NAC files, lot 60 D 137, “Minutes”

Minutes of the 192d Meeting of the National Advisory Council on International Monetary and Financial Problems, Held at Washington, May 22, 1952 1

confidential

Secretary John W. Snyder (Chairman), Treasury Department

Mr. Willard L. Thorp, State Department

Mr. Jack C. Corbett, State Department

Mr. J. J. Stenger, State Department

Mr. J. Thomas Schneider, Commerce Department

Mr. Robert E. Simpson, Commerce Department

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

Mr. Lewis Dembitz, Board of Governors, Federal Reserve System

Mr. Herbert E. Gaston, Export-Import Bank

Mr. Bernard Bell, Export-Import Bank

Mr. Edward Lynch, Export-Import Bank

Mr. Victor F. Hasenoehrl, Export-Import Bank

Mr. Harlan Cleveland, Mutual Security Agency

Mr. Melville E. Locker, Mutual Security Agency

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

Mr. Walter C. Louchheim, Jr., Securities and Exchange Commission

Mr. Andrew N. Overby, Treasury Department

Mr. George H. Willis, Treasury Department

Mr. Elting Arnold, Treasury Department

Mr. George Bronz, Treasury Department

Mr. Henry J. Bittermann, Treasury Department

Mr. William H. Wynne, Treasury Department

Mr. C. Dillon Glendinning (Secretary)

Mr. C. L. Callander, NAC Secretariat

Mr. Sidney B. Wachtel, NAC Secretariat

Mr. James W. Westcott, NAC Secretariat

[Page 240]

[Here follow a table of contents and discussion of proposed Export-Import Bank loans to American and Foreign Power Subsidiaries and the Paulista Railway in Brazil.]

2. Position Paper Concerning the International Finance Corporation

Mr. Glendinning stated that the management of the International Bank has recently completed its report to ECOSOC on the proposal for an International Finance Corporation, and that the report is to be considered at the coming session of ECOSOC. The Bank’s report,2 which is framed in general terms, concludes that there is an “important gap in the existing international financial machinery for financing economic development” in that there is no provision in the existing machinery for equity financing. The report proposes that an International Finance Corporation would make equity investments and loans not guaranteed by governments, and suggest that the financing techniques might cover the entire range of securities, including straight bonds and preferred shares of stock. The report indicates that the extent to which such a Corporation would succeed in generating a flow of private equity capital can be determined only by experience. The Bank’s management feels, however, that an International Finance Corporation would probably be able to stimulate the growth of private enterprise.

Mr. Glendinning observed that the United States Government will be expected to take a position on the Bank’s report in the ECOSOC meetings, and that the paper under consideration (NAC Document No. 1308)3 was prepared as a proposed position paper. In summary, the draft position paper recommends that the United States delegate should welcome the report of the Bank and that the delegate should state that the U.S. welcomes a full discussion of the proposal. The Staff Committee felt that there will be pressure in ECOSOC for further development of the proposal, and wanted to make sure that such further study would be done in the International Bank rather than in ECOSOC. The recommended position would instruct the U.S. delegate to take a position along these lines.

Mr. Glendinning called attention to the alternative language in the position paper, requesting the IBRD either to “draft a charter” or “formulate proposals” for an IFC. He also called the attention of the Council to the paper submitted by the Securities and Exchange [Page 241] Commission,4 which recommended the adoption of the following language:

“The United States Delegate should:

  • “1) State the readiness of his Government to give consideration to a draft of a charter for the International Finance Corporation, provided sufficient other members of the Bank are also interested, so as to assure that there would be an adequate initial capital and a reasonably extended area of operations to warrant further exploration of the proposal, and
  • “2) Recommend that if these conditions are met, ECOSOC should express the hope that the Bank will draw up a charter for an IFC for consideration by the Board of Governors of the Bank in September.”

Mr. Glendinning continued that the representative of the Securities and Exchange Commission on the Staff Committee had submitted this language with the approval of the Commission. The two alternatives in the position paper were submitted by the rest of the members of the Staff Committee. Thus, the question is whether to adopt the SEC language or one of the two alternatives in the draft paper.

Mr. Thorp remarked that State Department’s primary concern is in getting this proposal into the International Bank, on the ostensible grounds that in the field of finance the Bank’s Board is much more competent than the political representatives in ECOSOC and the General Assembly. In adopting such a position in ECOSOC, the U.S. delegate should not refer to the differences in voting arrangements as between the Bank and ECOSOC, but should argue that because this is a technical problem the Bank is the proper place to consider it.

With regard to the SEC proposal, Mr. Thorp commented that he didn’t disagree with the first paragraph. However, he was concerned by the specific instruction that the IFC charter should come before the Board of Governors of the Bank in September. He questioned the desirability of saying that the Board of Governors should discuss the matter in September. The language in the position paper, “at an early date,” appeared to be preferable.

