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William McChesney Martin, Jr., Papers

Series IV, Subseries B

Box 15/Folder 8

Memorandums, 1949-1951
Federal Reserve Bank of St. Louis






February U, 191x9

Dear Bill:
I am typing this memorandum myself and retaining no copy. It contains a few comments on the Treasury set-up and on m^jor current problems
which I thought might help you more if they were put down on paper.
1. Procedural matters.
(a) Secretary's Press Conference.

With fair regularity, the Secretary meets the Press on .
Wednesdays. On these occasions? he meets his top staff (Under Secretary
Assistant Secretaries, General Counsel, Administrative Assistant, and
Press Officer — i.e., Jim-Saxon) during the preceding half hour to be
briefed. The staff remains during the subsequent Press Conference, which
usually lasts between 10 and 20 minutes. The Secretary does not ordinarily
use written notes at the 6onference. My own practice has been to have ihhe
Division Chiefs in OIF hand to me before I leave for home the preceding
evening their suggestions as what questions may be asked (in their fields)
bv the reporters and what answers the Secretary might give. The next morning
I reviewed these with the Division Chiefs in a brief Staff Meeting, and
during that meeting made my own selection and jottings. I then expected to
spend about 5 minutes (at most) orally running down the possible questions
and answers with the Secretary when my time came during fchs his Staff Meeting.
Quite often, if the reporters ask for detail or if the Secretary hesitates
and turns toward one of his staff, that person pipes UD with a further word.
(b) Other contacts with the Press.
Reporters phone into my office with some frequency asking
for background, confirmation of rumors, etc. If the queries are purely for
information, my secretarv pefers them to the appropriate Division Chief,
all of -whomare experienced enough to stop talking if they are pressed for
policy views. Policy queries come direct to me, and I do what seems best
at the moment, $ust as you no doubt have done at the Ex-Im Bank. Once in
a while some matter eomes up which is of wide interest and is very complicated.
In these instances, at the suggestion of the Press Officer, I have arranged
to meet the reporters in my office and spend as much time as they want in
going into detail. I did this after the British crisis in 19h7, during the
French franc hubbub early in 19h8, and to explain our policy in winding up
Foreign Funds control.
(c) Overlap with other parts of the Treasury. On the whole, the
Treasury Order setting up the Office of International Finame gives it a
^ clear responsibility. Probably on 90 percent of the matters handled, ttere
is little need to check elsewhere in the Treasury (or else the checking
is done as a matter of routine by the staff). On a few matters, you may
wish to co-ordinate with other Treasury officials. I list these overlaps
below, insofar as I recall them.
In most of these matters, the policy responsibility rests with OIF (and hence with you).
Federal Reserve Bank of St. Louis


(1) Overlap with Under-Secretary Foley:
(a) Silver transactions, agreements, and policy. (Because
the Mint reports to Mr. Foley).
(b) Printing of currency for overseas use — nearly ended,
except for Germany. (Bureau of Engraving and Printing
reports to Mr. Foley)
(c) Procurement of strategic materials. (Bureau of Federal
Supply reports to Mr. Foley)
(d) Counterfeiting activities outside of the U.S. (Secret
Service reports to Mr. Foley). Incidentally, we
carrvon the OIF payroll a Secret Service agent in
Paris who overtly works on counterfeit matters throughout Europe.
(2) Overlap with Assistant Secretary Graham;
(a) Customs matters. (Bureau of Customs reports to Mr. Graham).
(b) Tax policy with respect to foreign countries or
U.S. enterprises abroad. (Tax Research reports to Mr.
Grah am).
(3) Overlap with Bureau of Internal Revenue. Principfgpily tax treaties.
Overlap with Fiscal Service (Mr. Bartelt). A series of matters,
such as U.S. holding and utilization of foreign currencies,
use of U.S. dollar currency overseas, payments arrangements
with and in foreign countries including war settlements,
various fiscal procedures involving foreign aid, etc.
Overlap with General Counsel. Over the years there have been
verv close relations between OIF (and its predecesser, Monetary
Research) and the General Counsel's office. I talk a lot of
matters over with Tom Lynch informally. Moreover, an Assistant
General Counsel has always been assigned, with appropriate
staff, to work with the OIF group. I instituted the practice
of naming this person Chief Counsel to OIF. The incumbent
is Biting Arnold, who is able, meticulous, and a little
pedantic. He has about 10 lawyers assigned to him (all on
the OIF, or Exchange Stabilisation, budget). They work very
closelv and continuously with the economists. Tern Lynch
never worries about being "left out". Sometimes Arnold,
needled by his staff, does complain. However, on the whole
the teamwork between economists and lawyers is smooth, effective
and valuable. A few of the lawyers try to be economists,
and a few economists try to be lawyers; but on the whoibe
they stick to their knitting. Tom Lynch signs some letters
which are heavtLlv on the legal side which I initial, and
vice i?ersa, for letters on the economic side.
2. Organization matters within OIF
Federal Reserve Bank of St. Louis


As I told you in conversation, there are three major vacancies
in the Washington staff: the Director, the Deputy Director,
and the Chief of the NAG Secretaria6.
George Willis, Chief
of the European Division, is Acting Director; and Dillon

-3Glendinning, Chief of the British Commonwealth Division, is Acting Secretary
of the MAC and Acting Chairman of the NAG Staff Committee ~ duties which
by Treasury Order go with the post of Deputy Director. He is not, however,
Acting Deputy Director.
I have known Willis for.a good many years. He
used to be too cautious, unwilling to take final responsibility. During
the last 18 months he has gone far to throw off these habits. He is a^very
able economist, thoughtful, imaginative, exceedingly industrious. He is
judicious (still somewhat cautious), and has a fine head for policy. In
my judgement he has done a very able job as acting director since August
15th. I will not venture to say whether he is the man to be director. I
think if I were making the decision I would make him either director or
deputy director, but in the latter case would not use the deputy director
as Secretary of the NAG or Chairman of the Staff Committee. Glehdinning
is by every test, in my opinion, an able and effective man. He is a little
young and needs a little more seasoning.
(b) There are, to repeat, two or three major overseas -vacancies:
A top man for a new office in India is one. Men to re-establish eitheror
both of our Chinese offices, one at the Embassy and the other in Shanghai.
The former irs more certain than the latter; it seems very possible that
Shanghai will not for some time justify a full-time Treasury man. Arthur
&xfcXKky Stuart, Chief of the Far Eastern Division, is fully up-to-date on
these matters.
(c). It is time, I believe, to arrange our overseas set-up on
the EGA side in more formal terms. In every European country where we have
a Treasury Representative we have arranged, on the basis of an exchange of
letters between Ambassador Harriman and me (approved by Secretary Snyder) ,
that k& the Treasury Representative will be loaned to EGA to serve simultaneously as Financial Adviser or Chief of the Finance Division on the EGA
Mission. ' However, although this is working very smoothly (except, possibly,
in Rome), oue men have not received any formal appointments from EGA. I
believe we should explore this matter soon.
3. Major current issues or activities. The following comments are
more or less pers6nal, and relate to some questions of substance or of
policy with which I have either been dealing personally or feel that vou
will at once be plunged into them. These comments supplement whatever
George Willis will hand you in a more formal memorandum which I have instructed him to prepare.
(a) Military Assistance Program. A Committee consisting of
Gross (Legal Adviser, State), McborKXESix Henderson (Chief Council, EGA),
and General Lemnitzer, is responsible for this planning. Paul Nitze is
the other senior official in State who is responsible. Treasury is involved
by invitation of Ernest Gross. The Secretary was willing for us to take
an active role on such invitation, but did not wish to seek a formal role
for Treasury. He wished to remain free to come to grips with the Program
on the fiscal or budget side. I suggest that vou ask the Secretary -whether
you should leave it to Willis, Arnold, Wynne, et al. to go to meetings, or
whether you should go. My own feeling is that you should go whenever
you know that the above Committee will attend; but the Secretary may wish
a less conspicuous Treasury participation.
Federal Reserve Bank of St. Louis

-u(b) The "Point Four" Program.
At the request of the President, the Secretary of State has just created an 8-agency committee to
plan the implementation of the fourth point in the Inaugural Address.
Treasury is one of the agencies* and the Secretary will no doubt designate
you to serve on the Committee. Willard Thorpe is chairman. In general,
the Secretary feels that treasury (and NAG) interest is more on the side
of stimulation of private investment and development of resources. So
far the new Committee (which at this writing has had only one meeting)
is concentrating on technical assistance* per se. I informed the committee
that the NAC was working on the private capital aspect.
This is, of
course, a program (although I dislike that term in connection with this
matter) which will call for your immediate attention.
(c) The Berlin problem. Since the first of September I have
been chairman of an informal committee of technicians on the currency and
taade aspects of the Berlin dispute. Victor Abramson has been the only
other Treasury official involved. He is fully informed. The Secretary
of the Treasury has not been involved, although I have kept him informed
— i.e., State and Army are responsible, and I participated in my capacity
as a technician, and did not involve the Secretary in my recommendations.
I think vou can do either of two things? (l) Assume my place on that
committee. (2) Suggest to State that either Henry Koch (Occupied Areas)
or Burke Knapp (Finance) become chairman, with Victor Abramson representing
treasury as a technici an. He could keep you informed and consult with you.
On the whole, in view of the history and the difficulty of keeping track
of the shifts and currents in State and Army on this troublesome issue,
I recommend (2).
(d) Export control policy. Treasury is a member of Secretary
Sawyer's Advisory Committee on Resources. I am the Treasury representative,
and Morris Fields (Chief of the Commercial Policy Division of OIF) is the
alternate. I always went to the meetings before I resigned as Director of
OIF. Since then Fields has. carried on, with the advise of a technical
committee within Treasury. I believe you should go to the next meeting and
size up the level at which other agencies are represented. Tom .Blaisdell
is Chairman, and Secretary Sawyer used to attend fairly regularly.
Some of
the issues are important.
(e) Anglo-American Loan Agreement.
For some months we have
been nursing along a negotiation with the British looVing toward a revision
of this Agreement. We have not agreed on the crucial Section 8(ii). EGA
and State are worried for fear we may complicate the passage of ERP and
116 through Congress, but otherwise are co-operative. I believe you will
have to dig into this quite promptly. Ishall be glad to help bridge over
the transition — but you will find that Messrs Willis and Glendinning —
particularly the latter — are very well informed.
(f) Bjgonal and Tri-zonal Fusion. I was the Treasury man on a
State, Arir.y, Treasury negotiating team to revise the Bi-Zonal Fusion Agreement late in 19h7. The main issue of interest to Treasury is that of
sterling convertibility re Bizone trade. A similar issue is ?lso going to
arise in connection with current Tri-Zone negotiations. Messrs Abramson and
Wynne are informed. I believe you will have to get involved in this rather
promptly, since the renewal of the Bi-Zonal Agreement at the end of December
Federal Reserve Bank of St. Louis

(g) The Austrian Exchange Rate. The U.S. Forces in Austria have
been screaming for the right to pay the personnel in dollar currency in
order to get the advantage of the black-market rate. It is easy to see
why they are screaming. But Treasury has held out stubbornly — against
State and EGA weakening — against this procedure on the ground that 1shat
is really needed is for Austria promptly to go into the IMF iko declare a
JSXKE par value and review its whole exchange situation. I think we are
winning on this* but Secretary Royal and Under Secretary Draper are pressing
hard for a decision. Mr. Willis is fully inTormed. I think you should
press for action. The latest news (today) is that the Embassy in Vienna
states that the Austrian Government will go into the Fund through its
Washington Entoassy. Nevertheless, I think we should force a policy cable
through State, Anrrr, and EGA making sure that the proper policy position
is known in Austria,,
These seem to me, at the moment, to be the main major issues. Of
course, there are a host of other questions on the docket, together with
less pressing major questions sich as general foreign exchange policy.
Federal Reserve Bank of St. Louis


Assistant Secretary Martin

March 8, 1949

Mr. Glendinning
Modification of the Anglo-American financial Agreement
I. Convertibility Provisions
In accordance with your suggestion at the close of our meeting on the
Anglo-American financial Agreement on February 24, I have drawn up several
possible alternatives for modifying the general convertibility provisions
of the Agreement (Section 8 (ii)), with the idea that we might use these
alternatives as a basis for further discussion of this problem.
Alternative 1
"The Governmente of the United States and the United Kingdom agree that
not later than July 1, 1958, unless a later date is agreed upon after consul-*
tation, they will impose no restrictions on payments and transfers for current transactions, fhe obligations of this paragraph (ii) shall not apply:*..
(b) to restrictions imposed in conformity with the Articles of
Agreement of the International Monetary Fund, provided that
the Governments of the United Kingdom and the United States
will not continue to invoke the provisions of Article XIV,
Section 2 of those Articles after this paragraph (ii) becomes
effective, unless in exceptional circumstances they agree
otherwise; or .... *
This is the proposal handed to the British in November which they were
unable to accept.
Alternative 2
*fhe Governments of the United States and the United Kingdom agree that
after a date to be agreed upon they will impose no restrictions on payments
and transfers for current transactions .... *
In principle this would seem to correspond to the proposal which the
British hare suggested.
Alternative 3
"The dovernsents of the United States and the United Kingdom agree that
on or before the date on which consultation with the International Monetary
l*und would be required under the provisions of Article XIV. Section 4. of
the Articles of Agreement of the Fund, they will iHpose no restrictions on
pagnaents and transfers for current transactions. M
In Section 8(li) (b) the word "cases" would be changed to "circumstances11
as in Alternative 1 above.
Federal Reserve Bank of St. Louis

- 2This alternative would appear to conform with the suggestion introduced
Mr. Tasca at our previous meeting. If anything, it might be considered a
lesa liberal modification than Alternative 1 since it provides for no exceptions o-cher than those in Section 8(ii) (b), ^xtually, of course, by changing
the word "cases" to "circumstances" in oection 8(ii) (b) adequate provision
would be made for a general postponement of convertibility for balance of
payments reasons*
*dt amative 4
"The Government of the United States and the United Kingdom agreo that
after a date to be determined by the two governments they arill impose no restrictions on payments and transfers for current transactions. II xe two ,.ovcrni tsar oh 1, 1950, and
tar the re after,
until restrictions on payments and transfers for current transactions have
been eliminated*
paragraph (ii) shall not applyt"
Section 8(ii) (b) would be modified to read as follows* ,
*to restrictions Imposed in conformity with any of the provisions of the
Articles of .agreement of the International Monetary Fund other than the proIV, Section £»"
Basically, this alternative is little loore than the proposal suggested
by the British, but by establishing a schedule for consultations, it forces
the matter into the open and requires public statements of the attitudes of
the two governments* Thus, it should enable the U* S, to exert a certain
amount of pressure on the British*
Alternative 5
"It, is the intention ul the Governments of the United States and the United
to ei-d all robtrictiona on payments and transfers for current transactions before tho date on \/hich consultations with the International Uonetary
Fund would be r"e aired under the provisions of Article XXV of the Articles of
Agreement of the Fund*
ithcr Government shall find, it&eli unable to end
Irat; -U-u. . ..• -;over rents will consult -nnufclly thereafter,
Section 8(ii) (b) to be modified as in Alternative 4*
This alterriative is similar to Alternative 4 except that it attciopts to
emphasize the expectation that convert ibility will be achieved in 1952*
Alternative 6

The Government of the United Kingdom expects to remove all restrictions
on payments and transfers for current transactions on or before March 1, 1952*
Should the G-overnment of the United Kingdom find itself unable to end all
Federal Reserve Bank of St. Louis


such restrictions by that time, it nd.ll consult with the Government of the
United States concerning tnose restrictions whieh are to be retained, and
the two Governments Kill consult annually thereafter until all restrictions
are removed•*•
Section 8(ii) (b) to be modified as in Alternative 4«
This is a more direct phrasing of Alternative 5 union recognises that
the United States has not taken advantage of Article XIV of the International
Monetary Fund and is not now autiiorized to impose restrictions on cmrrent
Federal Reserve Bank of St. Louis


Non-dis crimination

We need to establish a definite Treasury position en the question of
how supersession of the nori-discrimination provisions of the Financial Agreement by the ITO is to be brought about. You will remember that at our previous ijleeting Mr. Arnold indicated he had been unable to obtain a definite
answer from the State Department as to wiether that Department felt it would
be necessary to have specific legislation on this point. As a taeans of obtaining the views of the State Department, he suggested that the Treasury make
a concrete suggestion. For this purpose, we offer the following alternatives!
Alternative 1
Proposals submitted to the Congress and Parliament for the formal uiodiHcatiori of the Financial Agreement should contain an addition to Section 9
(in substitution for the reference to Section 9 itiich is now contained in
Section 8(iii) stating that ttThis section shall operate until the date on
which the International Trade Organization shall begin operations, provided
that both the Government of the United Kingdom and the Government of the
United States are members of that organization at that time, or until
December 31, 1951, whichever is earlier.1*
This alternative -would assume that specific legislation is recjiired
to provide for the suparsession of Section 9 by the IfO and would avoid any
question as to the interpretation of Section 8(iii). If the question were
raised during the ITO hearings, Congress would be advised that modifications
of the Financial Agreement were soon to be submitted to the Congress and wjuld
contain a proposal of this nature.
Alternative 2
During the hearings on ITO, Administrative spokesmen would state that
the Government of the United States and the Government of the United Kingdom
consider that the provisions of Section 9 wiH be superseded by the ITO
whenever that organization comes into effect with th© United States and the
United Kingdom as members*


Messrs, lillis, Glendinning, Arnold, Southard, Tasca, McNeill, Bronz,
Fields, Dlaser, Kidman


BUT - 3/8/49
Federal Reserve Bank of St. Louis


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aan b» roplaood b^ internal a@aawoa having
of t$^A« Is distort**!* £&?

as aao^ for l^Ll^i coal as fer Ancrloai aoal

of to« f risoo* Mmst 1 tuto an ob«t aele to tte
of intr»» .x.^:,-:.--,-fc;:i 'treui€*

Up* fots^bo addod that te i»

problem of tho tioal p^ioo to «hloh Itie ifc&ttd Statoa
la glirtog Ita f uU attoation*
Federal Reserve Bank of St. Louis

With roepeot to


Ui* Mr* F**a*h* that full coaridaaio* muat t» iOa**4 to to» HoOloy's

to brtag about iAMi%aT4iz» ehaxi^aa ar» doalrabl*


% .

r * • >




in Suroya HM a part at a
vidcr ^ollof affieNMilatiijmatlimal ii«ad9»
Federal Reserve Bank of St. Louis


in IwBKUpha*** ma wanted to
aU oountriaa aould banaflt Umi tte f»« HINT of

If* Mr. Petsohe tsook up the question of the French
exchange rate policy In the general problems raised by
the stabilization of European currencies. He recalled
that the objtottvt of tli* frtnc^i Oovernissnt had always
beta to attain *• quiokly as possible a tmlforia mad
•table exohaap;0 imte sy«tem. It MIS only temporarily
and by reason of olrouastanoes ludiependent of Its wish
that Pr&noe vas lead to set up s systtm with ailtlple
and variable rmtes.
4s soon as the British Oovtrmaent decides to fix a
new rate of exohange for the pound sterling not raising the
satae dlffloultles as the present oross-imte, Hr, Fetsohe
feels that the Frenoh Ooiremaient will be able to return
to a uniform exchange rate system^ On the other hand.
It Is probable that the Frenoh Government will oonsider
It wiser to wait some tlse before settling finally a new
fixed parity. In faot, experience shows that It aay be
preferable to oarry out the stabilization on the basis of
Federal Reserve Bank of St. Louis


* parity tasted in praatiee.

