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OUTLINE
Need for a Foreign Lending Arm of the United States Government.
The Export-Import Bank - Do Its Present Policies and Operations
Fill this Hole?
.
Relationship with Other Agencies - National and International
A#
B#
C.
D*
International Bank
International Monetary Fund
Economic Cooperation Administration
Department of State
A Positive Program for the Export-Import Bank.
I*
Need for a Foreign Lending Arm of the United States Government
The United States is committed to the support of the international
institutions for maintaining the peace, for financing reconstruction and
development and for monetary stabilization.
The second of these, the
International Bank for Reconstruction and Development, for various reasons
has not as yet been able to assume the role conceived for it at Bretton
Woods.
However, no United States institution can be justified as a
permanent part of the structure of the United States Government merely
because one of the international institutions is not functioning effectively at the moment.
Specifically, the justification for the Export-Import Bank as a
permanent foreign lending arm of the United States Government cannot be
based on the assumption that the International Bank for Reconstruction
and Development is not functioning as an international bank.
Nor can
it be so justified because the Economic Cooperation Administration's
lending program has deteriorated and merged with its grant program.
A case must first be made for the need, if such there be, of a
permanent foreign lending arm of the United States Government.
Force of
circumstance has placed on the United States the role of leading nation
of the worldj particularly in the field of international credit she has
assumed Britain's former role. It is axiomatic that a creditor nation
must accept and encourage imports - the government as well as industry
must accept this precept and encourage and assist its implementation.
- 2 If private commercial banks could handle, in its entirety, the
financing of foreign trade, both import and export, there would be no
need
or justification of a government bank set up by the Congress
specifically for the purpose of financing, assisting and facilitating
the foreign trade of the United States. The only reason for the existence
of an institution such as the Export-Import Bank, authorized to do a general banking business in this field, is the fact that there exists in
normal times and particularly in times of international economic or political maladjustment an area in which desirable foreign trade can be financed
only by the assumption of a risk on the part of the lending institution
which the private bank would not be warranted in undertaking.
The risk
involved may be too great for private financing for a number of reasons.
Too long a period may be required for the private bank to undertake it
or the country to which the goods are to be exported may be short of
dollars and, as a consequence, may have restrictive exchange or import
controls. Again, there may be disturbing political conditions in the
importing country which might, over a period of years, create some uncertainties on the part of the commercial bank as to prompt repayment.
Hence desirable, and perhaps, necessary foreign trade can sometimes be
carried out only with the assistance of a government lending institution
such as the Export-Import Bank. For such an institution to restrict its
lending to the standards of the commercial banks, and base its policies
on those standards would be to forget its raison df etre. The public
bank cannot limit its lending to "sound" loans in the strict commercial
sense.
It must take the longer risk and thereby protect and assist private
capital by making only those loans which commercial banks feel unable to
- 3make.
In carrying out this policy the Export-Import Bank would be ful-
filling the precepts of its statute of supplementing and not competing
with private capital*
If it limited its lending operations to the risks
commercial banks are willing to undertake, it would assure itself of
reasonable assurance of repayment to be sure, but would in effect be
violating its statute by competing with private capital. This thesis
does not imply that a government bank should engage in unsound lending,
for with prudent judgment and management experience has shown that there
exists reasonable assurance of repayment in many loans which commercial
banks would be unable or unwilling to undertake.
The abnormal demands during the last war, in addition to the ever
increasing demands of the whole American economy, have drawn on our
formerly unlimited resources to such an extent that some manufacturing
concerns will, in the course of a few years, be entirely dependent on
imports. Without the discovery of great new bodies of ore in the United
States for instance, industries using copper, lead and zinc will find
themselves in this situation.
