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Federal Reserve Bank of St. Louis
Series IV, Subseries A
Miscellaneous
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Federal Reserve Bank of St. Louis
AT ^
s&eier
*5(0ribc*
o
May 24, 1949
Dear Mr. Secretary:
I enclose a memorandum about
sterling devaluation which I hope you
will think worthy of consideration.
With g r e a t r e s p e c t , I am
yours
The Honorable
The Secretary of the Treasury
Washington, D. G.
Enclosure
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Federal Reserve Bank of St. Louis
May 24, 1949
Sterling Devaluation
I am not in favor of sterling devaluation under
present conditions.
Any considerable depreciation of the pound
would aggravate the present recession and might well result in deflation, depression and unemployment here.
That happened in 1920
and again in 1951 when the pound was depreciated.
a low of $3.19 in 1920 and $3.14 in 1952.
The pound struck
Those are years of un-
happy memory for the United States and the world.
On both previous occasions other powerful depressing
factors were at work too. So they are now. Then as now the Federal
Reserve had set in motion deflationary forces which they seemed
powerless to arrest.
Now again, recession has set in, and the
western world, after a worse war than that of 1914, and living as it
does in the shadow of the Russian threat, is less fit than then to
endure a currency and exchange breakdown, and the consequent disruption of trade, production and employment.
Doubtless many currencies are officially overvalued
and should be devalued.
But not sterling.
It is a key currency.
It and the dollar are the world1s great trading currencies.
Its
depreciation would be followed by general depreciation of other
currencies in terms of the dollar.
General depreciation of currencies
in terms of the dollar would cause depression here, and lead to demands for higher tariffs, and cessation of Marshall aid and lend
lease;
and ultimately to depreciation of the dollar as in 1955.
De-
valuation of the pound would begin a destructive cycle of competitive
depreciation of currencies, the very thing that it was hoped at
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Federal Reserve Bank of St. Louis
2.
.
Bretton Woods to avoid*
There is little reason to suppose that the problem
of the dollar shortage would be solved by the depreciation of the
pound.
The shortage of dollars arises not from the $4 price of the
pound, but from the need of England to import American food and
raw materials to feed her people and her machines, and the inability
of her socialized, planned and regulated economy to compete in the
dollar markets, except in luxuries, with the now greatly expanded
and much more economical and efficient free enterprise economy of
the United States, and over the still high American tariff.
It is not fundamentally a question of price but of
the relation of supply to demand.
than we need of hers.
Europe needs more of our exports
Lower prices are desirable but they cannot
alter the fundamental equation.
The dollar shortage arises from
the fact that the United States is a net exporter of farm products
and manufactured products and is a creditor on capital account.
Debasing the pound won* t change that grim fact.
American imports will rise with American wealth and
fall with American adversity.
Any program directed against American
exports, and so against American prosperity, will defeat its own
ends.
This applies to European import restrictions of all kinds,
of which one of the most formidable is pound depreciation.
The
road to recovery is expansion not contraction of trade.
Britain*s problem is on the way to partial solution
through the reduction of world prices for food and raw materials
with the consequent improvement in her terms of trade.
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Federal Reserve Bank of St. Louis
The rest of
5.
her problem is to effect a reduction in her costs and export prices.
That cannot be accomplished by increasing the cost of her necessary
imports of food and raw materials, as depreciating the pound would do,
Britain's best hope is to expand her exports to the
sterling area and to increase her imports from it, and to expand
multilateral trade, and bo create stable world conditions favorable
to the movement of American capital to underdeveloped areas.
To that
end every effort should be made to increase confidence in sterling,
the world1s great trade currency.
firm at $4 for a decade.
With American aid it has stood
It should be easier to hold it there than
to restore confidence in sterling at some new value after confidence
has been lost by devaluation.
I can see nothing but disaster as the result of any
considerable depreciation of the pound under present conditions.
On
the contrary our objective should be to help to strengthen sterling
and, as soon as may be, to restore its convertibility at least for
current transactions, excluding war loan and canital movements;
under proper conditions we should be prepared to use Marshall aid
to buy sterling to support it, if and when the British are again
prepared to attempt convertibility.
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Federal Reserve Bank of St. Louis
R. C. Leffingwell
and
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* S* ffosoni^r w»d $17* adll.lon iP»fMnp«4 »took wui hold bgr
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Federal Reserve Bank of St. Louis
§ *
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or otho?
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
ft* Bank** export financing oovsr* «aah things as;
(1) Rsv aafctorlAls ftod oo^todltlss
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Federal Reserve Bank of St. Louis
«lne« tte latMnva^tioABl Banic b«owa* op«r*tiT«
1.«n* authorlwd %gr lfe» *4»Ual»ti«toi» f*»
*
S-uofa lofiss will not INI considered in
vh«ther tli* Stink1 » losa* *nd p*ft**2*t**s exceed $3,5 Mllloa*
*Tfc* AdMalstVfttov IB coutultation idlth th* Weti^nml jMNlsdapf
a aslc tease to a forein eotaty •hAll Uto
the font of & lofta di» «.
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l nxnaberli^ etoout IdO* ^tel eelajpiee «&d v&g0* sm lf%T
tOOi
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cation* reoeivod in 19*7 a\»te»fSMl STjT «jod t§ credit* «»oimtlne to
Billion mum «uttoil«i4 ia ttot
lnorwi«e la staff will jppgfeftMy fe* ae4seee*i?ar to
carry out the Bank1* dwtlee im conaootion with the
Oooperat U-ai Aet*
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Federal Reserve Bank of St. Louis
SabJ*ctt Loading Policies of E3^iort-2a«>wt Baaak
BAQtiMMtt&td Action:
1. Tbe national Advisory Council is of the pinion that the field
of activity of the Export-Japort Bank in extending (or guaranteeing) foreign
credits, in relation to the field of activity of the International Bank for
ltw»truetl©n and Bewlopnent, should be as set forth in the attached State*
meat of Principles.