Moreover, the question of ths

stabilisation of the frano and probably that of the stabilization of various other H&ropea*i 9*rv*ns.isj:s 1ft connected
wltfc ths reeonstitutlon of reserves la gold or hard currencies.
In the ease of Pranoe, this reocnstitutlon should be faollltatsd
by th« faot that there txist ill the country substantial
privets gold rsssnrss whieh should noraally return one day
to the Bank of frsnoe bat it i@ nsoftssary to priias ths ptt«p
by inoreasiisg ths rsssnms of ths Bank of France.
Mr. Petsshe rsoallsol that ths nsosssity of resonstituting*
in oonntotion with ths stabilization, suffloisnt rsssnrss la
gold or hard ourrsnoies had bssn pointed out In ths middle of
1947 at ths tios of ths drawing up of ths first report on ths
European Rsoovery Program. Although never rejected^ atriotly
speaking, this ids* had not bssn aooepted by Oongrsss at that

Mr, Fetsohs asksd Hrc Saydsr vheth.r ths United States

^overnasnt today has any intentions and any program on this
Federal Reserve Bank of St. Louis

in*. Snyder replied that in 194? the American Administration
had suggested to Congress tfcmt at an Appropriate tlse Congress
alght be requested to supplement the European Recovery
Program with assistance la the form of stabilization loan*.
the appropriateness or need for such assistance would, of course,
depend upon Ufa* degree to whioh the S&ropean oountrles had
aohleved Internal financial etablllty and worked out the a»st
serious adjuatmente In external trade and payaenta relationships.
If euoh conditions Aould lie created in B^irope aore rapidly
than can mm be foreseen the United States would be willing to
accelerate Its study of the desirability and possibility of
assistance in this for®, Mr. Snyder said that the Aaerlcan
Administration did not now have this question under active
review and had not pushed it beyond the statement to Congress.
?• Mr* Petsche mentioned the dlfficultysltuation of the
French treasury* fnls situation Is due to a number of factors
la particular to the policy of systematic restrictions on credit,
the effects of which are naturally felt In the volume of
subscriptions of treasury bills.
Federal Reserve Bank of St. Louis

A rtadji-utisent

la tilt rat* of tilt pound sttriifif, should

it takt place, would isiprore tht situation of tht frtnoh

On tht out hand, as a result of tht laoreaat in

tht dollar imtt for ooauasroial operations, tht fmso
acmntsnrsliit of Aatrlomn aid woal4 fet insrsasodj

on tht

othtr hand, optrsttlng losttt rtsulting fro® the difftitntial
txohangt ratt syattm mmld dlsapptar.
Whli» awaitlag this tirtnt, tht frtnoh CtovtraBtnt it
oliligtd to takt a oh»nae and, in orcltr to inturt its finances,
to rtsort to a eertsla number of ^axtshift atasart*,


insists, hovtv^r, that thtst atana roaiin in

h^mony with tht prinoipltt to whieh it it oomaitttd and
iw»t bt inflittioatry in natn^t*
Out of th« SMiaturts whloh might INI taktn at present in
ordtr to tatt th« situation of tht fi**tasury would bt to
tli«inattl with tht approval of SC&, tht ptriod separating
tht dtposlt of fraaot in tht Sptoial Aeoount and tht
rtltattt fro® tht
Federal Reserve Bank of St. Louis

Sptnial Aodoimt.

It la agreed that this French suggestion would fee
treated In greater detail during the meeting of technicians.
VI. Mr* Petsohe expressed his gratitude to Mr. Snyder
for the help which Mr. Snyder has given France in the
negotiations concerning the release of the Indo-Chinese
geld blocked in Japan.

Mr. Petsche informed Mr. Snyder about the offers

which have been aade to the Bank of France by American
banker* for purposes of straightening out the credit granted
to the Bank of France against gold guarantee by the Federal
Beeerve lank of Mew York* Mr. Bmuisgartner le in touch with
Mr. Sproul on this subject. Hr. Snyder aeked for detaile
and eald that he would aiscues this question with Mr. iproul.
Till. Mr. Petaehe Indicated that he has Just been
infawed about the oonoera caused the United States treasury
by the extensive counterfeiting of dollar bills In*.
Ee has taken this sattsr up with Mr. Jules Moch, Minister
of the Interior, and promises Mr. Snyder the full assistance
of the French doverniaent.
Federal Reserve Bank of St. Louis

IX. Jtr. Pet«9h« aentlonM tlmt he is considering certain
rela*aticm« in the r«gla» for foreign &«**** in Fraada in
0rd$r to aalui po«*ible, oirtr ana abova tb« tnuisfar of
inooaw and other profits M&idli tet always b«»n authcrii^d,
tli« trmnsftr of capital*
Mr. £nyd«r and Mr. f *t»o>u agreed tii&t the questions
raised auring their octaveraatiaa would be espl^rea en the
tjoiiniofi.1 level ^etweeai Aaeriwua and French experte*
Federal Reserve Bank of St. Louis





July 6, 1949
* pm




y or conversation* July 5* between Secretory Snyder*
Assistant .Secretary Martin* and Mauri so Petsche^AHnister of
Finance and ;io<momio Affairs*
X* Fetsehe reviewed efforts. of French Id public flzkaneos^
pi>>ductions» and balance of payments* He Indicated how those
efforts had been made concurrent ^rith Aiaertcasn aid*
Snyder mentioned that this effort is appreciated at Its
true tr alue by hljasell* and by Araerlean public opinion*

Fetsohe raised question of axchan^e rates* He did so

with a great deal of prudence9 because he did not Intend to mix
in the affairs of other countries*

nonetheless* he could not

avoid raising the question because the outcome of the French
stabilisation effort, particularly in the field of balance of
payments * now hinged in a sense upon the evolution of the
exchange rate problem in other countries and upon decisions
for tihieh France is not responsible*
Snyder pointed out that the U,S« considered that questions
relating to exchange rates should be dealt with through the
(2) /Monetary Fund« U.S. policy is to refer thegj questions to the
Fund* giving to the American director of the Fund very wide
Federal Reserve Bank of St. Louis





This policy enabled IJ.S*

director to have a oongldsrable d egroe of £ legibility in
dealing with problems,

Snider vakeel Petsche his views concerning

the role of the Fund*
Petschs replied that France is* of course » always desirous
of cooperating with tha i<'uncU

He hoped also that a nay ttould

be found for the Fund to adopt a'soro realistic policy than it
had Ecaaetii?B0 followed in the past*
Snydei? said one of the purposes for which the Fund had been
created was to deal with exchange r ai;c- adjuaisaants that would be
necessary in the post-war period »

It had 1been enirisaged that

the Fund would enable &djU8&&ent& to be made in the full spirit
of international cooperation*

It had been thought that it

aig£tt be possible to snake these oeoetisary ad juatiaeats in 1945
and 1946«

However^ ^conomld ami po.litlcal development e in f&e

post-war period had so&de it neoesdav;/ to postpone the question
until greater restoration had beon acshieved by the var^torn
countries «

The 0«S«« in addition to tfc® assistance extended

through the Fund and International Bank* had given Marshall
aid for this purpose. How in 1940 it appeared that with the
success of the effort® of the ccuntr;io0« the tiise had come to
rea^aiaine the situation and work out any adjustments that were
Federal Reserve Bank of St. Louis


• 8*
found to be necessary*

Certainly the U*ti» had

naver env/.aaged that the jaalritemnee or the
present pattern of rates was a desirable end In itself if these
rates did not give realistic external values to tha currencies
of tiae member- countries of the Fund*

The United States did

act* therefore* approach this question* which tms now assuming
greater urgency* with &ny preconceived ideas* The United
States approach vras» however* with 021 open laind and with the
thought that a certain period of experimentation would be
necessary before an appropriate and realistic pattern of exchange
rates could be worked out which would contribute most to
encourage a free flow of £$rade«
Fetsehe agreed with Snyder that the Fund vas the appropriate
body for international decisions on these questions* He also
indicated his deeire not to intervene in affairs which tsere first
the decision of neighboring countries *

He pointed out, however *

that the exchange rate questions which are being posed in Europe
today have important repercuasions bc-th on the financial
situation of France and GQ the future of European economic
On the first point he $i3pha$lze£ the consequences of the
foot that France is r equiredp at least insofar as cozoaereial
operations a re concerned* to^espeet the official e ross-r&ts be**
Federal Reserve Bank of St. Louis


Page 4



tween the dollar and po&nd sterling; . The
result is that if the franc has a rate which
may b? considered satisfactory in relation
tc tt* pound BterVJLng and the principal aoa -co avertible
etm/eneies, it hati, in relation to the dollar, for commercial
operations, a rate which obviously places too low a value on
the dollar* The increase of French dollar exports is thus
(laopered by this state of affairs.

Moreover, the franc

counter-value of la&erfca under American aid does not reach the
total which it oughv, to reach (the effect of which is to reduce
ic one sense the efieotive&esg of ^cserioan aid) . If the
French &m«mmx3t we,"e to adopt a higher dollar rate for
ooaaterclal operational^ jU/vould be obliged at the sarae tizae
to raise the rates <?s.' all non-convertible currencies and to
fix them at abnormally high rates.

This would involve a

loss of substance or the greater p&rt of French exports,
An undersirabie gene ml price increase in France wuld ensae
and, without serving anjf purpose e- ^^uld thus place in
Jeopardy the whole stabilization effort.

Ho French Government

could envisage such a aeas&re. Another consequence is that
with respect to the dollar and other convertible currencies ,
France is obliged to auintain a double exchange rat© system
which involves not onl^ great eomplU cations but also
Federal Reserve Bank of St. Louis



franc losses for the French Treasury. In fact,
whenever the favorable balance from aon«
commercial operations carried out at the free rate is used
for commercial operations* the French Treasury inevitably
suffers a loss in franco.
On the second point, the mint raanoe of the present rate
for sterling forces European countries to follow different
monetary policies, 3ome of them follow a poliey analogous
- to that of reat Britain; they have a suitable rate of
exchange with reapeot to the pound and too low a rate of
exchange with reapeot to the dollar. Others, on the contrary,
have a suitable rate with respect to the dollar; but then
they have too high a rate for the pound sterling, which causes
them (Italy for example) to accumulate holdings of sterling
vhloh increase endlessly and which they can finance only by
inflation* It la thus impossible to prooeed with the elimination
of commercial restrictions and payment restrictions between
countries as they find it necessary to follow different aonetary
policies. The present exchange rate relationships are thus an
obstacle to the agreed objective of a free flow of trade.
France was currently studying in a preliminary and
entirely confidential way the £>o&sibility of eliminating
exchange controls between Benelux aM France* The principal
Federal Reserve Bank of St. Louis




-6immediate obstacle lay in the fact that France,

Belgium, and the Netherlands had adopted
different solutions to the problem raised by the sterling rate
and by the racessity of .mlntalning cross** ratse. Ae a result
there was a danger that the elimination of restrictions among
these thre?, countries would result in a distortion of normal
currents ttt trade.
Fetaohe concluded from this that the couplet ion of the
French recovery effofrfe and twie possibility of real European
econo'Jdo cooperation are subordinated to the solution of the
exo&aage rate problem and in particular to the problem of
sterling* He was entirely in agreement; that these problems
should be submitted to the Fund at tha appropriate time,
nevertheless, in any devaluation of tlie pound sterling, there
should be preliminary exchanges tvf views between the countries
moat concerned and the US. 3*he Ft ad tiould be obliged to
examine any proposed devaluation within a very limited time*
Because of the repercussions which suah an operation is likely
to hare on French policy and on European economic cooperation^
Fetsche felt it essential that, before fteing submitted officially
to the Fund,, it should be discussed with the French*
III* Snyder eaid that he would like to give Petsche some
completely objective information &n the economic situation in
Federal Reserve Bank of St. Louis



of the considerable speculation
In the press on an American recession. After
stxsuaarlzlng oarrent developments, lie indicated
his view that there Is no reason to think that the preaent
necessary adjustments will not bring about an even sounder
prosperity In the United States,,
Federal Reserve Bank of St. Louis

IV. Petsoh* brought up question of free trade in
Europe* He mentioned French proposal that participating
countries agree OB common liet of goods for which quantitative restriction would be eliminated by all countries
so that real free taar&et i*ould be created In Europe for
certain number of goods {as opposed to English solution
that each country establish itself list of goods for
which it tfould eliminate quantitative restrictions)•
He soiled attention to certain questions of free
trade between participating countries, and especially
to following;
«• relaxation of payments agreements, replacing aoftmrtte
gold payznentd (gold points) by consultative clans*
(tallclng points)*
- ellalaation of practices in internal financial an&
price policy, Incompatible with development of
Intra-2«ropaan trade.
Exesjple is price charged by Western Oeraany and
England for exported coal, vMoh is senoos handicap frf?
the ooaU»lffiporting countries and for freeing of trade.
Federal Reserve Bank of St. Louis

Ctanerally speaking ooDctarol&l policy end econoalo
Federal Reserve Bank of St. Louis

~ 9-

policy of Trtzone constitute an obstacle to intreEuropean trade. Petsehe added that he is placing
great hopes In administration of McCloy* •
3&yder replied that hs Is fully inforae&
about problem of coal prloe to *rhioh United states
Government is gUriag its full attention. With r**epeot to Senaany he feels li&e Kr, Petaohe that fttl>.
oonfldence auet be placed in Mr. MoCloy'o adminletration to bring about whatever changes are desirable
nov that policies in derraany do not hinge to sane
extent on overriding military considerations.
dnyder asked Peteohe t/hether French proposal
to create free trade area In Europe tras part of
wider policy of free international trade. Petsohe
replied that It definitely vas. He did saot believe
in autarchy in individual countries or in hoaisphefes
and wanted to create world vhe.t"e all countries could
benefit from free flow of international cocmeroe on
competitive basis*




that <*bje*tlvj of French ooveomamt fend almQv bun to attain aa
quiefciy ae pamible a enif oya and «t®tito cacafcaag* rote
It wa* osOjr tenpoxaxday and l$r reaaca of c&rmarteiicos 3ad$p*ndaat
of ita wish titet F*anoa wa* $&&K/'te sat tq& a <&at«B with fgfl^r'te «id

Aa MMB oa £'r&tiah Oov«na»/4it depict to fts nev rata of ax&tatige f«r
pound 9tarlin£ ?/ot raiaing thf< MBG di£^iaati<ie a© tho procant
foals ^Jbat Frooch Qo^arnmit will be alAo to r0t«ni to
rata csrataa^ QB tbi othaar ijaoci9 it ia probaKUi that
wOl eocaitfar 1* wiatr to waiit «»» tSsae txsf^pe csttiiJig finally
a new fiaw^ piorit^* la ft/at* «qpesrimie(i cho*^ that it my to psr&faeral&s
to «mgr oat atabUlcaticA oa taala of parity U»at«fi in praotioa*
qutatlon cf a^abiZicati/A of f!rane and pvetotV t2»t of •tefciliaation of
various c^ifaerfiiGrapaet;eumooide is eotmeotcd with roooe«tittitioii of
ia gold or haitf «mrfjiaiaa«

In oaaa of Fraae*9 tMe reoonatitntion

ba facilitated l»ee;is© of pg^vate go34 £«Mrvmi tihich abeuld
day to tto BwsJ: of Fxaaoo,
that sK&aaaify of yesocs(iit»tiag, l&
In gold or her<d cwroooioa hod
pointed out in 7.147 i& ecnasatioa ivlth i'i^vt ««(p«rt on ERF* Although
raja«tedt «tr£j*3y apeakingj» thia Hea had art 1t»e«Q aooopted 1y Oongree« at
that tlaa. 7£t8oh» aakad S^dar irtntlm* tb9 USaited State* Garogniiart to>!ay
haa atqr iatjotlcase and any prajpaa on tlda
Federal Reserve Bank of St. Louis

rapliad that in 1947 Adatei strattoi had
gastod to Congraga that at appropriate tin* Goagpaa*
sight ba resisted to ffupplessst EBP ^ith aasiatanee.
in foj* of at^Mliaation loasa, J^re^iatacetis or saad tar au&
«ou349 of aouraa, dapaad jipaa dagrea to wfeiefc 3ft8*gpeaaa oountria*
atiiiflved iate^aal fisaaoial stability atid vorh^d out moat serious
in external t#atis and payaMenta ralatloa^slp** If cud* oonditiens ahould b»
in Boropa nore I'apiily tbaa ean now l« f tawwwn ths tiftLted States
be vill^ng to aee*lavste its isto^r of th» <l«airaMlity aad
of aofdfitaaoo in thi* fora* Sasditr eeiil that /»dH5adUrfeeation did
thi* question undar set&va T^riaw aiod hed not pushed it b«yon4/siiit«aent to

