Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

146. Minutes of the 263d Meeting of the National Advisory Council on International Monetary and Financial Problems⁰

January 14, 1958.

[Here follow a list of participants and a table of contents.]

1. General Terms and Conditions of Development Loan Fund Loans ¹

The Chairman asked the Secretary of the Council to outline the problem for the information of the Council. Mr. Willis said that the Staff Committee had considered the proposed terms and conditions of Development Loan Fund loans under some time pressure, since the management of the Fund wished to establish the general principles of its operations as early as possible (see NAC Document No. 2204, 2nd revision). The Staff Committee accordingly had submitted to the Council a draft action which represented a summary of the Development Loan Fund proposal rather than an agreed Staff Committee recommendation to the Council.²

The Development Loan Fund proposal established a basic distinction between two types of loans, the economic overhead type and the profit-earning type.

On the economic overhead type it was proposed to charge interest at a rate that would cover the cost of money to the Treasury, initially 3½ percent, and to review the rate as the cost of money to the Treasury changed. The maximum maturity of these loans would be 40 years, but it was intended to relate the actual maturities to the life of the projects. Repayments could be in either dollars or local currencies, with emphasis on payments in local currency for the earlier maturities, and with a maintenance-of-value clause for loans repayable in local currency.

The profit-earning type of loan would in general follow the pattern of Export-Import Bank loans as to interest rates and maturities, and would be repayable either in dollars or local currencies, with a maintenance-of-value clause on loans repayable in local currency. The Development Loan Fund intended to use its authority for various types of participation in earnings, especially with respect to loans repayable in dollars.

The Staff Committee discussion had touched on the relationship between the two types of loans, but no definite agency positions had been taken. One point which had been made clear was that the distinction between the two types of loans did not correspond to a distinction between public enterprise and private enterprise in the foreign countries, since in some foreign countries projects regarded in the United States as the profit-earning type may be carried on by public bodies.

The Chairman asked Mr. Dillon if he cared to comment. Mr. Dillon said that the objective of the Development Loan Fund on the economic overhead type of loan was to keep interest rates as low as possible while covering the cost of money to the Treasury, in order to be competitive with loan terms offered by Soviet Russia, particularly in loan operations in underdeveloped areas. Moreover it was important to make the loan terms attractive so as to be responsive to the Congressional desire that as high a proportion of the aid program as possible be in the form of loans. He recommended an insertion in the draft action to express the basis for the interest rate for economic overhead loans, namely, that the interest rate cover the cost of money to the Treasury. He added that frequent changes in the interest rate were not contemplated unless the cost of money to the Treasury Department changed markedly, as it had in recent weeks.

On loans for the profit-earning type of project, Mr. Dillon said that there were many complex factors that would need to be considered. For example, some of those loans would be made to private United State enterprises, and therefore care would have to be taken that there was no suggestion of subsidy or preferential treatment. The Development Loan Fund was developing a policy on this type of loan that would lead to the closest possible coordination with the Export-Import Bank. As the Secretary of the Council had already pointed out, the second category of loans was not confined to private enterprise, since in many cases foreign governments engage in enterprises of this type that would be privately undertaken in the United States.

Mr. McIntosh inquired whether the action should provide for exceptionally low interest rates on economic overhead type loans under unusual circumstances. He thought that in some cases it might be desirable to make such loans at rates as low as 1 or 2 percent. Mr. Dillon replied that if such exceptional cases arose the Council would consider them; he felt that at the present time it was desirable to get a general policy rule for guidance.

Mr. Szymczak felt that the action should make it clear that United States borrowers under the profit-earning type of projects should either repay in dollars or undertake profit-sharing arrangements. He felt also that the action should specify that the terms and conditions of loans to local development banks should be considered separately by the Council. Mr. Dillon replied that the Development Loan Fund had discussed the question of requiring dollar repayment by U.S. borrowers and in general favored it, and that the DLF would probably take convertible debentures in many of these loans. He doubted that it was necessary to specify these points in the action. He continued that the terms of loans to local development banks had not yet been considered by the Development Loan Fund, and that when such terms were formulated they would be referred to the National Advisory Council. Mr. McIntosh commented that the Development Loan Fund did not contemplate lending to wholly-owned United States companies, but would lend to foreign companies in which United States investors had an interest. Mr. Waugh noted that the DLF might operate in areas where the Export-Import Bank was not interested in lending. Mr. Dillon expressed a preference for avoiding categorical positions on details of the loan operations since the situations would be complex and could not be fully foreseen. He said that the Council would be kept fully advised of developments. Mr. Coughran expressed a preference for keeping the terms of reference broad, and Mr. Szymczak expressed his agreement on the understanding that his position was fully understood. Mr. Dillon agreed that these views would be borne in mind and action inconsistent with them would not be taken without discussion in the Council.