2. The Council proposes that each application for an E^ort-Ii^ort
iiank loan or guaranty in the period iaaediately ahead shall be subjected to
•ere sever® scrutiny* with the requirement of a stronger •honing that the
proposed financing would be positively in the national interest of the United
States and that the funds cannot be raised on reasonable terms through private
channels on either a loan or an equity basis* Ikl* policy nould he applied
generally to lending policies of 1* S» Government agencies*
3* flie Council has also considered the question of setting up a new
U, 8* Ooyertiaent ageni^r or fund for the purpose of making loans to foreign
countries, inhere such loans sdght not meet the present l^art-Bapert Bank
requirement of «reasonable assurance of re|»yiaent« but is^are assistance in
the form of leans would be desirable for political purposes.
1*he Council does
not believe that any agency or fund for this purpose should be established at
iu ShoaM it becosse necessary te establish ai^r new fund for
extending assistance to foreign countries in cases not covered by the functions of existing institutions, the ad&ini&trator of this fund should have
discretion to eietend such assistance either cm a grant basis or, with the
advice of the Council, on terns calling for yepeyasnt.
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Federal Reserve Bank of St. Louis
or mixc-spu® wmwm SHE SKM® st*ass joemai car
BASK QU5BI33S H BEIAf Id 50 1»061 Of 3SB OTSKIWraOliAI, BASK FQi
1« fhe International Bank should be the nonsml source of loans for development project* involving direct financial obligations of a aesfoer
goverata&nt or goveroaental agency or its guarantee of the obligations
of other borrower*.
f, the JfcEp«rt-I*port Bank should not nake (or guarantee) loans within
the purview of the International Bank, except in special cases, such as
those ia which ia^ortant interest* of the United States warrant departure
from the g&neral principle, or an additional credit is required to continue the project initially finmnced by the Ixport-Iisport Bank, or a loan
is for the developaest of strategic material for importation into the
United States *
3. Loans to private Uaited States businesses or their affiliates, withoat governmental guarantee, aay be considered by the £x^ort*laport Bank
4. United States expcarter credits in aes^er countries, at the instance
of United States suppliers, involving orders for purchase of United
States equipment, aay bs considered by the Sxport-I^port lank on their
aerits if they are for such transactions as vould not fit into the
noraal pattern of International Bank project lending. In view of the
revolving nature of MaqKsrt-I^ort Bank funds, these credits noraaUy
should be of short-to-a»diu»~t©rm.
5. Cc^aodity loams t® finance the export of United States cosaoditiea,
short-term in nature, nay be coasidjered by the Kaqport-Import Bask on
their merits.
6* Loans and other credits by the Export-latporc Bank in countries
vhich are B»Bd>ers of the International Bank should be coordinated with
the International Bank's lending prograa by consultation between the
two Banks, and due weight should be given to whether such loans say
endangar the repayment of loams aaade by the International Bank, unduly
liait its future lending ia the MMriber country or run counter to governmental programs or priorities on vhich that Bank is planning its
lending activities.
7* loams ia countries not aeabers of the International Bank, whether
governaeiitai or private, may be eo**eider»d by the B*port-2»port Basic
on their nerits.
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Federal Reserve Bank of St. Louis
l^LAXXHG TO EXPOHT-IMPQRT
Attached are recommendations dealing with Export-Import Bank
leading policies, intended to adapt these policies more closely to tae
present situation, and also baling somewhat more generally with the
question of extending loans in eases where financial aid in such form
needs to be given for political reasons.
IB connection vita these reeomnendations, there ia given below
a •UBuaary oftitleBank's statutory objectives and of some other reiavant
policy considerations. 1&ereafter, there follow sons raamnta on "soft"
loans and on the question of setting up a special agency to extend financial aid (regardless of ability to repay) where such aid needs to be
given for political reasons. Finally, it is suggested that where aid on
a basis intermediate between loans and grants is for any reason desirable,
a fora of "contingent repayment loans"
would be free of the maim objections
applicable to other fonas of "soft*1 loans. 2he tern "soft loans" is used
to mean any loans that are aads without reasonable expectation that the
borrower can and will repay them according to a fixed schedule which ia
reasonably in line with conatrcial terms.
Objectives of the Bank
Hki Ba^ort-Iaport Bank Act of 1^$ states that tU« objectives
•ad purpose* of the Book shall be "to aid in financing and to facilitate
exports and import* and the ftTrhsng» of comodities between the United
States * . . and any foreign country or the agencies or nationals thereof.1'
Bit Act also provides that *th» Bank in the exerci»« of its function*
should supplement and encourage and not compete with private capital, and
that loans, so far as possible consistently vita carrying out the purposes
of Bisection (a) /^iotftd abo^f/, shall ®6narallor be for *i*cific purposes,
and, in the jud^aent of ^e Board <af Mraetowi, otf«p reasonable assurance
of repayment*
Within the broad field of loans aeeting these re^uireaents, tha
Bank wist (as General Idgsrton has pointed out) apply a nhi$Oy selective
procecs.' In deciding «aicH loan requests the Bank will grant, it seas*
cl«ar that in a nuafcer of cases the deteraining factor has proparly been
«» affect l^iat a particular loan would haw in giving positive support
to sotae 0* i« foreign policy objective — although this does not seen
«v«r to haw appeared in any official statement.