VZ« Patpoha aaationed difficult eituntisn of ^raodbt Eraaatary
dua to BWtbar of fteetcra aa^eiallgr i^srbasiati^ roatrloticue on craditt fait In
of aaabD«rljjti^» of ??oaeary bO3.a»
in nrta of poua^ ati^ling^ shotOd it tnka plaaa, «cn04
of tha Fara»di Tpeaescf» F»mi« eoimtflcrvalxitt of
aid would ba fnevaaaaa and & aareting lo&«a« *«fft&ting tscm the
emhanga rata ayataai would disappear*

Bkila awuitiiag tlda araat, P^aaseh Oovon^iRsxit ia o&tigadt to reaosrt to

•akaahift a»ai>^oe, tet inaista that thoaa latina xvaoin in harness nitfe
priaciplea tc- idiloh it ic aoon&t&adl a»d not 09 inflaticaiafy in natura*
Ona maaa®se® which Hdgii ba taken at praetxit wotOd ba to ali»inatat
approval of £C£» pariod eapamtiKg a&$e*it of ftonoti in Spoolal Aaoount and
Federal Reserve Bank of St. Louis

fop Seerat
fcrc® Spadal Acecoat.
It naa agreed that Preneh euggeetion tanOd be
teaated in g^e&ta? detail during &a&tlag of tee'anicii
VX2* Peteeha «9cpraae«d hie gratitaflte tr Slider fey help which Snider
baa given 3raneo in maotistlona ctmeamlog tba relaaae of the Xado^Chineoe
gold blocked la Japea.
* Pstscbe informed aqydar of rffeit asfie to Bank of Traaoe 1^
ba&kere for porpcae of fusiSing oret It granted to Bank of Fssaac®
apdbist gold goarantee lagr the ^odcsral Feeer^o Bank of tkw York* Bern*
gartaar IB in touoh with SproKl en thia» Slider a&ked for dataila and
aaid tbat he vould dl.oeucg vtth Sprc&l*
3Xo Betseba iridieated that he be« Jt^t baen iiidronnyd about eoneem
oauaad 0«S» Treasury l^r extonfii-v® counterfsaiting of dollar Mlln ia
Ha hae taken natter up i»ith Stochj Misdater of Xaterior^ and
finyder ftall aaaiatanoa of Frenoh
X* Fatesha asntioned that h» is coiwidcfirlng oertain relaxation*
for feraigt aeeeta in Fraaoj in ordar to naka poaaibla^ over
above trenef®r of income &od other profile t^iioli baa alwaye bean
authorised, branefer of e&pital.
Skadar ajad Patacha agreed that qweotdou ? raiaad diadng their
aation would be adored cc taateieal le^el between Amerioan and
Federal Reserve Bank of St. Louis

Jj • !



fAt our meeting last year the uovernor of the


States introduced the resolution proposing the creation of
the Ad Eoc Committee to study the duties ana remunerations
of the Executive Directors and their Alternates.
lag the resolution the

n present-

overnor stated his desire to bring

the matter before the board of uoveraors for an open and free
discussion in furtherance of our taatual and continuing interei
in the aost affective development df the Bretton Woods institutions*
As soon aa tn* s*aUa& closed, tiie deputies of tlie ooai*
mittee began a very eareful and comprehensive study of the
subject of the Board of Directors.

1 a» aure that the Board

of Governors ahares in appreciation for the effect and though!
which the deputies devotee* to their task under the able
leadership of their chalr«ant

overnor Frere of the National

Bank of Belgium*
In Its work the committee believed that ail points of
view should be carefully canvassed without any preconceived
Federal Reserve Bank of St. Louis

* 2•

opinion* ftfe to the ^ro^r organisation and functioning of the
Executive Directors*

he committee consulted all r^ecutive

Directors and officials of the Bank who wished to express
their views*

it also &atr*erca a great deal of other information

bearing on the problems before


The committee- era eluded that certein changes oouJd appro*
priately be lafinie IA I

t tlie «.*«0v tive directors.

So far as ecu la bo ascertained from the proceas whlcn the eons*
»ittee had 10 lowed there was so substantial objection to tae

Certainly, it was not the Intention of the United

tea represoatetivee or f i beii@¥& f of the committee aa a
vholef to put fopwarc:* proposals Miic.h mic;ht be sarloualy q^ysti neu by momicre of tiie ^enk«
Since the presentation of the report ol the Ad Hoc oi»sltteet
it has become clear that a consldemble number df the aiewbera
of th« ;'-o%-

I feel that the propraela aro subject

to certain from their points of view*
Federal Reserve Bank of St. Louis

ih« raited

. 3 States believes that full account should be taken of the
points of view of the members of the Bank*
Under the circumstances it appears to 117 Government
that the best course of action to follow would be to
instruct the Ad Hoc Committee to continue its deliberations
for the purpose of receiving the views of Interested members
and reporting to the noard of Governors at or before the
next annual meeting, ^y Government also considers that it
10 appropriate under the circumstances to enlarge the
membership of the committee somewhat. I, therefore, move
the resolution which has been laid before you.
Federal Reserve Bank of St. Louis


That the membership of the Ad lioc Committee appointed
at the Thlrti Annual Meeting of the Board of Governors be
increased by the appointment of two oovemor®, to be designated by the Chairman of the Board cC Governors! and
l*hat the Ad Hoe Committee continue Its deliberations
under Its terms of reference ami report thereon to the Board

overnors at or before Its Fifth Annual Meeting*
Federal Reserve Bank of St. Louis


The Executive Directors


the President



Subjects RecoitEaendmtions of the Ad Hoc Coismittee
The status la which th© Ad Hoc Committees report was
^t at the Fourth Annual Ifeting did not satisfy anyone* The
Governors could not agree | mid If the problem Is left to the
annual meeting there is no reason to believe that there will
be more general agreement next year than last*
In the eiroiaMStanees I believe that the tine 1ms cone
for the Executive Directors

the Presldefit to consider the

problem to see -whether they cannot come forward with a solution*
It would be a good thing for the Bank if, by this kind of cooperation, a course of action could be found which would satisfy
everybody and eliminate the necessity of continuing th© Ad Hoc
Gosaaittee in existence for another year.
I have discussed the matter informally with most of
the Executive Directors already* Mow 1 should like to suggest
a cours® of action for your consld oration.
As yon knowj th© Ad Hoc Coimaittee r*QMNttdM tro
principal changes — first f monthly rather than i*eekly iae©tiiigs|
secot^i, mutually exclusive periods of service for an Executive
Director am! his Alternate, 1 would life® to get your iriaws on
both these points, fhar© w&& be soise doubt ¥h@th@r the secona
Federal Reserve Bank of St. Louis

- 2-

point is an appropriate on© for action by the
Directors as a board, ana I therefor© do not bring It up
for board action, but for yoitr informal advlee as individuals.
As to th© tuonthly ta0*tingSj I do not believo th
was any opposition to this suggestion among the ftovernors,
except that one or two thought that the frequency of meetings
ought to be cteoldae! by the Cxecuti'.

sectors rather than th@

Governors* There is a good deal to bu said for that viewpoint
andf since the Governors have not actedy 1 propos© that the
Executive Directors talc® the Initiative.
I firmly bellw© that a system of regular monthly
laeetififs will make for fuller discussion and more adequate
Information than w© have had In the past, and I suggest that
w try out a procedure of monthly aastlngs during the coming
souths i purely on a trial basis and without rnaking any formal
changes in the rules and regulations of the Bank* Dtarlng that
trial period we should explore means of insuring that the meetings shall not be perfunctory la character but shall afford
fall discussion and Information, It might b© constructive to
think of
as sessions rather than meetings. For 9xaasplef
I think thoy should b® loag@r than those ¥6 now hold, lasting
day and perhaps more than one day. As a further

ba transacted | it would ba desirable to review our relations
Federal Reserve Bank of St. Louis

- 3with ©aoh of our member countries, 01? with &ach of a group
of our iseuber countriesf discussing the economic situati0nt
the status of loans already approved, the course of negotiations
on poising applications and the prospects for future businesa.
?.h a procedure wouldf I b@li©ve, be helpful in giving the
Bxeeutive Directors a full piotur© of th® day~t0«4ay work of
of th0 general treMa of its operations. If you
agree with that lin© of proceduret I propose sp^aifieallsr that
the Eaeecutive Directors
%r@©kly during the reiaainder of
October and through the second Tuesday of November and that
thereafter we hold regular meetings on th® second Tuesday of
each 8i0n$& until further notice, with the understanding that,
as in th© pasti additional meetings vill be held whenever
As to the question of the Alternate Directors, you
will r@iaemb0r that the Governors could not agree or?.
Ecuadorean proposalf whioh va« that thers should be no pro*
hibition of overlapping periods of service by an Executive
Director and his Alternate inhere thay represent three or mor©
countries* Frankly, I was not in favor of th® Ecuador ©an
proposal. On the othar haadf 1

say that I do not consider

it a question of fundamental importance either for the Bank or
for the vmrloms countries* My suggestion on this point would

be that | sine©
of the countries seem to feel strongly o
th© subjactf the Governors should accept the substance of the
Federal Reserve Bank of St. Louis

- If Bcuadorean amendment and see how it works out. I would
propose only a change in form. I do not like mentioning
a specific number of countries. Instead j I think th©
exception should be Biade on th® basis of the
writ involved (which was the basis on which the Ecuadorean
amendment was proposed) and I think that on that point the
Bank should tak@ th© word of the Executive Director himself,
In shortf I would suggest that the /id Hoe Ccamittee's proposal be changed to permit an exception to the general rule
in th© case of an Executive Director representing several
countries who advises the Bank that the performance of his
duties requires th® assistance of a full-tiia® Alternate,
In addition, 1 would suggest that the Ad Hoc Committeefs
recommendations as to Alternate Directors should not bec
laandatory until tha next election*
Qa this point the Bnmtive Directors should notf
perhapsf take formal aotionf but nevertheless I should appreciate their informal adviee* If the Directors agree with the
suggestion I have made^ I would propose to notify the Ghair^m
of ttm Ad Hoe C0mmlttd* that the President9 with the infonml
oonoarreao© of aH the' InUMktaal Executive Directors, suggests
that the Ad Hoc Coismitt©©^ report be amended to ambo-dy the
Eeuadorean proposal in the form 1 have mentioned above in the
interest of reaching a prompt general agreement* If that couM
Federal Reserve Bank of St. Louis



be dona I should hop© that the Ad Hoe Cotamlttee could sake
a supplemental report some tliae in January. I feel confident
that if the Executive Directors and the President agree on
these points, the Ad Hoe Coismitte© and the Governors will
accept their view,
I should appreciate receiving at your earliest
convenience your written coimients on the suggestions I have
made 30 that I ®&y ascertain the consensus of opinion in the
Board* i-^y interest is to have the Bank's operations as ef~
f iclent and economic as possible with full regard to th0
responsibilities of th© Executive Directors in the performance
of their role In the Sank, and In this I tow I can count on
yotsr wholehearted cooperation*
Federal Reserve Bank of St. Louis
Federal Reserve Bank of St. Louis

Treasury Department
Office of International Finance




Mr. Abramson


Messrs, Dickens, May
Arnold, Litschgi, F. Smith


Mr. Willis


. Abrainson

Subject: Taxes and Foreign Investments
Two considerations are important in framing a tax policy to be
applied to earnings on foreign investments. One is the need to conform this policy to our broad national aims in the foreign investment
field| the other is the need to align it with the policy relating to
taxes levied on earnings from domestic investments*
There has been an easy assumption in much of the discussion of
this subject that, since it is our national policy to aid foreign
economic development, any measures which induce foreign investment
are helpful. This is not true. There are limits to the national
benefits v;hich we can gain through an outflow of capital; and the
means which we employ to foster foreign investment must be shaped to
the pattern of these limits,
The first mistaken notion which must be cleared away is the view
that a liberal policy toward trade requires that there be no obstacles
to outward movements of capital. The free exchange of goods, which
is the hallmark of a liberal trade policy, is generally of mutual
benefit since it enables production to be carried on at the points
of greatest efficiency. There is not, however, always a mutual gain
when capital flows from one country to another. Such an out flow
may, although not necessarily, reduce the real income of large groups
Federal Reserve Bank of St. Louis

- 2of the population in the capital exporting country.

The national

gains in other forms may justify these losses, but there are limits
beyond •which they will not. Deliberate efforts to promote foreign
investment should, accordingly, be confined within these limits* are a number of ways in which foreign investments may
benefit the capital exporting country. Some of these aims can be
achieved where foreign investments are entrusted wholly to private
owners of capital; but others cannot. Where the outflow of capital
requires a special inducement, it is particularly true that private
initiative has often to be tempered by public guidance to assure a
socially useful result. This has an important bearing on the role
of tax incentives as a spur to foreign investment.
Traditionally, in our country, we have held to a minimum the
directional influence of the government over private investment,
either domestically or abroad. As an integral element of this policy,
we have sought to make our tax system neutral as among sources of
income. The tax concessions which we have made to those who earn
their income abroad have, for the most part, been designed, not to
promote foreign investments, but to preserve the principle of public
neutrality by subjecting taxpayers to the seme total levy irrespective
of the sources of their income. Where the tax treatment of foreign
investors is confined to this purpose, the usefulness of tax measures
as an instrument of public control is not at issue. A far different
set of problems arises, however, where the government seeks deliberately
Federal Reserve Bank of St. Louis

- 3to promote a publicly chosen foreign investment policy.
In these circumstances, private decisions -with respect to foreign investments T?ill, in some degree, have to be supplanted by
public decisions* To the extent that foreign investments are to be
subjected to governmental direction, tax incentives will have to be
•weighed according to their effectiveness as an instrument of public
control, When appraised in these terms, it will be seen that they
have a much more limited range of usefulness than when they are designed to preserve an impartial role for the government.
Where governments undertake deliberately to promote foreign investments, it must be presumed that there is a public purpose to foster
some particular forms or areas of foreign economic development. It
can never be to/interest of any nation to encourage an indiscriminate
outflow of its productive resources. Generalized tax concessions,
however, are likely to stimulate foreign investments to some extent
where they are not wanted; and selective tax concessions will often
be either ineffective or over-stimulative. A tax concession can
operate to encourage an investment only where there is already a fair
prospect of gain, and this will not often be present where risk factors
have long retarded private commitments of capital. Where the concession is effective, the amount and form of the added capital outflow
will be governed by private responses to the stimulus, and may bear
no relation to the public objectives sought through these measures.
Federal Reserve Bank of St. Louis

It has been asked whether additional tax concessions might not
at least be used as a supplement to other measures designed to promote foreign investments.

As a practical matter, it is likely that

the tax concessions -which the Congress will actually be willing to
provide will do little to over-stimulate foreign investments, and
will generally fall short of the aims sought in the areas singled out
for development.

If this is true, it can be argued that additional

tax concessions will be all to the good, since under them there will
be a maximum reliance upon private decisions and private operations.
However, there are two considerations which argue against even this
limited role for tax measures as a part of any progrsjn of public
sponsorship of foreign economic development.
The first, and forcuost, of these considerations is the influence
which tax discrimination of this sort would have upon the effective
Dines*ic operation of our income tax system.

This is obviously a

matter of judgment, but I am inclined to attach a great deal of weight
to the views which hold that such addit' onal discrimination would provoke demands for a wide variety of new exemptions by well-intrenched
pressure groups, which uijTit serve to undermine this vital element
our tax structure. Since tpx incentives are in any event likely
to operate perversely, or not s.t &11, as a measure to stimulate fore.' g
investment, and to require in other instances important supplementary
measures, this difficulty would in my opinion weigh the scales heavily
against their use at all for this .purpose.
Federal Reserve Bank of St. Louis

-5Tho second consideration relates to the supposed gains which
could be achieved through tax measures, by -way of averting governmental intercessions both at home and abroad.

I question the extent

to which such intercession could be avoided by this means. Deliberate efforts by one government to promote economic activity by its
nationals in areas within the jurisdiction of another government,
are likely to provoke control measures by the capital-import
country; and it is unlikely that the particular means employed by
the capital-exporting government will alter this resolve. If such
intercession is to come, it would be much better to have it upon
agreed terms among the g


ts concerned. For this purpose, only

carefully selective tax measures are appropriate.
There are in addition to these general considerations, a number
of detailed problems incident to the use of tax. exemptions as a stimulus to foreign investment.

It is clear that such exemptions will

have an effect only where the level of income taxes levied in the
foreign jurisdiction are below our rate. Our present policy of providing exemptions for foreign-levied taxes has encouraged foreign
governments to substitute income for other taxes, since this would
involve the least burden upon capital flowing in from the United States,
This has, in fact, been counted as one of the gains from our present
policy, inducing as it has the form of public finance regarded as
least likely to retard industrial development.