It is not merely an immediate demand for strategic materials, although that has a particular significance at the moment. It is the longterm requirements of those basic industries in the economy which must be
foreseen and for which provision must be made. It calls for immediate
steps to be taken in the development of copper, lead and zinc mines
abroad and in the development of sources of many other materials. A
United States steel company is already importing considerable tonnages
of iron ore from the Itabira mine in Brazil. Can it be said that private
-ucapital would have been able or justified in taking that initial development risk of making ore available from an undeveloped mine U00 miles
deep in the jungle which the Governments of the United States, Britain
and Brazil were induced to take only under the pressure of vrar time necessity . Yet with ore from Itabira already helping to supply our industry,
there is little doubt but that the #19,000,000 invested in that development by the Export-Import Bank will be regarded as great foresight on
the part of our government in taking a risk which neither private banks
nor steel companies could have undertaken*
The possibilities of similar
developments in Latin America alone are unlimited.
Only by governments
taking that long early risk with or without private participation can
those developments come to pass in time to meet the pyramiding demands
of our industralized civilization. To fulfill these responsibilities
the United States Government needs a permanent lending arm. Such financing of imports will not only support our basic industries but will assist
the United States to fulfill its role as leading creditor nation of the
world.
Aside from these economic aspects of government lending abroad, does
the United States Government need a mechanism for making foreign political
loans?
It is maintained that making a loan to a country for the sole
purpose of keeping an unpopular government in power in that country and
without economic justification is unwise, naive, undemocratic and ineffective. It is an attempt at a quick and easy solution by polite bribery.
But to say that the United States Government, or any government, should
never make a loan for political purposes is equally unwise and naive. The
solution lies in the belated discovery of an American scholar that
"politics and economics are inextricably entwined."
- 5Recognition of this basic fact leads quickly to the conclusion that
no foreign loans can be made -without producing both political and economic
effects in varying degree. A loan which is sound economically will generally have a good political effect. It follows, therefore, that to
produce the desired effect a loan must have a sound economic base. Otherwise it is temporary in effect and likely to produce an adverse political
reaction.
Can it be said that there was not a worthy political motive in the
Itabira Rio Doce loan agreement, namely to cement British, United States
and Brazilian ties during the war?
Yet its economic base was production
of a vitally needed basic material - iron ore#
The assumption that political considerations should be eliminated
from government lending is unrealistic. Governments are a part of the
body politic and cannot and should not engage in foreign lending operations without political as well as economic motivation and consideration.
However, to be effective politically and economically, foreign loans must
make an actual contribution to the economic vitality of the borrowing
nation. The Export-Import Bank*s 1100,000,000 credit to Italy is a case
in point.
Foreign lending by a government must be done by a single agency. It
must not be dispersed throughout different arms of the government. Only
by having it centralised can it be done effectively and with dignity. Experience has proven this. We found during the war that our Allies were
prone to play the Lend-Lease Administration off against the Office of
Economic Warfare in demanding essential civilian requirements and that
the multiplicity of United States purchasing missions and agencies often
bid against each other in obtaining needed materials at the expense of
- 6the American taxpayer. The jurisdictional competition between the
agencies made this possible. It became necessary to consolidate all of
these agencies in the Foreign Economic Administration in order that the
United States might speak m t h one voice abroad on foreign economic matters.
The same principle holds true in the foreign financial field. Should
it be decided to try to separate political and economic foreign lending the Congress undertaking the former directly and the Export-Import Bank
handling the latter, the so-called "borrowers1 union" would be aAuick to
play the one against the other. The indivisibility of the political and
economic factors would make this possible. The lending arm of the United
States Government must be a single agency with the full responsibility.
II.
The Export-Import Bank — Do Its Present Policies and Operations
Fill the Role of the Foreign Lending Arm of the United States
Government?
It would be an overstatement to say that the Export-Import Bank knows
what it can not do but is not sure of what it can or should do. And yet,
to clarify onefs thinking on the role of the Bank, it seems necessary to
point out that the Bankfs policies have been long on the side of selflimitation and short in the field of positive programming.