file particular kinds of situations in which the Bank would s*k»
^f'aTfolJ^?1"881*lgmm"m^ *****®** ia M»y 1^6 (in a report by the
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Federal Reserve Bank of St. Louis
-a11
In general, long-tent development projects are referred to
the International Bank in the first instance, fbft SxportImport Bank makes loans which have a special ana issportant
Halted States interest, for ejaosple, because the project is
designed to open up an additional supply of essential laports into the l&iited States, or because it requires United
States equipment and services of kinds which it is especially
desirable to export. Such interest may also exist because
the project is being sponsored and financed In part by private Ifaited States Interests, or because It covers a field
in which the Ixport-Iiaport Sank already has participated financially, or because the applicant country is not yet a
member of the International Bank.'*
Relation of th» Back to U» S. foreign policy
In eases where the chief justification for a particular foreign
loan rests on political factors, it seen* desirable that this be explicitly
recognized in the consideration of the loan rather than disguising such a
loan as having psriaarily economic purposes. Such recognition within the
government of the essentially political nature of certain loans would not
necessarily require that these loans be publicly announced a* political in
character. It would, however, facilitate the consistent application of
reasonable criteria to loan proposals*
In fact, the Export-Ia^ort Bank has been laaking such loans ever
since 19^5, and it appears that the Bank is a suitable agency for this purpose* It nay be desirable, however, to have some clarification of the
Sxport-Ia$»ort Bank's functions in this respect.
If the Sank did not aaJcc loans to further the political objectives
of Hie Goverssaent, there would aeem little justification for a Government
bank of this kind. While the Bank is supposed to make only loans that are
economically sound and offer good prospects of repeyiaent, and is expected
to be financially self -supporting, the Bank does not exist merely to earn
Interest or profits on behalf of the taxpayers. As in the past, the Export-Import Bank {and the HAC), in passing upon applications, should be
advised by the State Bepertaent (or other interested agency, aa the case
way require) aa to the special political considerations involved in each
proposed loan.
It could be suggested that the making of loans which involve a
political justification is sufficiently different from the financing of export and iaport trade so that it ought to be in a separate institution*
However, the political effect migtit fre^oentay be lost if the loans were
to eoae fro® an Institution specif ieally established to lend for political
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Federal Reserve Bank of St. Louis
- 3 •*
purposes. In addition, as a a»tter of Government efficiency, It would
neen preferable and feasible for * single institution to han<lle tbese
various fields of foreign lending on behalf of the U. S. Govemaent.
Fartbftraore, In many cases, a loan does not fall clearly in one of these
categories to Hie exclusion of the other*
The foregoing discussion applies only to loans which »eet the
requirement of "reasonable assurance of repayment" and which therefore
faH within the lending field of the Export-Iaport Bank, ft*** oust also
be considered the possibility of loans which do not aeet this requirement.
It would appear that the giving of aid in the form of loans, under these
circumstances, mlgrfc best be considered as an alternative to grants* on
occasions where the political situation would call for the giving of U. S.
Governaent aid in sons form regardless of the borrower's ability to repay.
Shs- possibility of such loans is therefore discussed in a later section
which deeJ» more generally withn soft loans*1.
Oarreat operations of the Bank
Tbs recent loans of the Sxport-Inport Bank have fitted wry
closely the leading fieM outlined in the draft "Statement of ^riaciples'
Sated September 2**, 1953 (agreed between Hr* Blade and General Eager-ton)
— which, as win be seen, is quite parallel to the 19*8 statement which
has previously been quoted in tiiis meaoraadm. 13ie Septaaber 24 draft
statement adds one important point, however, in that it provide* specifically for consultation vitfa tfce lateroatiojaal Bank whenever t&e laeportlap^t Bank proposes to extend any type of loan (or guaranty) in a country
which is araBBfcei-of t&e lateraatioual Bank. Such consultation should help
to assure that the resources of the JBaqport-liaport lank will be used to the
greatest advantage.
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f»o f*artb*r points ailtfit well be noted i» 1Ms connaction:
(1) flie consultation provision should be two-way, making
clear that the International Bank, when conteaplating
a loan (or guaranty) to a country where the ExportIsport Bank has any substantial interests, should also
consult the Export-Import Bask* fhe Presl^nt of the
International Bank has indicated complete agreement
with this view.
(t) It should be clear that in all cases, particularly in
case of disagreeaents, the SAC retains final authority
to determine the H* S* position with respect to ?*if4tng
policies and approval of loan operations.
With regard to interest rates and other terms, when the ExportImport Bank extends credits for development or for other long-term purposes, the Bank should continue its present general practice of not offering
•ore favorable terms than would be available on loans by the International
Bank.
In the interest of maintaining the usefulness of the ExportImport Bank as an instrument of II. S* policy, it seems desirable to
Bullion the Banfe'a right to extend oredit in any of the fields assigned
to it in the September 3k draft statement* When other national policies
call for restricting the volume of Export-Import Bank lending, this might
bast be done by the application of more severe tests in the scrutiny of
each loan application, such as by requiring that each proposed loan be more
positively shown to be in the national interest of the United States.
Under present circumstances, it is desirable for the JBxportImport Beak to increase the emphasis on its function of encouraging
private capital investment abroad. In view of the special need of minimizing the amount of Government funds disbursed, the Bank has entered
upon a new program whereby foreign credits may he extended by private
capital under guaranty arrangements of the Export-Import Bank, Such
guaranties should be arranged so as to be conducive to a gradually increasing volume of financing in which private capital itself would undertake the necessary risks. One step in this direction might be the introduction of partial guaranties, such as guaranties covering only exchange
risks, or covering only the portion of the loan with longer maturities,
in place of full guaranties* Efforts of this kind are particularly
desirable at the present time because the improvement in the financial
positions of many foreign countries provides a more attractive basis
for private loans and investments abroad.
