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April 3c, SUMMAfiY 0? THE Xm&-AMXBXCA& BANK D0CUMHLTT3 On July 5i 19^-0, tile President transmitted to tlie Senate four documents relating to the Inter-American 3ank. They were the Convention < signed on behalf of nine countries including the United States, the proposed Charter and By-laws of the Bank attached to the Con von -c ion, and a Bill to implement United States participation in the Bank, She Convention, which required the advice and consent of the Senate to ratification, was referred to the Foreign delations Committee with its attached documents. The Bill was apparently never introduced, but it is being: considered along with the other three documents. Since detailed banking legislation is involved, the Foreign Relations Committee has turned the documents over to tha Banking and Currency Committee for an advisory opinion. Senator Glass, who wet Acting Chairman of the latter Committee, has had the documents since last May without taking any Committee action upon them. On January 1*+, however, he is reported to have told the Senate Foreign Relations Co--"lit tee that he considered hearings on the Inter-American Bank advisable and that he would hold them without further delay. No action by the Banking and Currency Committee has yot been taken. THS CONVENTION The Convention was signed in May 19*+0 by the United States, Brazil, Mexico, Colombia, 3olivia, the Dominican Republic, Nicaragua, Ecuador, and Paragua;/, and will ccrr.c into effect upon proper ratification. It commits those who ratify it to take the necessary steps to establish the Bank, subscrib3 to its capital, and grant it iixiunities in accordance with the Convention and its attached documents. The Convention specifically frees the Bank's as30ts from seizure, except upon admitted or adjudicated claims against it. It also frees the Bank and its personnel from taxation, although nondiscriminatory taxes upon nationals of the country concerned arc permitted, and fcha Bank and its personnel nro subject to customs duties with ccrtrin exceptions. In addition the Baal-: is to be free of exchange control; and the government of each member country in which it operates le required to make gold and foreign exchange available tc it on a basis ss to rate, amount, and all other factors no less favorable than the mosv favored treatment extended under -any circumstances to anyone. Ehia latter provision is to guard against the danger that the 3ank, while itself free of exchange control, would find ell others in the market subject to that control and hence not in position to sell it foreign currencies that it was prepared to buy. In such a case the Convention requires the Government of the country concerned zo supply exchange on the moat favorable basis. It is a much stronger prevision than that protecting Benk for International Settlements assets. Strictly speaking, tills most favored eachanga treatment is applicable only when the local currencies being transferred have been derived from deposits, loans, and investments which the Inter-American Bank has made in that country, That is, the Bank could not receive deposits of local currency and transfer them out of the country on the privileged "basis. It would, however, seem to be possible for the Bank to lend the proceeds of local deposits in the local market at short term and then transfer the funds abroad at maturity with all tha privileges that the Convention grants, .although the Bank could make such loans only if there were no "timely objection" by the country concerned and in any case it must be assumed that the Bank will be governed o:/ the spirit of the Convention. Just how tho Bank will handle its accounting so as to demonstrate that the particular funds that it wishes to transfer abroad have liOQii derived from loans or investments in the country, and not from the ineligible operations that are continually drawing upon or feedingits cash holdings, is far from clear. Apparently it will either have to move its funds abroad immediately upon repayment of a loin or set up water-tight accounting compartments of a complicated character. Each deposit of ratification of the Convention rmst be accompanied by the designation of a person to serve on the Organizing Committee, Once having ratified, a country remains bound by the Convention for one year after it ceases to participate In the Bank and ceases to be in any way obligated to the Bank. The Convention regains open to the adherence of American republics which are not original signatories, and it is understood that Argentina and Venezuela, as well as a number of other Latin American countries, will be prepared to join the Inter-American Bank, when the United States has assured its existence, PROPOSED CHARTER By ratifying the Convention, the United States would agree to grant the Bank a charter substantially in accordance with that annexed to the Convention. This Charter creates a body corporate with the name !l Inter-American Bank?' to be governed by the By-laws which are rlso attached to the Convention. The Benk may begin operations when at least a total of 1U5 shares of the stock of the Bank are subscribed for by at least 5 governments adhering to the Convention. To date the Convention has been signed by 9 governments whose minimum subscription would be 205 shares. The Bank is given succession for a period of twenty years and the United States agrees not to repeal or amend the Charter, except upon the request of the Bank. Provision is made under the Charter for amendment