(1) The Bank has shied away from "balance of payments" loans. And
yet two of our most successful loans have been just that, e.g., Canada
and Belgium.
Furthermore, no loan can be made abroad which does not have
in some degree a balance of payments angle.
(2) The Bank has, with very few exceptions, insisted on government
or central bank guarantees when lending to a private entity abroad. This
- 7constituted prudent judgment immediately after the war*
Is it necessary,
in all cases now and in the future, to insure reasonable assurance of
repayment?
(3) The Bank has sought to make only loans which are "sound" in the
sense that they would be made by private banks in normal times*
In other
words, we have tried to refrain from assuming the large risks (greater
than the private banks could undertake even in normal times) in the development of sound economic projects*
(U) The Bank decided not to make any reconstruction or long-term
development loans as soon as the International Bank became operative*
This was done quite properly in order to eliminate, if possible, any duplication or overlap between the two institutions and to support the international institution*
One year later, however, the United States had to
resume unilateral reconstruction lending through the Economic Cooperation
Administration because the International Bank could not assume the burden*
(£) The Bank has refrained from engaging in promotional activity,
yet the statute of the Export-Import Bank prescribes that it shall not only
finance but assist and facilitate the foreign trade of the United States#
The Bank has quite properly refrained from solicitation of credits*
In the
administration of some credits, however, there is much which the Bank might
do to facilitate foreign trade* A case in point will illustrate this suggestion that the Bank broaden the scope of its operations in the foreign
trade field*
The Rio Doce - Itabira project was financed in part by the
Bank at a time when the war-time allies feared the loss of some of their
existing sources of iron ore*
With $19,000,000 at stake in the enterprise
and present assurance that the Brazilian Government w i H play its part in
the project, there is fair prospect of increasing tonnage of high-grade
- 8iron ore being delivered to the east coast port at Vittoria. American
steel companies are concerned about decreasing grade and resources of
domestic ore on the Mesabe Range• They are skeptical as to practic- ability of using Itabira ore on two counts. Lack of assurance of constant
tonnage being delivered at the port of Vittoria due to the ineptness of
Brazilian Management and the difficulties of inland transport in Brazil
and the long ocean haul give them pause.
It is suggested that the Bank solicit the help of American steel
companies in attempting to make the Rio Doce Itabira project a success.
This is not a new suggestion*
The objection has been raised that the
Bank would become vulnerable to criticism by dealing with one or two
United States steel companies. This objection can be overcome by adopting in this instance the industry advisory committee technique which
operated successfully during the war, both in the War Production Board
and the Foreign Economic Administration, and has been continued by the
Department of Commerce.
The Bank Yfould invite all of the U. S. steel companies, big and little,
to designate representatives on a voluntary business advisory committee to
come to Washington for the purpose of advising with officials and staff of
the Export-Import Bank on how best to solve the problem of successful transportation both inland in Brazil and on the ocean, of Itabira iron ore in
order to make that ore available to American industry.
The advice of this
committee might also be asked with regard to the problem of management
and operation. If some feasible plan evolved it might be advisable to
call in representatives of the shipping companies engaged in Latin American
coastwise trade to solve the problem of ocean haul.