Tb* encouraging of private capital requires the best possible
Judgment in determining case-by-case the effects that would result from
tbe withholding of the Bank's credit or its guaranty, Where private
capital could be found to provide the financing and assume the risks,
the Bank must avoid displacing it. In other cases, however, assuming
that thfe transactions to be financed would be positively in the interest
of the United States, it would be undesirable for the Bank to withhold
its credit because of any erroneous belief that private capital can be
obtained.
In this connection, it is important that the interest rates
charged by the Ixport-Jjsport Bank should be high enough to assure that
borrowers will go to the private market whenever they can. However, in
those cases when the Bank gives its guaranty in connection with a loan
from private sources, the interest rate payable to the private lender
should be kept as low as possible in order to maximize the incentive for
the lenders to consider the extending of credits at their own risk.
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Federal Reserve Bank of St. Louis
- 5Objectionable features of "soft loans"
When the question of aid for special political objectives
la being discussed, possible provision for "soft loans" mist be con*
aidered — that is, provision for cases in which the interests of the
United States, or special circumstances of the particular case, call
for extending the aid on a repayment basis rather than a grant basis,
and where at the same time there is no adequate assurance that full
repayment will actually be obtainable.
Ibe kind of loan that is particularly objectionable is one
in which the loan contract is at variance with the expectations of
one or the other party (or both parties) as to the repayment that the
borrower is actually going to sake, fhis applies particularly to
cases in which the loan contract calls for the borrower to repay fixed
amounts of principal and interest on specified dates, if it does not
really seem likely that the borrower will be in a position to make
those payments. Many of the same evils arise if, instead of taking the
form of a loan repayable in dollars, the U. S. Government agrees to take
payment in local currency, if the amount of local currency is more than
this Government is likely to need for current uses and if there is no
elear understanding as to the disposition of the excess.
Ttiere are several reasons why credits of these kinds are
undesirable:
(a) From the viewpoint of investors (including the World
Bank) who migbtt contemplate the asking of loans or investments in
the foreign country, and wtio would want to know whether the country's
outstanding liabilities stay already be too grefct, these obligations
to the U* S. Government would appear as real liabilities*
(b) As payments fall due and cannot be met, the necessity of renegotiation or default must necessarily introduce an
element of tension into our economic relations with the borrowing
country. While it may be claimed that the U. S. would at that
time have some extra bargaining power (because of our ability
to waive payments in exchange for some new concessions from that
country), it seems likely that the disadvantages of producing
such situations would ordinarily prove very much greater than
the benefits*
(e) The initial benefit to the U* S. from extending
credits of these kinds is much less than if the aid had been
given on a grant basis, because of the retirement that the
recipient country assume the obligations involved (even though
it may be doubted whether those obligations will ever be fully
mat).
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e> • ei
Ivsn nfe«r« the loam contract provides for consultation
between lender and borrower when difficulties aria®, these various
disadvantages still exist in large aeasure.
that "soft* loan* of the foregoing types are to
be avoided, there nmain at least three fonts in which financial
aid could be extended to a foreign goveroaanti
(a) teal loans, based on analysis of the borrowers1 ability
to repay, and itade with the expectation of full repayment according to schedule*
(b) Grants, which may be made in connection with agreements
or tmdertakinge of various kinda fcgr the reliant but which do
not call for repayment to the United State*.
(c) An intermediate form, which May be referred to as "contingent rep«ontent loans", in which it is agreed froa the beginning
that th£ rate of payments to be Hade by the borrower will depend
on future changes in scsae agreed aeaaure of the borrower^ ability
to pay. Thus, while there would be flexibility, the evils of the
kinds of soft loans mentioned in the preceding section would be
avoided. Bw outstanding example of such a loan arrangement at
present is the arrangement for Interest payments en the Anglo*
Aiaerican loam of 19lj6f while there have been problems and difficulties in the a&tinistraiioft of this loan, the study of this
experience Bay help to avoid similar difficulties in any future
"contingent repayment loan* contracts*
Contingent repayment arrangements in appropriate cases
isi^t enable the united States to obtain higher psyaents, during
prospercms periods, than the debtors could have committed themselves
to pay on a fixed basis* At the sane tias the arrangement would
aroM debt burdens that mi^it prove tandesirably heavy in depressed
periods.
respite the ffoemlng advantages of giving aid in the form
of such "contingent repsyssnt loans11 — e*g», for financing basic
economic development projects in tiader«teveloped countries of Asia —
there would be a naafeor of problems in in^ockicing then, la particular, it «cmld be difficult to iatro^ce such leans while also expect*
lag the recipient countries to try- to attract World Bank sad private
investment. The borrowers would be likely to prefer borrowing on a
contingent repayment basis, and it would be very difficult to set tip
standards for determining whether a given project could be financed
on this basis or whether regular Iferld Bank or private financing
should be reeptred*
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-7 C& the other hand, where aid ia to ba given and it is clear
that the country* a ability to repay would net justify any loan en a
fixed repayment basis, tha 0* S* Government nay wiah to go some distance ill specifying the condikionn under which tha recipient would use
t&e aid* ft* giving of aaaiatanee on a grant baaia (aa heretofore)
would give the tl. S. Oowrnnent acre power in this direction than if
the aid were to take the form of a contingent repayment loan.
