429. Memorandum from Reuter to Freeman, April 21
Sales of agricultural commodities under Public Law 480 have had a positive impact in helping to reduce our balance of payments deficit. Yet there is a tendency to ignore this resource when considering actions in the present drafts and even some call for restrictions on our Food For Peace efforts to avoid interference with dollar-earning agricultural exports. The 1960 Mason Report on U.S. local currency holdings suggested there exists wide-spread confusion and misunderstanding concerning both their use and value. This is still true.
We have been reviewing the use of P.L. 480 to improve our balance of payments position. Obviously this is not the major factor in the dollar problem. But a positive and imaginative use of P.L. 480 resources might provide up to the half billion dollars net additional balance of payments assistance in the fifteen months to the end of Fiscal Year 1964. Part of this will result from the very momentum of the present expanding program. Part will result from changing attitudes, allowing us to “sell” programs where we have significant local currency needs. Part will come from wider use of U.S. Treasury foreign currency holdings, presently standing at some $2½ billion equivalent.
These major areas of earning and saving dollars (primarily Title IV dollar sale and barter) are covered in some detail in a separate Food For Peace staff report. The following five points covering local currency use are illustrative of the possible short-term dollar actions under Title I alone.[Facsimile Page 2]
1. Uses of unexpected holdings:
During fiscal year 1962 the U.S. Treasury purchased $642 million worth of local currencies in 32 countries in which we showed no unallocated currencies but actually were holding local currency balances of almost $1½ billion equivalent (primarily in market development [5%] and contract adjustment [2%] funds and in unexpended but committed loan or grant money).2 “Buying” these monies with our appropriated dollars or “borrowing” them could have saved us up to $104 million [Typeset Page 1716] last year—and at the same time provided safeguard against devaluation of balances so used. Under current G.A.O. ruling this may take either Congressional action or clear indication of intent. Bureau of the Budget is studying both this possibility and action required.
2. Increased Title I U.S. use:
In food-deficit areas, Title I sales of agricultural commodities can generate local currencies for U.S. use. In fiscal 1962, we paid $271 million worth of bills in local currency. This can be increased by raising the U.S.-use percentage in contracts and by deliberately developing programs under Title I where local currency is needed. Our needs are the key—for we can’t “save” more than we use. Including the above transfer of dollars under Point I the U.S. Treasury last year purchased a total of $1½ billion worth of local currencies for U.S. use overseas.3 Economic and political factors prevent the use of food to generate the local currency in probably 85% of these cases. However, the balance of almost $200 million would have been subject to Title I currency action. With our expanding U.S. expenses for embassies and missions in newly-free countries, and with Peace Corps local currency needs of about $15 million a new factor this year, these U.S.-use local currency needs in applicable countries will rise above the $200 million 1962 balance not met. However, in the 15-month period $200 million might be a maximum [Facsimile Page 3] reasonable volume rate. The $104 million saved under the above provision would leave us a net dollar saving addition on last year’s figures of $96 million. The balances generated could replace the funded monies borrowed under the Use of Unexpended Holdings if this use of frozen balances were utilized to gain an immediate advantage.
3. Sale of Currencies to Tourists:
We have for years sold U.S.-held foreign currencies for dollars to U.S. personnel overseas. Recently in Egypt we made our first sale to a tourist. At least limited sale of local currency to tourists is now allowed under 13 Title I sales agreements. Extension of this plan, particularly in excess currency countries, should be encouraged and special arrangements made with major travel agencies and issuers of travelers’ checks. Even in the present 13 countries the U.S. holds over $365 million equivalent of local currencies. The value of this for the United States will depend on our ability to develop tourist exchange in the large excess currency countries.[Typeset Page 1717]
4. Sales of Currencies to Contract and Registered Groups:
Voluntary agencies registered with the Advisory Committee on Voluntary Foreign Aid transferred overseas in the six months from January through June 1962 a reported $22.8 million. Of this amount $9.7 million was in excess currency countries and $5.1 million in other Title I countries. Assuming this rate is maintained, we have at least $30 million a year subject to U.S. purchase for foreign currency holdings.
