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

45. Minutes of Meeting 59–2 of the National Advisory Council on International Monetary and Financial Problems⁰

March 23, 1959.

[Here follows a list of 24 persons present, including Under Secretary of the Treasury Baird (Acting Chairman), Under Secretary of State for Economic Affairs Dillon, Assistant Secretary of Commerce for International Affairs Henry Kearns, M.S. Szymczak of the Board of Governors of the Federal Reserve System, President of the Export-Import Bank Samuel C. Waugh, Administrator of the Foreign Agricultural Service Max Myers, and Assistant Director of the Bureau of the Budget Ralph W.E. Reid.]

1. Maintenance of Value on Loans of Local Currency

The Council considered the proposal of the Department of State, in which the Department of Agriculture concurred, to eliminate the maintenance-of-value requirement from all United States loans of local currencies (NACDocument 59–46).¹ The Acting Chairman asked Mr. Dillon if he wished to comment.

Mr. Dillon noted that the paper referred to the difficulties of negotiating PL 480 loan agreements with the maintenance-of-value requirement. He said that there was an additional problem not mentioned in the paper, in that a number of countries had signed PL 480 loan agreements but had not drawn on the loans. The whole problem was measured by the amount of unused local currencies in the possession of the United States. He recalled the problems that had arisen with Turkey, which for a long period had not signed PL 480 loan agreements. The United States had finally transferred a substantial portion of these PL 480 funds to a grant category. In response to an inquiry from the Chairman, Mr. Myers said that he had nothing to add to Mr. Dillon’s statement.

Mr. Kearns supported removal of the maintenance-of-value requirement and said that the policy should apply equally to private and government borrowers. Mr. Dillon said it would apply to all loans of local currency. Mr. Waugh recalled that there was no maintenance-of-value requirement on loans by the Export-Import Bank of local currencies under the Cooley Amendment to Public Law 480, and said that this raised the question of the interest rate. The interest rates on Cooley Amendment loans were comparable to those charged in the borrowing countries, so as to avoid interference with local banking systems. He said that the Export-Import Bank had had no adverse comment from borrowers concerning the level of interest rates on these loans. Mr. Waugh felt that there was need for a general review of interest rates on U.S. Government loans, in view of the rise in the cost of money to the U.S. Government.

Mr. Szymczak said that United States assistance to foreign countries through the PL 480 program should be dual, first through the sale of commodities for local currencies, and second through the use of the local currencies in ways that would help the economy of the foreign country. If maintenance of value on the loans were abandoned and the interest rates were unduly low, the result would be harmful inflationary pressure on the foreign economy. Therefore, the Federal Reserve view was that the interest rate should be related to economic conditions of the country. Specifically, it should be related to local interest rates charged to private borrowers.

Mr. Dillon suggested that the general interest rate question be deferred for further discussion in the Staff Committee and the Council. He agreed that the United States had a major responsibility to program foreign aid so as to be helpful in terms of local economic conditions. The U.S. Operations Missions gave this problem continuous attention. Mr. Dillon said he would like to avoid fixed and rigid regulations, especially since the rate of interest was important from the foreign policy point of view, as for example, in relation to the low rates of interest charged by the Soviet Union. The Department of State would like to increase the interest rates on PL 480 loans to 4 percent for loans for economic overhead projects and to local rates of interest on loans for profit-earning types of projects. A loan to a government for a project such as a fertilizer plant, which would normally be a profit-earning enterprise, should take the higher interest rate.

Mr. Dillon noted that there had been discussion by the Council on Foreign Economic Policy of a proposal that the PL 480 program should be made more flexible, and that in order to avoid accumulation of local currencies and to increase the possibility of psychological advantage, a large part of the program should be transferred to Title II for use in the form of grants. The consensus of the Council on Foreign Economic Policy had been that this approach would involve undue difficulties, and that other ways were available to attain the desired objectives. It had also been the consensus that the problem of accumulation of local currency should be dealt with by appropriate changes in the waiver procedure concerning the requirements of Section 1415 (of the Supplemental Appropriation Act of 1953), so as to facilitate the further use of grants. Mr. Dillon indicated that the Department of State would consult with the Director of the Bureau of the Budget to develop proposals along these lines.