It ia therefore difficult to envisage the extent to which
contingent repayment loans night be a suitable form to use whan
political eirciojietances dictate tha giving of special aid to a
foreign country. $ien and aa special prcblewa of thia kind arise,
tha extenaion of aid em thia basis might ba eonaidered
The foregoing discussion seens strongly
to indicate that any
w
prqpMftl of a new lending instituttoi, to »atee sof t« loans for fjolitieal
purposes, would be premature at this time, this it because th« indications are strongly against the making of "soft" leans of the objection-*
able t^pe® described in the first section of this not®, while there is
not enough 83Cp0riersce to sdvoea-te the ©stablisiaaent of an institution
to m&k© loans on a contingent repaymeat basis* For ^ffltjr purposes and
to many kinds of csa«s, «ber« ths o&Jeetiirt is political, it is likely
that a grant would 'be preferable to any kind of loan*
2f an^ speoial fund were to be established for the giving
of aM to foreign countries in speeial situations, it would se«st
preferable for the legislation establisaing the Ituod to o^rmit ths
aid to be gi^sn entirely on a grant basis, but permitting tins adsdnistratcr to make loans instead wliere the circumstances Justify. It
should farther be provided that the acteinistrator should in each ease
consult with the BAC on the question whether and en what teras ttie
prospective recipient would be able to repay. Vfoere the sdminlstrator
then decides to giir® the aid on a loan basis (calling for either fixed
or contingent p«^»ents)f the terms wouM be fiieed in consultation with
the SJ£*
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Federal Reserve Bank of St. Louis
'o all to whom theAe Ipresents come,7 aareetina:
a
is 16 to certify that
THE HONORABLE WTLLTAM MGQ. MARTIN, JR.
ha6 been ae6ianatea
an Alternate Delegate of the United States to the
<f
Extraordinary Session or the Inter-American Economic and Social Council
(IA-EGOSOG), to be held at Washington, D. C., beginning March 20, 1950.
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March 17, 1950
DEPARTMENT OF STATE, U. s. A.
WASHINGTON 25, D. C.
OFFICIAL BUSINESS
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Federal Reserve Bank of St. Louis
The Honorable
William McC. Martin, Jr.,
Assistant Secretary of the
Treasury in Charge of
International Finance.
W. Me. M-13
«
country cannot bo adequately met by the Federal Reserve System under the new banking law, but in order that this be done knowledge is necessary, sincerity is necessary, ability to read the factors of economic change is necessary, and the courage for independent action is necessary oven though it is realized that criticism
may bo severe and that it will come whatever is done.
It is also essential to
bear in mind that the System of itself can really accomplish very little without
the thorough cooperation of the Treasury Department.
must act together to achieve the proper results.
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Federal Reserve Bank of St. Louis
The System and the Treasury
CONFIDENTIAL
__
htfȣtil.: OF VISIT OF S^Ci^MI 3NYD2H,
Assistant Secretary Martin
Saturday, July 16
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Federal Reserve Bank of St. Louis
Morning:
Audience with Pope
Visit to Treasury Office
Conference, financL al-monetary
authorities
At Viminale.
Present:
Minister of Treasury, Fella;
Minister of Finance, Vanoni;
Governor of Bank of Italy, Menichella
9:00 am
11:00 am
12:00 noon
Agenda Italian authorities hope to cover:
General summary Italian financial
situation
Comments on ERP
Plans beyond 1952
Sterling problem
Need for normal dollar reserves
Point h and Italian emigration
Customs tariffs
Fiscal reform
Mr. 2ellerbach's luncheon for Secretary Snyder
at Restaurant Faro
1:30 pm
Afternoon:
Conference, foreign trade - economic
authorities
5>:00 pm
At Viminale.
Present:
Minister Tremelloni, Italian delegate
to OiSSC, Chairman of Inter-Ministerial
Committee on ERP;
Minister of Foreign Trade, Bertone;
Minister of Agriculture, Segni;
Minister of Industry, Lombardo
Prime Minister de Gasperi and Minister of
Treasury Pella giving dinner at Villa Madama 8:30 pm
After dinner:
Opera: La Tosca.
FOB
OF
Ilassaai lasOO noon to 12130 p.m»
b* aat fey "Bio
Mr* Minor
Mr
of §
at
Official sails
: 00 - 6:15
(7$
9":*30 all* - BOA
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stand
by the ttag
for use of partys
BKlofc 008
Bontiao Oil
256
, Mr.
Minister
inister of , inane o, Mr*
SECRET
ANTICIPATED U»S, FOREIGN GRANT AIID LOAM ASSISTANCE
The estimates given below of foreign grant and loan assistance
were made on the assumption that we shall not be engaged in a major
war, but that the Soviet Union idll intensify its efforts to extend
the orbit of its influence and controlo Our objective in providing
economic aid is to create situations of political and economic
strength in the free -world especially in critical areas iriiose present
•wea&ioss may invite Soviet thrusts« Ilcwaver, as a consequence of
increased demands on UoS« resources resulting from a military defense
program that may require expenditures at a rate of &>0 billion a
year, claims on UoSo resources for foreign aid have been limited
to programs that will meet most urgent and immediate needs» These
programs have therefore been restricted to those fulfilling three
broad purposes: (1) investment to increase the production and
facilitate the distribution of critical materials directly needed
for defense, (2) aid to strengthen the defense effort of our allies,
and (3) aid to enable governments -which are or can be expected to
become friendly members of the free Trorld to -win the confidence and
support of their own peoples as a solid foundation for political
stability and national independence o To reduce the drain on U0S«
resources, aid programs have been held to the minimum believed
necessary to effect these purposes.
