113. Minutes of the 235th Meeting of the National Advisory Council on International Monetary and Financial Problems1
- Mr. W. Randolph Burgess (Acting
Chairman), Treasury Department
- Mr. George H. Willis
- Mr. John O. Hally
- Mr. Thorsten V. Kalijarvi,
- Mr. Jack C. Corbett
- Miss Matilda L. Milne
- Mr. Thomas C.M. Robinson
- Mr. H.C. McClellan, Commerce
- Mr. James C. Foster
- Gov. M.S. Szymczak, Board of Governors, Federal Reserve System
- Mr. Arthur W. Marget
- Mr. Frank M. Tamagna
- Mr. Edward B. Hall, International Cooperation Administration
- Mr. Frank A. Southard, Jr., International Monetary Fund
- Mr. John S. Hooker, International Bank
- Mr. Earl L. Butz, Department of Agriculture, Visitor
- Mr. Raymond Ioanes, Department of Agriculture, Visitor
- Mr. Oscar Zaglits, Department of Agriculture, Visitor
- Mr. Ralph W.E. Reid, Bureau of the Budget, Visitor
- Mr. Edmond C. Hutchinson, Bureau of the Budget, Visitor
- Mr. CD. Glendinning, Secretary
- Mr. C.L. Callander, NAC Secretariat
1. Exchange Guaranties for Proceeds of Sales Under Agricultural Trade Development and Assistance Act of 1954
The Chairman referred to NAC Document No. 18562 and asked Mr. Butz if he wished to outline the problem for the Council. Mr. Butz recalled that it had been agreed in the Council a year previously that it would be desirable to obtain exchange guaranties on sales and on loans repayable in local currency under the Agricultural Trade Act (P.L. 480, as amended). Since that time considerable difficulty had been experienced in negotiating sales and loan agreements under this Act with exchange guaranties. The current problem was the negotiation with Brazil, which objects to giving an exchange guaranty for a loan repayable in cruzeiros. Mr. Butz indicated that the negotiations might break down on this issue. In view of the difficulties which had been experienced over the past year, Agriculture was proposing as a general policy matter the elimination of exchange guaranties on sales of agricultural commodities under Title [Page 287] I of P.L. 480 and on loans of sales proceeds repayable in local currency. Mr. Butz felt that the practical issue for the United States was of limited significance, since the existing exchange guaranties would be difficult to put into effect, and would have to be renegotiated if exercised.
Mr. Kalijarvi expressed agreement with the proposal advanced by Agriculture. The State Department felt that since the P.L. 480 loans are already quite soft, this additional relaxation would not be of material significance to the United States, while it would probably facilitate the carrying out of the program.
The Chairman inquired as to the effect of this proposal on Mutual Security Program loans. Mr. Hall recalled that the existing terms for Mutual Security loans and for P.L. 480 loans were uniform. ICA opposed the Agriculture proposal to abandon exchange guaranties, but if it were approved by the Council, ICA would favor the same terms for Mutual Security loans. Mr. Hall pointed out that the same commodities are often involved in both Mutual Security loans and P.L. 480 loans, and that under these conditions softer terms of P.L. 480 loans might create difficulties for ICA in placing sufficient aid on loan terms to satisfy the desires of the Congress in this respect.
There was a brief discussion of the effect of the proposed softening on the existing interest rate differential as between repayment in dollars and repayments in local currency.
Mr. McClellan inquired how the proposed change might affect other financial operations, and how it would affect existing loan obligations. Mr. Butz indicated that there was no legal obligation upon Agriculture to reopen existing loan agreements, but he felt sure that the question would be raised. He commented that very few loan agreements had been signed. Mr. Corbett suggested that the fiscal year 1956 be the period in which the new policy would become applicable, noting that no agreements had yet been signed in fiscal 1956 and that only one, the Japanese agreement, had been initialled. The retroactive application of the two-way option decision (NAC Action No. 783)3 was recalled, and it was agreed that pressure from existing borrowers for retroactive application of the change now proposed would probably arise, but that the Council need not decide this question at the present time.
The Chairman stated that the proposed policy change, if adopted, should be discretionary and not mandatory. Mr. Ioanes 4 indicated that Agriculture would not change its policy of lending in dollars [Page 288] when circumstances so indicate, as in the Argentine case, but he felt that cases in which dollar repayment could be required would be fairly rare. The Argentine loan was a special case in that Argentina is normally a competitor of the United States, unlike most borrowing countries.
Mr. McClellan stated that the Department of Commerce would be guided by the opinions of interested agencies, particularly the opinions of the Treasury on the fiscal aspects of the proposal. Commerce would agree reluctantly with the proposal, with the thought that the practical problem was one of obtaining as favorable terms as possible.
The Chairman expressed doubt that the fiscal burden on the United States would be measurably increased by the adoption of the proposed policy. He saw little prospect for dollar repayments, or for local currency repayments that would in fact be substitutes for dollar appropriations.
The Chairman expressed concern over the implication that abandonment of the exchange guaranty would practically eliminate the prospect of dollar loans. Mr. Corbett commented that under the existing situation the exchange risk fell on the borrower or on his government, and that private individuals were reluctant to borrow to meet local expenditures when they had to give an exchange guaranty. For this reason the State Department would expect the abandonment of exchange guaranties to result in increased loans of P.L. 480 proceeds to private investors in foreign countries. He noted that in Brazil private power companies would like to borrow these funds but would not do so if exchange guaranties were required.
Governor Szymczak felt that the Council had no choice but to approve the proposal, since the problem was to obtain the best terms possible. The Chairman indicated that the Treasury Department reluctantly agreed with the proposal with respect to 1956 business on a permissive rather than a mandatory basis, and that the 1955 cases could be considered as they arose.
The Chairman expressed the decision of the Council as giving discretion to the administering agencies to require repayment in dollars, or to allow repayment in local currencies either with an exchange guaranty or when necessary without an exchange guaranty. It was agreed that this decision would apply to fiscal year 1956 business, including the Japanese loan, and that its application to 1955 business would depend on further consideration of individual cases. The Chairman suggested that the action apply only to P.L. 480 loans and that the Council consider the question of applying the same policy to Mutual Security loans at a later date, after a review of the legislative history and taking into account the distinct nature of the ICA program. This was agreed.[Page 289]
It was pointed out that most 1955 loan agreements had not yet been signed. It was noted that the loan agreements are separate from the sales agreements and had been subject to considerable delays in negotiation. The 1955 program covered about $150 million of loans, most of which was represented by agreements not yet signed. The Japanese loan amounted to about one-half of this amount.
Mr. Southard stated that the Council’s decision did not affect exchange rate policy in the Fund, but that the exchange rate applicable to initial sales agreements would affect general exchange rate policy. He commented that this decision might enable Agriculture to obtain a more realistic exchange rate for the initial sales transactions.
The following action was taken (Action No. 826):
“The National Advisory Council offers no objection to sales of agricultural surpluses under Public Law 480 and loans of local currency proceeds of such sales without exchange guaranties, when in the judgment of the administering agencies the objectives of the program would be jeopardized by an attempt to obtain an exchange guaranty. It is understood that this discretionary policy would apply to sales and loan agreements beginning with the fiscal year 1956.”