Foreign Relations of the United States, 1955–1957, Foreign Economic Policy; Foreign Information Program, Volume IX

110. Minutes of the 228th Meeting of the National Advisory Council on International Monetary and Financial Problems¹

Washington , May 9, 1955

• Mr. W. Randolph Burgess (Acting Chairman), Treasury Department
  • Mr. Andrew N. Overby
  • Mr. George H. Willis
  • Mr. Henry J. Bittermann
  • Mr. John O. Hally
• Mr. Jack C. Corbett, State Department
  • Mr. William V. Turnage
• Mr. Marshall M. Smith, Commerce Department
  • Mr. Clarence I. Blau
• Gov. M. S. Szymczak, Board of Governors, Federal Reserve System
  • Mr. Lewis N. Dembitz
• Gen. Glen E. Edgerton, Export-Import Bank
• Mr. D. A. FitzGerald, Foreign Operations Administration
  • Mr. Jack F. Bennett
  • Mr. Leland A. Randall
• Mr. John S. Hooker, International Bank
• Mr. Gwynn Garnett, Department of Agriculture, Visitor
• Mr. Oscar Zaglits, Department of Agriculture, Visitor
• Mr. Percival F. Brundage, Bureau of the Budget, Visitor
• Mr. E.C. Hutchinson, Bureau of the Budget, Visitor
• Mr. Raymond J. Saulnier, Council of Economic Advisers, Visitor
• Mr. CD. Glendinning, Secretary
  • Mr. C.L. Callander, NAC Secretariat

1. Terms of Loans Under Public Law 480 and Public Law 665

The Chairman introduced NAC Document No. 1784, concerning the terms of loans under P.L. 480 and P.L. 665. Mr. Glendinning described the current negotiations with the Japanese for a loan under P.L. 480, pointing out that the issues presented in the paper were involved in the negotiations but had application to other situations as well. The immediate issue was whether the option of the borrower as to currency of repayment under a P.L. 480 loan should be modified. Present loan agreements permit the borrower to select the currency of repayment at the beginning of the contract, but permit him to change only from local currency to dollars, and require him to make all future payments in dollars as a condition of receiving the lower interest rate applicable to dollar repayments. It was now proposed to modify the option arrangement to permit the borrower to exercise a choice as to currency of repayment and as to interest rate, with respect to each separate payment. The Japanese had insisted that the loan agreement provide for repayment in dollars for reasons peculiar to their case, and desired this modification of the option to make their repayment obligation flexible. A related issue was whether such modified option terms should be applied to loans under P.L. 665 as well as under P.L. 480. A separate and general issue was possible easing of the interest terms in these loans.

Mr. Garnett ² expressed the concern of the Department of Agriculture about the problem of disposing of agricultural surpluses under the P.L. 480 program. Agriculture favored the modification of the repayment option because it was felt that this was necessary to enable the Japanese negotiation to be concluded successfully and would materially assist the negotiation of other sales of surplus commodities. Agriculture also favored a reduction of the rate of interest on loans from the proceeds of such sales to 3 percent, regardless of the currency of repayment. Mr. Garnett said that Agriculture had no position on whether the terms of P.L. 665 loans should be altered to contain the same repayment option as those under P.L. 480.

Mr. FitzGerald indicated that if changes are made in the terms of P.L. 480 loans, FOA would want the same terms for loans under P.L. 665 because of the advantage of uniformity in avoiding confusion and difficulty in administration of the loan programs. FOA thought it undesirable to make further concessions as to the interest rate, and preferred to retain the 1 percent differential. FOA felt also that present option arrangements had not presented difficulties in the loan agreements negotiated thus far, and feared that if the change were made for Japan the new terms would have to be extended to borrowers under existing agreements in cases in which the borrowers had originally been offered an option as to the currency of repayment. FOA would therefore prefer to see the option provision unchanged.

Mr. Corbett informed the Council that the Department of State favored the proposed change in the option arrangements, and felt that it would be advisable to extend such changed terms to P.L. 665 loans, including existing loans to countries which originally had had an option. State would prefer lower interest rates than the present 3 and 4 percent, but also favored a spread of about 1 percent in order to retain the incentive to repay in dollars rather than in local currency. The Chairman commented that in terms of the cost of money to the Government 3 percent for dollar repayment represented an irreducible minimum, especially in view of the initial grace period on interest accruals.

