115. Minutes of the 239th Meeting of the National Advisory Council on International Monetary and Financial Problems1
- Mr. W. Randolph Burgess (Acting
Chairman), Treasury Department
- Mr. Andrew N. Overby
- Mr. Elting Arnold
- Mr. Philip P. Schaffner
- Mr. Henry J. Bittermann
- Mr. Thorsten V. Kalijarvi,
- Mr. William V. Turnage
- Mr. Thomas C.M. Robinson
- Mr. Marshall M. Smith, Commerce
- Mr. Clarence I. Blau
- Gov. M.S. Szymczak, Board of Governors, Federal Reserve System
- Mr. Lewis N. Dembitz
- Mr. Lynn U. Stambaugh,
- Mr. Charles Shohan
- Mr. John D. Hollister,
International Cooperation Administration
- Mr. Hale T. Shenefield
- Mr. Leland A. Randall
- Mr. Frank A. Southard, Jr., International Monetary Fund
- Mr. John S. Hooker, International Bank
- Mr. Ralph W.E. Reid, Bureau of the Budget, Visitor
- Mr. Edmond C Hutchinson, Bureau of the Budget, Visitor
- Mr. Gwynn Garnett, Department of Agriculture, Visitor
- Mr. Oscar Zaglits, Department of Agriculture, Visitor
- Mr. George H. Willis, Acting
- Mr. C.L. Callander, NAC Secretariat
1. Terms of Loans under Agricultural Trade Development and Assistance Act (P.L. 480)
The Council met to reconsider the exchange guaranty aspects of the terms of loans under the Agricultural Trade Development and Assistance Act (Public Law 480). At the request of the Chairman, the Acting Secretary read the text of the Council’s previous Action on this subject (NAC Action No. 8262). The Chairman then reviewed briefly the factual background of the decision taken in Action No. 826, to allow the administering agencies discretionary authority to negotiate loan agreements without exchange guaranties when, in their opinion, the objectives of the program would be jeopardized by insistence on an exchange guaranty. The Chairman then asked Mr. Hollister if he cared to comment.[Page 293]
Mr. Hollister recalled that he had been out of the country at the time of the earlier Council consideration of this matter (see Council Minutes No. 2353), and that upon reflection on the implications of Action No. 826, beyond the Brazilian case, he had requested further Council discussion of the matter. He felt that to the greatest possible extent the P.L. 480 program should be conducted so as to minimize the dollar cost to the United States, an objective not likely to be served by negotiating loans without exchange guaranties. He feared that the waiver of the exchange guaranty in the Brazilian case pursuant to Action No. 826 was likely to touch off a chain reaction affecting both future P.L. 480 loans and the foreign aid program. He noted that it was now proposed to waive the guaranty in the case of the Japanese loan, and felt that the pressure would grow to make all P.L. 480 loans without exchange guaranties. Such a development would make it very difficult for ICA to lend foreign currencies derived from sales of commodities under Section 402 of the Mutual Security Act, as long as exchange guaranties were required on such loans. Even without the waiver of the guaranty, the P.L. 480 program had already become somewhat competitive with the Section 402 program. He felt that in view of the difficulty of treating different foreign countries in different ways, it would be in fact very difficult to apply the waiver of the guaranty only to exceptional cases.
Mr. Kalijarvi said that he felt that the Council had taken NAC Action No. 826 on a general policy basis rather than with respect to the Brazilian case alone. Mr. Garnett agreed, and said it was difficult to handle P.L. 480 loans on an individual basis, and that Agriculture would prefer as a general matter not to ask for exchange guaranties unless special reasons existed for requiring harder terms. The Chairman pointed out that such an approach would not be consistent with NAC Action No. 826, which provided for waiver of the guaranty only when it was considered that a guaranty would jeopardize the objectives of the program.
Mr. Garnett felt that in the Japanese case no exchange guaranty should be required because insistence on it would, in his opinion, jeopardize the sale of the surplus commodities. He felt that the requirement that the United States consider the economic position of the borrowing countries with respect to the use of the foreign currency proceeds of the loans was a more significant source of “softness” than the lack of an exchange guaranty. Mr. Overby recalled that at Council Meeting No. 235, Agriculture and State had expressed the view that the lack of an exchange guaranty would have little effect on the “softness” of the loans.[Page 294]
Mr. Smith indicated that Commerce was dubious about waiving the exchange guaranty and felt that there could reasonably be a difference between the aid program and the program for disposing of surplus commodities. He felt that there should be an element of incentive to encourage the disposal of surpluses under P.L. 480, over and above the grants and loans in the aid program. Gov. Szymczak, on the other hand, felt that both programs should be put on the same basis despite the differences between them because they both appeared the same from the point of view of the borrowing country.
In response to a question from Mr. Hollister, Mr. Zaglits4 explained that P.L. 480 essentially provides for sales of surplus commodities against foreign currencies and does not require exchange guaranties. In negotiations regarding the use of the local currency proceeds, Agriculture had tried to obtain exchange guaranties, and had encountered difficult negotiating problems. In the Brazilian case negotiations had gone on for about a year and it had become clear that no agreement was possible if an exchange guaranty was required. Mr. Garnett, commenting on the Japanese case, indicated that Japan was sensitive to interest rate considerations and might not accept the waiver of the exchange guaranty even if offered.
