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The original documents are located in Box C2, folder "Brimmer, Andrew, Oct. 1969 - April
1971 (5)" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Arthur Burns donated to the
United States of America his copyrights in all of his unpublished writings in National Archives
collections. Works prepared by U.S. Government employees as part of their official duties are in
the public domain. The copyrights to materials written by other individuals or organizations are
presumed to remain with them. If you think any of the information displayed in the PDF is subject
to a valid copyright claim, please contact the Gerald R. Ford Presidential Library.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
SPECIAL
Chairman Burns
For Release On Delivery
Saturday, October 10, 1970
8:00 p.m., E.D.T.
CENTRAL BANKING AND ECONOMIC DEVELOPMENT
The Record of Innovation
Remarks by
Andrew F. Brimmer
Member
Board of Governors of the
Federal Reserve System
At the
Tenth Anniversary Celebration
of the
Bank of Jamaica
Sheraton-Kingston Hotel
Kingston, Jamaica
October 10, 1970
FORD & GERALD LIBRARY
CENTRAL BANKING AND ECONOMIC DEVELOPMENT
The Record of Innovation
By
Andrew F. Brimmer*
The ten-year life of the Bank of Jamaica coincides
almost precisely with the "Decade of Development" proclaimed by
the General Assembly of the United Nations in 1960. In fact, I
understand that, when the organization of the Bank was being
considered, serious thought was given to the possibility of com-
bining central banking functions and responsibility for develop-
ment financing in the same institution. However, that course was
not followed, and the Bank of Jamaica has now accumulated a
decade of experience in central banking.
Yet, it appears that the Bank has been concerned with
problems of economic development almost as much as it has with
the traditional functions of central banking. Of course, this is
by no means surprising: while Jamaica has made significant eco-
nomic progress in recent years, it still faces a difficult task
in raising the standard of living of its citizens. And to this
task, the Government of Jamaica has assigned a high priority.
* Member, Board of Governors of the Federal Reserve System.
I am grateful to several members of the Board's staff
for assistance in the preparation of these remarks. Mrs. Dorothy
FORD
Helprin provided information on recent economic developments in
Jamaica. Messrs. Robert F. Emery, Yves Maroni, and Michael D.
O'Connor conducted the survey of central banking experiences in
GERALD
LIBRARY
Asia, Latin America, and in Africa and the Middle East, respec-
tively. Mr. Frank O'Brien was especially helpful in knitting
together the diverse regional experiences.
-2-
Thus, the celebration of the first ten years of achieve-
ment by the Bank of Jamaica is also a good occasion to review the
role which central banks have generally played in promoting eco-
nomic development in the last decade. It also provides a vantage
point from which to look ahead to see what opportunities central
banks in developing countries may have to encourage and assist
the development process in the 1970's.
In focusing on the innovative steps that central banks
have taken to help foster economic development, I am not overlook-
ing the fact that virtually all of these institutions have per-
formed most of the traditional central banking functions -- such
as managing the note issue, serving as fiscal agent for the
government, supervising the commercial banks, and managing the
nation's foreign exchange reserves, including the operation of
exchange controls in numerous countries. Moreover, many of the
central banks have carried out these assignments with considerable
skill.
Nor do I wish to ignore the crucial contribution that
central banks can make to economic development by achieving --
and maintaining -- reasonable stability in domestic prices and
equilibrium in the balance of payments. A central bank that uses
its powers to discharge effectively these traditional central
bank responsibilities makes a fundamental contribution to devel-
opment because these are conditions that encourage and sustain
growth. The converse of this is the fact that a central bank
GERALD R. FORD LIBRARY
-3-
that does not pay adequate attention to creating and maintaining
the climate for growth -- or one that does not have enough inde-
pendence to do so -- is undercutting the cause of growth, or
permitting it to be undercut by others. One of the basic conclu-
sions from a survey of the actions of central banks in developing
countries suggests that the nations that have prospered most are
also the ones that have the best long-term records in maintaining
internal stability and external balance. It is also significant --
and encouraging -- that in the last few years many, perhaps most,
of the countries that embarked in the 1950's on development pro-
grams that were unrealistic in view of their resources and infla-
tionary in their effects, have shifted to more realistic programs.
Most of them have found the road back to economic realism dis-
couragingly long, and some of them are far from reaching the end
of it yet. Consequently, whatever additional responsibilities a
central bank may acquire, its basic commitment to the maintenance
of economic stability -- both domestically and externally --
should not be downgraded.