- 9Thus the Bank would be assisting and facilitating American foreign
trade, stimulating imports, contributing to the productivity of Brazil,
thereby making possible the amortization of the loan, and building up
two-way trade between the United States and Brazil*
Other cases in point are the credits extended by the Bank to the
Finnish-American Trading Corporation and the Italian Handicraft Industries*
These were worthy credits designed to revive handicraft industries and to
promote imports into the United States#
In the case of Italian Handicrafts,
the Bank deleted an item for promotional activity in advertising and
selling*
Both of these enterprises are now encountering great difficulty
in merchandising their products at Finnish House and Italian Haidicrafts
in New York. For these projects to succeed the borrowers need dollars
with which to hire American technicians skilled in merchandising and advertising in order to make the American public aware of the existence of their
products*
If the Bank would lend dollars for this purpose, it would be
facilitating, financing and assisting imports into the United States and
securing more reasonable assurance of repayment*
(6) There has been a tendency in the Bank to say "No" in the first
instance when an application is presented*
Granted that a healthy skep-
ticism is an essential part of the prudent banker's make-up, it is maintained, however, that the government banker, who is forbidden by law from
competing with the private banker, should not do so even in this respect,
particularly y/hen his purpose, likewise prescribed by law, is to undertake
those risks which are in the interest of American foreign trade and which
the private banker cannot undertake*
This attitude has in many instances
resulted in the Bank's missing the time when the Bank could act one way or
- 10 the other on its own initiative, and later finding itself under conflicting pressures because of the delay and consequently unable to take definitive independent action.
In some instances the Bank might ultimately
have to disapprove because of the force of circumstance to the discomfort
and financial loss of the American traders concerned*
(7) The Bank has been inclined to refrain from making political
loans even when such loans had economic justification.
(This question has
been discussed in detail in the first section of this paper under justification of a foreign lending arm of the United States Government.)
(8) The Bank refrains from making long-term loans. This position was
based in part on the assiHiiption that the International Bank would undertake
the long-term development projects. However, is not the bulk of foreign
development a long term proposition —
foreign development which is in the
interest of American foreign trade. The development of iron, copper, lead
or zinc mines are long term projects. It often takes many years to bring
a mine into production.
(9) The Bank refrains from extending credits for exploration, confining its financing to development of known resources. Exploration, as
distinguished from wildcatting, must be done if new sources of mineral and
petroleum are to be discovered and developed. Who is to take that risk?
Neither the United States commercial banks or private venture capital will
normally take that risk of financing exploration in foreign lands. let,
it must be done — many of our domestic sources are running out. "Who can
take it other than the lending arm of the United States Government.
(10) The Bank has refrained from undertaking credits which looked
suitable when the International Bank wanted to make them but could not for
- 11 charter or other reasons. In undertaking a loan in such circumstances,
the Bank would merely be fulfilling its responsibility and would be doing
no disservice to the international institution.
In not making a desirable
loan in such circumstances, it might be doing a disservice to the fulfillment of its own responsibility.
Perhaps the Bank has leaned over backwards in its efforts at cooperation. The Bank has never taken the initiative in seeking to broaden its
program or with regard to increases in its lending authority*
If it is to
embark on a positive program of determining what projects would be desirable
in the broad interest of the United States and encouraging worthy development programs, instead of merely waiting for business, desirable and undesirable, to come to it, it must take the initiative with regard to the
shaping of its program and any necessary legislation pertaining thereto*
III. Relationship with Other Agencies - National and International.
International Bank - "When the International Bank for Reconstruction
and Development became operative, the Export-Import Bank brought to a
close its reconstruction and long term development lending. Close liaison
has been maintained between the two institutions and duplication and overlap
has been kept at a minimum. We have attempted to draw the line of demarkation between the functions of the two institutions on the basis of longterm general purpose and development versus short and medium term foreign
trade loans. By and large the result has been negative at least in the
field of long-term development lending which the International Bank has
found itself unable or unwilling to do partly because of its dependence for
its loan funds on the private investment market and partly due to the
- 12 apparent lack of recognition on the part of its present management of its
basic character as an international institution. However, the United
States is committed to the support of the international institution and
the Export-Import Bank, as the lending arm of the United States Government, must lend substance to that United States commitment. Nevertheless,
it is not incumbent on the Export-Import Bank to restrict its current
operations and determine its future character on the present ineptness of
the International Bank,
It can go forward in making sound economic loans
of varying term and of a developmental nature which the International
Bank, because of charter difficulties or otherwise, is unable to undertake.
International Monetary Fund - There is no conflict in operations
between the Fund and the Export-Import Bank, The relationship is primarily
consultive.