The harmful side of

this policy, it, has been said, is the fact that it has deprived foreign governments of the opportunity to attract capital from the United
States through a lowering of income taxes. A decision now to provide
Federal Reserve Bank of St. Louis

- 6more extensive exemptions for income earned abroad would thus reverse
these two effects5 it would perhaps lead foreign countries to employ
less satisfactory fiscal .policies; but it would allow them greater
latitude in adjusting their tax policy to attract new capital,


since it is the most highly industrialized countries which are most
likely to retain the highest level of income taxes, additional tax
concessions on our part would probably tend to divert capital flows
to the areas which our national interests would most favor.


is the danger, however, that once a substantial inflow had taken place,
and industrial development was further advanced, foreign income tax
rates would be increased to the disadvantage of the committed capital.
This hazard would operate to discourage reliance upon tax exemptions
as an inducement to capital investment.
A. second set of problems concerns the form of additional tax
concessions, whether through general legislation or through bilateral
agreements. The advantages of the former lie in the fact that stable
uniform rules, more easily administrable and less subject to attack
as discriminatory, can be enacted by the Congress. The bilateral
approach, on the other hand, offers the prospect that tax concessions
can be employed as a lever to secure measures by the capital-importing
countries to improve the climate of investment opportunities and thus
fortify and enrich the tax incentives which we provide. It is questionable, however, whether these gains would justify the complications
likely to result from subjecting our tax policy to such continuing
political discussions both at home and abroad, and the patchwork tax
Federal Reserve Bank of St. Louis

- 7structure that would emerge* The case for bilateral agreements is
strong -where I've advance public funds to foreign governments or enterprises, since in those circumstances we have an interest in assuring
both that the funds are properly employed, and that circumstances in
the borrowing country do not magnify these needs because of the
obstacles they present to private capital investments. However, where
our contributions are confined to tax concessions, the implications
are that it is the responsibility of the foreign government to make
these effective through supplementary measures of their own. There
are no objections, and much to be gained, of course, through treaties
relating to foreign investment conditions which carry no commitments
relating to our own tax policy.
The worth of tax measures as an arm of our foreign investment
policy cannot be fairly appraised except in relation to the other
devices which are at hand for this purpose. And all of them must be
judged in the light of the aims to be achieved. This requires a more
careful spelling out of details. Broadly speaking, there are several
levels on which it may be said that we have national aims in respect
to foreign investment policy. .'.-.. nave a national interest to secure
for ourselves assured access to certain essential raw materials and
supplies. Less certain, upon this narrower level, are the gains to
be achieved marketwise.through developing the productive, and hence
the consumptive, capacity of certain other countries. Broadest in
its implications, and most difficult to define or measure, are our
interests in the economic progress of other nations as a means of
Federal Reserve Bank of St. Louis

- 8building and strengthening democratic forces and thus safeguarding
our own* At least for the short run, we have also a unique concern
in those countries in which we maintain military forces as an aftermath
of tho -war.

The chief alternatives to tax measures to carry out foreign development programs of this nature are loans and guarantee arrangements covering specific risks. The ERF program and the proposed guarantee
plan are illustrative of these alternatives, Whatever their limitations, it is clear that they can be more easily fashioned and more
sensitively adapted to the varied and changing programs in this field
•which may be required in the national interest. Inhere there is a
risk of loss, these can be shared upon anactusrial basis or subsidized,
thus providing a form of incentive for which tax concessions are useless,
In contrast, even where tax concessions did constitute an effective
stimulant, the amount of new investment promoted by these means could
not be calculated in advance, and could only be controlled by the
administratively difficult iaethod of varying the rate of tax remission,
I presume that loans and subsidies of various sorts would also create
ecedent which might provoke demands for similar actions in the
domestic field; however, nothing so basic as our income tax structure
would be threatened by this pressure.

Federal Reserve Bank of St. Louis


Harch 15, 1950

This memorandum outlines the main elements of a program of United
States aid to the independent countries of southern and southeast Asia,
•luding India, Pakistan, Ceylon, Indonesia, Indochina, Siam and Burma*
The prograri is shaped primarily in terms of the economic requirements of
these countries, but would have incidental beneficial effects upon the
ch and Dutch balance-of-payments, and would make a partial contribution
to a solution of the sterling balance problem. It would involve dealing
directly with uiG countries concerned, rather thar. indirectly through
'.tain, France and the Netherlands*
The direct approach, priiaarily in terns of the requirements of the
economies of the area, .

.volving considerable American control over the

use ol the aid provided would promote trie long range economic strength
of tJje area, but would make lees of a contribution to the problem of the
sterling balances than a prograr. directed specifically to the problem of
clie sterlmg balances in the Far East.
j program is designed to afford flexibility as to timing and progn*
content for each individual country, and involves a country-by-country
approach, rather than an integrated area program, which is especially
wpuited tc. the region.

If confined to the countries Mentioned, the program

•.t raise a question as to the appropriateness of roaking provision for

ings as U.e ^rab countries, Palestine and turkey, and Latin

America. The components of the pro&mm follow:
1. Authorization to extend up to oae billion dollars in long
term development credits to be ccaaaitted over a five year
period through the Export-Import Bank on somewhat more
Federal Reserve Bank of St. Louis

** 2 —

liberal standards than customarily applied fcgr the bank,
and upon more liberal terras as to interest rate,
and grace period.
Authorisation to grant up to ^300 million to India and
Pakistan over a three year period for the purchase of r
consumption goods and raw materials in the United States,
principally agricultural eomaodities* The local currency
counterpart of this aid would be used to purchase and retire
an equivalent amount of blocked sterling.
A greatly expanded program of Point IV teclmical assistance
for the area, with emphasis on the following!
a* Agrieultiiral technology and technicians, in connection with which (25 million per year for 3 years to
b© authorized for the purchase of tools, food process*
ing and storage facilities, insecticides, fertilisers
and other ntatoriala needed for demoa« Nation purpose*
in coanection therewith.
b» TechnicianB to be employed in tiie plaiming,


tiofi and operation of dtftolopraent projecte financed
imder (1) above.
Broad authority to negotiate tripartite agreements with Britain
and the sterlMg 'balance eoontriM (sainly India and Falcistan
which now hold about 700 million pouads) with respect to sterling
balances of the creditor countries :in the Far East* ?he
objective would be to achieve a xsaxissm lessening of the burden
Federal Reserve Bank of St. Louis

•. 3 —

of these balances on Britain, and the specific U. S.
objectives would be as follows:
Federal Reserve Bank of St. Louis

a* In consideration for African dollar aid, the use

of sterling area dollar resources ogr countries
aided under this program would be limited to not more
than their current dollar earnings*
b* As indicated in (2) above5 the local currency counterpart of U»S» grants in aid would be so utilized as to
liav© the effect of cancelling an equivalent amount of
sterling balances.
c» Sterling balances, m an amount equivalent to the total
U.8* line of credit extended to each country would be
segregated in a special account and immobilized pending
repaj-TBent of the credits,
d» Remaining balances, less amounts considered necessary
as monetary reserves, would be funded under terms which
would reduce the annual sterling drain on I?r"tain, and at
an interest rate low enough to permit effective red-actions
in the capital sum.
Federal Reserve Bank of St. Louis


It is Important
that this Paper
should be made
c. *. •OTBUOOHT nnmm omci

Federal Reserve Bank of St. Louis

Treasury Department
Office of International Finance


To: Mr.. Willis
From: Messrs. Abramson, Arnold^May
and Dickens
Attached is a very short
memorandum to Mr. Martin stating
the problem of tax exemption as
it appeared at the present time*
It seemed to us pjofo^able that
this "brief statement accompanied
by copies of the previously prepared memoranda was a suitable
method of presenting it to
Mr. Martin.





: up. Martin


: Mr. Will!


March 29, 1950

SUBJECT: Exemption of Foreign Income from U.S. Income Tax
as a Means of Fostering Investments Abroad
This subject —Tax Exemption of Foreign Income as a Means of Postering
Investments Abroad — has been discussed widely during the last year or more
for various reasons, among which are (l) the statements that new foreign
investments will contribute to the solution of the so-called dollar problem
and (2) the prominence given to direct foreign investments as a means of
providing underdeveloped countries with industrial know-how, especially since
the Point IV program was enunciated. It may be assumed that it is the policy
of this Government to foster private foreign investments. The questions are:
Is tax exemption a desirable method of implementing that policy and, Will it
be an effective method?
Complete exemption has not been tried in the U»S. but, by legislation,
this country has already embodied variations and combinations of types of
partial exemption in our tax structure. Among these are (l) the tax credit
under which income taxes paid abroad are deductible from income taxes payp.ble
in the United States on that income, (2) the complete exemption available to
China Trade Act corporations and to individuals and corporations deriving
SO percent of their income primarily from the conduct of business in a
possession of the U.S. and (3) exemption from corporate surtax to so-called
Western Hemisphere Trade corporations. While these exemptions, by legislation,
a,re in a sense quite far reaching, it is clear that they are carefully restricted
exceptions to a general rule*
Present circumstances under which question is raised,
The question of tax exemption is up for immediate consideration because
of a draft convention on double taxation negotiated last November between the
U.S. and Colombia which Colombia is very anxious to formalize. That draft
convention provides among other things for the exemption from surtax of
dividends paid by Colombian corporations (comparable to Western Hemisphere
Trade corporations) to U.S. corporations (Article VII). It also includes a
provision to the effect that the patrimony tax included by Colombia shall be
classed as an income tax for the purpose of calculating the tax credit in the
U.S. (Article XVI, (l)). This latter provision is included solely in order
to raise the tax credit in the U.S. to the equivalent of the U.S. normal income
tax. Combined therefore with the exemption from surtax, this gives total
exemption within the limits specified above, that is, dividends paid to U.S.
Federal Reserve Bank of St. Louis

- 2-

Before Mr. ELdon King went to Colombia to negotiate the present draft
tax treaty, a meeting was held in your office, attended "by Mr. Graham,
Mr. Lynch and representatives of the Tax Legislative Counsel's office, to
discuss this among other subjects. It was agreed then that Mr. King could
discuss the matter of exemption and the relation of such provision to the
conclusion of a tax and an investment treaty but no assurance was given him
that such a provision as that presently included in the agreement would be
approved by the Treasury Department. Furthermore, at the meeting in
Mr. Graham's office after Mr. King returned from Colombia, serious questions
were raised with respect to this exemption provision and the question of
procedure from that point on was raised by Mr. Lynch. Assurances were given
that the Treasury Department was not committed in any way by the negotiations
which had been carried on.
Although the chief negotiator for Colombia is in Washington at the present
time "on other government business11 and it is desirable that a decision should
be reached in Treasury with respect to this particular matter, neither the
Colombian representative nor Mr. King should feel that this Government is
committed to go ahead with this particular provision. Both before the negotiations started and subsequently, Mr. King was carefully informed that this
exemption provision was a questionable one and one about which no commitment
could be made. It is therefore definite that we need feel no compulsion at
this time for agreeing with the exemption provision of the Colombian treaty.
This draft convention raises two important problems, (l) the desirability
of the general principle of complete exemption from U.S. income tax and
(2) the desirability of accomplishing the exenrption, assuming that such is
deemed a proper method of fostering foreign investments, by means of bilateral
negotiations. The arguments for and against are given in the three short
memoranda attached.
Federal Reserve Bank of St. Louis


Office Memorancfum


Assistant Secretary Martin



Mr, Willis





The General Convertibility Provisions of the Anglo-American
Financial Agreement (Section 8(ii)).

Daring the Fund-Bank meetings in September 1948, we initiated
some discussions with the British concerning possible modification
of the Anglo-American Financial Agreement. Our purpose in initiating
these meetings was to have something to offer the Congress in the way
of "regularizing11 our position with regard to the convertibility commitment in case embarrassing questions were raised* The Secretary
had two brief conversations with Sir Stafford Cripps and three meetings
were held with Sir Henry Wilson-Smith* In preparation for these meetings we had had a number of discussions with the NAG Staff and also a
meeting of the Council.
At these meetings we proposed to the British that the Agreement
be modified to provide for the resumption of convertibility of sterling
on July 1, 1950, unless the two governments should agree to a further
postponement. We also proposed that the British obligation to convert
sterling for residents of the United States (Section 8(i)) be continued
beyond its present expiration date, which is December 31, 1951> and
suggested that the commitments covering convertibility for sterling area
countries (Section 7) and sterling released from accumulated balances
(Section 10) be amended to provide for the same treatment as for current
earnings of non-sterling area countries. We made these proposals because we thought it advisable to obtain some "quid pro quo" for what
would appear as a substantial concession to the British in releasing
them from the original terms of the commitment.
The September conversations were followed by further talks with the
U» K. Treasury Delegation here in Washington in November 1948 and in
January 1949, In these talks the British opposed the commitment to
resume convertibility on any fixed date. In effect, they were unwilling
to consider any arrangement which gave the U* S. Government rather than
the British Government the final voice in determining the date for resuming convertibility. They proposed that the obligations be assumed
only when the two governments might agree that it be undertaken. They
were prepared to consider modifications of the obligations in Sections
7 and 10 to insure that sterling released from accumulated balances and
sterling accruing to sterling area countries be accorded equal treatment
with current earnings of other areas, and they were also willing to consider the extension of the obligation to convert sterling for U. S.
Federal Reserve Bank of St. Louis


- 2The British argued that the existence of an inter-governmental
obligation to establish convertibility by a specific date tends to
create conditions which militate against the success of such an operation by promoting speculative transactions in anticipation of convertibility. In the same way they argued that sterling holders would not
be likely to have the same confidence in the success of the venture if
it were not instituted entirely on the initiative of the U. K. Government.
Their opposition to our proposals left us with the alternatives

(a) Acceeding to a compromise modification which provides for
convertibility only when the British agree to institute it;
(b) Abandoning any effort to modify the Agreement and allowing
it to stand in its present form; or
(c) Reporting to the Congress our inability to agree with the
British upon a modification.
About a year ago we discussed this problem within the Treasury at
some length and we reached rather general agreement upon a new proposal
for modification of Section 8(ii). lundamentally, this proposal constituted an acceptance of the British point of view, but it was intended
to put the United States in a somewhat stronger position in urging convertibility upon the British than would be the case if the Financial
Agreement provision were allowed to lapse. This was to be accomplished
by requiring annual consultations between the two governments until all
restrictions had been eliminated. Although we agreed upon this new line
and even drew up appropriate language, a copy of which is attached, we
took no further action, either to discuss this proposal with the British
or in the national Advisory Council.
Federal Reserve Bank of St. Louis


Proposed Modification of Section 8 (ii) of the Anglo-American
Financial Agreement

"The Governments of the United States and the United
Kingdom agree that after a date to be determined by the
two governments they mil impose no restrictions on payments
and transfers for current transactions. The two go-vernments
will consult not later than March 1, 1950, and each year
thereafter, until all restrictions on payments and transfers
for current transactions have been eliminated. However,
notwithstanding the provisions of Section 7 and 10 (ii), the
Government of the united K ngdom may maintain restrictions
on the use of sterling balances released or otherwise available for current payments, or on the use of the sterling
receipts from, current transactions of sterling area countries
if similar restrictions may be placed on current transactions
in accordance with the provisions of this paragraph, (ii).
The obligations of this paragraph shall not apply:
Federal Reserve Bank of St. Louis


to restrictions imposed in conformity with any of
the provisions of the Articles of Agreement of
the International Monetary Fund other than the
provisions of Article XIV, Section 2$ or


to restrictions imposed in connection with
measures designed to uncover and dispose- of assets
of Germany and Japan."
Federal Reserve Bank of St. Louis

, 'Treasury Department
Office of International Finance



Following summarizes highlights of Tripartite Meetings:
le Assessment and common objectives. After analyzing gains and losses
in world situation there was general agreement that there has been shift
in power relationship favorable to Soviet Union which means situation
serious and of increasing danger, Bevin and Schuman agreed we should
realize this and act along line following points which I....made. (1)
Dangers in present situation, particularly those flowing from growing
disparity between military strength of East and West; (2) need for strong
economic foundation to support defense effort and maintain living conditions; (3) importance of drawing West German economy into service of
West; (4) first priority for building up strength and vitality of West;
(5) importance of holding in Asia while doing first priority task in
West; (6) in line with Schuman1s emphasis on presenting peaceful intent
of West to world public opinion, importance of countering with truth the
false notions of Western position; and (7) conception TAT Organization
not an end in itself but only as tool to make action possible. We agreed
that general negotiations with Soviet Union now would almost certainly be
unproductive. Bevin and particularly Schuman laid great stress on dangers
in present impasse in UN and we agreed to have our representatives in UN
consult on problems Soviet boycott caused for UN, especially (A) Can
Security Council function effectively on important questions in absence
of permanent member; (B) Is there any realistic and desirable alternative
to Trygvie Lie as Secretary General; (C) Attitude on admission of new
memberso I indicated that there could be little point in their discussing
recognition of Chinese Communists since we believed yielding to Russian
blackmail might place "Western interests in Asia in jeopardy outweighing
advantage of return of Soviet representatives to UN. This matter left
that three governments will consult whenever one of them believes matter
can be usefully taken up again.
2. NATO. v General agreement on need for strengthening organization to
provide for coordination various activities such as defense and finance
committee and for some concerting policy of members on political questions
common concern. Details left to be worked out Pact Council meeting next
3« Political and economic integration western Europe and Atlantic Community. No agreed conclusions yet reached. Representatives of Ministers
will consult Canada FONMIN and probably review again. On economic side
British position is to stress development NATO as broad Atlantic Committee
unity framework while France stress continuation and some association
United States and Canada with existing European organizations such as OEEC.
I have made it very clear while ERP ends in 1952 United States interest in
Europe has no terminal date and that Administration will consider appropriate recommendations to Congress to meet extraordinary situations which
may develop. On Germany relationship general agreement cannot be associated
with NAT in any way this time. French take position against possibility
of future association but British incline as we do to hold this possibility
open especially economic field.
4. Migration. Agreed declaration issued stressing importance this matter
Federal Reserve Bank of St. Louis