of the By-laws of the 3aa3c ether than Article 5A, which states purposes for which the Bank is established. Amendments may be made ^oy a four-fifths majority of votes cast Vj the Board, except in two cases -3which require the unanimous vote of the representatives of all participating governments (and not merely unanimity of the votes cast), A unanimous vote is required to change the minimum holdings of participating governments in the stock of the Bank and for amending the provisions authorizing "timely objection" to the transactions of the 3ank "by the participating government concerned. The Bank may sue or "be sued in any court of competent jurisdiction, BY-LAiffS Location The principal office of the Bank must be in the United States, and at least one branch or agency must "be established in every other participating country. Capital Structure and Participation The authorized capital is $100,000,000, consisting cf 1,000 shares having a par value of $10C,000 each, to be paid for in £Old or dollars. Fifty per cent of the issue price must be paid at the time of subscription and the balance may be called up later at the discretion of the Board of Directors, provided, however, that with respect tc Groups A, B, and C below only 25 per cent of the issue price need be paid at the time of subscription, and any part of the remaining balance which is called up shall not require payment of more than 25 por cont of the issue price in any cne year. The minimum subscription requirement of the participating countries, determined in relation to the dollar value of the total foreign trade of each in 1S3&» ^ s a s follows: GROUP A: Costa Eioa Jcuadcr 31 Salvador Haiti fticrxe.gua Paraguay C-E.OUF 3: 5 shares each Dominican Republic Q>uat eni£ 13. Panama 10 snares each GROUP C: Bolivia 15 shares GROUP D: Uruguay 20 shares GROUP E: Peru 25 shares i Jfc. GROUP ?: GROUP G: GROUP H: Ohile Colombia Cuba 30 shares each Mexico Venezuela 35 shares each Argentina Brazil United States 50 shares each Each government, upon subscribing to its minimum quota of shares, obtains twenty votes. If it subscribes to additional shares, it will obtain one vote for each such additional share purchased. I~o government, however, may acquire a voting power in excess of 50 P e r cent of the total voting power of all the other participating governments — that is, it can never command more than one—third of the votes. The shares of stock held by each government will be security for all its obligations to the Bank, and any government that violates any provision of the Convention as determined by a four-fifths majority of tho Board will be liable with it3 shares for any resultant damages to the Bank and its participation in the Bank mast cease. Management The administration ox the Bank will be vested in the Board of Directors, composed of one director appointed by each participating government. A director's term is two years, subject to the pleasure of his government. The 3oard must meet at least four times a year and the President may call special meetings at an:/ time. The 3oard will select the President of the Bank, whe will be chief of the operating staff and ex-efficio Chairman of the Board, and one or more vice-presidents, who will be ex-efficio vice-chairr:an of the Board. Their terms will bo for two years, and they will bo eligible for re-election or may be removal for cause at any time by the Board. The Board may, at -any meeting, by a four-fifths majority vote, authorize the President or a committee to exercise any specified powers until the next meeting of tho 3eard and may delegate the power to make loans and extend credit in snail amounts for such periods as it may determine. Before the Bank finally approves a loan in excess of cue year, however, it must have a full written report on the merits oS the proposed transaction, prepared by a conx-iittee of experts which may include outsiders, Within a year after its first meeting the Board must prescribe a limitation, relative to its capital and surplus, on assets of the. Bank with maturity in excess of one year. It must also prescribe reserves against demand deposits and other obligations cf the Bank. After these 1 imitations and reserve requirements have been established, they can be altered only by a four-fifths majority vote of the Board. Most of the longer-term operations of the Bank also require a four-fifths majority vote. The specific operations requiring a four-fifths majority arc shown in the table on page S. The United States will acquire a veto powor over such operations if it obtains oncugh shares to give it more than twenty per cent of the vote. How many shares it must acquire for this purpose depends upon tho extent of tho participation by other countries, Tho number of sharos is worked out on three representative cssumptions in an appendix to this memorandum. Accounts and Profits The accounts of the Bank will be kept in terms of dollars. Dividends paid mas'" not bo more than three per cent per annum on the paidup amount of the stock and will be noncumulative. Before any dividends are paid 25 per cent of tho nat profits must be paid into surplus until surplus is equal in amount to the par value of the authorized capital stock of the Bank, and any profits remaining after dividends have been paid will be paid into surplus as a dividend reserve. Purposes and Powers lline purposes, many of them overlapping and repetitive, are stated for the Bank. The Bank is to assist in Stabilising .currencies, to facilitate monetary equilibrium, to stimulate the full