The Council discussed briefly the question of the use of the guarantee powers of the Development Loan Fund. It was noted that guarantees were not covered in the proposed action, and would need to be considered at a later date.

Mr. Kearns said that the Department of Commerce understood the Congressional intent as requiring that the DLF aid private investment where possible. He felt that the lower interest rate proposed on economic overhead loans would give them a priority over loans to private enterprises. He had in mind primarily native private enterprises in foreign countries, and said it was important to guard against appearing to favor government investment over private investment. Mr. McIntosh pointed out that if the Development Loan Fund makes loans to private enterprises at 3½ percent it would create problems for commercial banks and for the Export-Import Bank. Mr. Dillon said that the Development Loan Fund was not attempting to discriminate against private investment but rather was trying to stimulate it. The DLF would be glad to receive practical suggestions from the Department of Commerce and other agencies on measures to stimulate private enterprise.

Mr. Southard commented that he assumed the economic overhead type of loan would be particularly appropriate for the Development Loan Fund, in view of the fact that Eximbank facilities were available for loans for the profit-earning type of project in most areas. It was noted, however, that the Export-Import Bank does not lend in some areas of the world, and that the Development Loan Fund would not lend for projects for which Export-Import Bank financing would be available.

Mr. Reid referred to recent discussions of the Administration bill which would require that interest paid and charged by Government lending agencies cover both the cost of money and of administration. He said that the view of the Bureau of the Budget was that interest rates on loans repayable in dollars should cover the cost of administration as well as the cost of money to the Treasury. The Bureau therefore would prefer 4 percent to 3½ percent. The Bureau was also concerned that repayment in local currencies would in time lead to a Development Loan Fund consisting entirely of local currencies, and therefore would favor an interest rate of 5 percent on loans repayable in local currencies, to provide an incentive for repayment in dollars.

Mr. Baird said that the Treasury Department felt that the one percent differential provided no real incentive for repayment in dollars. Mr. Dillon agreed that the one percent differential was not effective. He thought the Development Loan Fund would collect some dollars on loans undertaken in countries where other lending agencies would not operate, for example, Taiwan. The DLF might collect interest in dollars and principal in local currency, or the other way around. In countries in which the Export-Import Bank and the International Bank made loans, to require Development Loan Fund loans to be repaid in dollars would reduce the dollar debt service capacity of the borrowing country. Therefore, in those cases the DLF would take local currency in repayment in order to keep its position junior to the positions of the Export-Import Bank and the International Bank. Referring to the interest rate bill,³ he noted that the State Department had raised strong objections on foreign policy grounds to making foreign loans subject to the bill. This remained the position of the Department of State. This view had been discussed with legislative leaders, who felt that the Development Loan Fund and other foreign lending institutions should be excepted from the bill, on the ground that the Congress should not tie the hands of the Executive Branch in economic competition with Soviet Russia. Mr. Baird suggested that the President might make exceptions to the bill on foreign policy grounds, perhaps through the National Advisory Council, and Mr. Dillon indicated that this might be appropriate, provided the exceptions were broad.

At the conclusion of the discussion the Council took the following action (Action No. 1106):

“The National Advisory Council offers no objection to the general terms and conditions proposed for Development Loan Fund loans, as follows:

• “(1) On loans for economic overhead-type projects the interest rate would cover the cost of money to the U.S. Treasury and would be initially 3½ percent. The rate will be reviewed from time to time with changes in the cost of money to the U.S. Treasury. The maximum maturity of the loans would be 40 years, and the loans would be repayable either in dollars or in local currency, as specified in the loan agreements. A maintenance-of-value provision would be required for loans repayable in local currencies.
• “(2) On loans for profit-earning types of projects the interest rates would be not less than the interest rates on Export-Import Bank loans for similar projects, and the maturities would be similar. Loans would be repayable either in dollars or in local currency as specified in the loan agreements, with a maintenance-of-value clause required for loans repayable in local currencies. It is understood that the Development Loan Fund would use various types of participating arrangements in some of these loans.”

0. Source: National Archives and Records Administration, RG 56, Records of the Department of the Treasury, NAC Minutes. For National Advisory Council Use Only.
1. Congress established the Development Loan Fund, which the Eisenhower administration had proposed as a means to finance international development, in Section 6 of the Mutual Security Act of 1957 (P.L. 141, Eighty-fifth Congress, approved August 15, 1957); for text, see American Foreign Policy: Current Documents, 1957, pp. 1554–1557.
2. A copy of NAC Document No. 2204, 2d revision, January 13, is in National Archives and Records Administration, RG 56, Records of the Department of the Treasury, NAC Documents. The draft action was incorporated in NAC Document No. 2204.
3. Not further identified.