«• 2 —

especially Germany, Italy and calling for review by experts to determine if additional approaches this problem available -which could be
5« Germany, Principal agreements were: (A) Declaration of policy
toward Germany to be issued May 14 indicating the course ahead in
development of relations between the Western Powers and the German
Federal Republic, stating our ultimate objective of reuniting Germany,
and reaffirming offers on unification we made to Soviets at Paris in
1949» It was agreed must move forward with relaxation of controls and
with our policy of closely associating Germany with Western community
of nations. It was not possible in limited time available to arrive
at clear understanding of speed and manner doing this. Certain differences of emphasis were revealed. Our feeling was there must be
positive action by the High Commission to foster democratic development
in Germany. The British seemed not to share this feeling to same extent
but rather to concentrate on relaxation of controls by a series of
reciprocal steps chiefly involving German action in field of foreign
affairs. But British unwilling translate this principle into practice
for example on question permission German shipbuilding for export.
French laid considerable emphasis on retention of supreme allied authority
but seemed prepared to go some distance in relaxing controls, especially
at local level and in internal affairs. (B) Creation high level working
group London to review allied controls on Germany and make recommendations
for eliminating major practical obstacles arising out of the continued
state of war. (C) Public declaration of our intention to remain in Berlin
and of our intention help much as possible in solution it economic problems.
(D) An unpublished directive to high commission instructing it take
various measures for the improvement of position of western sectors of
Berlin and to study what counter measures could be adopted if Soviets
again try interrupt Berlin's communications with West. (E) Instructions
to High Commissioner on answer to be made to Dr. Adenauer's request for
declaration that territory Federal Republic would be defended against
attack. The answer to be made is that, under Articles 5 and 6 of the
North Atlantic Treaty, an armed attack upon the occupation forces of
the Yfestern Allies in Germany is considered as an armed attack against
all the parties to the treaty and will bring into operation the provisions of Article 5 of the treaty. The reply will further state that
the Three Powers have no intention in the present European situation of
withdrawing their occupation forces from Germany. (F) Joint public
statement denouncing Soviet failure to return German Power's as well as
Japanese Power's. (G) Decision for Three Powers to send in about one
week similar notes of protest through diplomatic channels to the Soviets
on the creation of the militarized police in the Soviet zone of Germany.
(H) Instruction to High Commission to study the limitation on German
steel production, in view of fact that production is for first time since
war running at about the maximum permitted level.
Federal Reserve Bank of St. Louis

- 3We also discussed following matters:
(A) A Federal Police Force in Western Germany. Dr. Adenauer recently
asked the High Commission for authority to establish a Federal Police
Force of 25,000. The British pressed hard for agreement to authorize
the establishment of a force of 5,000. I said that I thought the
matter should be studied by High Commissioner and that I -wished to
consult the President and the Chiefs of Staff. Mr. Schuman took somewhat similar position. It seemed to be consensus opinion that it premature consider rearming Germany.
(B) Exports from Germany to the Soviet orbit are at present controlled
in accordance with American practice, which is more restrictive than
controls applied by the French and British. They pressed for agreement
to place exports from Germany on the same footing as their own and for
the encouragement of German trade with the East. I said that I could
not give consideration to the matter until the expert committee now
considering security controls on shipments to the Soviet orbit has completed its work.
(C) In brief discussion new French proposal on joint utilization of
French and German coal and steel industries, Bevin pointed out difficulties British participation stressing conflict with British planned
economy but on the whole did not depreciate French initiative. This
statement somewhat warmer tovrard topic than previous official British
statements. I expressed appreciation for French initiative along lines
my previous message and public statement. Bevin and I welcomed Schuman1s
suggestion French officials explain proposal in more detail to High Commission which will be done soon.
6. Austria. Ministers agreed on general principles to guide Tripartite
action in treating Austrian Government as far as possible as independent
state and in lessening the burdens of occupation. Decision on the appointment of the civilian High Commissioners was deferred until May 18 to enable
Schuman to consult the French Government. At that time a final decision
will also be made on future procedure with respect to treaty negotiations
and on language of a public statement on Austrian question.
7* SEA- Indochina. Based on our preliminary bilateral conferences there
was agreement reached on the assessment of the situation and our common
objectives in SSA. It was decided that no Tripartite declaration on the
subject would issue from the conference. The British objected to such
a declaration, partly because it would exclude commonwealth. I did not
advocate this and the French reluctantly reconciled to its absence. T¥e
also trilaterally agreed to take certain common measures in an effort to
suppress gunrunning into French Indo-China and to cooperate on our
information policies and activities in the area.
8. Colonial questions.
Broad lines of policy in respect of the political,
economic and social development of Africa were discussed and a wide identity
of view found regarding basic objectives. It was agreed that there should
be subsequent discussion for the purpose of reducing the area of disagreement regarding approaches to colonial problems in the UN.
Federal Reserve Bank of St. Louis

- 49« Continuing consultation. It was agreed consultations among three
governments should be intensified and FONMINS meet with sufficient
regularity so that meetings would be regarded normal events and not
assembling because crisis exists.
10, Obtained general agreement our position on satellites and Yugoslavia and importance consulting and insofar possible acting in concert
these question. There follows highlights of my bilateral talks with
Bevin on subjects not also covered Tripartite conversations.
1. Near East. I emphasized our concern on arms shipments to Arab
states and Israel and proposed British and French join United States
in declaration recognizing these states need maintain certain level of
armed forces to insure internal security and legitimate self defense
and permit them play their part in defense of area, and specifying
(1) that arms would only be shipped on condition receipt of assurances
of non-aggressive intent, and (2) that United States-UK and it should
signify intention taking immediate action consistent UN obligations to
forestall any threat aggression within area. Bevin agreed in principle.
Now working out drafting and procedure with British after which French
will be approached. British agreed our appraisal gravity situation
Iran and views exchanged respect possible steps check deterioration that
2. India and Burma. British agreed our concept United States role
should be supplement not supplant endeavors of UK and commonwealth which
have primary interest.
3. China. Found ourselves still wide apart though Bevin frankly expressed
his disquietude over protraction his negotiations with Peking on recognition.
An unearned increment of conference probably resulting my Washington conversations with Franks was announcement by British of its action in
Hong Kong to safeguard aircraft.
4. SEA. Agreed on assessment of situation and British reaffirmed their
intention of discharging their particular responsibilities in area.
5* Palestine Relief Agency. I stressed importance British contribution.
Bevin promised to review.
6. In discussions British position in world and our relationship with
British, following British preoccupations emerged: (A) Their emphasis
on Labor's domestic program and UK viability by 1952; (B) Their desire
for a "special relationship" with United States; (c) Their desire to
maintain their commonwealth and sterling area or world position as
distinguished from role of an European power; (D) The5_r resulting
emphasis on developing WATO as an Atlantic community umbrella as distinguished
from French theory of developing strictly European organizations such as
OEEC; (E) Their concern over divergencies UK-US policy as illustrated by
China and colonial matters. There follow highlights bilateral talks
Schuman on matters not duplicated tripartite discussion.
1. Indo-China. This was main subject discussed in detail Paris. Mr.
Schuman in his opening statement to me substantially met United States
on the points which we have been impressing on the French without success
Federal Reserve Bank of St. Louis


- 5up to this point. Mr. Schuman reaffirmed the acceptance of responsibility for Indo-China by France, he acknowledged that United States
assistance must be supplementary and not substituting, he assured
United States that the March 8 agreements would, be loyally executed
and liberally implemented, he stated that the Cabinet had taken the
decision -to establish a new ministry for handling the affairs of the
associated states. Mr. Schuman did not make exaggerated requests for
aid and seemed gratified with what I was able to tell him. In effect,
I said that I was hopeful that for the balance of the fiscal year
amounts might be found for both military and economic aid coming up
to the neighborhood of $20,000,000, that we were proceeding urgently
on the top priority military items requested by the French and that I
was hopeful favorable action on legislation now before Congress would
enable United States to continue military and economic support in the
fiscal year 1951 • On balance I feel that the talks with the French on
the subject of Indo-China were successful.
2. Palestine Relief Agency. I stressed importance French contribution
and Schuman said he thought would be forthcoming in June.
In general, while the results of conference are not spectacular from
the press point of view, I feel both in my talks and the preparatory
talks progress has been made especially with respect to better understanding of FUNDAMENTAL questions confronting United States which will
pave the way for improved cooperation and more effective concerted action
in future.
Federal Reserve Bank of St. Louis




The Ambassador and Mrs. Bruce
Secretary Snyder
Hon. & Mrs. Win. McC. Martin* Jr., Ass't Secy of Treasury
Hon. 4 Mrs. James E. Webb, Under Secy of State
Hon. Brent Spence
Senator and Mrs. Maybank
Senator and Mrs. Flanders
Mrs. Roberta Paul, daughter of Sen* Maybank

Prime Minister and Ifcne Pleven
Minister <£ Finance and Mme Petsche
Minister of the Budget and Ifeae Faure
M. & toe Wilfrid Baumgartner, Oov. of Bank of France
M. & Mme Jean Monnet

Minister of Foreign Affairs Robert Schuraan
Federal Reserve Bank of St. Louis


September ilt

M £ II 0 R A K


In the evening of August 18t about an hoar ultCr the . eeretary of the i'Ft&sury announced an offering of IB-month 1*1/4$
note* in exchange for maturing obligations on September 15 and
October lf the Federal Reserve Boara announced its decision to raise
the discount r&t from 1-1/2,1 to 1*:
On the following Monday aornin.^ it was plainly Indicated by
the Federal Reserve tHat it would ba profitable for holders of tfte
"rights* to the new iesuf to sell t
to th« Faaaral Reserve rather
than to *xchar
^ci for tht 1-1/4S note* Sale of the "rights" to
the Federal Reserve on the first aay amounted to $819 million and
avy purchases havs continued daily since then until at the close
of business on .September 3t they amounted to I?f093 million* Ae
one uriter aaid* The Reserve Board undersold the Treasury on its
own securities.
Since then a number of financial writers who favor an increase
in interest rates havi had a
J. day eom&enaing the t@dar&l Reserve
for- its action aad critici&inr the Treasury• The federal Reserve act
has bean described
as a practical means of cour
ting inflationary
meat r banks9 lending and it has been suggested thut the Treasury9s
action was basto; upon political expediencyf
.ad by a
desire to continue a policy c
ap monay. Virtually
effort was
made to
thar public understanding of the Traasuryfs problem and
tt&rj of the Treasury has bten frequently ,_„ ^^
by the coiiBsittaeft represent
Americas A2sociationt
Mutual :
auks, and Insuraaot Coapai-!
or the skillful
uhlsh he has managed the public debt since the war.
action of the federal Reserve has bten describod as a
"declaration of indtpendenotj* as
is of itself is a nreat virtue*
Maoy p-:rsoEs seem to ov rlc k
ea I
System was established in IMS, conditions «@re consiaerably different
from thost ^lieh e%ist today. f
blie dabt nas little aore than
m and the
rnMent s
^ditures were less than -^S/4
is efttivaleat to about a «eek of pr sent day money
requirement ,
Iviget vas practically in balance, Hie
problems of the Secretary of the Treasury

Ft* relatively Infinitesimal*
Federal Reserve Bank of St. Louis

- 2 •>
4s a result of two world wars and a major depression, the public
debt of the united States Gov rument today is approximately $257
billion* This is about half of the total public indebtedness. The
management of this huge public debt is a major responsibility of the
Secretary of the Treasury* Many regard it as his greatest responsibility.
In managing the public debt the Secretary of the Treasury must
determine not ""only the amount f funds to be raised to finance the
Government's vast activities, b t he also must determine the types
of securities to be offered and the rates of interest at which the
off rings s&all be made. These are statutory responsibilities and
call for th ; exercise of judgment*
In determining the types of securities to be issued, the terms
of the offerings, and the rates of interest to be paid, the Secretary takes into consideration the economic forces finish are at play
or may be in the offiri .
The decisions of the Secretary of the Treasury with respect to
typ-s of securities to be offered and their terms, including rates
of interest to be paid, undoubtedly have an important offeet upon
the activities of the Federal Reserve Board in the field of money
and credit* But so do many other fiscal operations of the Government have effect on money and credit problems of the Federal Reserve,
notably taxation and. expenditures* If, as seems to be contended,
the Federal Reserve should determine the interest rates to be paid
on Government obligations,
it might also be contended that the
Federal Reserve s jurisdiction should also be extended to a supervision of Federal Budget*.
Aside from the fact that the laws enacted by the Congress impose upon the Secretary of the Treasury the duty of fixing the terma
of public offerings (subject under certain conditions to approval
of the President) the amount of interest paid is part and parcel of
the Federal Budget, Therefore this item is of concern not only to
the Secretary of the Treasury but also to the President. The annual
interest cost is now about ;j;5,.02^,000.000 which is about an eighth
of the total Federal Budget,, For evary dollar of a .utional interest
that must be paid, the Secretary must raise an additional dollar
either through taxation OF by borrowing,,
Federal Reserve Bank of St. Louis


- 3It is erroneous to conclude, as is frequently inferr
the Treasury's principal or onl
ctiv- Is to reduce tue Interest
eott ia
ru of other factors. Th© Treasury recognizes as
clearly as anyone else tnat the rate of interest paid on Government
obligations Is an Important element to consider in a program to
combat inflationary forces. The effect of fiscal policies, however,
ainst ot
actors* On the other har-. t a Treasury
^le at a return for the money tar; 'overn-*
ment spends.
Additional cost to
>ublic Treasury resultin
from aa Increase in the Interest rate is a determinable matter but
ti e return Is Impossible to measure. It is a general assertion that
the benefits, through 2'odacsd prices, would Qut*el;-h the additional
cost* Hot only is it impossible to wei ii these benefits but it is
also Impossible to dr
lae their distribution a?m>nn; the citizens.
Some fl
have interpreted the present situation
as a battle between I
rwnent agencies for power. Although no
useful public service Is served by
In i
ojoct on tilis
I may be worth notirv that the actions
;cretary of
the Treasury,
-den a number coulu be mentioned, provide no reasonable basis for any such assertion . lhat the Secretary of the Treasury
has fc k in public debt mna^ement Is Cooperation, consideration, f
and due recognition of his responsibility for financing the Government s
operations and of refun.
the huge war debt*
;-ne of the statements indicate that
Interest ra:e on t.
usury's offering Is ttimroalistlcl! and imply that the Septeml
financing can t
I through the support of i
• 3Py.e :
3£. --cl'-La lj, the federal ReservF created the situation
bichmakes such support necessary. Through its power to issue currency and conduct open ^arkot operations 1
rnment securiti
yser.-e Is In a position
r to assist in the sale of
a Treasury offer
r to
b Its failure, in tills co mection
.resting to note th
• notes which are I
I by t
re by law "obli
s of
alted States«tt
s fact is so state
ue notes. Fedxrral j-esorve
notes are not ba--.--ked solely
Pi i oservc.
ay are backed by the cr^
.r to buy a
vernment securities in the
market, provid;
jderai Deserve System with an effective weapon
aold Over tixo Ji&ad of the Secretary of
Federal Reserve Bank of St. Louis


•» 4 *•

Therefore, It requires courage to differ with the Federal Reserve.
In the li^ht of what has happened, for the Federal Reserve to assume
credit for support in;-; the Treasury in its September 15 financing is
like kaoc
a man clown and then claiming credit for lifting him
up an
his support*
Since the Treasury announced the September 15 refunding
operations, the Fedoral" Reserve System has said in effect to investors?
Tie have on our shelves better securities than those offered by the
Treasury « , • Brin ; to us your 'rights1 to the Treasury's offering
and we will sell you better securities * . • Somo of the securities
we have carry the same rate of interest as those offered by the Secretary of the treasury, but we will sell th*m to you at a price which
will net you a better rate * * « Moreover, the Secretary of the
Treasury has offered you the September notes at par, but; if you will
wait until after September 16 you will be able to buy them from us
at a discount * •
The discharge of the duty imposed by law upon the Secretary
of the Treasury in the fixing of terms of Treasury offerings necessarily involves a lar^e decree ol individual judgment, and whenever the
element of judf^tent is involved it is to be expocted that there my
some disagreement, in srite of contrary views as to what the
rate of interost saould be the decision of the Secretary of the Treasury
with respect to the September 15 offering was not an unreasonable
one* The eflect of the Federal Reserve action is to invade the autho ity ana responsibility imposed upon the Secretary of the Treasury,
It is doubtful whether the Congress intended that tne Open Market
ait tee use tlie autnority of its open market operations as a means
of coispelli
I Secretary of the Treasury to fix interest rates
to suit its judgment*
Federal Reserve Bank of St. Louis

- 5ll the ^ost-fctr economic studies the economists of the
Federal Reserve Board admitted that the critical issue is not
selely or even primarily, as is sometimes argued, whether interest
rates on the public debt should be stabilized or whether there
sLould be flexibility in market
. They stele-- th^t elthot
stability of interest rates and bond prices Might impede monetary
authority, it is by no means clear that * policy of permitting
fluctuation in the rates and prices of Government securities would
promote stability as long as the present public debt structure is
retained. They slao express the view that to be effecti?e against
inflation, higher interest rates would have to result in the conversion of idle OP excess monetary balances into Government securities
or time deposits. In the long run, the rate of interest "probably®
has a great deal of influence both on the employment and holding of
money. But in the face of short*run inflationary developments of
any real la&gnitude, ®a very great increase in interest rates might
be necessary
to resist the conversion of Government securities into
deposits. *
In this connection it is interesting to note the observation
of these economists tiiat " Interest rates of 5 and 6 percent on
vernment securities following the last war (World iar I) were not
an adequate curb on credit expansion by banks and did not promote
absorption of Government securities to any significant
fhe following excerpts from Study Mo* 8, issued in November of
194?, (p. 107) are worto ^uotin
"Experience shows that increases in Federal Reserve discount or bill-buying rates have not always exerted effective restraint against credit expansion generated by speculative -demands.
Such increases would be even leas effective in a situation where
their primary effect would be upon prices of outstanding
Government securities> rather than upon private borrowers."
"Substantial variation in short-term interest rates,
however, in view of the large volume of public debt outstanding and
its broad distribution among owners, would have serious repercussions throughout the economy without exerting the same influence
Federal Reserve Bank of St. Louis

