42. Letter From Acting Secretary of State Dillon to the Chairman of the National Advisory Council on International Monetary and Financial Problems (Anderson)0

NAC Document 5946

Dear Mr. Chairman: In order to promote the most effective use of local currencies owned by the United States, and in order to expedite and improve the P.L. 480 program for the disposal of agricultural surpluses, the Department of State proposes that the United States eliminate its “maintenance-of-value” requirement whereby foreign borrowers of United States-owned local currencies must repay to the United States any additional amounts which may be necessary to reflect the dollar equivalent of the local currency at the time of lending.

This proposal is consistent with the recommendations of two recent expert reports on the subject—the report of Dr. John H. Davis on [Page 100] P.L. 480,1 and the Special Report on the Accumulation and Administration of Local Currencies submitted to the International Cooperation Administration by Messrs. Berenson, Bristol, and Straus.2

At the present time local currencies accruing to the United States as a result of P.L. 480 sales are almost the sole source of local currencies available for foreign lending. In the future, however, this source will be broadened by inclusion of local currency repayments, not only of P.L. 480 loans themselves, but also of ICA and DLF loans. The problems created by the maintenance-of-value clause are, therefore, likely to increase.

The maintenance-of-value provision has in many cases caused considerable difficulty in negotiating loan agreements under P.L. 480. Foreign governments are understandably reluctant to conclude loan agreements requiring maintenance-of-value on local currency loans from the United States when they have an alternative choice of borrowing from their own banking system without the maintenance-of-value requirement and of allowing equivalent amounts of P.L. 480 funds to remain idle.

It is now the policy of the United States to require that substantial agreement be reached on the terms of P.L. 480 loan agreements at the same time as P.L. 480 sales agreements are concluded. This practice is desirable as a general rule. However, if we continue to insist upon the inclusion of maintenance-of-value, as well as upon a simultaneous understanding on the loan and sales agreements, we may expect that negotiating difficulties will increase, will slow down the surplus disposal program, and may reduce its over-all magnitude.

The negotiating problems now experienced in connection with making local currency loans effective are formidable. Idle local currency funds are accumulating in a number of countries and this is proving to be a serious obstacle in making use of the funds to promote economic development, which is an important objective of the Agricultural Trade Development and Assistance Act. We believe that the maintenance-of-value requirement is a major inhibiting factor in effectively promoting this objective.

The benefits to the United States originally anticipated from the maintenance-of-value clause are largely illusory. The clause has meaning, of course, only for currencies which have been overvalued and for which devaluation has occurred or is in prospect. In such cases, however, the United States is often favorable to devaluation and would not want the maintenance-of-value clause to stand as an obstacle to sound currency reform. Also, we may expect that if there has been a devaluation the country concerned will press vigorously for renegotiation to [Page 101] eliminate the effect of the maintenance-of-value clause. Consequently the clause is a potential source of trouble in our relations with other friendly governments.

It should be noted that the elimination of maintenance-of-value in respect of loan repayments would in no way affect the amount of local currency presently received by the United States in return for the sale of P.L. 480 agricultural products since such receipts are not now subject to maintenance-of-value. It should be noted, also, that the elimination of maintenance-of-value would still entitle the United States to receive in repayment for local currency loans the same amount of local currency it would have held if the loan had not been made, plus, of course, interest.

In view of the foregoing, it is requested that the National Advisory Council take early favorable action on the proposal of the Department of State, which is concurred in by the Department of Agriculture, to eliminate the maintenance-of-value requirement from all United States loans of local currency.

Sincerely yours,

Douglas Dillon3
  1. Source: National Archives and Records Administration, RG 56, Records of the Department of the Treasury, NAC Documents. For NAC Use Only.
  2. Not further identified.
  3. See Document 36 and footnote 1 thereto.
  4. Printed from a copy that bears this typed signature.