The Chairman agreed it would be expecting too much to require a charter to be completed by September, because setting up an international financial organization isn’t done overnight.

Mr. Cleveland said that the position paper is a good one, and the MSA believes the U.S. Government should go this far in supporting further exploration of the matter. He saw little difference in the language of the three alternatives.

[Page 242]

Mr. Cleveland indicated that it might be interesting at this time to summarize the Congressional situation as a result of the adoption of Congressman Javits’5 proposal by the Committee on Foreign Affairs of the House of Representatives.6 There have been consultations with Mr. Javits within the last few days with the objective of making the language of his amendment more flexible. The two changes under discussion were (1) to add the words “to stimulate economic development” to the purposes of the amendment, and (2) to delete the specific reference to the International Finance Corporation as an affiliate of the International Bank and to substitute the words “any international financing organization created to further the objectives of this section.” This second change would be necessary, he explained, in case the organization is not called the “International Finance Corporation”. It also makes possible the consideration of regional financial organizations of the same character. Mr. Cleveland added that these two changes appear to be satisfactory to Mr. Javits. The amendment makes $100 million available on a permissive “not to exceed” basis. It was generally agreed in the executive branch that no objection would be raised to the amendment in this form.

Mr. Schneider called attention to the fact that the reactions of business and investment communities on the prospects of success of the proposed corporation were not uniform. He quoted from the Bank’s report:

“There was substantial difference of opinions, but it was the view of a considerable, probably the preponderant, group that there was good reason to believe that private investors would be interested in availing themselves of the facilities of the Corporation, and that the Corporation should prove an effective inducement to additional private investment in the underdeveloped areas.

“Among another group the proposal met with complete disfavor. This outright opposition was generally founded on the belief that public funds should not be used for equity investment in private enterprises. Many in this group expressed the view that, where the climate for investment is favorable, ample private funds will be forthcoming. In their opinion, where the climate is not favorable, neither public nor private monies should be invested. Others thought the proposal inherently unworkable; they believed that the public character of the Corporation would be incompatible with participation in private undertakings.”

[Page 243]

Mr. Schneider noted that these opinions resulted from an informal survey of members of the investment communities in Belgium, Canada, France, Italy, the Netherlands, Switzerland, the United Kingdom and the United States. He said the Secretary of Commerce and he both agree with the unfavorable view, since nothing has been shown that warrants the establishment of an International Finance Corporation. However, he added that additional opinions from other investment communities could possibly alter the position of the Commerce Department.

Mr. Gaston was in full agreement with the views expressed by Mr. Schneider. He remarked that he had no reason to suppose that creation of a special fund of this kind, whether or not relying wholly on U.S. funds, would stimulate private investment in other countries. He pointed out that the Bretton Woods Agreement7 established certain lines of action for the International Bank to follow, and that the Bank has been acting under the charter of that authority. He thought it premature to say that this charter and this scope of action is not going to be sufficient to meet the problems of international lending. Mr. Gaston thought it was strange that the International Bank would want to consider this matter, since it would involve the creation of a different sort of institution to make equity and unguaranteed investments—something the International Bank has not been empowered to do itself.

Mr. Martin said he concurred entirely with the views of Mr. Gaston and Mr. Schneider on this matter. The United States has been hearing about this type of investment for five or six years, he commented, but he had seen nothing concrete to support the idea.

The Chairman then brought the discussion back to the disposition of the position paper. He asked if the Council should follow the course suggested by Mr. Thorp and favor referring the matter to the Board of Governors of the International Bank.

Mr. Thorp observed that the problem is a strategic one. The State Department is not prepared to favor the establishment of an International Finance Corporation, but it has to deal with the fact the ECOSOC will be considering the Bank’s report. ECOSOC will also be considering the proposal for an international grant authority. The State Department intends to take a firm position against the proposed international grant authority. There is divided opinion on the IFC proposal, however, and accordingly it was thought [Page 244] desirable to have this matter considered further by the International Bank. State does not want the proposal considered further in ECOSOC.

Mr. Thorp thought it possible that an IFC might be successful. For example, there may be situations in which private investors would be interested, but not to the extent of providing all the capital. The marginal capital could be provided by this Corporation. If the plan works, he added, that would be fine; if not, there would be no harm done.

Mr. Gaston commented that the dollars would then be lost. Mr. Thorp disagreed, saying that if the idea did not work, the corporation would be liquidated. The Chairman observed that it has not been the practice to return money once it has been appropriated. Mr. Gaston continued that he believed the Council should express firm opposition to the Javits amendment to the Mutual Security bill, and should also express the opinion to ECOSOC that, after due consideration, the Council does not believe it feasible to establish an IFC.