- 6:

upon borrowing and lending as in the past 1*hen private debt was a
, more important part of the iotal debt structure^ Maintefianee of
substantially higher interest rates, furthermore, would raise the
cost of the public debt, and widely fluctuating rates would greatly
complicate the Treasure's task of refunding its large maturities.
Finally, it is important to recognize that higher levels of
short-term interest rates would not prevtfct si .if ting by banks, corporations* and others from the Tast holdings of uovernmeat securities in order to meet private demands for credit if these demands
are particularly strong or banks are competing actively for such
business. In other words, while sale of short-term Government
securities to purchase longer-ter^a issues might be prevented by
diminishing the existing spread between short and long-tana interest rates, the higher short-term rates would not prevent sales of
Government securities to expand private debt."
The economists stated that "If traditional Eeserve System methods of influencing changes
in the amount of private debt through changes in interest rates are
resumed, appropriate protections will need to be established against
undue instability in the market value of the vast public debt.
In connection with the problem of debt maaageaeatf it would
seen tMt the Federal Eeserve should hsive given more consideration
to the importance of maintaining a stable securities market at such
a crucial time when it was not known the extent to wiiich the
Government might be required to borrow money to finance military
activities. It also seems that while a great deal of claims are aade
for the psychological value of the increase of interest rate, such
action is little more than working around the fringes of a program
to combat inflation* Ihe way to attack inflation ^is through direct
or qualitative controls along the lines of the rresident's speech on
Saturday night.
is no conflict of objectives between the
Treasury and the Federal Reserve. The Secretary of
just as much concerned as the Federal Eeserve about
stable economy and a prosperous nation* lie is just
the importance of the stability of the buying power
and a sound currency system as the Federal Eeserve*
Federal Reserve Bank of St. Louis

Secretary of the
the Treasury is
isaintaing a
as much aware of
of the dollar
As a matter of

fact he has * graatar dir»0t lataraiit nai i^affoiulbility in
•eoaomio stability tocauee It is Ji* w&o kta'.to fimi&a* tlwf
tiofis of Hit Federal aoverna«ntf whether the lit Ion is at paaee or
at war* ua in ttia ra^raiantatlTa of tta '^rt *ld«i»t of tha c&ited Stataa»
aiaetad re^resantatiYi of tka laopla on ivncaa sliouldtrs j»0at» tfca
ras|oaaibllit| for aaoacmlc $tayiitj and tha fauaral weifara*
Ilia aaci*ataj7 of tfct fi^iaam»| lias aj$aaf$faa
aaaioii to soaviuot tha i^aUaral Eaatr^a S^atam taat an increase
In lutarast rates at tltia tlaa i$ usaaeaiiary^ inadTisablaf and
in tiit latarest of a atabla ucnramaaat aaavritiaa auirkat* ^i« has
saaloualj- atoldad aceroael*2Miiit u^oii ta« functioaa of tha Fadaral
iMiitrra S^stam, and Ma diaaiotrgad Ma duty nitk a Mgk iagraa of
eoura^a and diaor«tioa»
Federal Reserve Bank of St. Louis



:*Mr. Martin



Se teiaDer
DA jjB: P'

25, 1950

: Mr* Kamarck

SUBJECT: Treatment of United States Government Debt (Memorandum prepared in
response to your request for any ideas on domestic financial policy}
At the present time, I understand there is a conflict in policy
bet-ween the policies of the Treasury and of the Federal Reserve Bank as
to the public debt* The Treasury wishes to keep the government security
market stable and prevent a rise in interest rates on government securities o The FRB wishes to restrain credit expansion by the banks but
cannot do so if the banks can secure additional reserves by selling government bonds to the* FRB which has to buy them to maintain the price of
government securities.
It seems to me that both objectives are important, need to be
pursued and need not necessarily conflict. Certainly with the public
debt as large as it is and with the possibility of further large increases in the debt, a stable and orderly government security market is
most important* At the same time, it is equally important that every
possible fiscal and monetary measure be taken to avoid inflation* The
more we can do through fiscal and monetary measures the greater the
likelihood that we will be able to avoid sweeping direct controls«
Reconciliation of these two important objectives could be achieved
in a very simple manner but one which represents a considerable innovation in United States monetary policy. Normally, 1 would hesitate a
long time before making such a recommendation. But under present conditions, I think that it deserves very careful consideration.
The proposal is that the banks be required to hold, in addition to
their regular reserves, a secondarjr reserve of government securitiesc
If this reserve were properly chosen, it would freeze the present holdings by commercial banks of United States Government securities, i«e«
around $65 billion of government bonds. The whole point at issue
between the FRB and the Treasury would then have disappeared. The
monetary authorities would be able to curtail bank credit through
action on bank reserves and there would be no danger that any bank
could offset the Federal's action at any time by selling government
bonds to the Federal. This proposal is, of course, not original as
far as discussion in the United States is concerned. It might also
be pointed out that it was the institution of a similar securities
reserve by Einaudi in the fall of 1947 which broke the back of the
Italian inflation.
Federal Reserve Bank of St. Louis


5, 1950*
Mr, Southard
Mr. Willis

Financial Control* and Expert Control*

The following a*msrandaai attempt* to summarise ay approach to this problem.
So far as I can see, it Is very difficult to draw any meaningful distinction between type* of exchange and trade controls for administrative purpose**
I believe that tae foreign fund* control type of operation probably come*
closest to a type of control which doe* not Involve partnership with direct
controls an commercial transaction*. This is so if the primary objective 1*
to secure the maximum immobilisation of dollar funds for certain areas*
Kevertheless, even here, particularly with blocking controls applied to
neutral areas, cooperation wita expert and impart controls would scam to
be involved*
So far as X can see, the almost universal experience in other countries
indicates the desirability of associating financial controls in close
partnership and coordination with export and import controls, in order to
achieve the objectives of policy. Within this area it does not appear to
me that the intent of the controls influence! appreciably the desirability
of combining financial and trade control* if the objectives are to be effectively pursued, for -example, it seems to me doubtful that the role of
financial controls would ever be limited to capital transactions, if the
intent of the controls is to prevent capital outflow. I believe the financial
control? would be very much concerned with following up export licenses to
see that export proceeds were in fact surrendered to authorized banks.
If tae intent of a control system is rather to assist in limiting exports and
imports to fixed amounts for particular areas, financial controls may be
less significant but would still normally be used to supplement expert and
import licenses, primarily because the banking system exercises such a key
role in such transactions that it is usually an effective spot at which
to introduce an administrative check* this is partly because the financial
system generates a gooa deal of intelligence when it is cooperating without
•peedal effort to do so, and because bankers are extremely useful agents
of tat* Government in carrying out licencing procedures. They are particularly
effective in interpreting regulations for the public.
Consequently, the general experience in other countries, as 1 understand
It, is that instructions to banking institutions normally are given by
the treasury or Central sank, while instructions to trader* involving export
and import licenses, quotas, etc*, emanate fron the agency corresponding to
the Commerce e artmnt in this cas?> For example, in ingUnd, the financial
regulations are Issued by the treasury or the Bank of England while the
export and impart control instructions ar@ isamed by the Board of Trade*
Federal Reserve Bank of St. Louis

. t«
III Canada, the trading and financial agencies cooperate through a
Foreign Exchange Board bat the primary agencies in carrying out the
program ire the banks rather than, for example, Chambers of Commerce,
or local agc?nts of non- financial departments*
If the t/. S. is serious In its objective so far as export controls
are concerned, it seen* to me robable that increasing reliance will
be placed on the cooperation of financial institutions as time goes
en* I believe it is the responsibility of the treasury Department to
provide the guidance to financial institutions In this field. This
does not mean that It should not be done in close and efficient coordination with those responsible for trading controls. For example, If
it is decided to add some form of financial affidavit, it may be highly
desirable that this for* be attached to export declarations as a unified form and sent to Comneree as the prlnary enforcement agency. Hot*ever, the contacts with the financial community, whatever their form,
seem most effectively handled by the treasury. It does not sees* too
persuasive that the Treasury leave this responsibility to Commerce at
this stage in the development of controls, because the cooperation
being requested is not too effective and is devoted to an objective
which does not involve either broad capital movements, or a type of
control with which the Treasury happens to have had experience. The
tJ. 3* is already involved la a irar which has cost a substantial number of casualties, and the entire drift of events is toward more emphasis on official utilization of resources for defense. It is an
inportant objective to try to prevent the evasion of export controls.
If the financial coa*unlty can help in this objective, the
Treasury should not be afraid to discharge its responsibility for
financial leadership, because of Its fears that its open participation would be misinterpreted. It shoula not be difficult In dealing
with the banks c.ncerned to explain the Treasury's interest In such a
way as to avoid serious qaalM in the financial conmanity. II; on the
other hand, the device beiag proposed Is not sufficiently effective
to warrant treasury sponsorship, 1 seriously question the advisability
of Introducing such a burden on the banking system at the indirect
suggestion of the Treasury Department bat with direct responsibility
la the Commerce Department* It might be preferable not to suggest
such financial affidavit under those conditions.
Aiaang other considerations, this view is taken beoause It does
not eeem at all clear at what stage the Treasury considers that active
Treasury responsibility for the inevitable partnership between financial ami trade controls should eofflwmoe. It is not believed that the
treasury isould uiah to limit its iatereat in this field entirely to an
attempt to freeze the assets of national; of occupied territories.
Federal Reserve Bank of St. Louis

- 3-

let, it does not see* at all easy to determine at what point our
oojectivsB become sufficiently serious or sufficiently different in
type to warrant active treasury responsibility. It is believed that
reflection will show that an attempt to define such a point could
not be easily put in terms which can be explained to responsible
officials who are not experts in the technical distinctions involved.
Consequently* the only distinction which appears staple, is that based
upon the channel of contact with the business eoawonity. Where the
channel is financial, a financial ana of the Govenuaent should be
responsible* Mhere the channel is a coaaercial enterprise, the Ooa•eree DepartKnt should be responsible* that is the easy distinction
to draw* the others are likely to appear to be sophisticated and unconvincing. Again, this doas not n*an that duplication of effort
and staff is desirable,
As to substantive suggestions for dealing with the current problem of enforcement, the following are offered for consideration. It
might be productive for the treasury to request infora*lly the as«lstance of the banking conaunity in bringing to the attention of the
treasury Depertatect for the use of the Cownerce Department, any intelligence which they sight be prepared to give aa a patriotic contribution, on a confidential basis* It i» possible that this kind
of an approach might elicit more actual leads aa to violations than
weulo be unearthed from the processing of a large voluws of affidavits
by an enforcement staff. IB any case, if an affidavit is to be adopted,
it se^As inconceivable that it would be done without a prior discussion
with the banking coewunity and an attempt to secure their cooperation,
normally such an educational isrograaa and ar/peal for cooperation would
to be the responsibility of a financial agency of this
Secondly, perhaps neaaiagful progress towards avoidance of reexports might be obtained from a similar attempt to secure the cooperation of foreign erahaage control authorities in foreign countries,
In such an ao roach rreaaury representatives abroad would appear to
be the most effective channel in those areas in which they are stationed,
Consideration night, for example, be gives to requiring a certification
from the local exchange control authorities that the good* concerned
would not be re-exported without processing to certain areas, This
problem of eaforneaent is a aore limited one than the broad question
of preventing exports of similar type goods by forai&i countries, and
in this lisjited area, the interest of the countries themselves sight
in some cases lie in cooperating with the United States to prevent re*
exports* this will be particularly true aa supplies become wore scarce.
Federal Reserve Bank of St. Louis

Both of tfeooo suggestion* aey have been explored and discarded

In *u», it would bo ay vis* that insofar a* possible, the action*
taken in this field which involve financial institutions or financial
ana* of government here or abroad be dealt with as tho responsibility
of tno Treasury, openly and frankly* 1 take this view because X see
no useful distinction based on the type* or Intent* of controls, but
only a distinction based en tho t&pe of institution with which tho
At tho sane tine, it would bo appropriate to approach the task
in tons* of a Joint effort to reaeh tho objectives considered worthwhile. Particularly in processing of paper*, maxiaust efficiency
should bo sought rather than duplication of paper work*
Thirdly, tho Treasury bo governed too greatly fey a fear
that it* own appearance on tho scene will stimulate undesirable
speculation. Such an approach inhibit* action toy tho Treasury until
the last possible neaont without any real assurance of avoiding tho
substantive result* In tho for* of speculation, which are largely
determined fey tho forecast of event* rather than tho action* of
particular goverinsint agencies* the Treasury i* bettor able to
eentrol public reaction directly than through other parties, with tho
possible exception of tho initial iapact which at tho present tin*
would not be/very serious one*
Tteo fubctantiT* results idth roapoet to tho form and eventual
oxtont of financial controlt aro anejoet to wueh batter centre! by
tho financial ag»w>iw itaM thay |>wWlelp*t* dlr^otly mthtF thMi
MjCficult Jwi»^ietiojri*l problwai «ai potential trmmifwi of
p«r«om»l ffrom Gom»re« to tb» Treaitiry Btpartuiont can b« avoided
l)f continttou* and rea»on*bl« eoop«rmtioD la attaining ob^otiTM
iriiich az^A of ^"**HiBi1iM
liHDox^arifMk ti> a INHPV
••^p ^•^^^^
*» i*eal. MOM to MM>

poopl« of tfeia country.
»*P^P ^p^*BB(^^Pifc w


^•^P^WB'^MfcaM^J ^P^Pv

A ^^^BJWPB^^P^H»*fcA»»* ^^^



•wflMvAAK •nP^wOT

flw m*djil«tr»tiw re»pon»ibUiU«» i&ieli fld^t ba atitalled for
tlui treasiary FJQT «f«ntiMaiy bo substantial, Thflgr cio not Mod to bo
8\ibotantial «t 1*o p re sent tiaw oinco tho priaary dif foronoo botnoon
tiio recorrwoadation of 19^- Southard and iigr approadi 1« that tho
freastoy participate idth Gomnoroo in tho deTelopwent of font and In
tho approach rado to tho Kodoral Kooarvo Banks or othor banks»
Federal Reserve Bank of St. Louis
Federal Reserve Bank of St. Louis


Kr. Willis

The attached memo may be of interest in
connection with the question of enforcing
export controls.


Jmr* Siting Arnold

November 21, 1950

Edwin F. Rains
Customs activities in connection with export controls.
I spoke to Hr. Frank Russell of the Bureau of Customs today
arid he gave me the following inforaatioti with regard to the present
role of Customs in connection with export controlsi
the Bureau of Customs Is presently engaged In enforcement work
with regard to exports falling within the restrictions of the
Export Control Act, the oold reserve Act, the Regulations relating
to the exportation of Arms, Ammunition and Implements of r-ar, the
Marco tics Import and Export Aet, and the export provisions of the
Atomic inergy Aet*
a specific license Is required in connection with
an exportation pursuant to one of the above-named acts or regulations, the license Is presented together with en export declaration
to the marine Division of the Justoms House at the port through
which the shipment is being made* The Uarlne Division examines the
license and export declarations and compares the description of the
merchandise set forth OR the export declaration with t^ie authorisation contained in the license* In addition, Customs Inspectors
at ports of exit (Including alrporis) asks spot hecks to ascertain
that the »«rehaadis« actually being shipped conforms to the
description In trie documents. Because of shortages of funds
inspection of outgoing merchandise Is, for aH practical purposes,
restricted to Instances In which tn«re exist ^rounds for suaplcior.*
Customs believes tnat a much more thorough-going Inspectior, of
exports Is desirable*
irispection of mercha/idise exported ^ parcel post Is
today wi^min the jurisdiction of the Post Qfflem Department but
it, too, because of inadequate IVmds, Is not actually inspecting
the aerchandis® which Is being sent out* !^r* iMssell said that he
feels that the Inspection ef outgoing parcel post shipments should
be hat died by Customs personnel*
of violations of the Export Control Act are
carried out both d>y Customs agents and by agents of the Office of
Intematioial Trade of the Department of Commerce* fie»ical3y,
Federal Reserve Bank of St. Louis

Custom ageats investigate those instances whore Custom activities,
either In th* ttarizie Division or at the piers, disclose an actual
or probable violation* Agents of the Office of lhter»atiOB*l
trade Invest! cats those instances where the Department of Cotaaerce
ties found a suspicions export license application or has reason
to suspect that there has been or aajr be transshipment of
oerchaadlse to so unauthorimed destination* Mr. Huasell stated
that It Is believed that the larger nanber of investltmtlons Is
being handled tqr Custowi
Hf» Russell said that he does not believe th&t Investigations
\sy Custww sgents have, at least thus far, required the agents to
go to banks or other financial institutions to aake inquiries with
to the financing of
So Custoas p«rsonr»l abroad are engaged in expert control

Federal Reserve Bank of St. Louis
Federal Reserve Bank of St. Louis

Treasury Department
Office of International Finance


194 .....

To: Assistant Secretary Martin
From: Mr. Hebbard
Subject: Current Developments in the United Kingdom
I think you may be interested in the
attached summary, prepared by Mr, Widman.




