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

179. Minutes of Meeting 59–4 of the National Advisory Council on International Monetary and Financial Problems⁰

July 17, 1959.

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

1. Export-Import Bank and Other Foreign Lending Interest Rates (NAC Document 59–185)¹

The Secretary of the Council reviewed the history of the problem and the conclusions of the Staff Committee as contained in NAC Document 59–185. He pointed out that under the earlier actions on rates charged by the Export-Import Bank the rates on loans for more than 2 years had been set at “2 percent above the current yield (actual or computed) of U.S. Government securities of comparable terminal maturities” (NAC Actions 615 and 883).² The Staff Committee had proposed two alternative amendments to the earlier actions. Alternative A would advise the Export-Import Bank that the appropriate rate for loans of 2 or more years maturity should be at least 5-¾ percent until further review by the Council. Alternative B would in effect suspend for the present the principle of a 2 percent differential by providing that rates need not exceed 5-¾ percent until further review by the Council. Under both formulations it was proposed to delete from the earlier actions language relating to loans to governments and to private borrowers. With respect to the Development Loan Fund, the Staff Committee had submitted a draft action³ which would call for the continuation of the 3-½ percent rate on economic overhead loans.

Mr. Upton said that some weeks earlier the situation had been reached where if rates on Export-Import Bank loans were raised to 6 or 6-¼ percent according to the formula U.S. exports would be made still more costly at a time when we were particularly aware of the need for keeping the U.S. competitive. Similarly, raising the rate on DLF economic overhead loans to 4 percent would create psychological warfare problems. There was the choice of dropping the formula and establishing an ad hoc rate (Alternative A) or of keeping the formula and agreeing to deviate temporarily from it (Alternative B).

However, it was important to continue to work toward a new set of rates that would eliminate some of the present anomalies. At present the DLF was financing foreign goods at 3-½ percent while the Export-Import Bank was financing American goods at 5-¾ percent. On the other hand, any decrease in rates on Export-Import Bank loans to bring them closer to the rates on DLF loans would make it more difficult for the Export-Import Bank to obtain private participation in its loans. Treasury had looked forward to the Export-Import Bank’s selling some of its paper this year to help balance the budget. Any increase in the rate on DLF economic overhead loans would raise the question of the U.S. rate versus the Soviet rate, but there was a question as to the significance of a 3-½ percent rate payable in local currency that remained in the foreign country as against a Soviet rate of 2 percent that was taken out of the borrowing country in real goods. Alternative B was preferable but there was a very difficult rate problem and it was necessary to go further towards solving it than we have in this ad hoc measure.

Mr. Waugh said that he thought the proposal that had been made in the paper and the discussion that had been presented by the Staff and by Mr. Upton covered the matter very well.

Mr. Mann said he would emphasize what Mr. Upton had said as to this being an ad hoc solution to the immediate problems with which we are faced. He thought the State Department would prefer Alternative A to Alternative B since the decision was ad hoc, but if Treasury preferred Alternative B State would agree.

Mr. Szymczak said he agreed with everything Mr. Upton had said. It was necessary to emphasize the temporary nature of the solution and the need for continuing study of the problem of interest rates so that another look could be taken at it in the fall. Mr. Kearns also agreed with Mr. Upton.

Mr. Macy⁴ observed that Mr. Upton had indicated that if the rate fell below 5-¾ percent it would interfere with selling loans from the Export-Import Bank’s portfolio. He inquired whether there would be any difficulty if the rate remained at 5-¾ percent. Mr. Waugh thought the 5-¾ percent rate was satisfactory. He added that he was finding more interest on the part of the private capital market and referred to the participation of the commercial banks in the program of financial assistance to Spain.

Mr. Macy said the Bureau of the Budget wanted some assurance that this decision would not unduly affect the understanding with the Export-Import Bank with respect to the budget. Mr. Waugh said that the understanding was that the Export-Import Bank should use every effort to avoid drawing on the Treasury during the current fiscal year. Whether or not the Bank could do that would depend on the regulations laid down by Treasury on the differential on guaranties over and above what Treasury is paying. The Bank was still trying to sell paper on a non-recourse basis. The difference between 5-¾ and 6-½ percent was not going to affect the problem the Bureau of the Budget was raising. The Chairman agreed.