Mr. Schneider concurred with this view, but thought there might be a more diplomatic way of expressing the position. He felt, however, that it should be made clear to the United Nations that up to this time the Council has serious doubts about the proposal. Mr. Thorp pointed out that the position paper raises a number of critical questions which would be best dealt with in the International Bank.

Mr. Overby noted that in the informal discussions of the problem in the Bank, the United States had sounded all the notes of caution that should be sounded, including the question of whether the proposed corporation would encourage or discourage private investment. A whole series of questions was raised, he continued, but the United States was the only country to voice them. The management was not swayed much by the questions. The report was made by the management of the Bank and has not been approved by the Executive Directors. Mr. Overby also remarked that he had testified on the IFC proposal before the House Foreign Affairs Committee, but had been unable to persuade Mr. Javits to omit this proposal from the bill. Since he had been unsuccessful both in the Bank and before the House Foreign Affairs Committee, Mr. Overby believed the Council should take a stronger position than the one in the present position paper, if the Council does not intend ultimately to favor the proposal.

Mr. Gaston believed that the tone of the paper was strongly favorable toward the IFC proposal.

Mr. Schneider recalled that the Mutual Security bill before the House requires MSA, TCA, the Commerce Department and the [Page 245] State Department to develop a program for the encouragement of private investment abroad. These agencies have already started on this program. Mr. Schneider did not believe the Government should consider the proposed corporation unless the program fails.

The Chairman asked what position Mr. Schneider would take if the bill is passed by the House and the Senate, including the Javits amendment. Mr. Schneider answered that the executive branch should take a position now in opposition to the corporation. Mr. Martin agreed, and said that the Council should not attempt to postpone the issue.

Mr. Cleveland observed that there really are two different issues here, which are partly a matter of tactics. The tactics proposed by the Staff Committee with respect to the problem in ECOSOC is to keep the matter from being decided in ECOSOC by having it referred to the International Bank, where it can be discussed as a technical problem. MSA favors these tactics regardless of the eventual position of the executive branch on the proposal. U.S. opposition to the proposal in ECOSOC would induce a wave of sentiment there to refer the matter to the U.N. General Assembly, which would fit in with the desires and aspirations of the underdeveloped areas. Mr. Cleveland felt that regardless of the eventual U.S. attitude on the proposal for an International Finance Corporation, getting the matter out of ECOSOC should be a primary concern of the Council.

There is another problem, Mr. Cleveland continued, on the Congressional side. The proposal for an IFC is only one of a number of amendments to the Mutual Security bill. Mr. Wood8 feels strongly that the Administration will be better off the fewer the amendments that are opposed. Since this particular amendment is permissive, MSA believes it would do no harm. No one contemplates that in fiscal 1952 the Administration would transfer $100 million of aid from one place to another. For this reason, MSA believes that the best tactics would be to refrain from opposing the amendment.

There is another strong tactical reason for not making a major issue of this matter in Congress this year, Mr. Cleveland added. Since it is not really known whether an IFC would be a sensible and useful arrangement to fill an apparent gap in international financing and development, it is worthwhile to give the International Bank an opportunity to work the proposal out more completely. For this reason he felt that the Council should reserve its position on the merits of the proposal until it has a specific plan before it.

[Page 246]

Mr. Gaston expressed doubt as to the tactical wisdom of refraining from opposing an unacceptable proposal. If a request for equity financing is a good business proposition, it will be financed, if it is a bad business proposition, it will not be financed. The reason why private foreign investment is not larger is not the failure of foreign countries and international organizations to subscribe to equity capital, but is to be found in a great many obstacles relating to military and political situations and to commercial policies of foreign countries which deter private capital from making equity investment. Both the Export-Import Bank and the International Bank now encourage equity investment abroad, Mr. Gaston continued, because when a loan is made for a project, the investor has a certain amount of protection due to the participation of these two organizations.

Mr. Thorp observed that those are certainly strong arguments on this matter, and he saw no reason why any number of questions on the IFC proposal should not be raised in ECOSOC. However, in view of the problem of the political relationship of the United States with the underdeveloped countries, he believed the proposal would be considered better in the International Bank than in ECOSOC. If the United States goes into the ECOSOC meetings and declares itself flatly against the proposal, then it will be referred to the United Nations rather than to the Bank. The proposal will then be voted upon favorably in the General Assembly, which would put the United States in a continuously embarrassing position. Despite U.S. opposition, he explained, the United Nations can establish an institution that will be a thorn in the side of the United States, because people will want to know why this country is not interested in the institution.