Mr. Hebbard



Lisle mdman-vT


DATE: November 22, 1950

fOD QprorT

Current Developments in the United Kingdom

1* Gold and Dollar Reserves
With the cessation of the speculative movement the rate of increase
in British gold and dollar reserves has dropped very, very sharply. For
the past three -weeks increases have averaged about $20 million a week —
an annual rate of about $1 billion. As of November 11 reserves stood at
$3>lUO million. My guess is that American firms which bought sterling
goods in advance during the speculative period are now utilizing their
sterling acquisitions*
2« Over-all Balance of Payments
A rough check of the over-all British balance of payments position
for the four months July through October leads to the conclusion that the
British are running an over-all surplus of an annual rate of something
like |1.1 billiono Here is the way the over-all picture looks:
(Millions of Dollars)
Trade Surplus
Net Invisibles




3o Exports
Exports to all areas in October were at an annual rate of more than
$7»1 billion. Roughly, on a volume basis this represents about 198 percent of 1938 exports and something like 180 percent of 19^7• Exports to
the United States and Canada have also risen steadily. In October they
were at an annual rate of $900 million, which compares with $575 million
for the year 19^8 and $520 million for the year 19^9«, Exports to the
entire dollar area — on a payments basis — were at an annual rate of
$1 billion in September. This compares with $1^75 million a year ago*
Federal Reserve Bank of St. Louis




U. Position of the Rest of the Sterling Area
The Malayan position is now beginning to reflect the tremendous
upsurge in rubber prices so that Malaya alone was contributing dollars
to the United Kingdom in September at an annual rate of more than $600
million. As a group the colonial surplus in September was at an annual
rate of $700 million. Among the independent sterling area countries
(excluding South Africa and Ireland from consideration) only Pakistan
and Iraq were in deficit with the dollar area during the month of
September and their deficits were insignificant,, India continues to
show substantial surplus as does New Zealand. For the first nine months
of the present year India has had a dollar surplus of some tiling in
excess of $f>0 million.
5>* Sterling Balances
September figures show a rise in American holdings of sterling.
The increase, however, was only about $3£ million.In the past three
months there has been very little change in the total of sterling
liabilities. Non-sterling area holdings have dropped as have dollar
holdings of independent sterling area countries. The big increase is
in the holdings of the DOTs. We do have to remember that the third
quarter is the off-season for Australia and New Zealand exports,
however, and over a longer period of time we may see increases in their
sterling holdings as well as further improvement in their dollar position.
6. Domestic Economy
Industrial production continues to run well ahead of last year.
Indications are that g.n.p. at constant prices will be up more than
f? percent. Retail prices, on the basis of the official index, have
risen only 2 percent since devaluation. Wages have gone up only
1 percent; wholesale prices have risen nearly 20 percent; but the
failure of these increases to filter down into the retail price index
is truly amazing. Budgetary receipts are exceeding the estimates and
the over-all budget position is some $£00 million more favorable than
at the corresponding time last year.

cc: Messrs. Willis, Glendinning, Curtis
Federal Reserve Bank of St. Louis

w&mxmm FOR m* musrn
1 have r@&d the MMNMlMj dated January 15>, 19!? 1, from
Mr. Black to you cm the subject of "United States Development
Landing and the International Bank11.
The memorandum reflects misconceptions as to the role of
the Bxport~Xisp0rt Bank and as to its activities in those countries
ishieh ar© members of the International Bank. The substance,
however, is a recommendation that consideration be given to the
establishment of policy ndth respect to the roles of the two
Banks in countries where both may operate.
. Black's suggestions with respect to the proper scope
o.f the work of the Sxport-Import Bank are very closely circumscribed. He proposes in substance that the lending of the
E3s$)ort*Isi>ort Bank be limited to (1) loans to countries which
ar@ not members of the International Bankj (2) extensions of
projects irher© previous Bscport-lmport Bank -credits make it the
most appropriate lending agency, and (3) loans for projects of
strategic Interest to the United States which special considerations make inappropriate for International Bank financing.
In MWmtlng on this I think it should be said in the
first place that in our opinion the United States Oovsrnraent
should not enter into any compact which would limit its freedom of action with respect to loans to foreign countries
wherever the interest of tha United States may seeia to dictate
that these loans b© mad©,
It mat also be recalled that the Export-Import Bank has
& direct injunction from Congress to utilise tha funds available
to it for facilitating and aiding in financing the export and
isqport trad© of the United States. It is our belief that no
formal decision ought to be adopted without the express consent
or direction of Congress iihich would (a) prevent the ExportImport 'Bank, as an agency of the United States, from serving
the interests of American exporters and importers, or (b) pre*
vent the Kxport»Import Bank from fostering American investiaents
in foreign lands where national considerations make such action
desirable, or (e) hamper in ai^r way th© ability of th© ExportIiaport Bank to forward th© economic and political interests of
Federal Reserve Bank of St. Louis

the United States* This applies with especial force to lending
for the production of strategic materials*
All of these qualifications clearly should b© made to the
proposal that the International Bank act as the chief agency for
developmental lending throughout the world. This, of course,
implies the hope that the International Bank will become, as it
has not yet become, truly an international agency and not merely
an agency disbursing under international direction funds isade
available by th@ United States.
Certain allusions in Mr. Black's report should be noticed.
One is contained in the statement nl also realize that if foreign
aid is to b® utilised priinarily to obtain short-run political or
strategic returns to the United States, International administration of the aid would probably be inappropriate.* Loans of the
Exporb-Import Bank have not had this objective.
I quote again:HA third, and avsn more persuasive reason
(for establishing the International Bank) was the desirability
of insulating the United States Govesrnment fro®, the frictions
and tensions that inevitably attend a .foreign lending program.
Experience has amjO^f demonstrated that ^overnBient-to-govems^nt
fin., continued over any substantial period of time, is not
likely to be productive of political good-wl.ll.1* fhe Exportlasport Bank has had experience with governsent-to-government
financing and probably for a longer period than any other agency.
The statement quoted does not at all agree with this Bank's experience .
I quote again: «**..«. it (the Export-Import Bank) did not
©ntar the field of long-term construction and d@velopn.ent loans
on a large seal© until the passage of the Export»I?npGrt Bank
Act of 19ii5» At that tise and thereafter loans for reconstruction and development assumed increasing importance in its operations.n The fact is that the Export-Import Bank has been making
developmental loans continuously since 1/38. Changes in the
character of its operations have been two (1) the making of large
reconstruction loans by direct warrant from Congress in 19iiS and
early 19l*6j (2) the enlargement of its operations in countries
outside the Western Hemisphere where the International Bank was
not able to function or where special considerations dictated
prompt action in the interests of the United Stater. In the
light of this record, the statement in Kr, Black's paper that
•With the years, however, these long-term lending activities
have lost their interim character *.. and are apparently considered a permanent function" is quite meaningless and has little
relation to the facts.
Federal Reserve Bank of St. Louis



Aa entirely false picture is created by the statement that
"The fact that the Saqport-Import Bank had entered th© development
field and was apparently prepared to sactend its ectirities ia
that field, usually on more faTor&hl© terms than the International
Bank could offer, mad® countries hesitate
to sii>®it projects to
th© International Bank for financing.11 The facts are that the
Export-Import Sank had been for year* in th© field of developmental
loans in the countries in which the International Bank has more
recently entered and it ms the entry of the International Bank
into the picture that created a n^w factor in the situation* which
s@«n»d to dictate th© need for clos® cooperation between the two
Banks — cooperation 'shich the i<xport»Import Bank has always been
willing to accomplish and has smight to accomplish. The KxporbImport Bank has never solicit^ loans and its coamitayBtlg ar@ isade
only after consultation with artiagreei^nt of th© national Adid.sory
Council* which is the coordinating authority on United States
foreign financing.
Such inaccuracies,, however, as occur in Kr. Black*s statement
shoxiid »ot prevent a realistic approach to the problem and a solution that will protect the interest© of the United States and at
tisie give the Interrmtionml Bank adequate freedom for promotion of th© objectlves for which it was constituted*
Federal Reserve Bank of St. Louis



Post-War European Experience and the Interest
Rate Controversy

Any one seeking positive support for the Treasury viewpoint in the
present interest rate controversy -will find small comfort in post-war
European experience.
Without exception, every Continental country and the United Kingdom
has taken monetary steps much more drastic than anything proposed by the
Federal Reserve System in order to deal -with the problem of internal inflation.

In brief summary, European countries have taken all the steps

necessary to deprive their banking systems of the power to expand reserves
except with the full approval of the central authorities.
a variety of techniques to achieve this result:

They have utilized

secondary reserve require-

ments of all sorts, increases in central bank rediscount rates, deliberate
increases in yields on long-term government securities, and moral suasion.
A detailed, objective summary of the steps taken by each European
country is contained in pp.83-95 of "General Credit Control, Debt Management,
and Economic Mobilization" prepared by the Staff of the Joint Committee on
the Economic Report.
The only real support for the view that the United States long-term
and short-term government rate should be pegged at present levels for the
duration of this emergency that can be adduced from post—war European experience is the indirect argument that there are alternative techniques,
e.g., various types of secondary reserve requirements and direct selective
credit controls, that not only can be used, but have been used in Europe
or cr-«ok depo*it$

to deprive banking systems of their power to increase reservesAwithout calling
for any increase in the government bond rate.
Federal Reserve Bank of St. Louis


c: •
- 2-

If one is prepared to support the use of alternative techniques that
will achieve the same results as fractional upward increases in the yield
on government securities one can citeAEuropean experience to show that
interest rate adjustments are not essential to achieve the objective of
bringing the volume of commercial credit under control. Fractional interest rate adjustments are clearly much less effective as a means of
inhibiting sales of governments to the central banking system, for example,
than are special reserve requirements.

The European countries have, as

stated above, been prepared, not only to make it impossible for the commercial banks to dispose of existing holdings of governments but also to
restrict the power of the banks to use new cash deposits to create additional reserves.
One of the problems posed for the Treasury by the present controversy
is the fact that fractional interest rate adjustments are so obviously of
limited effectiveness. It is easy enough to demonstrate that fractional
interest rate shifts -would not have much effect in curtailing increases in
bank reserves and bank loans. The Federal Reserve System -would presumably
not quarrel with this contention. But it is a -weapon that is available and
•would doubtless have some effect. This is all that the proponents of the
Federal Reserve approach need maintain in public debate and as long as advocates of the Treasury view take the extreme position that the interest
rate weapon is of no use I do not see how they can expect much public support,
The problem of the Treasury spokesmen is to demonstrate that there are other
monetary and fiscal measures which can and should be put promptly into effect
Federal Reserve Bank of St. Louis

- 3and -which -will achieve the same anti-inflationary results but without
the adverse fiscal consequences of an interest rate increase.

So long as

the Treasury stand is purely negative, the Federal Reserve •will have all
the advantages in public debate traditionally associated with those individuals and. institutions -who are vocally against sin and inflation and
have a program for dealing -with
Federal Reserve Bank of St. Louis



Assistant oecretary Martin

rroi&: pe;>uty Comptroller Robertson
This proposed program falls within the scope of
lectioa 708 of the Defense Production Act of 19&Q. An
attempt *as ru ae u^ chairman McQabe to launch a similar
program some weeks ago but it bogged down in subcommittees,
confusion, ®tc. that is no indication that it would not b*
effective If properly sparked. If it is deemed worth trying,
it must be implemented by;
Federal Reserve Bank of St. Louis


Delegation by the President to the Secretary
of his powers under the above-mentioned
statute, unless the President launches the
program himself.

£. A specific written understanding oetween the
Secretary (or the President) and the AttorneyGeneral, as well as consultation with the
Chairman of the Federal Trade Commission
(required by the la*}.

Publication of the program or (in the language
of the st&tute; "request* in th© Federal


consultation by the Secretary mith represent atives of th© American Bankers Association; i . ossibly ft!th representatives
of atate Associations, and 6tate and Federal
bank supervisory agencies, for the purpose
of enlisting their support and active cooperation. This w,;uld ba in addition to
the nec&ssar^ coaLiunicatioii fco every State
,sC6rs Association.
Federal Reserve Bank of St. Louis

- 2~

The elimination of all red tape. Th© attached
message should expressly state that the Treasury
does not %ant to see the nagraemantsnf and that
It will not be necessary to file th*a& with
government agency.

(Draft of February 3, 1951)
Statement Re Program for Curtailment of Koneasential Bank
(February, 1951)
The clangers we face today are great and demand correct
and courageous action.

Our civilization is in jeopardy and the
means of its preservation are by no means solely military. ¥•
cannot hide behind an army and navy.

Ve must cast off fear and

Above ^11 we must maintain the economic stability

upon which all our efforts are built* In his recent address to
the Congress, General Eisenhower - himself a distinguished professional soldier - placed special emphasis on the importance of
the American economy to European as well as American survival*
He commented that nthe fighting forces are but the cutting edge
of a very great machine" and emphatically stated that "our system
must remain solvent as we attempt the solution of this great
problem of security, else we have lost the battle from within
that we are trying to win from without.1*
A truly "solvent" economic system is not simply one in
which the number of money units on the asset side of a balance
sheet exceeds the liabilities,

A nation's solvency is not

measured in terms of millions or billions of francs or dollars
or pounds.

The true measure of solvency in a free enterprise

system is the well-being of all elements of the population, which
in turn rests upon a financial structure which, by its assurance
of stability for tomorrow as well as today, gives encouragement
to saving, to planning, to initiative, to progress in all fields.
Federal Reserve Bank of St. Louis

vie all Eiust recognize that no single element can do more
to destiny the foundation of this structure tha» uncontrolled

Americans have been fortunate enough to spend their

lives in a country which has not known severe inflation for store
than 150 years* fter this reason it can never be too greatly
emphasized that practically no one benefits by inflation, that
it is a universal destroyer.

It destroys the savings of the

thrifty and the old, it destroys the day-to-day security of
every worker, it destroys initiative and hope, and eventually
it kills incentive to work and preserve. Above all, it leads
to bitterness, conflict, and loss of desire to defend and maintain the most fundamental principles. Unless our system remains
truly solvent we shall lose the battle without exchanging a shot
with the ettesy.
Th* American eeonos^f, which we must strive with all our
power to protect against the ultimate horrors of inflation, eon»
sists of many facets - not only our enormous production of raw
material, manufacture of millions of machines and appliances,
and construction of the world's greatest network of transport
facilities, but the entire structure of material achievement and
economic and financial prosperity, fhe American eeonowy is great
not only because of what it does, but because of how it is done by individual, voluntary initiative and energy, fhe American way
is built upon the stability as well as the productivity of our
Federal Reserve Bank of St. Louis

- 3la the preservation of this stability, the American
banking system and governmental fiscal authorities have a responsibility second to none, fhe degree of importance of
this responsibility is reflected in the heated controversies
that rage about the determination of crucial fiscal and credit
In a govermsent as vast and intricate as ours, honest
differences of opinion on very fundamental matters are Inevitable. Almost always, such differences are presented and
threshed out.

3ne view or another prevails on its merits and

becomes an established principle of action.

Rarely indeed

are convictions so intense or decisions so crucial that the
adherents of one position or the other cannot bring themselves
to concur in the views of another, or In a workable co®proolse»
I think it may truthfully be said that, In the history
of the treasury Department, no problem has received more sincere and concentrated thought than the underlying plan by which
the national debt is to be financed during the critical years
of the 1950 »s»

With full realisation of the significance of national
debt management to the nation's financial structure, we have
determined upon the financing and interest structure pattern
which Is now familiar to all bankers.

As previously stated,

there are sincere and honest differences of opinion on thl*
Federal Reserve Bank of St. Louis

matter, but the Treasury Department Is convinced that, giving
due weight to every factor presented, the pattern of interest
rates on the national debt to which w@ are adhering is the only
feasible plan *ieh will permit all necessary financing of our
rearmament effort while avoiding an excessive increase in the
annual interest burden and also without disturbing fundamentally
the existing smooth operation and equilibrium of our country's
financial structure* We are satisfied that our basic fiscal
policies are entirely consonant with effective containment of
inflationary dangers*
These dangers cannot be repulsed by any single weapon*
INi roust fight them with adequate taxation, elimination of all
unnecessary government expenditures, and effective control of
wages and prices* But our efforts along these lines will fail
unless we throttle down the up ward-spiral ing pressure that
flows from spending by individuals and business in excess of
their real needs* and the f*«4img of this unnecessary spending
by creation of bask credit beyond what is essential for defense
purposes and miaimna civilian needs*
All of us are deadly serious in the determination to dan
this potential major source of an inflationary flood* Credit
W.1X3L be controlled, this will be done either in the free,
voluntary, cooperative way, or in a compulsory, regulated way*
fhe choice is yours.
Federal Reserve Bank of St. Louis

- 5voluntary way is the American way; it is the democratic, the efficient, and the far-sighted way. To be effective,
it mist represent a concerted effort on the part of all American banking institutions. This is not a struggle which concerns any one class of banks; in order to be successful it itsust
be Joined in by state banks and national banks* member banks
and nonmember banks.
The success of such a voluntary program will be of
enormous significance to the preservation of democracy in the
economic world as well as the political. The program which
must be carried out will be not only nor© effective if it i»
done of our free will and without compulsion of law or governmental sanction, tout it will be another exanple and encouragement to the world, by demonstrating once s*or* the extent to
%*tich the free eitisens of a free country can govern themselves
without compulsion or force. Knowing that the creation of nonessential bank credit sm*t be curtailed by one means or another,
we mast exhaust every means of accomplishing it in the voluntary way, before we admit that American self-discipline cannot
d© the job, «ad resort to law and regulation and all the regimentation that they entail*
Voluntary credit control has been tried many times, and
I mist admit the results indicate some validity in the judgment
Federal Reserve Bank of St. Louis

of those who now eontead that voluntary methods «ill not work,
that tii* free enterprise system, being based on self-interest»
is fundamentally unadaptable to a voluntary program of self.
denial. But my faith in the patriotism of the American people
and their ability to rise to any emergency, as well as ay
dread of the long-range effects of compulsory credit controls*
make it impossible for me to accept that view without at least
one final resolute effort.
In this spirit, the Treasury Department hereby calls
upon the banks and bankers of America to Join in a concerted
effort to achieve effective credit control through the demo*
eratie process*

va ask all bankers, with the coordinating

efforts of their local state and national associations, to
enter into mutual commitments and agreements, one with another,
to serve as a basis for definite and effective limitation of
bank credit for a trial period of six months.
fhe agreements implementing this program should be local
in scope - covering a city or town area, or a county or group
of counties in rural districts. ¥e are calling upon each
State Bankers Association to act immediately to group all com*
mereiml banks within each state into local units for this purpose. This is a task which they are best fitted to do prositly
and on a practical basis* the urgency of the problem is such
that the local units m»fe be defined and activated with th*
Federal Reserve Bank of St. Louis

- 7utmost dispatch, and without lengthy studies of the relative
aerits of different groupings. In a coaston effort of this
type, any reasonable local arrangement will work, if it has
the support of the units making up those groups.
*?he local gjoups, made up of responsible representatives
of the commercial banks, should meet immediately upon designation, fur the purpose of intensive discussion and formulation
of definite operating programs before the end of this month*
Both the procedure to be followed and the content of the
agreements must be fixed at those meetings. They will not be
uniform from place to place, fhe very nature of the problem
demands that the agreement in each place be fitted to local con*
ditions and the actual operations ©f the cooperating banks. In
many situations it will be possible to agree to complete elimination of certain types of nonessential credit » for example, loans
for vacation expenses*

It is probable that in general the wost

practicable means of curtailiaent will consist of specific percentage reductions in aggregate loans for appliance purchases,
Inventory accumulation, and the like* Ho doubt, banks in which
consuBier and inventory credits, for exaiaple, are a relatively
minor factor, will be able to pledge and achieve a p*eater relative reduction t han will those banks in which such loans are so
important that mn equally large percentage reduction would not
be possible without threatening the successful operation and
existence of the institution.
Federal Reserve Bank of St. Louis

It would be unwise to gloss over the difficulties of such
a program. It will require the utmost measure of good will, free
from any taint of suspicion, obstructionism or defeatism. It
can be successful only if approached with a determination that
it will succeed, and a willingness and eagerness to ^ive to
the fullest possible extent.