Mr. Waugh observed that coordination by the Council was particularly appropriate in the field of interest rates and although the Bank was willing to accept either Alternative A or B thought that from the standpoint of the Council Alternative B was preferable.

Mr. Mann moved the adoption of Alternative B and the Chairman stated it was the sense of the meeting to adopt B.

The interest rate on loans by the Development Loan Fund was then discussed. Mr. Waugh said he did not like the idea of referring to an Export-Import rate and a DLF rate. He would like to have a ruling by the NAC that certain rates be charged by the two institutions.

Mr. Upton repeated that he was concerned about the anomaly of using U.S. funds at low interest rates to finance the purchase of goods abroad, and asked how important the 3-½ percent was, particularly since it was charged in local currency.

Mr. Mann said the State Department felt that the 3-½ percent rate was about the right level for economic overhead projects. The DLF charged 5-¾ percent on the profit-earning types of projects, and the average interest rate on DLF loans was about 4.4 percent last year. The State Department thought some regard should be paid to the fact that the DLF was created as a substitute for grants, that it is a prime instrument of U.S. foreign policy, and that even less than the Export-Import Bank and the International Bank is it a profit-making institution. The Soviets make a great deal of the fact that we charge higher rates than they do. The State Department did not think the traffic would bear more than 3-½ percent. You could not go much above that figure without endangering our psychological objectives. There was also the argument of status quo—any increase would be a shock to the borrowing countries.

Mr. Willis pointed out that when the 3-½ percent rate was set it was related to the then cost of money to the U.S. Government of about 3-¼ percent. Mr. Mann said we were talking about loans most of which are repayable in local currency, and questioned whether anything would be gained by raising the interest rate by ½ or 1 percent.

Mr. Upton thought a more important factor was the relationship with other rates in this country as well as the impact on exporters. He was still disturbed about purchases abroad.

Mr. Mann agreed it was unfair competition. He recognized the validity of the argument and the seriousness of the balance-of-payments situation, but wondered whether the problem was not one of procurement, not merely related to DLF but of general application. The State Department had begun an independent study on what to do about it. Mr. Dillon felt strongly that the problem was one of procurement and that it should be dealt with directly rather than through the interest rate. The Chairman agreed that this was the effective way to deal with the problem.

Mr. Waugh said he was glad to hear the statement that the DLF was a substitute for grants. He did not think you could compete with the Soviets on interest rates. They could always change their rates, whatever our practice was. However, if there was any argument for increasing interest rates it was that the repayment would be in local currency. He cited as examples of anomalies in rates that the International Bank had made a $72 million highway loan to Iran at 6 percent, the DLF a $25 million loan to the same Government at 3-½ percent, and the Export-Import Bank a highway loan to Liberia at 4-¾ percent.

He said that the Filipinos had been in that day to discuss some loans. He had told them that he thought the U.S. Government should take the position that the Philippines could buy dredges anywhere they wanted but if they bought in Germany the U.S. should not furnish the financing. His only serious disagreement with the DLF was that he thought the DLF was making loans in fields where they should not. The same thing would be true of the Inter-American Bank. He added that the U.S. economy is vital to the whole free world and he thought we were financing ourselves out of the international market to the extent that we might weaken our position.

The Chairman observed that the important factors with respect to the DLF loans were the character of the loans and the fact they were not tied. Mr. Waugh said a third factor was the cost of money to the U.S. He added that if the loans are tied and two institutions make loans in the same field, one should go out of business.

Mr. Szymczak thought the only thing to do was to bring the matter back to the Council for review as often as possible.

The Chairman announced that it was the sense of the meeting that on a temporary basis the rate of 3-½ percent would be continued on economic overhead loans by the Development Loan Fund. The following action was taken:

I. Paragraph 1 of NAC Action 883, May 18, 1956, is amended as follows:

The National Advisory Council advises the Export-Import Bank that the appropriate rate of interest on loans of two or more years maturity should be 2 percent above the current yield, actual or computed, of U.S. Government securities of comparable terminal maturities, provided that the interest rate need not exceed 5-¾ percent until further review by the Council.

II. The first two sentences of paragraph 1 of NAC Action 1106, January 14, 1958,⁵ relating to Development Loan Fund loans, are amended as follows:

On loans for economic overhead-type projects, the minimum interest rate should be 3-½ percent until further review by the Council.

