that in the case of some of these loans it would not be expedient or in the best interests of the United States to be bound by a rigid interest rate formula. He felt that because of the importance of the special considerations sometimes involved in Export-Import Bank loans, alternative 1 (a) was somewhat too rigid. The adoption of alternative 1 (b), viewed as a floor to interest rates, would preserve the necessary degree of flexibility.

Mr. Burgess asked General Edgerton what effect the adoption of alternative 1 (b) would have on Export-Import Bank rates in relation to International Bank rates. General Edgerton replied that if Export-Import Bank rates were set at the floor, they would be lower than International Bank rates. This would be the case where the special considerations are important. For example, he referred [Page 323] to the development of strategic material production as a defense objective in which the U.S. has a special interest which would justify lower rates by the Export-Import Bank.

The Chairman advanced the view that in most cases Export-Import Bank rates ought to be as high as International Bank rates. General Edgerton agreed with this view. Mr. Overby pointed out that alternative 1 (a) would bring the rates of the two institutions to approximate equality.

The Chairman was of the opinion that the rule adopted should deal with the most commonly occurring cases, and that under special circumstances exceptions to the rule could be made. This would be preferable to the adoption of a rule that would cover the exceptional cases but not the usual cases. With this understanding, General Edgerton stated that he had no important reservations to alternative 1 (a).

Mr. Phleger stated that the Department of State preferred alternative 1 (a) and felt that exceptional cases in which lower interest rates are indicated ought to be handled as they arise. Secretary Weeks also favored alternative 1 (a), and added that Export-Import Bank and International Bank rates should be equal. Mr. Martin joined in supporting alternative 1 (a) and felt that, on the whole, it is better to make downward rather than upward exceptions if necessary. There was general agreement that the rates of the Export-Import and International Banks should be approximately equal except in unusual cases.

The Chairman then proposed that the Council adopt alternative 1 (a) with the understanding that exceptional cases in which lower interest rates were indicated would be treated as they arose, and that the Council also adopt paragraphs 2 and 3 of the recommended action. The proposal was adopted unanimously. General Edgerton, referring to paragraph 2 of the action, called attention to the last sentence, which expressly recognizes one kind of special circumstance that sometimes arises with Export-Import Bank loans.

Action: The following action was taken (Action No. 615):

The National Advisory Council advises the Export-Import Bank that the appropriate interest rate for loans of more than two years maturity to foreign governments or guaranteed by foreign governments or central banks should be 2 percent above the current yield (actual or computed) of U.S. Government securities of comparable terminal maturities (leading to a rate of approximately 5 percent on 20 year loans under present circumstances). Loans not guaranteed by governments should continue to be made at rates at least ½ to 1 percent above the rates applicable to government loans.
The National Advisory Council advises the Export-Import Bank that the appropriate rate on cotton and other short-term [Page 324] credits repayable in less than two years should be 3.5 percent for the current year and that subsequently the rate should be approximately the average rate on short-term loans to business by banks in the United States as computed by the Board of Governors of the Federal Reserve System. If, however, it should appear that a rate so determined would discourage U.S. exports or imports, the matter should be presented to the Council for consideration.
The National Advisory Council advises all other agencies of the Government that the pattern of rates set by them on foreign loans and other foreign credits should conform to the foregoing standards.

Mr. Anderson referred to page 2, paragraph 6, of the paper, concerning the continuation of a differential of ½ to 1 percent on loans made to private entities without government guarantee. He stated his understanding that this paragraph was not intended to fix a rigid spread between guaranteed and unguaranteed loans. Rather, he understood that in the case of unguaranteed loans to private entities, the differential from the guaranteed loan rate might be higher and would be based on the credit standing of the borrower. The Chairman said that it ought to cost more to borrow from the Government than from private sources, so that there would be a penalty on borrowing from the Government. Mr. Burgess observed that the differential noted in the paper between guaranteed and unguaranteed loans should be regarded as a floor, and that in some cases the differential might be much higher than 1 percent.

[Here follows discussion relating to a statement of the Council’s activities January 20–May 14, 1953.]