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immediate relea se

February 18, 1955

Remarks of J. L. Robertson, Member of the Board of
Governors of the Federal Reserve System, to representatives of banks and other financial institutions
uith respect to che President's Balance of payments
Let me discuss more closely what the President's

°gram means for banks and other financial institutions -

^earing in mina, of course, that what is asked of them is
° n ly part of the over-all attack on the balance of payments
Given the urgent need for a decisive cutback in

Pital outflows this year, what is an appropriate and


alistic target for the banking community?


After a great

eal 0 f thought, the Federal Reserve has concluded that


y expansion of bank lending abroad in 1965 should not
greater - and preferably should be less - than the


e of growth of domestic lending.

Last year, in con-



t , foreign bank lending rose three times as rapidly

Qomestic loans and investments.
More dollars are needed abroad day by day, month
month, to finance trade throughout the free world -

but not as many dollars as we have been providing.


the need for voluntary restraint on collar outflows - the
need for a curtailment of the rate of expansion of the

Here is a situation in which we can make prog-

ress by standing still awhile - as the need for dollars
abroad increases.
Therefore, we have asked all banks to restrict
credits to foreigners that are not clearly and directly
for the purpose of financing exports of United States goods
and services.

Jhile all exports must be financed, we seek

to have outstanding credits to foreigners (including export credits) held during 1965 to a level not over 5 per
cent above the amount outstanding on December 31, 1954.
In most instances, individual banks shoula do better - especially the larger ones - to offset the fact that some
bona fide export credits to foreigners may be granted by
banks that had no outstanding foreign credits at all last
This target must apply to all foreign credits loans and investments, acceptances and deposits.
target must be aimed at by all banks.

And the

The institutions

represented in this room account for most of the outstanding u. S. bank credit to foreigners, but of course we




expect the smaller banks also to participate in this program.
This target will take care of any possible increase in
bona fide export credits.

The National Foreign Trade Coun-

cil has estimated that U. S. exports in 1965 will be about
5 per cent higher than the rate for the fourth quarter of

Hence, an increase in export credits by 5 per cent

the amount outstanding at the year end should cover the
requirements of export expansion, assuming no change in the
Proportion of exports financed by credit.

Thus, even if

-il credits granted by banks to foreigners were export
credits, the 5 per cent target would still be realistic.
Actually, as you know, only a fraction of bank
credits to foreigners are used to finance exports of U, S.
§°ods and services.

In the case of long-term credits, we

know that this fraction is only around 15 per cent.
^ e case of acceptances, it is about 40 per cent.

In the

case of other short-term credits, it may well be less than
acceptances, but assuming for argument's sake that the
^action were equally high, this would mean that altogether only $3 billion of the total of $10 billion of
^ank credits to foreigners outstanding on December 31,
^ 6 4 , was for the purpose of financing exports of U. S.


goods and services.



An increase of $500 million in such

credits would thus finance an export expansion, not by 5
per cent, but by more than 15 per cent - an expansion
chat, unfortunately, is highly improbable.
And in fact, this calculation is still too conservative .

All of your short-term credits and a substantial

part of your long-term credits will be repaid in 19 55.
Assuming - quite conservatively - that only half of your
total nonexporc credits outstanding will fall due this
year, an additional $3-1/2 billion would become available
this year to expand your export credits.

Although it is

unrealistic to expect that extensions or renewals of nonexport credits could be cut back to zero, in theory you
could (within the Federal Reserve target) increase your
export credits outstanding from $3 billion to $7 billion enough to finance an export expansion of 133 per cent;
You will understand, therefore, that I do not intend to lose any sleep about the possibility that our
target might prove to be too restrictive to permit the
granting of all bona fide export credits.

You will have

Plenty of opportunity to cut down your nonexpert credits,
if that should prove necessary in order to make room for




any imaginable expansion of export credits.

We recognize

that in some cases this adjustment cannot be made overnight, especially if the credits granted or committed during the first six weeks of this year have already taken you
over the target.

But you shoula be able to get within the

limit in a reasonably short period of time.

In fact, you

will probably be able to maintain your nonexport credits to
foreigners at a level which will not impose a serious burden

ither on you or on your domestic or foreign customers,


ince the target level will be one-third higher than your

outstanding credits were at the end of 1953.
Within the limits set, we must a^oid creating more
Problems than we solve.

Hence, it is assumed that while

h i d i n g by the target, you will exercise discretion in allocating loans.


Since it would be in your own best inter-

t , undoubtedly you will concentrate on credits that are

xempt from the Interest Equalization Tax.

This would mean

that in the medium and long-term field you will give preferen

ce to the less developed nations.

Moreover, again in

your own interest as well as in that of the U. S. economy

large, you will presumably avoid any cutback that w>ould

^flict a serious burden on less developed countries, whose

economic grouch is especially in our national interest, or
on such developed countries as Canaaa or Japan (boch of
which are heavily dependent on U. S. finance) and the
United Kingdom (which, as we all know, is going chrough a
difficult period in its own balance of payments).


again, I am sure this problem will hardly arise in practice since you will be able to stay within the target
limit and still meet the real needs of these countries.
The 5 per cent target is simple ano straightforward.

it requires a minimum of interference wich your op-

erations and no elaborate machinery or detailed supervision.