productive use of capital and credit, and tl promote virtually all phases of economic activity in the Western Hemisphere. It is also to promote research on technical questions and contribute expert advice. In order to carry out these purposes, the Bank is given power to engage in the usual banking and investment operations, Host of these operations in excess of two years require a four~fiftns vote of the 3oard of Directors or a government guarantee or both. Other operaticna ordinarily require that an opportunity be offered to the government concerned to raise a timely objection. If such an objection is made, the operation cannot be carried out in that country. Furthermore, there is a general provision that the operations of the Bank shall at all times be conducted in conformity with the policies cf the participating government directly concerned. A tabular statement of the Bank's powers, indicating the extent to which they are subject to these special controls, is given on the next page. In general the Bank may extend credit only to participating countries. It may, however, pat funds at the disposal of non-participating countries by purchasing foreign exchange or placing deposits with them, and its resources may be draw:-, from any part of the world. The "timely objection" provision does not apply to operations with non-participating countries. -6MAJOB. CONTEOLS OV3R OFEHATIONS OF THE INTSR-AMEEICAL* BANK (Abbreviations used are explained in the footnote) MI i« A. A. A. l .3 • J_ • J _n Suoject to the conditions noted, the Bank may 1. 2. 3. 4. 5. 6. 7. Deal in precious metals and foreign exchange Guarantee availability and rates of exchange Make deposits Make loans Guarantee loans Discount bills and other obligations Deal in securities 8, 9. 10. 11. Accept deposits Pay interest on deposits* Borrow from governments and banks Rediscount bills and other obligations with governments and banks 12. Sell debentures and other obligations of Bank Term oiy operation Two years More than or less two years i.o.(4/5) (4/5) T.O. T.O. T.O. T.O. T.O. T.O. (4/1) T.O. T.O.(4/5) (4/5) T.O. G.G.(4/5) G.G.(4/5) G.G. (4/5) G.G.:T.C.(4/5) T.O. (4/5) T.O. T.O.(4/5) T.O. T.O.(4/5) T.O.(4/5) T.O. T.O. 13. Act as agent or correspondent T.O. 14. Operate custody accounts T.O. 15. Deal in cable transfers, accept bills, issue letters of credit subject, on one interpretation, to all three limitations; on the other, to only those limitations which apply to a similar operation. * Interest may be paid only on deposits of central banks and governments. EXPLANATION OF A3BBSVIATI0NS G.Gr.: Government Guarantee (or direct Government obligation) required. T.O.: Timely objection. Operation forbidden if timely objection is made by director of country concerned. He must be notified by Bank of its proposed action and be given a reasonable period of time (fixed by 3ank) to object. Unanimous vote of all participating countries is required to amend this provision. (4/5): Four-fifths of votes cast by Board of Directors required. When the four-fifths requirement appears only in the column headed "More than two years", it, in fact, applies to operations with a maturity of one year or more. A four-fifths vote is also required to (l) determine violations of the Convention by participating governments; (2) establish or change the Bank's principal office or agencies; (3) select or remove the Bank's president and other officers; (4) determine official duties, consnittees, and departmental organization; (5) authorize officers or committees of the Bank to exercise specified powers of the directors for limited periods; (6) change regulations of -7the directors governing reserve requirements and specifying the limitation on intermediate and long-term assets in relation to capital and surplus; (7) call up balances due on stock; (3) fix the issue price of the Bank's stock; (9) permit transfer of Bank's shares to the Bank or other participating governments; (10) declare dividends from dividend reserve in surplus; (11) change Bank's capital structure; (12) liquidate the Bank; (13) request that Bank's charter be repealed, amended or renewed; (1*0 amend the Bank's By-laws. A unanimous vote of all participating governments is required to change minimum share holdings of such governments and to amend provisions relating to "timely objection" by any such government to transactions of the Bank. Section 5A specifying the purposes of the Bank cannot be amended, PRAJT OF BILL RELATING TO ESTABLISH^? OF THS INTER-AMSRICAN BAITK Ratification by ths United States of the Inter-American Bank Convention, with its attached Charter and By-laws, requires only the advice and consent of the Senate by a two-thirds vote. For the United States to grant a Charter to the 3ank, however, and to determine the exact method of its participation, legislation by both the Senate and House of Representatives is necessary. A draft of a Bill to accomplish this was transmitted by the President to the Senate, along with the Convention and its attached documents, on July 5» 19^0* The Bill appears to have gone to the Senate Committees without actually having been introduced in Congress. The first half of the Bill grants the Bank a charter in the form in which it was attached to the Convention, Its second half covers participation by the United States. It grants the privileges and immunities enumerated in the Convention, and it creates an Inter-American Bank Committee consisting of the Secretary of State, the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, and the Federal