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The basic
SECRET
- 2-
The basic task in Europe is to prevent regression from recovery
levels now achieved as the European nations begin new rearmament
programso The basic task in other areas is to assist them to make
progress toward meeting the aspirations ana demands of their people
for the satisfaction of their basic needs,
to enable the govern-
ments thereby to command allegiance and support, and to maximize the
output of materials essential to the continued strength of the free
worldo
In determining whether and to what extent to provide UoSo Government assistance in any given area, account has been taken of aid
likely to be made available by the IBRD and other sources9 and of
increased dollar earnings that should result from expanded U*So
Imports, upward price movements, and U0So troop expenditures abroado
Aid has been scheduled in the form of U«S0 Government loans for
development projects normally regarded as bankable where it appears
that recipients can carry additional dollar debto Aid has been
scheduled in the form of grants for technical assistance projects,
including associated supplies and equipment required to make the
technical assistance projects effective.. In certain exceptional
cases, grant aid has been scheduled for capital investment projects
as "srello This has been done only in the case of countries of great
strategic importance to uo, for which loans and investments cannot
be contemplated in the near future and which, in the absence of
certain capital goods, would experience rapid economic deterioration
and political instability0
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Making
SECRET
-3-
Making available funds for carrying out the foreign aid programs
outlined below will not in and of itself achieve the foreign policy
results desiredo It will be necessary that the essential supplies^
many of which may be in short supply, be assured both for shipment
under the aid programs and for shipment for essential purposes where
the foreign countries themselves are able to furnish the necessary
funds o To accomplish this purpose as well as to minimize the drain
on the U«So economy in the form of non-essential exports careful
examination will be necessary of the scope of our export controls
and the policies under which they operateo
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SECRET
-tActual and Anticipated Ue So Government Grant and Loan Aid
(Including Point IV but Ebccluding HDAP and Other Uilitary Aid)
(5 million - .fiscal years }
Area
1953J/
1952
1953
1951*
1955
-S/
30
30
30
30
30
7ii(i;8)
- 2/
EUROPE
T'estern Europe*
(Including Greece arl Turkey)
Grant
Loan
Yugoslavia
*Urant
Loan
sa
15
«>
LATIN AMERICA
"Grant
Loan
Ub
U»
225
225
28
225
26
12
12
137
30
120
75
106
65
63
25
185(95)^ 152
159
98
6C
60
IS
10
20
35
55
55
55
U*(32)
225
23
225
231^
171^
n?(25)
FAR EAST
'Japan 2t Kyukyus
Grant
South East Asia
(Including Formosa)
Grant
Loan
Korea
Grant
Philippines
tyrant
Loan
New Zealand
Toan
29(15)
50
15
50
NEAR EAST AND AFRICA
"TTeaFlilasi
"""Errant
Loan
30
75
70
90
80
60
Grant
Loan
38
29
38
30
25
2*5
25
16
Grant
3
300
350
325
300
( International Organizations )
Grant
13
17
22
27
27
25
Africa
SOUTH ASIA
25
16
TECHNICAL ASSISTANCE
g
TOTAL GRANTS:
TOTAL LOANS:
GRAND TOTAL:
* The estimates of grant aid for Western Europe are still in discussion among 2CA, the
Department of Defense, and the State Department,,
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SECIIET
SECRET
FOOTNOTES
Includes estimated supplementary appropriations (set forth in
parentheses) -which have not as yet been requested*,
2/ The total ERP appropriation for 19£1 is §
of -which £60
million is programmed for loans and grants for African DOT'S and
is shown in the table as part of the aid to Africa*
3/ It is possible that further grant aid will be needed for
Jugoslavia in 1952, the amount of which cannot now be ostiraatedo
h/ The funds available for obligation in 195?1 for Japan and
Ryukyus is $32 million less than the Defense Department estimates
to be needed* It is anticipated that the 032 million will be
borrowed in 1951, and need for repayment is reflected in the
19p2 aid estimate. With regard to the estimates for 19529 the
Army is presently considering converting to a partial pay-asyou-go basis beginning July 1, 19>U In that event, about
§UiO million of the ^Llk million shown above for 19§2 would
not be appropriated for economic aid to Japan but would be
made available instead to the Defense Department for its
expenditures in Japan0
5>/ The Defense Department's supplementary appropriation request
for military activities in Korea will include $95> million,
shown in parentheses above, for relief and rehabilitation of
the Korean economyo
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Federal Reserve Bank of St. Louis
SECRET
Western Europe: The estimates for Western Europe arc still in discussion among
EGA, the Department of Defense, and the Stato Department0
Yugoslavia; Yugoslavia's disaffection from the Soviet Bloc has subjected her
economy to severe strains because of abruptly severed trade relations -with
Cominform countries, heavy defense expenditures, and the greater need to
succeed as a Communist state in rapid industrialization. It is in the UoS
interest that Yugoslavia remain outside the Soviet Bloc and maintain a
viable economy*
To assist Yugoslavia to overcome the effects of the recent severe
drought, grant aid of $Ik million -will be needed for expenditure in
fiscal 1951* However, because certain government agencies are providing
inmediate food relief for Yugoslavia out of their existing appropriations,
Congress -will be asked to appropriate only OW milliono It is possible
that, in consequence of the drought, further grant funds will be needed in
19$2o
The IBRD rather than the Sxlmbank Is expected to provide further
loan funds for Yugoslavia »s economic development
Latin America; The program of economic assistance -which is projected for
Latin America is primarily one of production for defense purposese The
objectives are to increase the availability of critical materials which
the Ue Se Td.ll need for industrial and defense output, to maintain
production of food and other items at a level adequate to meet the
essential requirements of western Europe from this traditional source of
supply, and to develop production "which 7d.ll minimize the dependence of
Latin American States on imported food and other essential supplies in
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case
SECRET
case of emergency. In addition, as a specific defense measure, it mil be
necessary to speed up the construction of the Inter-American Highway*
Increased ,U« So procurement and higher raw materials prices will
increase Latin America's dollar receipts and her capacity to service further
dollar debt* Consequently the major part of U« S« assistance to Latin
