Foreign Relations of the United States, 1948, Western Europe, Volume III

840.50 Recovery/12–748

Memorandum by the Financial Policy Subcommittee to the Correlation Committee on the European Recovery Program¹

[Washington,] December 7, 1948.

Subject: Loan Program Policy for the Second Year of the ERP

Recommendation

It is the opinion of the Financial Policy Subcommittee that:

(1) The initial request to Congress for the second year of the ERP should be on the basis of an all-grant program. Such an approach should not wholly exclude the Export-Import Bank from extending loans to participating countries, but the request should indicate that no wide-scale lending to these countries by the Export-Import Bank is expected.

(2) Only if it becomes evident after formal or informal consultation with the Congress that an all-grant program is not feasible should provision for loans be included in the Program. In that event the Administrator should seek to reserve to his own discretion, in consultation with the NAC, the actual loan amounts, and should advocate retention of the present methods of administering loans.

Background

When the initial program was being formulated, there was some feeling at the technical levels that it would be desirable to have the aid program on an all-grant basis, but in any case it was believed that the Administration should be free to use its discretion in determining the amount of assistance to be extended in the form of loans. During the course of the hearings, however, the Congress pressed Administration spokesmen to suggest a definite figure for loans. Administration spokesmen insisted that no decision could be made at that time as to whether funds would be allocated in the forms of loans or as grants, since the Administrator would have to determine the ability of the participating countries to repay dollar loans after negotiating with the countries themselves. It was repeatedly stated that the proportion of dollar aid which could prudently be provided on a loan basis must depend on the estimate of the borrowing countries’ capacity to repay in dollars and also on the degree of flexibility which could be introduced in the terms of repayment, and it was indicated in part of the testimony that the Administration would attempt, as progress was made toward recovery, to swing more into loans than into grants. Under Congressional insistence, various Administration leaders finally testified that they believed from 20 to 40 percent of the assistance in the first fifteen months could be extended in the form of loans.

Analysis

1. It is generally agreed that it would be preferable to permit the European countries to husband whatever borrowing capacity may remain to them for use in the crucial period following the end of the ERP. However, in view of the testimony given by Administration spokesmen at the Congressional hearings last year and the implication that a substantial proportion of aid in subsequent years of the program would be in the form of loans, the Congress would be entitled to some explanation of the factors which would compel the Administration to request an all-grant program. There are several factors which could be presented to justify a reappraisal of the outlook for loans:

(a) The United States has now had an opportunity to examine detailed economic programs for the four-year period of the ERP prepared by the countries themselves. Other information on the economies of the European countries has been collected through research by the ECA missions in the countries themselves and through specific requests to the governments of these countries. These new data provide a much better basis for judging the ability of the European countries to repay dollar loans than was available to the Administration last year. A reassessment of the outlook on the basis of this new information casts greater doubt upon the ability of the major participating countries to service further dollar loans. Even in the cases of these countries which have relatively good prospects of being able to repay, it is now clear that the realization of these prospects is surrounded by so many uncertainties as to cast doubt on the soundness of any large volume of loans made at this time. In the Netherlands, for instance, prospects depend almost entirely upon the preservation of pre-war relationships between the Netherlands and the Netherlands East Indies. If dollar receipts of the Indies are available to the home government, repayment prospects are relatively good. However, if the Netherlands were compelled to depend on the dollar earnings of the home area, they would encounter the greatest difficulty in servicing any further loans.

(b) ECA has discussed loan programs with the various participating countries and has found that most countries believe that they could service additional loans only by measures involving grave risks of creating political and social unrest.

(c) Moreover, it has become increasingly clear that in the period immediately following the end of the recovery program most European countries will need to receive a fairly substantial inflow of private capital from the United States. It is therefore most essential that no action be taken by the U.S. Government which would tend to dampen such a capital movement. If European countries have been over-burdened with obligations to the U.S. Government which have prior claim on the countries’ limited resources, it is doubtful whether any substantial volume of private investment will be forthcoming.