Mr. Stambaugh felt that the exchange guaranty might not be of too much importance because only a portion of the foreign currency proceeds could be used for U.S. Government purposes, and the balance would presumably be loaned out for the economic development of the borrowing countries. Mr. Hollister voiced objection to allowing the borrower to set the exchange rate at which repayments would be made. Mr. Reid5 said that he felt that in its previous discussion the Council had considered the Brazilian case the exception rather than the rule, and recalled that the Council had at that time decided that the waiver of the guaranty would not apply to loans under the Mutual Security Program. Mr. Southard felt that it might be feasible to have different standards for loans under the two programs, in view of their differing purposes.
The Council discussed the question of the probable value to the U.S. Government of foreign currency repayments, in terms of whether the U.S. Government had need for the foreign currencies and in terms of the requirement that the U.S. take into consideration the economic condition of the borrowing countries. The Chairman expressed the opinion that in many cases the U.S. might obtain effective dollar utilization only to the extent of 10 or 15 percent of the foreign currency proceeds. He recalled that NAC Action No. 826 [Page 295] was taken to enable Agriculture to conclude the Brazilian loan, and felt that the record was clear as to the exceptional character of the Brazilian case. Mr. Hollister commented that the differing interpretations of NAC Action No. 826 were the reason he wished to see the question reopened. Mr. Kalijarvi stated that the key to the problem is the concessions necessary to enable the surpluses to be sold. He noted that P.L. 480 contains authority for grants as well as loans and does not provide guidance as to the distinction between grants and loans. He felt that a case could be made for a distinction between P.L. 480 and Mutual Security operations, in view of their differing purposes.
Mr. Southard noted that after the Brazilian case every prospective borrower would know that a waiver of an exchange guaranty was a possible condition of a loan, and would be likely to attempt to obtain the softest possible repayment option. Mr. Kalijarvi, recalling that the Japanese loan had been mentioned at the earlier Council discussion, said that since the terms of the Brazilian loan had become publicly known, denial of a Japanese request for a waiver of the exchange guaranty would create a very difficult situation. Mr. Garnett indicated that the Japanese negotiations were being held up on the question of the exchange guaranty. He stated that the Japanese had requested information on the terms of the Brazilian loan as a possible alternative to the already initialled agreement, which had been negotiated before NAC Action No. 826 was taken. The Council discussed briefly the question of the relative United States interests in Japan and Brazil.
Mr. Hollister suggested that each waiver of exchange guaranty be treated as an exception to the general policy, and that each such case be referred to the Council. He stated that if the guaranty waiver were widely applied, he would be forced to report to the Congress that ICA was unable to meet its obligation to dispose of surpluses under Section 402. In this regard Mr. Hollister stated that in presenting its program to the Congress his agency had informally assured the Committees that exchange guaranties would be obtained.
Mr. Garnett argued that ICA loans are already soft, and that a waiver of exchange guaranty on P.L. 480 loans would not materially affect ICA’s loan program. He felt that Agriculture needed all possible assistance in disposing of surpluses under P.L. 480, and that the waiver of exchange guaranties was not of primary importance, although it helped. He hoped that further complication of loan clearance procedures in the Government could be avoided. He felt that in practice every prospective borrowing country would elect the non-guaranteed local currency loan at 5 percent interest.
The Council discussed at length the Japanese case and the relationship of the ICA and P.L. 480 programs to each other. Mr. Garnett [Page 296] noted that the Japanese sale involved $65 million worth of surplus commodities, and argued that ICA has an advantage over Agriculture in moving surpluses under Section 402 because it is not bound by the requirement that sales be “in excess of the usual marketings” of the commodities. Mr. Kalijarvi pointed out the considerable pressures toward disposing of agricultural surpluses, and felt that if the Japanese sale should fail, serious questions would be raised. Mr. Overby commented that the problem is to dispose of surplus commodities and expressed the view that if the Council were again confronted with the problem it faced in the Brazilian case it would again come reluctantly to the conclusion expressed in NAC Action No. 826. He assumed that because of the pressures to move surpluses the administering agencies would see “jeopardy” in many individual cases. He felt that this situation constituted a good argument for providing assistance in the form of either hard loans or grants rather than soft loans. The Chairman commented that foreign currency loans with or without exchange guaranties have many elements of grant aid.
It was proposed by Mr. Smith that the Council revise NAC Action No. 826, so that as a matter of general policy there would be no waiver of exchange guaranties in P.L. 480 loans, including the Japanese loan and any future Brazilian loans, with the proviso that individual cases in which the administering agencies believed that the exchange guaranty should be waived would be referred to the Council. This proposal was supported by Governor Szymczak and Mr. Burgess, and opposed by Mr. Kalijarvi. Mr. Stambaugh felt that in view of the publicity given to the Brazilian loan terms it would be preferable to permit a waiver in the case of Japan and then apply the revised policy in future cases.
Mr. Garnett noted that very few prospective negotiations involved such large amounts of surplus commodities as were at issue in the Japanese case, and reviewed briefly the pattern of exports of U.S. agricultural products to Japan. He felt that in view of the importance of the Japanese case, the Department of Agriculture would request that it be reopened. The Chairman replied that the Council would be glad to reconsider the matter if further discussion were desired.
The following action was taken (NAC Action No. 840):
“National Advisory Council Action No. 826 is hereby revised. It is the view of the Council that exchange guaranties should normally be obtained in loan agreements under the Agricultural Trade Development and Assistance Act (P.L. 480). Individual cases in which the administering agencies believe that efforts to obtain an exchange guarantee would jeopardize the objectives of the program should be referred to the Council for further consideration.”