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

118. Minutes of the 247th Meeting of the National Advisory Council on International Monetary and Financial Problems¹

Washington, July 9, 1956

• Mr. W. Randolph Burgess (Acting Chairman), Treasury Department
  • Mr. Elting Arnold
  • Mr. Henry J. Bittermann
• Mr. Herbert V. Prochnow, State Department
  • Mr. Jack C. Corbett
• Mr. Marshall M. Smith, Commerce Department
  • Mr. Robert E. Simpson
  • Mr. Rene Lutz
• Mr. Arthur W. Marget, Board of Governors, Federal Reserve System
  • Mr. J. Herbert Furth
  • Mr. Robert Sammons
• Mr. Samuel C. Waugh, Export-Import Bank
  • Mr. Charles Shohan
• Mr. John B. Hollister, International Cooperation Administration
  • Mr. Walter Schaefer
  • Mr. Hale T. Shenefield
• Mr. Frank A. Southard, Jr., International Monetary Fund
• Mr. John S. Hooker, International Bank
• Mr. Gwynn Garnett, Department of Agriculture, Visitor
• Mr. William F. Doering, Department of Agriculture, Visitor
• Mr. Edmond C. Hutchinson, Bureau of the Budget, Visitor
• Mr. George H. Willis, Acting Secretary
  • Mr. Allen J. Fisher, NAC Secretariat

1. Use of P.L. 480 Currencies for Loans to Private Borrowers

The Chairman recalled that Mr. Schaefer had earlier suggested that the United States should encourage the lending of currencies resulting from sales under P.L. 480 to private enterprises, both United States and foreign (NAC Document No. 1925).² A proposal with respect to this matter had been developed in NAC Document No. 1962.³ The one point of disagreement was whether there was some area where maintenance of the value of the local currency might not be required.

Mr. Hollister said that no one was more anxious than he to see local currency used to get private enterprise to do a job that otherwise the American taxpayers’ money would have to do. Although there possibly were circumstances where it might be necessary to make concessions, he did not wish to start breaking down the maintenance of value provision in the original negotiations. At the present time the sales agreement is negotiated before the loan agreement. It was his view that the loan agreement should be signed at the same time as the sales agreement. If later it should turn out that in a particular country an exception with respect to maintenance of value was necessary in order to get some money into the private industry sector, some modification in the loan agreement might be made. However, he did not think we were at that point yet.

Mr. Schaefer said that in 1954 ICA⁴ had assured Congress that the dollar value of the local currency loans would be maintained. He made the additional points that any change in the maintenance of value concept would probably have repercussions on the Section 402 loans and the Mutual Security loans; that the United States was making a concession in not charging interest for the first 3 years of the loans; that the foreign countries were being offered a very low rate of interest and would have the opportunity of making a substantial profit on re-lending; that the maintenance of value provision might act as a deterrent to devaluation; that it was ICA’s responsibility to see that funds were properly accounted for once they were loaned; and that there was great difficulty in many countries in differentiating between the private sector and the public sector. He thought that abandonment of the maintenance of value provision would make the program more difficult to carry out.

The Chairman inquired whether in any of the contracts to date there had been an exception to provision for repayment in dollars. Mr. Hollister replied that Brazil was the only exception.

Mr. Garnett said that the position of the Department of Agriculture was that there were certain advantages in not having a maintenance of value clause in these loans. The Chairman inquired whether in negotiating the loans it would be possible to segregate the funds to be loaned to private industry and to waive the maintenance of value clause only with respect to such funds. Mr. Garnett thought this might be done.

Mr. Prochnow said that he understood two steps were involved, the first being a government-to-government transaction between the United States and the foreign country, and the second the contract that the local government makes with private enterprise. As he understood the ICA position there would be insistence on maintenance of value in the first step, and the State Department was in agreement with that position. He inquired whether in the second step ICA would require the local government to include a maintenance of value clause in its contract with the private enterprise. Mr. Hollister said that that would be up to the local government.

Mr. Prochnow inquired whether, if the foreign government did not require a maintenance of value clause in its contracts with local enterprise, it might argue when it came time to repay, say 10 years hence, that part of the exchange loss that had been incurred was due to a loan made to an American company. Mr. Hollister said ICA was not making a distinction between American and foreign companies.

Mr. Prochnow also asked whether, if a country required a maintenance of value clause from private companies, and an American company wanted a loan but did not wish to assume the maintenance of value obligation and appealed to the U.S. Government, we would do anything about it. Mr. Hollister did not see why we should.

Mr. Prochnow further inquired whether there should be any requirement that the foreign government set aside any portion of the funds for American enterprises. Mr. Hollister said this was worth considering but he was not willing to insist upon such a requirement now. The State Department might wish to look at it carefully on a country-by-country basis.

The Chairman asked how many loans had actually been made. Mr. Shenefield said that there had been 11 loans to 9 countries. Both the Spanish and the Japanese Governments had loaned funds to private borrowers without passing on the maintenance of value clause to the borrowers. In Brazil, with no maintenance of value clause, one loan had been made to subsidiaries of the American and Foreign Power Co.