Economic Cooperation Administration - The Act creating the ECA
prescribed that the Export-Import Bank should make and administer loans
on terms determined by the Administrator of ECA in consultation with
the National Advisory Council*
The role of the Bank contemplated in the
Act has been reduced to the point where the Bank plays simply a minor
agent's role. This has come to pass as a result of the procedure adopted
by ECA whereby loans and grants are merged in the same program. As is
always the case, the good currency depreciates to the value of the
cheaper currency when the two are mixed*
Thus, ECA loans mixed with grants
have in effect become grants with a loan facade.
Consequently the first year's operations of ECA will turn out to
be virtually a grant program.
No attempt is being made to deprecate
- 13 a grant program in the first phase of European Recovery.
Perhaps it
was a mistake to try to force loans in that first phase of the program
but the grant program was essential. Pump priming in that quantity should
so stimulate European economies as to cause sound economic projects to
emerge on which constructive loans can be made. This being the case, the
foreign lending arm of the United States Government (the Export-Import
Bank) should undertake that lending program in the second phase of
European recovery.
If the Bank believes this, it should take the
initiative in so suggesting*
Department of State - There exists no need to rehearse the history
of the Bank's relationship with the State Department.
working relationship is satisfactory.
The present
State participates in the Bank's
actions but does not dominate. State keeps the Bank informed as to
foreign policy considerations which are always taken into account in
the Bank's deliberations0
IV. A Positive Program for the Export-Import Bank.
If the Bank is to assume the role of the sole foreign lending arm
of the United States Government, its approach to such a role must be
positive not negative.
It must seek ways and means of fulfilling this
necessary role and now is a propitious time for it to take the initiative
arid move in that direction. The first step should be the adoption of a
modus operandi encompassing the following steps. In recognition that
the American national interest is best served by stimulation of healthy
multilateral world trade, the Bank should proceed:
- 1U(1) To facilitate United States foreign trade in and out, export
and import, to the extent of promoting American foreign trade through the
medium of Advisory Committees of American importers, users of imported
materials in their manufacturing processes, e.g., steel companies who can
use Itabira or Steep Rock iron ore and of United States commercial banks
who engage in foreign financing.
The latter committee could facilitate
the Baik's efforts to obtain a maximum of private capital in foreign
financing. Also an Advisory- Committee of Exporters, whose membership
would be a cross section including the small manufacturing concern
engaged in foreign trade but 7fhich cannot afford a foreign department as
well as the large American manufacturer, e.g0, General Electric, Westinghouse, General Motors, etc.
(2) To establish a transfer section in the Bank for handling
transfer guarantees and possible export insurance. To this end the
Bank should initiate any necessary legislation.
(3) In assuming its role as the foreign lending arm of the United
States, to undertake to lend to ERP countries in the second phase of the
European Recovery Program following the initial phase of the disbursement
of grants by E.C.A. aid in consultation with the President and the
National Advisory Council to initiate the necessary legislation.
(U) To extend development credits in furtherance of two-way
United States foreign trade to Latin America and anywhere in the world
supplementing and not competing with the International Bank.
{$)
Through advice, suggestion and assistance to develop into the
foreign trade center of the United States and to issue a quarterly or
monthly publication reporting the facts and developments with regard to
-15Export and Import and foreign financial problems, as a guide and for
the information of American exporters and importers and commercial banks.
This to be done under our present Act in pursuance of the directive to
assist and facilitate American foreign trade, and of encouraging,
supplementing and not competing with private capital.
(6) Consult and advise with officials of industrially underdeveloped
countries both in "Washington and the foreign countries concerned in an
effort to help them determine what projects would be most creative in
the development of their respective economies. This will involve sending
missions from time to time at the request of the foreign nation*
(Our
Department of Agriculture has done most constructive work in this manner
which has proved to be decidedly in the national interest.)
@FedFRASER