130. Memorandum From Henry C. Wallich to the President’s Special Consultant (Randall)2
- Export-Import Bank
This memo summarizes some of my recent studies of Eximbank policies. It suggests an expansion of Eximbank lending, in order to help meet the needs for international development credit and to contribute to the rebuilding of the international capital market.
The Need for Foreign Lending
It is hardly necessary to dwell upon the importance of foreign investment and foreign lending. The potential gains to the United States are all familiar—better customers, more and cheaper raw materials, stronger allies, and a strengthening of the forces of free enterprise. If we are to end grants, it seems logical that we should step up lending. Most of the world is rapidly getting in better shape to support the service of sound loans made on a business basis.
Rebuilding the International Capital Market
It is often argued that there is a conflict between public and private lending, because loans from public funds make it unnecessary for the foreign borrower to pay the price or create the conditions that would be necessary to obtain private capital. This danger is very real. But it should also be possible to encourage private lending and investment by means of public loans. It should be possible, for instance, to negotiate for fair treatment of private [Page 330]investors in connection with the granting of Eximbank loans, through investment treaties or less formally, and to emphasize loans that would help a country to put its house in order, as well as loans concentrating on the framework of public services—like power and transport—needed by private investors. A rate of interest could be charged that would allow private capital to compete. All these approaches have been used in the past to some extent, but they probably could be employed more systematically and explicitly. This would mean to use public lending as a positive instrument for rebuilding the private capital market.
Eximbank or International Bank?
A second question that inevitably comes up in this connection is the relation between Eximbank and International Bank. Why should not all developmental lending be left to the International Bank, which was established for that purpose? In fact, the Eximbank has been under injunction from the NAC to stay away from loans that the International Bank could or would make. There is no doubt that for long-term loans that are part of a national development program, the International Bank is better set up. A role in this field for the Eximbank nevertheless seems desirable for several reasons. First, there are the limitations imposed upon the International Bank by its statute: the need to get the foreign government’s guarantee on loans to private borrowers and the limitation of its financing to no more than the import cost of projects that, moreover, must be directly productive. These two latter restrictions admittedly seem to be handled rather flexibly. Secondly, it seems desirable for the U.S. Government to have an arm like the Eximbank. The International Bank cannot be primarily interested in the special concerns of the United States, such as fostering closer relations with Latin America or stimulating strategic materials production. Finally, although it is clearly undesirable to have active competition among official agencies, it is probably equally undesirable to put an agency in a position where it enjoys too comfortable a monopoly. This aspect is emphasized by the fact that the International Bank may be under increasing pressure from its debenture holders to be cautious in its lending as the time approaches when the Bank may have to sell debentures in excess of the amount fully protected by the U.S. subscription.
Recent Eximbank Operations and Policies
The scale of Eximbank operations has been expanding in recent months, after contracting severely in 1953 and early 1954. During that earlier period, the Treasury seems to have frowned upon Eximbank lending, as tending to increase the deficit. Potential borrowers [Page 331]were made to feel that their loan inquiries were not welcome; new business consequently dried up. Then during the summer of 1954, Senator Capehart3 put on his campaign for an expansion of the Bank’s operations, mainly in the direction of straight exporter credits, which the American exporter prefers to developmental lending to foreign countries. An amount of $500 million was added to the Bank’s loan authority, bringing the total to $1,500 million. The Citizens’ Advisory Committee set up by Senator Capehart came out with a report urging an expansion of Eximbank lending. In the hearings on the confirmations of the Bank’s new directors, Senators Capehart and Bricker4 expressed impatience with what they called the Bank’s deference to the International Bank, although it was not quite clear whether they meant to attack the existing division of functions between the two institutions. The attitude of the Treasury also seems to have softened.
Under the influence of this prodding and removal of restraints, the Eximbank has expanded its program. It has set up a system of credit lines to exporters to simplify the financing of routine transactions. It also appears to have accepted participation in the export financing plans of the Chase. The projection of annual credit authorizations submitted to the Budget Bureau shows a rise from $250 million in fiscal 1954 to $460 million in fiscal 1955 and $665 million in fiscal 1956. Nevertheless, actual disbursement will continue to lag, as a result of the low volume of commitments in 1953 and 1954. Net disbursements, in excess of repayments, are projected at only $100 million in fiscal 1955 and at $30 million in fiscal 1956. However, actual authorizations during the first seven months of fiscal 1955 are reported to be running about 30 percent above the projections.