In assessing the role that central banks in developing
countries have played in the 1960's, several questions should be
raised:
- Have central banks in developing countries --
while not ignoring their traditional tasks --
taken innovative steps to encourage economic
development?
LIBRARY GERALD R. FORD
-4-
- Have these central banks been able to alter
the flow of credit in favor of development
needs?
- Have they assisted in creating institutions
specifically designed to provide development
finance?
- Have central banks in developing countries
succeeded in efforts to encourage the mobil-
ization of savings by private financial
institutions?
- Have these banks used their proximity to the
centers of political power to advise their
governments as to the importance of monetary
and fiscal stability in creating a climate
conducive to investment and economic growth?
- Finally, what is the record of success -- and
of disappointment -- harvested by these central
banks in the struggle for economic development?
To answer these questions, a comprehensive survey was made
of the special efforts made by central banks in developing countries
to orient economic growth toward the goals of economic development.
For the purpose of this discussion, these efforts can be grouped
under four headings: the mobilization of savings, the fostering of
development finance institutions, the allocation of credit for devel-
opment, and advice on the development process.
Before proceeding further, I must explain the numerous
references to particular countries in the comments below. In every
instance, my purpose is to illustrate the general range and pattern
of measures adopted by central banks to help promote economic devel-
opment, and no country is singled out as a target for criticism or
invidious comparison. The conditions mentioned are often widespread.
However, without specific illustrations, we would be left with a
collection of miscellaneous generalizations.
GERALD FORD LIBRARY
-5-
Mobilization of Domestic Savings
While external capital, from either public or private
sources, can speed the development effort, the developing country
must depend primarily on its own resources. This being the case,
the mobilization of domestic savings is of fundamental importance.
To the extent domestic savings are made available for development
purposes, the prospects for noninflationary financing or develop-
ment are enhanced. Thus, the central bank can make a significant
contribution through policies which encourage savings to remain at
home and to flow to financial institutions and away from money
lenders, real estate, and other speculative activity. Moreover,
savers must be assured as to the liquidity of the instruments
issued by financial institutions in return for their funds -- as
well as about the soundness of the institutions themselves.
Once the question of safety is answered, savings are
attracted by the promise of reasonable earnings. Thus, the
interest rate on savings deposits must be competitive with alter-
native uses of funds. However, in the highly inflationary
environment of many developing countries, savings will not flow
to financial institutions -- that could make them available for
productive investment -- unless interest rates are high enough to
yield realistic earnings in the face of inflation. This means
that the rate of interest should be "positive" in the sense that
it exceeds the rate of inflation.
FORD is LIBRARY GERALD
-6-
Where deposit rates are negative in this sense, the flow
of savings into financial institutions is restricted to a few special
cases -- such as deposits by individuals with no other means of hold-
ing their funds, by those who use savings accounts for current trans-
actions, and by those who deposit funds for special purposes, such as
gaining access to bank credit. In the meantime, other institutions
offer higher rates, such as finance companies, credit cooperatives,
mortgage banks and the mortgage departments of commercial banks. In
this respect, one should note that the Jamaican authorities have taken
a positive step by freeing interest rates on time deposits of six months
or over.
In Africa and the Middle East central banks are generally
strictly limited -- in terms both of time and amounts -- in the
extent to which they can lend to governments. However, by speci-
fying certain asset ratios, central banks in this part of the
world have channeled a share of private savings to governments --
so that they could be used for the purpose of development. Included
in the composition of almost all such ratios were short-term govern-
ment obligations. Given the fact that in Africa private demand for
credit is often quite slack, commercial banks might hold idle funds --
or invest abroad -- if they did not hold Treasury bills to satisfy
such liquidity ratios.
While this has been a successful means of mobilizing
FORD is LIBRARY GERALD
savings that could be made available for development purposes, it
would not be desirable under all circumstances. If the liquidity
ratio becomes an instrument for ensuring a market for the obliga-
tions of governments, it can lose some of its usefulness as a
-7-
monetary tool. Further, in an economy in which credit is tight,
such mobilization of funds would squeeze the private sector from
which the bulk of investment generally comes.
The Bank of Israel has encouraged the development of a
wide variety of instruments attractive to savers. These measures
include deposits denominated in dollars, deposits tied to the
price index for value maintenance, and, recently, full removal of
ceilings on interest rates. The result was an unusually high
private savings rate. In Brazil and Chile, the value of financial
instruments has frequently been linked to a price index to over-
come the disabilities of low interest rates.
