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BOARD OF GOVERNORS DF THE FEDERAL RESERVE SYSTEM _. . December 28, 1945• Date Office Correspondence To Chairman Eccles From Mr* Knapp Subject:. Attached is a letter dated December 27 to you from Mr, Sproul developing the argument for using the direct Treasury method rather than the indirect Export-Import Bank method for handling British credit. Also attached is a copy of my acknowledgment. Mr. Sproul1s special points spell out in some detail the third paragraph of your letter to Secretary Vinson in which you stated that "The Export-Import Bank would be acting completely out of character in handling the British credit" because "it operates under Congressional mandates to concentrate on financing the foreign trade of the United States and to operate on a commercial basis". Att. FEDERAL RESERVE BANK OF N E W YORK 7 December 27, 194-5. Honorable M. S. Eccles, Chairman, Board of Governors of the Federal Reserve System, Washington 25, D. C. Dear Marriner: I was glad to have your letter of December 20th enclosing a copy of a letter you had written to the Secretary of the Treasury, putting yourself on record with the National Advisory Council concerning the implementing of the British credit, I have thought about this a good deal since my earlier letter to you, and I am convinced that the way we propose that it be handled is much the better way. You are right, I think, in emphasizing the unique character of the British credit as the main reason for not channeling it through the Export-Import Bank, and in omitting reference to the close relationships between this bank and the Treasury. As far as the latter point is concerned, arrangements could be made so that payments, under the credit, would come to the Bank of England account with us, whether from the Export-Import Bank or the Treasury, with almost equal facility. Of course neither we, nor, I believe, the Bank of England and the British Treasury, would want to see an account opened directly with the ExportImport Bank by the Bank of England, and I assume that this would not be contemplated no matter what the arrangement. Some special points to bolster the general argument that the direct Treasury method rather than the indirect Export-Import Bank method should be used, are as follows: 1. Under Section 2(a) of the Export-Import Bank Act of 194-5, the Bank may make loans only "for the purpose of aiding the financing and facilitating of United States exports and imports ....." This is the principal, but not the sole purpose of the British loan. Paragraph 3 of the financial agreement specifically provides that the credit may be used, not only to facilitate purchases by the United Kingdom of goods and services in the United States, but also "to assist the United Kingdom to meet transitional postwar deficits in its current balance of payments, to help the United Kingdom to maintain adequate reserves of gold and dollars, and to assist the Government of the United Kingdom to assume the obligations of multilateral trade, as defined in this and other agreements." Thus, a part, and possibly a substantial part, of the British loan will be expended in third countries and, furthermore, may not even indirectly facilitate United States exports (if the dollars acquired by third countries are simply held idle). That part of the loan will be expended in third countries is further clear from the VICTORY FEDERAL. RESERVE BANK OF NEW YORK. -2- Hon. M. S. Eccles 12/27/45. commitments imposed upon Britain within one year of the effective date of the agreement to permit, with certain exceptions, multilateral convertibility of sterling which foreign countries will be currently acquiring. 2. Apart from the purely legal aspects of the matter (which perhaps could be generously interpreted to cover the British loan), extension of the loan would be in direct contradiction to the established policy of the Bank. Export-Import Bank loan contracts have generally included "tying clauses" requiring that the proceeds of the loans be spent only in the United States. In its General Policy Statement of September 11, 194-5, the Bank reaffirmed its intention to confine its loans to the financing of United States exports and imports only. The pertinent paragraph of the policy statement reads as follows; "As a general rule, the Bank extends credit only to finance purchases of materials and equipment produced or manufactured in the United States and the technical services of American firms and individuals as distinguished from outlays for materials and labor in the borroYfing country or purchases in third countries." 3. In recent months, the Export-Import Bank has made three principal kinds of loans: (1) 30 year loans at an interest rate of 2-3/8 per cent which replaced financial arrangements concluded v.ith certain countries under Section 3(c) of the Lend-Lease Act; (2) rehabilitation loans for the purchase of United States goods at an average rate of 3 per cent to be amortized over 20 years; and (3) development loans to Latin-American countries for periods of 5 to 20 years at a rate of U per cent. These loans come somewhere near having the quality and attractiveness which make participation of commercial banks in Export-Import Bank credits a possibility, which latter is one of the aims of policy of the bank. The British credit does not (and should not) have these attributes. I am sure the technique we suggest is the one to use, and I hope the enabling legislation will require it, or permit it so that the Treasury may use it. Yours sincere^ 2B, Mr. Allan Sproul, President. Federal Reserve Sank of feew x'ork, So?/ iork 7, Dear Mr. I In the abeenee of Chairman Stain** nho lg m\i of should like to «*ekriowled#e your l e t t e r of Dnttnber 2? addfetted to bin on th© subject of the procedure lor handling the British credit* ic s t i l l have no official nord nonet ml rig '^roijr^EB on thi enabling leglnlation for «MJ credit bmt It l i idorttood that the matter rests at the moment with toiletajfj Vinson. I have learned inform&lly, howvnr9 tfcat itrlom eofi#idoratlon It being jivtBj at le&st in the State DtpartMM&j to iHttfltm; the Bpitith credit through the &tport-Lxport lank primarily beoevee thla eoume appeen to have tnttie&l advantage! in tno approach to Congreon« For on® thing, i t would asj;tire tftat the natter ewald be referred to the ffnahing <sarf Currency On—tttnoij which are nnnntrtnrod to he relatively »jvq>athetl6« furthersor©, i t i s hoeed lh«t Cengr^eae will avthorite raising the. required fnBda at a public doot tranaftotioe rather that through the ordinary appropriation [innmniilt, lad i t is felt that tt nonXd he eor« diffic\ilt to obtain Mth anthttfttitlnn in a ooni^letelf nev net of Confreas than in & "sl&ple*' «sendteent to the »rf&ent lsport->Inport legielatlon in vhlth the ^public dtnt transact 5 on" technique la already onbodjed. The nveeinl points etated la your l e t t e r aertalnly denonnti thvit the Export-Import hmiK wo^ld oe acting completely e«t of eharaoter In htfrflTHnf ihe British oredit f althongjhf of course, Congreee could implicitly or ©xplicitly alter th@ oharaeter of the Bank*s oporatdont for the purposes of the British CMMWt In-.ie^d, I believe tlntt tilt legislative history of the fljioi t Ti>ni I Bank aete &nXm i t ojsite tlnar that the nank is at pfeiMat boond by Congressional ntodttOf md not only by i t s c?m policy decisions, to Bake only "tied" losn^ and to a®ka then on terms approxisRating a tot»i©reial basis. I t S*»<MPS mw^lf cle-.-ir th-t neither of the** criteria could be stretched to covsr the British loan. I think you. ntaj re«t aonred tost even if the Britinh loan i s pawed throufh the teport-Import 3am payments under the tredit nlll be to jrotor Bank for British a#BOMttt« The Rxport*Inport innk hat llr* A f MMNNftt* for i t s customer* and I f#»l sure haa no intention of exprpding i t s oper^tiona in th&t flirection. Very traly J. 'iu JSK rl pp, t to the
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