Loan Administrator (presumably the last-named will now be changed to Secretary of Commerce). This Committee is to appoint the American representative on the organizing committee of the Bank and also appoint and fix the compensation, if any, of the director to represent the United States on the Board of Directors of the Bank. Any member of the Committee or any other officer or employee of the United States or any director, officer, or employee of any Federal Reserve Bank or of any corporation the majority of the stock of which is owned or controlled directly or indirectly hy the United States is made eligible, along with others, to serve on the organizing corxiittee or as a director or in any other capacity with the Inter-American Bank. The director will serve for a period of two years, subject to the pleasure of the Committee. He will have full power to represent the United States on the Board of Directors and to decide whether or not to enter a timely objection on behalf of the United States; but he mast keep the Committee informed with respect to matters involving the Bank and must in any event enter a timely objection, pursuant to the By-laws of the Bank, when directed to do so by the Committee. Various powers are given to existing financial agencies in the United States to facilitate United Statet participation in the Bank. The Reconstruction Finance Corporation is directed to subscribe to stock of the Bank on behalf of the United States up to an aggregate par value of $25,000,000, and its borrowing powers are increased accordingly. The Corporation is also authorized to pay the compensation and expenses of the United States director, alternate, nominee, or proxy. Both the B2TC end the Export-Import Bank are authorized to make loans to the Inter-American Bank and to purchase its debentures and other obligations. The Treasurer of the United States is authorized to receive deposits subject to check by the Bank, provided that he pays no interest on such deposits. Section lU of the Federal Reserve Act is to be amended by adding the following paragraph at the end thereof: "(h) With the consent of the 3oard of Governora of the Federal Reserve System; and subject to such regulations and limitations E S the Board of Governors may prescribe, each Federal Reserve Bank shall have power to act as depositary, custodian, and financial agent for the Inter-American Bank, to establish correspondent relationships with and open and maintain banking accounts for and with the Inter-American Bank, to purchase, sell, and deal in any obligations of the Inter-American Bank, and to effect for or with the Inter-American Bank any transaction which such Federal Reserve Bank could effect if the Inter-American Bank were a member bank of the Federal Reserve System or a bank located in a foreign country." LETTER FROM SECRETARY HULL TO SENATOR GEORGE Early in 19^-1 a meeting was held in Washington between a group of bankers, wh^ had been critical if the Inter-American Bank proposal, and Mr. Berle of the State Department, assisted by various experts including members of the staff of the Federal Reserve Board, As a result of this meeting the bankers agreed that they would cease their opposition to the proposal if Secretary Hull would write a letter, embodying the agreement reached at the meeting, to Senator George who was then Caairman of the Foreign Relations Committee, to which the Inter-American Bank Convention had been referred. The agreement was to seek an amendment to the By-laws of the Inter-American Bank that would -prevent what the New York bankers chiefly feared — namely, possible competition between the Bank and coinmercial banks in direct loans to the public. As the By-laws now stand the only loans that can be made directly to the public without first obtaining a Government guarantee are those with a maturity not exceeding two years. Even these may be prevented by the timely objection of the Government concerned (see table on page 6). It was agreed at the meeting that after the Bank was established the United States would seek to obtain an amendment to the Bjr-laws requiring that the Bank's credits or operations in securities with a maturity not exceeding two years be guaranteed by a participating government, central bank, or other acceptable hanking institution. This procedure, if successful, would bring about the change without requiring the re-negotiation of the Inter-American Bank plan with all the participating governments before the Bank could be established. On March £, 19^1, Secretary Hull wrote Senator George a letter in which he stated that "On nay own behalf and on behalf of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, and the Federal Loan Administrator, I am prepared to state, for your information and guidance in passing upon the above-mentioned convention that, should we participate in the InterAmerican Bank Committee as provided in the proposed Bill, it would be our purpose, so soon as the Dank is established, to undertake to have the representative of the United States of America on the board of directors exercise his best efforts to bring about an amendment of the bylaws of the bank as indicated above." Should Congress now insist on further changes in the By-laws of the Bank, it is possible that the procedure embodied in this letter of Secretary Hull to Senator George could again be employed. That is, the members of the four-man Qomoittee which will pick the American director could commit themselves formally in advance to have the United States representative use his best