In Asia, several central banks in recent years have
played a major role in the mobilization of savings for development
through dramatic reform of archaic interest rate structures. The
best example is that of Korea, where in 1965 interest rates on
deposits were increased sharply -- from 15 to 26 per cent in the
case of one-year bank deposits. Commercial bank loan rates were
also raised substantially. This reform, supervised by the Bank of
Korea, was followed by an increase in the national savings rate
from 7 per cent in 1964 to 16 per cent in 1969, and inflationary
pressures were simultaneously reduced. In this period also, Korea
emerged as a country with an exceptionally high rate of economic
growth, averaging 11 per cent per year from 1964 to 1969.
The lesson from this body of experience suggests that
central banks might look to raising the real return that the banking
GERALD FORD LIBRARY
-8-
system is able to provide to the orginary saver -- if more local
resources are to be mobilized to finance the investment required
for economic development.
One of the major obstacles to channeling potential savings
to investment in developing countries is the lack of liquidity of
financial assets. A number of countries have adopted measures to
enable an investor to liquidate his holdings -- without incurring
prohibitive capital losses. Mexico provides an outstanding example
of action intended to assure the liquidity of savings. This involved
a commitment by issuing institutions to repurchase their financial
instruments at par at any time regardless of their maturity.
The Bank of Mexico, the Nacional Financiera, and, ultimately, the
government, stood behind the financial institutions bidding for
savings. In effect, this meant guaranteeing that these institu-
tions would always be able to meet their obligations to savers.
Of course, the development of almost every type of
capital market institution enhances the liquidity of financial
instruments. Countries such as the Philippines, India, and
Malaysia have rather advanced capital markets, where funds can be
marshalled and channeled for development purposes. The Central
Bank of the Philippines has played a major role in developing an
open primary and secondary market in Treasury bills. Such action,
of course, requires that governments be willing to pay the higher
interest costs associated with a free Treasury bill market.
FORD is GERALD LIBRARY
-9-
The creation of efficient stock exchanges (where appro-
priate) would increase the liquidity of financial investments.
However, where such exchanges do exist in some developing countries,
inadequate public disclosure of financial data on listed firms is
a principal holdback to the expansion of securities markets. In
the case of the combined stock exchange of Malaysia and Singapore,
extensive public disclosure has been a principal factor in making
the exchange outstandingly successful. Other developing countries,
and their central banks, pondering how to increase the availability
of funds for investment, might well study this example. Other
promising areas would appear to be development of a Treasury bill
market and markets for commercial paper.
In addition to action to increase the attractiveness of
savings and to ensure adequate liquidity, central banks may encour-
age saving in at least two other ways -- both aimed at reassuring
savers as to the security of their deposits. One is by means of
deposit insurance. The other is examination of banks with the
objective of enforcing standards of sound banking.
Central Bank Assistance to Development Institutions
In some places -- the Latin American countries provide
a rather widespread example -- central banks were founded to pro-
vide commercial banking, and some of them have even been given
specific development banking assignments. Over time, however,
there has been a separation of these functions, since experience
indicated that their location in one institution tended to produce
&
FORD
GERALD
-10-
conflicts of interest and to interfere with the effective performance
of central banking functions. But this separation does not mean
that central banks have played no role in the growth of development
banking institutions. Central banks -- with varying degrees of
appropriateness and effectiveness -- have provided capital for devel-
opment lending institutions, such as agricultural and industrial
development banks. They have extended credit to them, purchased
their securities, or helped to create a market for their securities.
In Colombia, Bolivia, Ecuador, Guatemala, Jamaica, Mexico,
India, Afghanistan -- and quite generally in Africa -- central banks
have subscribed to some part, usually a minor part, of the equity
capital of developmental institutions. However, on the whole, this
technique has had only limited use. This is as it should be, because
heavy dependence upon central banks for provision of equity capital
would have been inflationary. In general, it is best that develop-
ment institutions be financed by noncentral bank sources, including
governments, intergovernmental agencies, and private investors,
whose funds represent savings.
Extension of credit to development institutions by central
banks is subject to the same difficulty. To the extent that the
loans are renewed, and are never repaid, they assume the character-
istics of a capital contribution that does not come out of savings.
Much the same can be said of the fairly widespread practice, partic-
ularly in Latin America, of direct purchase by central banks of the
obligations issued by development finance institutions.