3iis project is not a matter for

arm * s -length negotiation, but one in which all are working
shoulder to shoulder for a single gpal - the general welfare.
The agreements to be entered into must have all the
definiteness that the subject matter permits, fhe program will
not succeed on a basis of pious platitudes. Specific provision
must be made that the banks concerned will not compete in the
area of agreement? loans rejected by one bank, in furtherance
of this program, imst not be granted by another.
fhe initial trial period for the program will be six
months, and at regular monthly nestings of each |p*oup every institution should make a full and revealing report of its progress
in eliminating and excluding nonessential credit from its loan
portfolio. When one participating bank fails to meet its reasonable curtailment "quota1*, it will be the duty of the group
to inquire fearlessly into the reasons.

In a common cooperative

effort of this nature, any relaxation of standards is bound to
lower the noral level of the entire group.
Federal Reserve Bank of St. Louis

- 9Reates&er, the strength of this program mist flow from
the faet that the agreements are (15 self-made, in the sense
that you bankers will formulate them without governmental direction; (2) self-policing, without governmental interferene*
or enforcement| and (3) self-serving in the long run, because
it way avoid the necessity of compulsory controls.
In recognition of the iisportance of this effort and in
order to remove any obstacle to the eossplete success of this
undertaking, the Attorney General has taken the unprecedented
step of assuring me that during the trial period, no action by
banks in accordance with agreements formulated on this plan will
subject them to prosecution by the Department of Justice under
the anti-trust laws*
As heretofore Indicated, the trial period will be the
six months beginning Harch 1, 1951, unless during that tine it
becomes clear that the plan is not functioning effectively and
I am consequently obliged to ask that the program be abandoned
and the agreements terminated*
great nmtber of American bankers have expressed to me
their eagerness to get into the battle now being waged to preserve the way of life which has given us opportunity, prosperity,
initiative, and freedom.

Ihis program offers to every /ifliericaa

bank and banker a prime opportunity to get into the battle on
one of its most crucial fronts.
Federal Reserve Bank of St. Louis

Bankers know better than many

- 10 other citizens the economic facts that underlie to&ay's fiscal
and credit complexities. They know that our econosqr is producing
close to Its maximum capacity, that th« needs of our military
preparation mist be satisfied first, and that civilian demands
trill receive everything else that is available*


expansion of bank credit will not add a single item to the
available supply, but will simply push up prices, engender dlslocations and dissatisfactions, and actually cause basic injury
to our country ~ its defense activities and the welfare of its
Along with this realization, bankers also know that excessive credit growth will be stopped, either by such voluntary
programs or - If these ffcil - by lairs and regulations and governMtttal controls,

^nerlean bankers can and nHl render an out-

standing service by getting these truths across to the people
of their coBBUBiltles* and by acting as leaders not only In
thought but In action t hrougfc the Inauguration and operation of
this program.
V* have ©aamiialeated with ©very State Bankers Association,
and we are confident that each of them will assist to the utmost
in defining the groups of banks within the stmt©*


bankers themselves can act today, as the nucleus of their group,
to launch the prog*** by holding the first meeting of representatives of each bank* fhls frill make it possible to draft, to
Federal Reserve Bank of St. Louis

- 11 accept, and to put into operation before the end of thi s
month an agreement which adapts tne principles of the
nation-wide program to local conditions and needs*
The Tre&supj Department and other agencies of the
federal government will render evi»ry possible assistance*
But the work of getting this program under way and making
it operate successfully rests exclusively in your hands,
ijonsequtntly the achievement of its goals will be a tribute
to American b&nk* and bankers and an inspiring example of
democratic action at Its best*
Federal Reserve Bank of St. Louis


(Draft February 5* 1951)
Statement Re Program for Curtailment of Nonessential Bank
(February 1951)
Ho tax program could be successful under current
conditions, unless it were supported by restrictive monetary and credit policies. Deficit financing is no answer.
The demand for credit continues to mount relentlessly because of unusual opportunities for profit, fear of the
future (including rising interest costs), and defense needs.
The Federal Beserve and the Treasury have the power
and the machinery between them to establish whatever interest rates are deemed wise. Under normal circumstances,
open market operations of the Federal Reserve might penalize
banks sufficiently to deter expansion of credit. But in a
period; of national emergency, one is justified in questioning the traditional techniques of the market and calling
upon\the banking system to police itself through resort to
voluntary restrictions.
Curtailment of credit in accord with our agreed objectiy;es is one of the most effective means of preserving the
•V '

value\of the dollar and maintaining the independence of the
banking system.
Federal Reserve Bank of St. Louis

(Draft February 5* IS
Statement Re Program for Curtailment of Nonessenttal Bank
(February 1951)
No tax program could be successful under current
conditions, unless it were supported by restrictive monetary and credit policies. Deficit financing is no answer.
The demand for credit continues to mount relentlessly because of unusual opportunities for profit, fear of the
future (including rising interest costs), and defense needs.
The Federal Reserve and the Treasury have the power
and the machinery between them to establish whatever interest rates are deemed wise. Under normal circumstances,
open market operations of the Federal Reserve might penalize
banks sufficiently to deter expansion of credit. But in a
period of national emergency, one is justified in questioning the traditional techniques of the market and calling
upon the banking system to police itself through resort to
voluntary restrictions.


Curtailment of credit in accord with our agreed objectives is one of the most effective means of preserving the
value of the dollar and maintaining the independence of the
banking system.
Federal Reserve Bank of St. Louis



FEB 19 1951

"Washington, D. C.
February l6, 1951.

Memorandum from J. K» Vardanan, Mentor of the Board of Governors,
Federal Reserve Systen.

On the 12th instant I received fron United States
Senator John ¥. Bricker of Ohio a letter dated the ?th in which
ho consents on ny public stp.teaent of February 5th.


as Senator Bricker1s letter was official and published in the
Congressional Record, I an writing an open letter in answer
rather than a private letter in order to reply to certain
inferences in the Senator's letter.
Attached is a copy of Senator Bricker1s letter to no
and a copy of ny reply dated February 15th,

J, K. T.

Federal Reserve Bank of St. Louis



February 15,


FEB 19 1951

Dear Senator Bricker:
Your letter of the 7th is acknowledged with thanks. I
particularly appreciate your having taken time to read my statement,
although the connotation of "totalitarianism" which you place on it
surprises me almost as much as if you had suspected me of cannibalism,
for instance. That interpretation, and fear that you may have drawn
really serious conclusions just as foreign to my intent, make it
necessary for me to make myself more clear than I evidently did in my
statement. Therefore, I will reply to each paragraph of your letter
in detail.
In my statement of February 5th I said that in my opinion
Governor Evans' account of the conference between the President and
the Federal Open Market Committee was correct as to what was
actually said. But I expressed the thought that regardless of the
words spoken the President was allowed to leave the conference with
the erroneous belief that the Committee would support the Government's program. I understand that some other members of the Board
had the same thought; and only one member, so far as I know, has
denied that the President was allowed to leave the conference with
a false impression.
You are correct in interpreting my statement to indicate
my belief that this Board should support the Government's program
as officially promulgated on January the 18th by the Secretary of
the Treasury, the spokesman for the Government in this field. My
advocacy of such support is based, upon both legal and economic reasons. However, my statement did not indicate approval or disapproval of the Government's plan, nor did I discuss its economic
advantages or weaknesses. I simply say that since this Board has
absolutely no statutory authority to alter or to cancel the Government 's debt financing plan, and has not even the remotest suggestion of statutory authority to initiate a substitute plan, it should
support the Government's program until such time as the Congress
clarifies the situation by legislative enactment which will either:
Federal Reserve Bank of St. Louis

(1) Give the Board authority in the area of public debt management , or

(2) Give the Board more effective control of investments and
reserves of banks and insurance companies and otherdepositaries, lending agencies and institutions whose
operations materially affect the national credit structure,
(3) Relieve this Board of some of its responsibility for credit
The Federal Reserve has supported the Government bond market at
arbitrary price levels whenever necessary for the past nine years. While
the Board has repeatedly reported to Congress the dilemma which confronts
it, so far as I know the Board has never asked the Congress for relief
from its implied obligation to continue this se3,f-imposed practice, and
the Congress has not seen fit to direct the Federal Reserve System to stop
this practice. Failure of the System at this time to give the same degree
of support to the Government plan, and the withdrawal of this arbitrary
price support, would probably result in a chaotic Government bond market
and a decline in the price of long time Government bonds to some figure
below par. Just where the price would go is anybody's guess, but any
material decline under present circumstances might result in some sort
of a buying panic that would further decrease the purchasing power of the
If I may be permitted a question at this point: Would you as a
citizen or as a United States Senator recommend that the System withdraw
its arbitrary support from the Government bond market, and allow the bonds
to go below par?
If you will read again my statement you may consider it less
"amazing" if you note that I did not advocate waiver of any actual statutory responsibility, authority or prerogative. What I did advocate was
that we do not now raise a question regarding prerogatives and authority
which this Board has never had nor claimed to have; and which if they ever
existed by Congressional intent or otherwise, have most probably been
waived and forfeited by this Board's actions or lack of action.
In this connection it should be borne in mind that the Board
issued a public statement on December 8, 194-1 which said in part:
"The System is prepared to use its powers to assure that
an ample supply of funds is available at all times for financing the war effort and to exert its influence toward maintaining conditions in the United States Government security market
that are satisfactory from the standpoint of the Government's
Federal Reserve Bank of St. Louis

Since December, 1941? the Federal Reserve has consistently and
without exception supported the United States Government bond market at
arbitrary price levels whenever it considered such support advisable or
necessary. The System is currently following the same course. Under
present conditions and in view of the actions of the Board extending over
a period of more than nine years it seems to me that any statutory prerogatives in the premises, if they ever existed, have been forfeited by
the precedent set by the Board itself.
You might be interested in knowing that for more than a year I
have advocated, and I believe some other members of the Board have done
likewise (but I speak only for myself), that conversations with the
Secretary of the Treasury and action by the Bof.rd be initiated with a view
to reducing to par the arbitrary price on long time Government bonds. I
could not then see any justification for supporting those bonds at high
premiums, while at the same time owners of "E" savings bonds, mostly small
individual savers, were penalized by loss of some interest if their bonds
were cashed before maturity.
Also I was afraid that if we continued such high level arbitrary
support the market might become frozen into that pattern by circumstances
and events which would make it inadvisable or impossible to change the
arbitrary price without disrupting our economy. The Board has not acted
to free itself of this shackle to a pegged price which the Board voluntarily put on itself in December 194-1 and has consistently worn since that
date. Therefore, the System, which is a creature of the Congress, now
finds itself in a situation where public debt management, an area in
which the Board has no authority, is having a material affect on credit
control, an area in which the Board does have statutory authority.
The dilemma is serious and warrants the most careful and constructive consideration by every thoughtful citizen, and especially you
and your colleagues in the Congress. And until the Congress acts I do
not see any constructive course of action left open to this Board other
than to carry on the same general policy it has followed during the past
nine years, because the Government's financing program has been officially
promulgated and stands today as the only financing program which the Government has. If we do not support that program, what are we to do, since
we have no authority to cancel or change it and no authority to initiate
one of our own?
And here again let me emphasize that I am speaking in this letter
only for myself.
My statement does not indicate in any way that I am willing to
waive, nor did I advocate that the Board waive, any statutory authority
or prerogative which the Board as such may have or which the individual
board members may have under the law or under their oaths of office.
Educated as a lawyer and having enjoyed more than twenty years successful
experience as a practicing attorney, banker and businessman, the law is
Federal Reserve Bank of St. Louis

-4very real to me. I have always believed that our Constitution with its
implementing framework of statutory laws is the most sacred and valuable
asset which we as a nation possess. And, incidentally, I have spent more
than six years in the combat forces of our amphibious Army and Navy defending that belief. In civil life my most serious disagreements with friends
in public office have been based on my thought that their actions were in
some way interfering with the operation and perpetuation of our constitutional republic. In view of this veil known official and personal
record, your inference that I an a sponsor of totalitarianism seems to me
to be less than justified.
As to this Board's accountability to the Congress the minutes of
the Board should show that during my nearly five years membership I have
emphasized on several occasions my firm belief that we were accountable
to the Congress and to no one else. From time to time and particularly
during recent years we here in the Board have had more than one discussion
of this subject, and 1 have been critical whenever one of my colleagues
acted in any way which I felt might jeopardize our limited right to freedom of action as provided under present law.
The admonition in the last paragraph of your letter is cordially
and wholeheartedly accepted and I assure you in your official position as
a United States Senator that as long as I serve as a member of the Board
I will not willingly waive my responsibilities under the statutes or under
my oath of office.
Let me repeat, the law is silent &s to the Federal Reserve's
authority in the area of debt management, end on the other hand the law is
quite specific in placing responsibility for management of the public debt
in the hands of the Secretary of the Treasury. Therefore, I feel that the
welfare of the Nation would be better served if this Board continued to
support the official Government financing program just as it has since 194-1
and that the Board should immediately approach the Congress with an explanation of its position and ask for such clarification as the Congress might
care to make in the premises. To do otherwise, that is, to withdraw the
arbitrary support of Government bond prices which we have maintained continuously during the past decade, could result in near panic in the Government bond market which might easily depress Government bond prices to
some unknown level. On the other hand if we continue to give the Government financing program the board's customary support until the Congress
shall determine otherwise it is possible that the present pressing necessity for arbitrary support of the market might be considerably lessened
or even eliminated during the coming months.
Again, please accept my thanks for writing to me as fully as you
have. And I would welcome an opportunity to discuss these grave questions
with you personally, or with any of your colleagues who may take the
problem under advisement.
Federal Reserve Bank of St. Louis

With best wishes, I am
(Signed) J. K. Vardaman, Jr.
J. K. Vardaman, Jr.

Committee on Banking and Currency
February 7, 1951

Dear Mr. Vardaman:
This will acknowledge receipt of your statement of February 5> 1951
and the attached memorandum requesting any comment that I might care to
The first part of your statement relates to your version of what
took place at the January 31st conference between the President and the
Federal Open Market Committee. Naturally, I cannot determine whether
your report of that conference or the report of Governor Evans is correct.
However, the aftermath of confusion which has followed a conference
intended to clarify matters convinces me that the President has failed
to grasp the basic issues of fiscal policy which are at the bottom of the
dispute between the Treasury and the Federal Reserve Board.
Your statement makes it clear that you feel that the Board should
support the financing and bond program advocated by Secretary Snyder. If
this opinion is based on economic rather than legal considerations, I
do not question your right to advance it. My own view is that the
Treasury's fiscal policies will result in disastrous inflation. Since,
iiay, 1950, the Board's holdings of government securities have increased
by $3*500,000,000 which in turn has led to .a six-fold expansion of credit.
The proposal that the Board should continue to support the Treasury's
cheap money policies has been accurately described by Mr. Henry Hazlitt
as "fighting fire with gasoline."
The concluding paragraph of your statement is one of the most
amazing ever uttered by a public official in recent years. You say,
"The question of statutory prerogatives . . . should be subordinated to
the all important necessity of supporting the Government and the Presidency
in this national emergency." The meaning of this euphemism is that the
laws passed by Congress should be disregarded whenever the President
feels that the national emergency so requires. I am unalterably opposed
to that sort of totalitarian philosophy either in war or in peace.
You also say in the final paragraph of your statement that you
"unhesitantly waive any theoretical statutory authority and prerogatives
in order to support the Government and the Presidency at this time."
First, I would like to point out that the laws of the United States are
not "theoretical" for 150,000,000 American people. They must obey them
or go to jail. By what right do you presume to waive statutory authority
in violation of your oath of office?
Federal Reserve Bank of St. Louis

The Honorable James X. Vardainan, Jr.

Page - 2 -

February 7? 1951

Finally, I invite your attention to the fact thet the Federal
Reserve System is accountable to the Congress and not to the Presidency
as you suggest. Congress has not charged the Board with the duty of
supporting the price of government securities, but ra/bher with the duty
of supporting the value of the dollar.
Until such time as the duties of the Board may be changed by Act
of Congress, I trust that you will see the impropriety of your suggested
waiver of statutory authority and prerogatives.
Sincerely yours,
(Signed) John W. Bricker

The Honorable James K. Vardaman, Jr.
Board of Governors
Federal Reserve System
Washington, D. C.

Federal Reserve Bank of St. Louis

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102