efforts to bring about the desired amendments of the By-laws. Since the power of the United States director will be very great if this country acquires more than one-fifth of the voting power, such a commitment might be regarded as sufficient assurance that any reasonable amendment could be obtained, Hot only will the United States director have a substantial portion of the voting power, but the Board of the Inter-American Bank will be conscious of the fact that this institution is largely dependent upon the United States for the funds that will be needed in addition to capital. They will not be likely to reject any appropriate safeguards that this country considers desirable. -10AFFMDIX IITIEE-AMERICM BAKE Capital Participation and Voting Fo77er of United States and Other Ccrantries on Various Assumptions The By-laws of the in the amount of 100 million par value of 100,000 dollars be increased or decreased by Directors. Inter-American Bank provide for capital stock dollars, consisting of 1,000 shares having a each. The number and par value of shares may a four-fifths majority vote of the Board of Each participating government is required to subscribe for a minimum number of shares, fixed in relation to the value of the country's total foreign trade in 193$« ^ n e minimum holdings of participating governments may be increased or decreased only by unanimous vote of the Board of Directors. In return for its minimum subscription each government receives 20 votes. Every share purchased above the minimum Bob scription carries one additional vote, providing that regardless of the amount of stock it owns no government may have more than one-third of the total voting power. Most of the long-term operations of the Bank require a fourfifths majority vote of the Board of Directors. ?or the United States to have veto power in such cases, it would be necessary to obtain somewhat more than 20 per cent of the vote. The cost of obtaining this portion of the vote, under various assumptions as to the total subscribed capital of the Bank, is given below: Capital oi' Inter-American Bank (Assuming United States to acquire just enough shares to obtain veto power) Subscription by Subscription by all 21 countries 9 present signaMinimum by All shares tories: minimum subscribed by all but U. S. all but U. 3. Amount subscribed: United States Other countries Total $7,100,000 15,500,000 22,000,000 $13,100,000 33,500,000 51,600,000 $22,300,000 77.200.000 100,000,000 Amount paid in (l/2*): United States Other countries Total •^,550,000 7,750,000 11,300,000 6,550,000 19,250,000 25,300,000 11,^00,000 •53,600,000 50,000,000 * Half the issue price of each share is to be paid in at the time of subscription, and the balance is subject to call on three months1 notice at the discretion of the Board of Directors. Special provision is made, -11however, for eleven of the smaller countries, which need pay in only onefourth the issue price at tha time of subscription, and an additional one-fourth within one year, -no more than one-fourth being subject to call within any subsequent 12-month period. The full amount that the table shows as paid-in might not be received by the Bank until the end of its first year. Detailed analysis of shares -and votes The number of shares subscribed and votes obtained by each country in the three cases shown in the table on page 10 are given In detail below. In each case the United States is assumed to purchase just enough shares to give it veto power in decisions requiring a four-fifths majority vote. 1. Assuming that the present nine signatory governments are the only subscribers for shares and that the United States is the only government taking more than its minimum subscription: Shares Minimum subscription United States Brazil Mexico Colombia Bolivia Dominican Republic Ecuador Nicaragua Paraguay Total minimum subscription Additional U. 3« subscription to Obtain veto power Total Votes 205 20 20 20 20 20 20 20 20 20 120 21 "22o 21 201 50 50 35 30 15 10 5 5 5. 2. Assuming that the governments of all 21 American Republics subscribe and that the United States is the only government taking more than its minimum subscription: -12- Minimum subscription United States Argentina Brazil Mexico Venezuela Chile Colombia Cuba Peru UruguayBolivia snares 50 50 50 35 35 30 V 30 25 20 15 votes Shares Vote Minimum subscription Dominican Republic Guatemala Panama Costa Rica Ecuador SI Salvador Haiti Honduras Nicaragua Paraguay- 20 20 20 20 20 20 20 20 20 20 20 Total minimum subscription Additional U.S. subscription to obtain veto power Total 10 10 10 20 20 20 20 20 20 20 20 20 20 5 5 5 5 5 5 ^35 U20 Si a 5i5 501 3. Assuming that the governments of all 21 American Republics subscribe for the total authorized capital stock: All 21 countries: Minimum subscription Additional subscription Total United States alone: Minimum subscription Additional subscription Total Shares Votes 435 ^20 1,000 9*5 5c Possible acquisition of veto power by other countries If only the nine governments that have already signed the Convention participate in the Bank, the total capital stock will be sufficient for three governments besides the United States to acquire veto power ever decisions requiring a four-fifths vote. If the governments of all 21 republics participate, the total capital stock will be sufficient for two governments besides the United States to acquire veto power. If the derjand for additional shares exceeds the amount available, sucii demand must be met on an equal basis from available shares. W.R.G.
@FedFRASER