BERALD R. FORD LIBRARY
-11-
In view of this inflationary potential, some central banks
have turned to less direct -- and less inflationary -- methods of
helping development finance institutions raise their capital. This
has been done in El Salvador, Guatemala, Dominican Republic,
Argentina, and Honduras. In all except one of these countries, the
central bank has attempted to create a market for the securities of
development finance institutions of various kinds. They have
attempted to do so, in more or less noninflationary ways -- including
the use of profits from the ordinary operations of the central bank.
At various times over several decades, banks in Argentina, Guatemala,
and Honduras have tried to increase the liquidity of investments
through the use of repurchase commitments.
In general, it seems that central banks in developing
countries have not exhausted their financial expertise in trying
to make a contribution in this area. As an example, it appears
that efforts to make markets for the securities of development insti-
tutions (which have been explored only tentatively) might be reopened,
with greater determination and with more stress on ways to keep
securities lodged in private hands. It might also be asked whether
the guarantee instrument could be put to effective use here, without
opening a line to central bank resources that would channel infla-
tionary funds into the economy.
FORD
GERALD
LIBRARY
-12-
Allocation of Credit for Development Purposes
In a substantial number of developing countries, the
commercial banks are foreign-owned, and most of them traditionally
have concentrated on financing foreign trade and domestic commerce.
In the face of this situation, a number of central banks have
attempted to influence the flow of commercial bank credit away
from such traditional uses and toward capital development projects.
The central banks of Latin America, Asia, and Africa have all made
extensive, and varied, efforts in this direction. In fact, it is
probably in this area that the greatest amount of central banking
expertise and effort has been expended with the objective of pro-
moting economic development.
With the allocation of credit in mind, differential
discount rates have been used in a large number of countries. In
Latin America, these include Argentina, Bolivia, Brazil, Colombia,
Costa Rica, the Dominican Republic, Ecuador, Peru, and Venezuela.
In the Middle East and Asia, Israel, India, Indonesia, Korea,
Pakistan, the Philippines, the Republic of China, and Thailand
have also employed differential discount rates. Ordinarily, the
central bank charges a preferential rate on discounts or advances
against favored types of paper to induce the commercial banks to
increase their lending or to reduce the cost of funds to those
activities in which this paper originates.
GERALD R. FORD 1
-13-
Experience suggests that the use of differential rates
has not been universally successful. The potential for effecting
a change in the pattern of lending by the use of multiple discount
rates would increase as recourse to central bank credit by the
commercial banks became more extensive. But it could seriously
frustrate efforts to pursue a restrictive credit policy at times
when such a policy may be needed on overall economic grounds.
Several central banks have sought to allocate credit by
the establishment of portfolio ceilings. This technique has been
used in Costa Rica continuously since 1948, and to some extent in
Colombia. It has also been used in the Philippines, Nigeria, and
the Congo (Kinshasa). The Costa Rican regulations provide an
overall ceiling for each bank with separate subceilings on loans
for major economic sectors and on some subsectors. The system may
have helped to change the pattern of credit flows, although the
data are subject to questions as to the accurate classification of
some of the commercial bank loans. The Colombian system, which was
in use briefly in the early 1960's, may also have had some effect
on the pattern of credit allocation. But the fact that it was
discontinued suggests that the Colombian authorities were dissatis-
fied with the results, or that the difficulties of securing compliance
were too great in view of the results achieved.
Central banks in developing countries have made extensive
use of reserve requirements as a tool of monetary management.
A
number of these institutions have linked differential reserve
LISSARY GERALD R. FORD
requirements to the composition of commercial bank portfolios to
-14-
influence the allocation of credit. This technique has been
employed in an elaborate way in Mexico. Commercial banks are
allowed to maintain a lower cash reserve ratio, provided that
prescribed percentages of their portfolio consist of specified
types of loans or investments. The prescribed percentages may be
changed as the central bank shifts emphasis from one type of loan
to another. Portfolio ratios associated with reserve requirements
have also been used to some extent in Argentina, Brazil, Chile,
Colombia, the Dominican Republic, and Peru. In Colombia, the
system was combined with a secondary reserve requirement under
which the banks were to hold specified bonds of the State Agricul-
tural Industrial and Mining Bank.