Mr. Thorp reminded the Council that ECOSOC is under instructions from the General Assembly to develop a plan for an IFC. The Chairman pointed out that if the proposal could be moved into another agency, the United States would not have jeopardized its ultimate position.

Mr. Gaston expressed the view that the Council should prepare a position paper indicating very strong doubt that there is anything of value in the proposal. He believed the same representation should also be made to Congress. Since the United States was asked by ECOSOC to take a position on the proposal, Mr. Gaston did not see why it should refer a statement of its position back to the International Bank. The Chairman pointed out that the attempt would be to have the proposal referred by ECOSOC to the International Bank, after which the United States could take its position in the Bank. Mr. Overby agreed with Mr. Gaston that the position paper under consideration takes a favorable attitude [Page 247] toward the proposal; but he also favored the idea of moving consideration from ECOSOC to the Bank.

Mr. Thorp believed that the U.S. delegate should raise questions in ECOSOC on those aspects of the proposal of concern to the United States, but should not take too strong a position against the proposal for fear of failing to get it into the Board of Governors. He then suggested that it would be a good idea to have a working party redraft the position paper in light of the present discussion. Mr. Martin agreed, provided the ultimate objective was to kill the whole project.

Mr. Thorp commented that the State Department was not prepared at this time to take a strong position either for or against the proposal, but wanted to see a more detailed proposal before taking any position.

The Chairman suggested that a working party revise the position paper for resubmission to the Council. In the meantime, he advised the Council members to give the matter considerable thought because of its extreme importance.

Mr. Overby questioned the advisability of the MSA proposal to change the Javits amendment by generalizing the reference to the IFC. Mr. Cleveland replied that the main purpose of the change of language was to avoid Congressional sanction of the proposal in advance of the ECOSOC meeting, so as not to tie the hands of the United States in ECOSOC. Mr. Cleveland pointed out that at the moment, the Council’s record with respect to the Javits amendment consists of the non-committal letter sent by the Chairman to Mr. Javits. If the Council intends to get Mr. Javits to take his amendment out of the bill, a question of tactics needs to be considered.

Mr. Cleveland hoped it would not be recorded that there is a consensus of vigorous opposition to the IFC proposal in the Council. He said the MSA position is similar to that of the State Department.

Mr. Schneider questioned whether the Council should take any position with respect to the legislative proposal. Mr. Cleveland advised the Council that Mr. Harriman had told Mr. Javits that this was the kind of question under the jurisdiction of the Council, and that he would refer it to the Chairman of the Council. The Chairman then wrote to Mr. Javits saying the administration was interested in exploring the proposal but had taken no firm position on the matter. Mr. Cleveland concluded that there is a question now of whether the tone and substance of the letter to Mr Javits should be changed during the present session of Congress.

Mr. Thorp commented that if the proposed amendment goes through in its present form, the U.S. position in ECOSOC would be [Page 248] intolerable. The Chairman observed that if the amendment is passed by the Congress, the Council would be forced to take a firm position. Mr. Cleveland pointed out that the amendment is not contained in the Senate bill at the moment, but he thought Mr. Javits would try to have it introduced on the Senate floor.

The Chairman concluded that the Staff Committee should take another look at the problem, after which the Council would consider it again.

  1. Regarding the establishment and functions of the National Advisory Council, see footnote 2, p. 306.
  2. International Bank for Reconstruction and Development, Report on the Proposal for an International Finance Corporation (Washington, 1952). It was also distributed as U.N. Document E/2215, May 1, 1952.
  3. Dated May 13, 1952, not printed. (NAC files, lot 60 D 137, “Documents”)
  4. Staff Document No. 582 (revised), Supplement No. 1, May 6, 1952 (NAC files, lot 60 D 137, “Documents”).
  5. Jacob K. Javits (R.–N.Y.).
  6. Javits’ proposal was in the form of an amendment entitled “International Finance Corporation” to H.R. 7005, which became the Mutual Security Act of 1952 (66 Stat. 141). This section provided that up to $100 million of the funds allocated for military, economic, or technical assistance could be used for the purpose of subscribing to the capital of an IFC. This amendment was not approved by the Senate and was subsequently deleted in the conference report (H. Report 2031). It was thus not included in the final bill passed on May 23, 1952.
  7. In July 1944, the major nations of the world established a new international monetary system at Bretton Woods, New Hampshire, which was designed to provide a relatively constant exchange rate for international currencies. Both the International Monetary Fund and the International Bank for Reconstruction and Development were created at the Bretton Woods Conference. For documentation on the events surrounding the Conference, see Foreign Relations, 1944, vol.ii, pp. 106136.
  8. Presumably C. Tyler Wood, Associate Deputy Director of the Mutual Security Agency.