Expansion of Operations
Under the Bank’s statutes, the volume of operations is subject within a very wide range to the discretion of the management. It is quite possible to argue that the recent shift in policy has accomplished all that was required. In view of the unfilled foreign demand for American capital, however, and the feeble state of the international private capital market, a more deliberate and broader program deserves consideration. The following measures, in ascending order of effectiveness and difficulty, might be taken:
- A clearer indication to potential borrowers that the Bank really welcomes applications. The contrary impression reportedly still [Page 332]seems to prevail, for instance, in some Latin American quarters and even in our Embassies there.
- A more constructive attitude toward applications in the making. In some cases loan commitments have been made under which no feasible projects have been brought in. It should be possible for the Bank to help in the surveying and financial setting up of the project. In other cases, there are projects potentially suitable for an Eximbank loan where the Bank could encourage inquiries without putting itself in the position of “soliciting loans.” Here the Bank’s tradition of having only a minimum staff seems to stand in the way of constructive lending.
- A broader view of the meaning of a “productive project.” Recently the Bank turned down a loan to finance the equipment of a hospital in Peru. The NAC asked it to reconsider. Wider acceptance of non-self-liquidating projects that clearly strengthen the economy would open up new areas for loans.
- More financing of the local expenditure component in development projects. At present the Bank will do this only in small amounts, if at all, since this kind of financing is not tied to the furtherance of any particular American exports. The Bank does regard it as justifiable under its statutes, however, if it is required to get certain exports moving. Actually, unless the dollars loaned for such domestic financing go into reserves somewhere in the world, they almost inevitably must come back to the United States directly or indirectly and increase our sales. A more generous attitude on such financing of the local cost of investment projects would make many projects feasible that are not so now.
Financing of Eximbank Activities
The Eximbank proposes to increase the proportion of its loans to be refinanced in the market with its guarantee. The NAC has often urged the Bank in that direction, but has never made it mandatory. For the Bank the choice between direct loans and guaranteed loans is a matter of relative indifference, since both obligate its loan authority equally. But from the budgetary and public debt point of view, it makes all the difference.
The Bank apparently often encounters rather stiff demands on the part of institutional investors. It might be possible to reduce these demands by more intensive spadework, and perhaps by making the form of the guarantee more attractive. It would seem that here is the Bank’s chance to prepare the American capital market for a resumption of foreign portfolio lending. In some cases, the Bank already has been able to place the shorter parts of amortizable loans in the market without its guarantee. As world conditions improve, the maturities that can be sold in this way are likely to lengthen. It may become possible to place securities with limited guarantees—as to interest only, or principal only, or part of principal. The possibility of foreign bond issues guaranteed by the Eximbank might also be [Page 333]considered, if a way can be found to keep the use of the money under the control of the Bank.
The problems of refinancing the Eximbank’s loans in the market appear to have been less thoroughly explored than most other phases of its operations. It is true that guarantee financing outside the debt and the budget seems to be attracting some criticism at this time. But the Eximbank has operated in this way for some years; it is doing so within rather narrow limits set by Congress. This area therefore seems to deserve further investigation.
Hoover Commission Report
The Hoover Commission5 has just made several recommendations about the Eximbank from which this memo diverges in some respects. Among these recommendations are the following:
- To eliminate short-term export financing by the Bank.
- To appropriate annually through Congressional action the funds required for the Bank’s lending.
The reason given for the first suggestion is that the Eximbank finances only 2 percent of our annual exports, and that this marginal amount is not worth compromising the principle of avoiding government competition with business. With this argument one is bound to sympathize. It happens, however, that the Chase project probably falls at least partly into this area. The Hoover Commission report would kill off, in this instance, one of the most interesting pieces of the very private initiative that it sets out to protect.
The recommendation for an annual appropriation of lending funds seems to have a similar effect. It argues against the principle of guarantees—at least that appears to be implicit in the idea of an annual appropriation for lending, in place of an authorization as hitherto. By inhibiting guarantees, it would stymie one of the possible methods by which the Eximbank could help foreign borrowers get back into the private capital market.
- Source: Department of State, E Files: Lot 60 D 136, Papers from Mr. Waugh. Wallich was Professor of Economics at Yale University and a foreign policy consultant to President Eisenhower.↩
- Homer E. Capehart (R–Ind.), Chairman of the Senate Banking and Currency Committee, 1953–1954.↩
- John W. Bricker (R–Ohio), member of the Senate Banking and Currency Committee.↩
- The Commission on Organization of the Executive Branch of the Government, commonly called the Hoover Commission after its Chairman, former President Herbert Hoover, was established by P. L. 108, enacted July 10, 1953 (67 Stat. 142), to study the workings of the various departments and agencies of the Executive branch and to make recommendations which would improve efficiency and eliminate waste in government operations. The Commission submitted 20 reports to Congress in the 2 years of its existence. For an overview of the Commission’s findings, see its Final Report to Congress (June 1955).↩