(d) Of great importance is the fact that the international political situation has not developed in as favorable a manner as had been hoped. The deterioration of conditions in the Far East and developments in trade with Eastern Europe indicate that, while the European Recovery Program has not been seriously prejudiced, the long-term position of the European countries is not likely to be quite as favorable as had been expected. When the question of loans was discussed a year ago it was assumed that trade with Eastern Europe would improve and that many European countries could develop surpluses with countries in the Far East which could be used to service dollar loans. Now there is serious doubt that Eastern Europe will furnish the goods which the Western European countries need to relieve them of their abnormal dependence on the Western Hemisphere for supplies and their consequent abnormal requirements for dollars. In addition it is now doubtful whether the Far East countries will be able to pay any appreciable amount of gold or dollars to Western Europe should the European countries achieve the expected surpluses with the Far East.

(f) [sic] It is becoming apparent also that for many years the OEEC countries will probably find it necessary to devote a somewhat greater percentage of their resources to defense than had previously been anticipated.

All of these developments indicate that the margin above self-sufficiency or viability to be attained at the end of the Program now appears likely to be somewhat less than Administration spokesmen believed it would be when they testified before the Congress last year.

The technicians of the U.S. Government who have continued to study this problem believe that even under quite optimistic assumptions the balances of payments prospects of the recipient countries do not offer reasonable assurances that a substantial volume of ECA loans in addition to the loan amounts for the first year of the Program could be serviced.

While some of the countries appear able to develop current account surpluses in their over-all balances of payments within a few years after the conclusion of the Program, others cannot reasonably be expected to do any more than balance their over-all international accounts. Most of the countries will probably continue to require dollars in excess of their current dollar earnings at that time in order to avoid political or social unrest. Even in the cases where countries might achieve surpluses in non-dollar areas equal to or greater than their Western Hemisphere deficits, there is no assurance that such surpluses can be used to meet their dollar needs.

Furthermore, their position also depends somewhat on the strength of other European countries, for they are in general, creditors toward the other participants. Because of this, most if not all, of the aid which they receive from the United States will be conditional upon their extension of local currency grants to other participants. Hence, the U.S. is not in position to extend substantial amounts of loans to these creditor countries unless their aid to debtor participating countries is shifted from a grant to a loan basis.

2. If the approach to the Congress were made on the basis of an all-grant program, it would probably be necessary to indicate that the Export-Import Bank was not wholly excluded from extending loans to the participating countries during this period. It should, however, be stated that no large-scale Export-Import Bank lending program was in prospect for these countries and that it was necessary to predicate the request for aid on the assumption that no such loans would be forthcoming. It would be envisaged that the Export-Import Bank might extend loans to cover the financing, among other things, of certain long-term projects involving the expenditure of funds over a period of years, possibly extending beyond the ERP period. The ECA program would, of course, take cognizance of any such loans which might materialize.

3. Should it become imperative that some portion of the program be in the form of loans, it would seem preferable to recommend that the actual amount of loans be left to the discretion of the Administrator in consultation with the NAC. In the event this approach were used, it would be made clear in the legislative history that loans in a substantial amount, but totalling much less than 20 percent of the authorization requested, would be sought from the participating countries. However, the Administrator should seek to have the entire amount of the aid made available for either loan or grant use in order that there be as much flexibility as possible. It would seem desirable in any case to avoid the setting aside of a fixed sum for loans with the loan funds to be derived from a public debt transaction—the method used in the first year’s program.

If the decision were made not to ask for an all-grant program but to seek to reserve the extent of loans to the discretion of the Administrator, much the same line of argument could be employed as if the approach were made on an all-grant basis.

(a) It could be pointed out that the long-term programs of the various countries have not yet been correlated and that the formulation of an overall, consistent program may alter the outlook for certain countries.

(b) Much can be said to show the dependence of the outlook for loans upon fluctuating political developments, the situation in Eastern Europe and in the Far East.

(c) The defense requirements are unknown at this stage.

(d) The operation of the intra-European payments plan may necessitate the extension of substantially all of the assistance rendered to some of the stronger European countries in the form of conditional grants.

All of these factors make it unwise to attempt to set any figure for loans in advance. They would indicate, furthermore, that the amount of loans which probably could be extended would be well below the $1 billion set aside for loans in the first year of the program.

1. The Financial Policy Subcommittee was composed of the senior technical representatives of the agencies which were members of the National Advisory Council on International Monetary and Financial Problems. Under the leadership of C. Tyler Wood, Special Assistant to the Deputy Administrator of the Economic Cooperation Administration, the Correlation Committee was revived to supervise, as it had in 1947, the interdepartmental preparation of the recovery program presentation to Congress.