A.I.D. contracts with colleges, business groups and other organizations have long contained clauses covering use of local currencies by such contractors. However, the expansion of Title I to provide currencies where not now available and the use of allocated but unexpended balances should develop further dollar [Facsimile Page 4] savings. The possibility also exists for small quantities of local currencies, particularly in excess currency countries, being sold to business firms, foundations, missionary groups and others not directly financed by U.S. agencies.
A final area of consideration here might be the payment of certain veterans’ retirement and disability benefits to foreign residents in U.S. foreign currency holdings.
The proposals under this section may require a legislative amendment to P.L. 480 similar to the provision authorizing tourist sale. A significant dollar drain might be plugged by such action without limiting the activities of such groups.
5. Third Country Use:
Consideration should be given to possible third country use of local currencies. For example, East African pounds and the French trading community francs might be generated in one country and used in others within the bloc. We should investigate the use of Egyptian pounds in other Arab countries; and perhaps even dinars and zlotys for certain U.S. uses in Communist-bloc countries.
We presently are paying $4.1 million of U.N.R.W.A. costs with Egyptian pounds and $2.7 million with Syrian currency in addition to $6.7 million equivalent through direct food shipments. This is more than half of our U.N.R.W.A. support. During 1963 Fiscal Year we have budgeted $239 million for support of the United Nations and other international organizations and special programs. “Third country use” such as the payment of Indian rupees as part of our Congo peace-keeping support might be possible and to the degree that excess currency country funds were used the United States would have savings in both dollar outflow and cash budget spending.[Facsimile Page 5]
To accomplish this important effect on our balance of payments position would indicate more careful management of current holdings of currencies, some increase in the U.S.-use portion of contracts, and [Typeset Page 1718] the more deliberate use of Title I where we need local currencies. It may well mean an increased rate of Title I sales during 1964 Fiscal Year. This will require a change in Agriculture Department priority from Title IV to Title I in currency deficit countries.
Greatest obstacle to this increase will be considerations of normal marketings. The past approach to this has tended to be conservative. If balance of payments is given a priority consideration we may find greater objections from other food exporting countries. Department of State concurrence in this expanded Title I use would be required. It should also be emphasized that the cutting off of dollars supplied by normal U.S. expenses could work a hardship in some countries and presumably increase A.I.D. expenses. (Korea is a good example.)
However, we have adequate foodstocks and adequate Congressional authority for their use. In general the “demand” is present. A country-by-country review, using the broadest possible “shopping list”, should provide direction for a Title I “sales campaign” to reach our goal. Careful relationship of this projection to A.I.D. country goals would be essential to effective program development.
Title I step-up offers us our greatest potential for quick additional dollar impact and should provide more than half of our additional dollar savings. However, the expanded use of barter under the new regulations should allow Defense and A.I.D. offshore procurement of materials and services and some additional stockpile requirements through the use of food in place of dollars. The present artificially low barter rate of $80 million per year presumably will be greatly increased, although we do not yet have an experience on the acceptability of this for current-use procurement. The eventual impact will probably be determined by the aggressiveness of A.I.D. and Defense in utilizing barter and the willingness of State to approve such expanded use.
One final proposal might be considered. Title IV sales legislation provides a moratorium of up to two years following last shipment in any year. More rigorous restriction of this provision [Facsimile Page 6] and shorter term contracts with higher interest rates might allow for earlier and larger dollar earnings under Title IV contracts. This would make Title IV more nearly the transition step to full normal commercial transactions.
In summary then, we contend that for many purposes food and dollars are synonymous. When we spend local currency for U.S. uses, we are spending food and the dollars remain in this country. When we lend the local currencies back to the receiving country what we are really doing is lending food to help develop that economy.
It is this “food-for-dollar attitude” which has frequently been lacking in overall foreign programming and in previous recommendations on this subject. Our ability to grow food can be important to us here—[Typeset Page 1719]and at the same time contribute to the world struggle for freedom from hunger.
Director, Food For Peace