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

127. Minutes of the 261st Meeting of the National Advisory Council on International Monetary and Financial Problems¹

Washington, September 10, 1957

• Mr. W. Randolph Burgess (Acting Chairman), Treasury Department
  • Mr. George H. Willis
  • Mr. Philip P. Schaffner
  • Mr. Edwin F. Rains
• Mr. C. Douglas Dillon, State Department
  • Mr. Jack C. Corbett
  • Mr. Phil R. Atterberry
• Mr. Marshall M. Smith, Commerce Department
  • Mr. Clarence I. Blau
• Mr. Arthur W. Marget, Board of Governors, Federal Reserve System
  • Mr. J. Herbert Furth
• Mr. Samuel C. Waugh, Export-Import Bank
  • Mr. Glenn McLaughlin
• Mr. Walter Schaefer, International Cooperation Administration
  • Mr. Austin P. Sullivan
• Mr. Frank A. Southard, Jr., International Monetary Fund
• Mr. John S. Hooker, International Bank
• Mr. Oscar Zaglits, Department of Agriculture, Visitor
• Mr. Ralph W. E. Reid, Bureau of the Budget, Visitor
• Mr. C. Edmond Hutchinson, Bureau of the Budget, Visitor
• Mr. Henry J. Bittermann, Acting Secretary
  • Mr. C.L. Callander, Assistant Secretary
  • Mr. Victor A. Mack, NAC Secretariat

1. Interest Rates on P.L. 480 Loans

The Chairman asked Mr. Schaefer to present the question for the consideration of the Council. Mr. Schaefer commented that the interest rates on loans under the Agricultural Trade Development and Assistance Act (PL 480) and on Mutual Security loans were out of line with the cost of money to the Treasury and had not been adjusted since their adoption to reflect the world-wide increase in interest rates (see NAC Document No. 2119). He noted also the Presidential statement regarding the importance of charging interest on US Government loans sufficient to cover the cost of money to the Government, and referred also to the Administration bill which had been introduced in the Congress along these lines. The ICA therefore proposed that the interest rates on the PL 480 loans be increased by 1 percent, to 4 percent for dollar repayment and 5 percent for repayment in local currency, and further proposed that interest accrue from the date of disbursement rather than after the 3-year interest-free period which was applicable to PL 480 loans in the past. Mr. Schaefer thought that there was general agreement that it was desirable to raise these rates by 1 percent and to abandon the interest-free period, but he understood that the Department of State wished to reserve the right to make exceptions in certain cases.

Mr. Dillon stated that the staff of the State Department had felt that PL 480 loans were different from the kind of loan which was the subject of the proposed legislation requiring that interest rates cover the cost of money, the cost of administration and the risk. It was thought that the PL 480 loans themselves involved no cost to the Treasury, since the currency lent was foreign currency derived from sales of surplus commodities, and might have been of little use apart from the loans. In view of these differences from ordinary loans, State had thought it desirable to set the interest rates on PL 480 loans in the light of the foreign policy objectives of the loan program. The Department of State, however, could also see the merit of having these rates reflect the general rise in interest rates. After discussions of the matter with the regional bureaus and with the Secretary of State, it had been determined that the Department of State would agree to the proposed increase to 4 and 5 percent, provided that the Department of State could reserve the right to set the rate at lower levels in cases involving serious foreign policy implications.

The Council discussed the State Department proposal, and the question of whether under the State proposal, individual cases for which exceptional treatment was proposed should be referred to the Council for its consideration. Mr. Dillon pointed out that if the State Department position was accepted it would involve reserving to State the right to make exceptions in cases involving serious foreign policy implications, so that to have formal NAC consideration of each proposed exception did not appear to be appropriate. The Chairman suggested that the point might be met by providing that there would be prior consultation with the Council in each exceptional case. Mr. Dillon agreed that this would be appropriate.

Mr. Reid noted that the purpose of the proposed legislation regarding interest rates on Government loans was to increase the rates on certain domestic loan programs, such as the 2 percent Rural Electrification loans, to the going level of rates. The Budget Bureau felt that the passage of the bill in the next session of the Congress might be endangered if it became known that foreigners were obtaining PL 480 loans at lower rates than those which would result from passage of the legislation.

The Council discussed suggestions advanced by Mr. Waugh and Mr. Smith for increasing the spread between the rates for dollar repayment and the rates for local currency repayment, in order to increase the incentive for repayment in dollars. There was general agreement with the logic of such proposals, but the consensus was that a spread large enough to provide an effective incentive for dollar payment might involve an unduly low dollar repayment rate or an unduly high local currency rate.

The Council discussed the question of whether granting exceptions in some cases might make it difficult to apply the higher rates in other cases. Mr. Zaglits informed the Council that the Department of Agriculture favored the proposed rise in the interest rates, and suggested that an alternative to granting exceptionally low rates might be to provide other forms of assistance to the countries involved.

At the conclusion of the discussion the Chairman expressed the view of the Council that the interest rates on PL 480 loans should be raised to 4 percent for dollar repayment and 5 percent for repayment in local currencies, to accrue from date of disbursement, with provision for the granting of lower rates in cases involving serious foreign policy implications, and with the understanding that there would be opportunity for prior consultation with the Council in each such exceptional case. It was also agreed that the higher level of interest rates would apply to transactions under the authority available for the PL 480 program for the fiscal year 1958, and that the old rates and terms would continue to apply to loans negotiated under the authority pertaining to prior fiscal years. The Council also agreed that the decision applied only to PL 480 loans, and that the terms of loans under the Development Loan Fund would be considered at a later date.

The Council took the following action (NAC Action No. 1054):

“The National Advisory Council advises the administering agencies that the minimum interest rates on loans to governments under the Agricultural Trade Development and Assistance Act of 1954, as amended, from funds made available for the fiscal year ending June 30, 1958 should generally be 4% when payment is made in United States dollars, and 5% when payment is made in the foreign currency, provided that exceptions to this policy may be made where serious foreign policy implications are involved. Loans to governments, whether repaid in dollars or in foreign currency, should be made with appropriate provisions guaranteeing the dollar value of the loan against changes in exchange rates. Interest on such loans should accrue from the date of disbursement without the waiting period provided by loan contracts made under previous fiscal year authorizations.”

[Here follows discussion of proposed IMF drawings by the Netherlands, proposed Export-Import Bank credits to Air France and Japan, a proposed IBRD loan to South Africa, and other business.]

1. Source: Department of State, NAC Files: Lot 60 D 137, Minutes. For NAC Use Only.