America is scheduled in the form of loan aid (largely for transportation,
fuel and power facilities )• It is estimated that Latin America mil
require foreign capital for investment at a rate of about $350 million
a year, of trfiich the International Bank may be able to finance about $L25 million
a year, leaving about $225 million a year for Uo S« Government loans0
Grant aid for Latin America includes %6k million over four years for
completion of the Inter-American Highway, and about $28 million a year
for an expanded technical assistance program, mth particular stress
on aid through the IIAA to increase indigenous food productiono
Japan and_thgJR^ulgyxisi The estimates of budgetary requirements for Japan and
the Ryukyus Islands represent, for fiscal year 1951, funds actually made
available for obligation^ for fiscal year 1952, figures recently sub«
mitted by the Department of the Array to the Bureau of the Budget; and for
other years, tentative projections by the Department of the Army0
The assumptions underlying them, particularly those relating to
Japan's foreign trade prospects, are on the -??iiole conservative,, Should
her foreign exchange earnings exceed the estimates, however, the more
favorable economic position that would result from the projected level of
aid in fiscal year 1952 -would not be inconsistent with objectives of Uo So
policy toward Japan0
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The
SBCEET
The Defense Department is considering a partial pay-as-you-go
arrangement to begin on July 1, 19£U If that arrangement is established,
it would obviate the need for any GARIOA appropriation for economic aid
to Japan, although GARIQA funds for administrative expenses and the
reorientation program might continue to be needed^
South East Asia (including Formosa) i The objective of U» S« aid is to
strengthen the present moderate and Western-oriented governments in this
area, to increase internal support for these governments, and to give
concrete evidence at the grass roots of 130 So Government constructive
interest in the local welfare*
The amount of aid actually required will depend on the direction and
pace of current political and military developments =. The estimates assume
that there will be no serious political degeneration in the countries
concerned and that those countries which are now suffering military and
guerilla operations will become gradually pacified*,
The grant aid program for STELI countries is substantially a continuation of the program recommended by the Griffin IILssion and recently
initiated under EGA* It embraces rehabilitation and development projects
with strong emphasis on technical assistance and associated supplies
and equipment for direct implementation of technical assistance projects,
as well as consumer goods needed to raise local revenues for rehabilitation
projects without embarrassment to the fiscal systems of the countries
concerned* The projects cover a wide range, but particular emphasis is
placed on health, agriculture, and transport*
Uo So Government loan assistance is provided for longer-term capital
investment projects in Indonesia and Burma which have capacity to service
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further
SECRET
SECRET
further indebtednesso Thailand's needs for long-term capital investment «
will probably be met by the International Bank. Malayan needs should
logically be the responsibility of the Uo K0
The estimates for Formosa are projected on the assumption that Formosa
will continue to be part of the free world, -sshatever the nature of the political
arrangements that may be made respecting her status. Aid estimates for
Formosa taper off in the later years, reflecting the assumption that increased
productivity would enable the island to carry a greater portion of the
burden resulting from a high level of Chinese military expenditureso
Korea: The studies of the damage to and requirements of the Korean economy
in consequence of the hostilities liave not been completed, and it will
be many months before reliable figures can be obtained,.
Estimates thus far compiled by EGA indicate that the total cost
of foreign aid for reconstructing and restoring the Korean economy
would be somewhat less than $1 billion* The capacity of the Korean
economy to absorb imports requiring foreign financing is probably
"United to $L£0 million per yearo The absorptive capacity would be
greater in the initial years, however, since a substantial portion of
total requirements is for relief-type goods. The annual costs set
forth are projected only through fiscal year 1955* but assistance
beyond that date may be required if the country is to become selfsustaining.
It is assumed that the U« S« will bear 6$ to 70 percent of the costs
of a United Nations program*
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Federal Reserve Bank of St. Louis
Philippines
SECRET
Philippines; The payments and expenditures of the United States in the Philippines have supported the economy of that country since liberation fron
the Japanese forces. Without such assistance the large trade deficit and
budgetary deficit would have resulted in a serious economic crisis and
inevitable large-scale support of the Corsmunists. However, U.S. funds
were largely used for current consumption and were not in general applied
to the basic development of the Philippine economy. The program projected above is .designed to assist in the development of resources of
the Philippines required to achieve viability and stability which are
essential if the Philippines are to resist Gorjmunist pressure.
A minimum program designed to achieve viability wiH have to be -based
primarily on agricultural development but some increase in industrialization is justified. The major goals required to be reached are self sufficiency in (a) rice, corn, fish, vegetables and fruit; (b) increased sugar
production for export to at least the U«,SW quota total level and abaca
production to the 1940 level; (c) modernisation of selected nines and
determination of location and extent of rdneral resources; (d) expanded
facilities for processing ores, wood and agricultural products; (e)
expanded hydro-electric power for the production of nitrogen fertilizer
and for other purposes; (f) expansion of small-scale industry, and (g)
improvement of public health and primary and vocational education to the
extent required to provide the basis for economic developr.;ent0 In addition,
if any economic development program is to proceed with reasonable prospects
of success in the Philippines, it will be necessary that (h) the Governmait's
budget be balanced ty raising revenues substantially, and (i) that popular
support among the agrarian population be enlisted by improving agricultural
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credi*
SECRET
-11oredlt facilities, providing for land resettlement and redistribution, etc.