General Edgerton indicated that while the Export-Import Bank did not have a strong direct interest in the matter, he would prefer to see the option arrangements unchanged and would like to see the spread in the interest rate maintained. Governor Szymczak expressed agreement with the FOA position. Mr. Smith expressed agreement with the FOA position on the option and on the interest rate, but did not agree that uniformity of terms between the two types of loan was necessarily desirable. Mr. Brundage indicated that the Bureau of the Budget felt satisfied with the present arrangement.

Mr. Garnett pointed out to the Council that the proposed sale to Japan was estimated at $85 million, and stated that he feared a Council decision against the proposed two-way option would further delay the negotiations. The Department of Agriculture considered this a very important issue.

Mr. Overby commented that the purpose of the P.L. 480 program is to dispose of agricultural surpluses and that difficulty in doing so would constitute a reason for a change in the existing Council position. He inquired why it would be necessary to extend changed option terms to P.L. 665 loans. Mr. FitzGerald replied that administrative simplicity was one argument, and pointed out that many P.L. 665 loans are made from local currency derived from the sale of agricultural surpluses. FOA feared that if the loan terms under P.L. 480 were materially softer than those under P.L. 665, FOA might experience difficulty in administering its agricultural surplus disposal program.

The relationship of the two programs was discussed further and the probable effect of the two-way option on the amount of dollar repayments under loan agreements was discussed. It was pointed out in this connection that under the existing option countries electing to repay in dollars are required to commit themselves to dollar repayment for the duration of the loan agreement in order to obtain the benefit of the lower interest rate, and that this might deter countries from electing to pay in dollars because of an understandable reluctance to commit themselves for long periods in the future. It was argued that the two-way option would enable a borrowing country to repay dollars at the lower rate of interest during any period in which its balance-of-payments position was favorable, while leaving open an avenue of retreat to local currency repayment should the balance-of-payments position become less favorable. Therefore, it was argued that it was likely that the U.S. would collect more dollars under the two-way option than under the existing arrangement.

Mr. Hooker reported that the management of the International Bank had expressed concern about the terms of the P.L. 480 loan to Japan. The IBRD would like to see the loan made because the Bank hopes to make an agricultural loan to Japan, but is unwilling to proceed until the current loan negotiations are settled. The Bank felt that unless the two-way option proposal is extended to Japan, the IBRD might have difficulty in extending its contemplated credit, since the Bank would view less favorably a Japanese commitment to repay a P.L. 480 loan in dollars than a commitment to repay under the two-way option proposal.

In the course of subsequent discussion there was general agreement on the desirability of maintaining a differential in the interest rate terms and for retaining the present rate structure of 3 and 4 percent. While there was no complete agreement with respect to the two-way option proposal and uniformity of terms as between P.L. 480 and P.L. 665 loans, there was general agreement that it would be desirable to find some compromise solution which would be acceptable to the International Bank and would not interfere with its possible extension of credits, while at the same time permitting successful conclusion of the Japanese negotiations. The Chairman summarized the discussion and suggested that the Staff Committee meet in the near future to work on a possible solution, and in the interim suggested further consultation with the International Bank. The Council agreed with this suggestion. (The Staff Committee met on the following day, May 10, 1955, and reached agreement on a recommendation to the Council which was approved by a telephone poll concluded on May 11, 1955. See Staff Minutes No. 446³ and NAC Action No. 783.⁴)

[Here follows discussion of the application of the American Overseas Finance Corporation for an Export-Import Bank guarantee.]

1. Source: Department of State, NAC Files: Lot 60 D 137, Minutes. For NAC Use Only.
2. Gwynn Garnett, Administrator of the Foreign Agricultural Service, Department of Agriculture.
3. Infra .
4. NAC Action No. 783 reads:

   “The National Advisory Council advises the Director of Foreign Operations that NAC Actions No. 730 and No. 740 are hereby amended so that loan agreements under Public Law 665 and Public Law 480 may give the borrowing government the right, with respect to each payment of interest and amortization, to elect payment in dollars or its own currency and to apply to each such payment the interest rate applicable to the currency in which payment is made. Inasmuch as existing loan agreements were offered to signatory governments as being standard for loans under these statutes, in the interest of uniformity and equal treatment to borrowing governments, and in furtherance of the objectives of the aforementioned Acts, the Council further advises that the existing loan agreements with countries that were originally offered an option as to currency of repayment should be modified to provide similar option rights to the governments concerned.” (Department of State, NAC Files: Lot 60 D 137, Actions)