[Here follows discussion of an unrelated matter.]

3. Proposed International Development Association

Mr. Willis stated that the Treasury Department might be called upon to appear before the Senate Foreign Relations Committee the following Tuesday (July 21) to make a brief statement on the proposed International Development Association. The timing presented a problem since it had been anticipated to bring to the Staff Committee soon a draft NAC report which could go to the Congress later this session and which would be considerably more full than the brief report made to Senator Fulbright in May 1959 (see NAC Document 59–121). He recalled that in January 1959 the Council had transmitted an interim report to the Congress (NAC Action 59–6 and NAC Document 59–3), that in April a “talking paper” had been prepared which had been used for discussions with other countries (NAC Document 59–104), and in May the letter referred to previously had been sent to Senator Fulbright.⁶

Since that time there had been discussions with the Executive Directors of the International Bank as well as with Mr. Erhard, Mr. Pinay, the British, and other distinguished visitors. Reactions were generally favorable. At this stage the questions which might be raised by other countries were not entirely clear, but there were some definite indications as to the matters of most concern to the foreign technical people. There was a considerable amount of hesitation about soft loans. The other countries have done little in the way of providing assistance, as distinct from hard loans, within their own colonial spheres, and this brings them into a multilateral assistance program for the free world as a whole. There was a question as to the eligibility of colonies and a problem with respect to countries like Australia which consider themselves in an intermediate category, and which feel they would contribute without qualifying for soft loans from IDA. There were special problems relating to countries such as the Netherlands and China. Despite these particular problems, it was hoped to have a document soon which the International Bank would transmit to all the Governors indicating that the United States would probably wish to introduce a resolution regarding IDA at the September meetings. The matter of a possible contingency item in the 1961 budget had also been discussed with the Bureau of the Budget.

The testimony to be given on Tuesday would be based on the documents already distributed. It was hoped not to anticipate the discussions which should be held within the Council forum during the next week or two.

Mr. Waugh asked whether the Council had ever been presented with the question whether the U.S. would actively support IDA. When the idea of an International Development Association was started it was solely in terms of local currency but now it had changed completely. It was pointed out that the talking paper had been circulated to Council agencies and had received their approval, and that the letter of May 15, 1959, to Senator Fulbright had been cleared by Secretary Anderson with the other Council members, although this may have occurred during a visit abroad by Mr. Waugh.

Mr. Macy inquired whether figures would be discussed in the Tuesday testimony. Mr. Willis said the letter to Senator Fulbright had stated that we assumed the initial capital should be in the range of $1 billion and that U.S. participation would be about $300 million. The $1 billion figure was the one Senator Monroney had used. Mr. Waugh thought this referred to local currency. Mr. Willis said this was not entirely clear. Senator Monroney gave an important role to local currency but it was not clear it was the only aspect he had considered. While not all of the talking paper had been discussed with Senator Monroney, a number of the problems had been reviewed with him. Senator Monroney had stressed local currency, but also an element of capital which should be available for loans at low interest rates for long terms repayable in local currency.

Mr. Macy inquired whether the Treasury representatives would refer to any figures other than those included in the May letter. Mr. Willis said there would be no other dollar figures. There were indefinite amounts of local currency involved.

Mr. Ross⁷ stated that the State Department had also been asked to testify.

[Here follows discussion of an unrelated item.]

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. Dated July 15. (Ibid., NAC Documents)
2. For text of NAC Action 615, taken May 18, 1953, see Foreign Relations, 1952–1954, vol. i, pp. 323–324. Taken May 18, 1956, NAC Action 883 is in Washington National Records Center, RG 59, NAC Files: FRC 71 A 6682, NAC Actions.
3. Incorporated in NAC Document 59–185.
4. Robert M. Macy, Chief of the International Division, Bureau of the Budget.
5. See Document 146.
6. Dated May 19, NAC Document 59–121 is in National Archives and Records Administration, RG 56, Records of the Department of the Treasury, NAC Documents. NAC Action 59–6 has not been found. NAC Documents 59–3, January 8, and 59–104, April 30, are ibid. The letter sent to Fulbright on May 15 is NAC Document 59–121. (Ibid.)
7. Emerson Ross, Special Assistant in the Office of International Financial and Development Affairs.