There is no immediate prospect of any substantial flow of private
capital into the Philippines and it would appear that the economy is not
strong enough to support loans for the ninirnum development required to
achieve viability. With grant funds available for this purpose over the
next few years, it is considered that public loan capital and private
equity capital could then start to flow into the Philippines to support
the type of development required for long-term stabilityo
New Zealand; New Zealand is not a member of the- International Bank and wiJJL
*
probably need Ebdmbank assistance to expanci productive capacity. Aid
to New Zealand is aid in the coranon defense effort.
Near East: This area because of its location for international transport and
its oil production is of vital ir]portance to the U. S.
Iran is more insistently under the pressure of Soviet proximity irnd.
interest than perhaps any other country. There is foment and unrest in
the neighboring Arab States. Immigration into Israel of Jews presently
residing in Moslem States continues unabated and with it heavy economic
burdens for the State of Israel. In addition there remain several hundreds
of thousands of unsettled Arab refugees froti the war between the Arab
States and Israel.
The U. S. is already committed to assist in the resettlement of
Arab refugees. In the case of Iran, it is desirable that the U. S0
render effective assistance as tangible evidence to the government and
the people of American interest in the preservation of the countryfs
independence and to strengthen both the ability and the will to resist
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Soviet
SECRET
SECRET
-12-
Soviet aggression and communist subversion. It is necessary in the Arab
States to provide assistance that will cdve some forward momentum to
those static economies. In the case of Israel? it is in the U.S. interest
that Jewish minorities be romoved to places of safety and away fron
potentially explosive situations, and that the State of Israel, which
is the haven for these minority groups, become a self-sustaining economy „
In addition to aid for the settlement of Arab refugees, the grant
aid scheduled for this area is intended to cover the cost of an enlarged
program of technical assistance and associated supplies and equipment,
ranging fron specific projects at the village level for the improvement
of health, sanitation and education facilities, training in agricultural
techniques and the provision of seed, tools and fertilizer, to broad
survey and diagnostic missions.
Loan assistance is provided for capital investment projects in Israel,
Iran, Lebanon, Saudi Arabia and possibly Egypt. (It nay becone necessary
to increase the grant component for the Near East area if Iran is unable
to secure loan assistance for necessary development projects.)
Africa; The bulk of the assistance for this continent is intended for the
African dependent territories. Tho purpose of both the grant and loan
aid is to expand and develop the production of strategic raterials and
associated improvements in transportation, power and port facilities, as
well as indigenous food, fiber and othor essential raw material production
so as to increase and maintain the internal economic development of the
African territories and their contribution to the. Western European-
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Federal Reserve Bank of St. Louis
economies.
-13-
eeonomies. The progran is a continuation and expansion throurh the
years 1952-55 of activities already underway in the EGA,,
Western Europe's 1949 imports froi.. overseas dependencies, largely
in .Africa, amounted roughly to about £.5 billion in value. U. S.
imports fron those areas cone to about .'400 million in value. Raw
material and food exports fror. these territories included rubber, palm
oil," sisal^ henp, hides and skins, cork, copra, vegetables, fruits,
cereals, sugar and dairy products.
It is anticipated that the aid will be made available through and
in cooperation with the -European colonial powers. If carefully administered
the program should contribute not only to the objectives cited above but
should also have the effect of increasing employment, productivity, and
economic and political stability throughout Africa.
Aid has been scheduled in the form of loans to t:-.e extent that loan
aid appears feasible.
Snail amounts of aid have been scheduled for the independent countries
of .Africa, largely for technical assistance,
South Asia; The situation in the Indian Sub-Continent is one involving de facto
economic deterioration to date and the prospect of continuing future deterioration as population growth outruns prospective increases in productivity*
Continuing future deterioration appears inescapable unless external aid can
bo injected to reverse the trends that are now so clearly discernible.
Reversal of those trends is an imperative vital interest of the U. S.
India and Pakistan are of determinative importance in the pattern of Asian
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Federal Reserve Bank of St. Louis
political
SOCKET
- 14
political relations. The present governments of India and Pakistan
are moderate in policy and friendly to the V'est, and they continue to
command the support of the wide majority of their people. However,
support is giving way to apathy, and organized parties on the extreme
right (fanatic religious groups) and the extrece left are gaining
strength as economic conditions continue to deteriorate. These adverse
political and economic trends might be reversed now by a substantial
U. S. aid program, directed 'toward a replenishment of capital plant
(in the form primarily of tillable land) and by a concomitant largescale improvement in agricultural and industrial technique*, If these
adverse trends are allowed to gain strength, however, a situation might
be created which—like that in China— could only bo redressed through
an effort lying beyond our capabilities*
The reason that aid to this area needs to be extended predominantly
in the touts, of grants is that the economic development of those countries
has been historically so retarded that their imediate oapacity to service
loans, particularly dollar loans, is extrerely limited,* Without grant
assistance economic progress could be achieved only over generations*
The volume of aid for the Indian Sub-Continent has been determined
largely on the basis of programs developed by these countries themselves
and submitted to the Colombo Conference These programs do not exceed
the volume of activity which is considered an essential nfnimun if
political stability is to be maintained,. Account has been taken of aid
likely to be made available by the U* K o p other Commonwealth countries,
and the International 3ank0
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It is
SEGI&T
SEGiiET
It is not supposed that & substantial aid program as scheduled for
this area would of itself bring about significant increases in living
standardso
It is hoped, however, that beyond the prevention of economic
deterioration and consequent political instability during the next few
critical years^ the recipient countries at the end of such a program would
have established an environment that would encourage a maximum utilization
of domestic savings and a reasonable flow of outside investment capital
for further developmental activities0
Technical Assistance: The estimates represent the anticipated contribution
of Point IV funds to the UN Technical Assistance Program, the C&S and
other international organizations<,
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SECRET
@FedFRASER