Uith the understanding that bona fide export fi-

nancing is to be given priority and met adequately, and
that serious cutbacks in other credits may need to be
avoided for certain councries, within this 5 per cent
target each bank would be free - subject only to any
guidelines that may be developed - to use ics resources
as ic thinks best.
ye will need some informational reporting, mainly
a kind already supplied to the Treasury.

Without ade-

quate information, we could not spot points at which
threats to the effectiveness of the program or problems
its equitable execution might arise; we could noc gauge


7 •

the success of the program and hence the possibility of
relaxation; and we could not become aware that an uncooperative institution was taking advantage of the voluntary character of the program to compete unfairly with other

But let me emphasize that we have no aesire to

buraen you with unnecessary reporting.
We are aware that a number of difficult problems are
likely co arise in carrying out the program.
relationships with

For instance,

your foreign branches will certainly

Pose complicated questions.

Another major problem will be

domestic credits which would affect the U. S. payments balance as much as credits to foreigners.

I am thinking, for

example, of credits to domestic borrowers that the borrower
is going to use for financing operations abroad other than
those directly connected with exports.

Jr some of your

customers may be eager to increase the amount of their borrowings for export financing so as to free their own funds
for uses inconsistent with our program.

These are areas

in which we will be working closely with you, and with
the Department of Commerce in its efforts to limit foreign
credits and investments of nonfinancial corporations.

In the case of the so-called Edge Act and Agreement
corporations, the guiding

principle, of course, is that

banks with such subsidiaries be neither favored nor penalized in comparison with other banks.

The most equitable

solution, as a rule, seems to be to combine the parent bank
and its subsidiaries for the purpose of calculating the 5
per cent target.

Lquity investments abroad, which are not

available to banks without Edge Act subsidiaries, may require special treatment, but we are in a position to deal
^Jith that problem.
In connection with these investments ana with banks'
holdings of foreign securities or other foreign assets,
problems may arise with respect to the disposition of
those assets.

It would obviously undermine the program if

banks were to sell such assets domestically so as to free
more of cheir own funcs for investment abroad.
Transactions of banks for account of their customers and fiduciary accounts will also require attention.
I am sure that you will avoid encouraging customers
to extend any credit to foreigners that you could not extend yourself within the carget limits, and that you will
avoid acting as brokers or intermediaries by diverting to

them credits that you would normally finance out of your
own funds in the usual course of business.
We will endeavor to develop, very soon, appropriate
guidelines to deal with these and other problems.

In do-

ing so, we may request representatives of the banking community to serve on a small technical advisory committee to
assist us.

In any event - whether or not we issue guide-

lines or have an advisory committee - officers of our Reserve Banks will be in touch with you on an individual
basis to assist in working out problems that you encounter.
As you know, this is not the only group that is being asked to make a strenuous voluntary effort to implement the President's program.

You were joined at the

White House today by representatives of leading business
corporations that are being asked to make similar efforts.
But the contribution that the banking system itself can
wake is crucial.

And your economic interest in the suc-

cess of the whole program and in the consequent continuing strength of the dollar is particularly strong.
The place of nonbank financial institutions in
the President's program is somewhat different.

To the

be st of my knowledge - which is admittedly imperfect




in this field - most of these institutions have played a
minor role in the recent expansion of credits to foreigners, although some of them have purchased large amounts of
IET exempt foreign bonds and also have placed part of
their liquid funds abroad.

,/hat we muse ask from them,

at this time, is that their foreign credits and investments in 19 55 also be kept within limits comparable to
those we are suggesting for the banking community, and
thac no additional liquid funds be placed abroad.
Obviously, any potential foreign borrower whose
credit application must be rejected by a commercial bank
on account of the voluntary restraint program will be
tempted to tap other credit sources.

The pressure on

investment houses, finance companies, insurance companies,
and pension funds to extend foreign credits not subject to
the IET - perhaps even credits that are - will no doubt increase considerably.

Many if not most of these potential

borrowers will be excellent risks and will offer excellent

It is asking a great deal when we request these

institutions to resist the temptation.
we must do so.

But, of course,

If such credits were granted, restraint

by the banking system would be in vain.

From the point




of view of our payments balance, it makes no difference
at all whether a credit to a foreigner is extended by a
bank or by some other lender.
One problem involved in charting a course for nonbank financial institutions is the relative lack of data
regarding their foreign lending.

Only a few of them have

undertaken transactions that are reportable on Treasury
foreign exchange forms.

We shall certainly have to re-

quest additional reports from these institutions.
Moreover, in the case of some nonbank institutions
the problem of customer accounts will probably be even
wore troublesome than in the case of banks.

And in the

case of insurance companies, obvious exceptions must be
ttade for foreign investments connected with foreign cove

rage requirements - exceptions that will have to be analo

gous to those made for the same reason in the IET legislation.

But there is no denying that the Federal Reserve is

far less conversant with the practices and problems of non
bank lenders than with those of banks.

Hence, discussion

of doubtful points with us in the System by the representa
tives of these financial institutions will be particularly




As you see, che success of this entire sector of
the President s program depends on your acceptance, your
dedication, and your unremitting effort to achieve its

Given the present circumstances of our nation's

economy - and che desire of all of us to avoid rigid controls - the Government believes that, in this area, it
vJould be in the best interest of all to rely on voluntary
restraint - rather than on laws and regulations - to reduce the outflow of dollars on capital account.


your cooperation, the country's balance of payments in
1965 can be leveled in the direction of full equilibrium.
Your actions could have a decisive effect, and world confidence in the dollar would reflect it.