Mr. Waugh pointed out that principal payments on loans under Section 402 were now coming due and that the Export-Import Bank was going to be confronted with an acute problem in the next 18 months. Interest had been paid regularly on these loans but there were some delinquencies on principal payments starting July 1. Under the P.L. 480 program loans would be made to governments for 30 to 40 years at a 3 percent rate. He did not see how there could be one set of conditions for one set of loans and another set for a second series of loans. He pointed out that there were no Section 402 loans to Brazil. Furthermore, he did not see how anything could be done about the maintenance of value provision without going to the Congress.

Mr. Smith said that the interest of the Commerce Department stemmed from a policy of promoting private capital investment. He thought the ICA proposal would provide an incentive to private investment, provided maintenance of value was not imposed on the private borrower. The Chairman asked whether Mr. Smith would require the borrowing government to maintain value and would hope the government would not pass that responsibility on to the private borrower. Mr. Smith agreed and said he thought this should be stipulated in the negotiations. Mr. Schaefer, however, believed it would be inappropriate to stipulate what the foreign government should do in its relations with private borrowers.

Mr. Marget⁵ said that he understood the proposition was that there would be maintenance of value in government-to-government transactions and that what happened thereafter was not our business. He thought that was extremely important. Removal of the maintenance of value provision might create more damage than otherwise. The Chairman said he understood the consensus to be that the paragraph in brackets on the second page of the draft action should be omitted. Mr. Willis said the staff would interpret this decision to mean that if in the course of negotiations it proved impossible to get both a set-aside of funds for private enterprise and maintenance of value, the set-aside would be abandoned.

Mr. Smith believed this raised the question of how seriously our negotiators were going to try to get agreement on a set-aside. The amount might vary but a real effort should be made to obtain it. Mr. Burgess did not think the action ruled out this possibility. He pointed out that the foreign governments were getting a very favorable deal and they might be willing to agree to a set-aside.

Mr. Garnett said that the two basic reasons of the Department of Agriculture for proposing that accounts not be denominated in dollars were to provide an overall incentive to the program and to encourage investment of the local currencies in the private sector. On the latter point they believed that their proposal would encourage a greater total investment, that it would provide something of a deterrent for investment in agriculture (since investment in the government sector was likely to be predominantly in agriculture), and that it would be compatible with our overall objective of encouraging private investment.

The Chairman said that he understood there was a strong majority in favor of maintenance of value on the part of government-to-government transactions, at least for the present. This would be reaffirming our previous position. He thought we should explore as we went along the possibility of trying to persuade the foreign countries to lend some of the funds to private enterprise. If it were found subsequently that the way was absolutely blocked the matter could then be reconsidered.

Mr. Prochnow expressed concern over whether the program would have the effect of building up government institutions abroad.

Attention was called to the bracketed language in the first paragraph of the draft action which referred to United States objectives “under that Act”. It was agreed to delete the bracketed language.

The following action was taken (Action No. 903):

• “1. The National Advisory Council favors the negotiation of agreements by agencies administering sales and loans under the Agricultural Trade Development and Assistance Act of 1954, as amended, which provide that some portion of the local currency proceeds of such sales be made available on a non-discriminatory basis for loans to private enterprise, both local and foreign, of friendly countries, when, in the opinion of the administering agencies, this can be done without sacrificing other United States objectives. These loans could be made available: (a) for economic development; or (b) to promote multilateral trade among nations; as the Act indicates.
• 2. Where appropriate, such funds may be used to supply the local currency component of loan projects involving private enterprise whose foreign exchange costs are financed by the Export-Import Bank, the International Bank, or the International Finance Corporation.
• 3. Loans to private enterprise should generally be provided through appropriate lending institutions in the borrowing country, including branches of United States banks; the choice of institutions should take account of varying situations in different countries.
• 4. The United States terms for P.L. 480 loans regarding maintenance of value for the portion to be used for financing private enterprise should be the same as for the portion for friendly government use. Local governments should be encouraged to assume on a non-discriminatory basis the exchange risk on private enterprise loans, and in their discretion, to utilize the interest earnings obtained through relending of United States funds in providing for this risk, although the United States recognizes that these are matters for determination by the foreign government.
• 5.

  The standard terms and conditions should be applied by the United States to both the portion loaned for the direct purposes of the government and the portion to be relent to private enterprise.

  Funds reloaned to private enterprises by lending institutions participating in this program should be made available to the private borrower at a rate of interest and other terms no more favorable than those applied by the United States to the foreign government or its agencies under the loan agreement, and no less favorable than the usual terms of the local agencies.

  The terms of loans to private enterprises should be based upon existing conditions in the money market of the foreign country and the policy of its monetary authorities.

• 6. The administering agencies are requested to submit a periodic report on pending and completed sales and loan agreements which provide for loans to private enterprises, including a report on the status of loans made under this program.”

1. Source: Department of State, NAC Files: Lot 60 D 137, Minutes. For NAC Use Only.
2. See footnote 2, Document 116.
3. Not printed. (Washington National Records Center, ICA Director’s Files: FRC 61 A 32, Box 309, Loans)
4. In 1954 the functions of ICA were performed by the Foreign Operations Administration.
5. Arthur W. Marget, Director of the Division of International Finance, Federal Reserve System.