Mr. Kearns objected to too rigid a rule for the determination of interest rates to private borrowers. An interest rate, for example, of 15 to 20 percent per annum would be oppressive and would cause difficulties. Mr. Waugh noted that the highest interest rate on Cooley Amendment loans was 10 percent per annum, and that the approval of the foreign governments would have to be obtained for any PL 480 loans to private borrowers. Mr. Dillon said that the interest rates on such loans should conform to the practices of the Export-Import Bank on the Cooley Amendment loans.

Mr. Reid expressed support for a position substantially along the lines outlined by the Federal Reserve Board, inasmuch as a quid-pro-quo was involved in giving up maintenance of value. He expressed doubt that the maintenance-of-value requirement had been a serious obstacle to the conclusion of PL 480 loan agreements, since disbursements under loan agreements which had been signed amounted to about $1.6 billion. He also expressed doubt that the maintenance-of-value requirement had limited the magnitude of the programs, which was fundamentally determined by budgetary requirements rather than the attitudes of prospective foreign borrowers.

Mr. Szymczak reiterated the need for maintaining financial stability in countries receiving aid, and noted the importance of interest rates in this effort. Mr. Dillon agreed, and cited the successes of the aid program administrators in maintaining financial stability in countries like Greece and Korea.

Mr. Baird said that in principle the Treasury saw merit in the Federal Reserve Board view, but that in view of foreign policy considerations it did not seem desirable to press that view to the ultimate conclusion. He noted that the loan repayments would be in local currency and thus would not affect the United States budget. He raised the question of when a decision to abandon maintenance of value would become effective.

Mr. Dillon suggested that the date on which the policy would become effective, and the question of retroactive application of the policy, should be decided after further Staff Committee discussion. It was desired to keep a maintenance-of-value requirement on dollar loans which were repayable in local currency, and it would be undesirable to have the dropping of maintenance-of-value on PL 480 loans raise questions on the maintenance-of-value requirement on dollar loans. He felt that the matter should be explored further by the Staff Committee.

At the conclusion of the discussion the Council agreed in principle that the maintenance-of-value requirement on loans of local currency should be eliminated, and that the interest rate for such loans should cover the cost of money to the Treasury for loans for economic overhead projects and should currently be at the rate of 4 percent; the rate should follow local interest rates on loans for profit-making types of enterprises. The Council requested the Staff Committee to work out the details of the application of this principle, including the time at which it should become applicable, and to present an appropriate draft action for Council approval. (The Staff Committee subsequently considered the matter and agreed on a recommended action for the consideration of the Council which was approved by a telephone poll completed on April 14, 1959. (See Staff Committee Minutes 59–12 and 59–15,² and NAC Action 59–77³).)

The Acting Chairman noted that the foregoing discussion had dealt only with loans of local currencies, and said that questions had been raised concerning interest rates on loans of dollars. He asked if the Council wished to discuss this subject.

Mr. Reid indicated that he would like to see the general question discussed. Mr. Dillon said he was not prepared for a full-scale discussion at the present meeting, but that given time for preparation he would be willing to have a general discussion. He said it should be borne in mind that the Development Loan Fund was a major foreign policy instrument and that there were real problems in meeting the competition of Soviet loans, which recently had been made at interest rates of 2½ percent and on progressively softer repayment terms. He pointed out that the Development Loan Fund operation as a whole, in terms of loans already made, involved a weighted average interest rate of 4.1 percent, and on this basis was meeting the cost of money to the Treasury. He said he would be reluctant to change the basic DLF interest rate unless it were necessary in connection with bringing interest rates on all U.S. Government domestic lending programs into line with the cost of money to the Treasury.

[Here follows discussion of the last item.]

0. Source: National Archives and Records Administration, RG 56, Records of the Department of the Treasury, NAC Minutes. For NAC Use Only. Presumably drafted by Acting Council Secretary Philip P. Schaffner, who was present, although the source text does not indicate the drafter.
1. Document 42.
2. Dated March 24 and April 14, respectively. (National Archives and Records Administration, RG 56, Records of the Department of the Treasury, NAC Staff Committee Minutes)
3. Dated April 14. (Ibid., NAC Actions)