The Mexican authorities appear to be satisfied with the
results obtained under their system, which has been in use for
over 20 years. They believe that the system was instrumental in
inducing commercial banks to take an interest in types of produc-
tive loans which they had not made because of inertia or force of
habit. Furthermore, there seems to be a feeling that, since banks
have become accustomed to making such loans and have them to be
remunerative, they may well continue such lending in the absence
of the regulation.
The import deposit requirement technique (primarily
intended to deal with balance of payments difficulties) has also
been employed by some central banks to influence the allocation
of commercial bank credit. Generally, the deposits are required
&
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GERALD
LIBRARY
-15-
to be held by the central bank. Alternatively, the commercial
banks are required to hold with the central bank reserves equal
to the deposits. Imports for development purposes and other essen-
tial needs may be favored with a low requirement, and a progressively
higher requirement may be applied as the essentiality of the imports
diminishes. The import deposit requirement technique (with differ-
ential rates) has been used in Argentina, Brazil, Chile, Colombia,
Ecuador, Indonesia, Pakistan, Paraguay, the Philippines, Uruguay,
and Vietnam.
As a technique to influence the allocation of credit
under a policy of promoting economic development, the import
deposit scheme may leave domestic producers of nonessential and
luxury goods with ready access to credit. It may also provide
domestic producers of all goods subject to the import deposit
requirement with a degree of protection against imports that may
not be needed in the long run.
Virtually all central banks in the African and Middle
East regions have taken steps to influence the flow of bank loans
to priority or favored activities within the private sector. Tech-
niques used include credit guidelines, quantitative rediscount
ceilings, direct approval of bank loans, and selective liquidity
ratios. Countries using one or several of these techniques include
Nigeria, the Ivory Coast, Tunisia, Congo (Kinshasa), and Israel.
In general, the practice in the region is replete with direct and
quantitative controls.
&
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-16-
The results of these efforts appear to be mixed.
However, at least in the Congo (Kinshasa), direct and quantitative
central bank controls seem to have been successful in increasing
significantly the amount of credit extended to agriculture while
reducing the amount intended to finance imports.
The Bank of Israel has probably gone as far as any
institution in encouraging favorable terms for development lending.
Controlled credit is extended at about 9 per cent, whereas ordinary
bank credit costs about 17 per cent. In recent years, credit
controlled by the Bank of Israel has represented about 30 per cent
of all bank credit outstanding to the private sector. These
controlled credits include rediscounts, specified loans which
give the bank an exemption from liquidity requirements, and credits
granted on the basis of deposits received under approved savings
schemes.
In a number of instances, central banks have given
specific -- and in some cases quite detailed -- guidance with
respect to the desired composition of the commercial banks' loan
portfolios. The Central Bank of the Philippines has followed
such a practice since April 1957. All bank loans are classified
into four priority categories, with those in the more essential
loan categories being given preference in central bank rediscount-
ing operations. In addition, maximum ceilings are imposed on
loans in the two lowest, less essential categories.
&
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-17-
The conclusion reached on the basis of the foregoing
discussion seems clear: a few attempts to allocate credit for
development purposes seem to have been particularly successful.
But, on the whole, the results have been rather mixed.
The Central Bank as Development Adviser
Serving as adviser to governments is one of the oldest
and most widespread roles of central banking. In the context of
economic development, this role takes on special significance.
Advice is particularly needed in four areas: (1) policies for
domestic stability, with particular emphasis on appropriate fiscal
policies; (2) exchange rate policy, with the objective of main-
taining external balance; (3) the formulation of development plans
that are feasible in view of the country's economic and financial
resources; and (4) the broad range of policies affecting the cli-
mate for investment -- both domestic and foreign.
How a central bank performs as a development adviser
will turn on a variety of factors specific to particular countries.
However, a survey of central bank experiences in this regard
clearly suggests that the relative freedom from involvement in day-
to-day debates on economic policy has been crucial. In general,
where the central bank has been allowed to maintain a reasonable
degree of detachment, its advice has tended to be objective -- and
respected -- even if not always received with enthusiasm. As a
rule, the central bank is likely to be a well-equipped institution --
LIBRARY GERALD R. FORD
-18-
with respect to staff and financial resources -- to undertake the
research and analysis on which a well conceived development plan
must rest.
The opportunities open to a central bank to advise the
government will also depend on the type of overall organization
created to formulate and execute the plan. In countries with
strong planning commissions or development ministries, the scope
permitted to the central bank may not be very wide. But, on the
whole, the evidence suggests that in many countries the central
bank is a senior partner in the development enterprise.
Moreover, the particular role the central bank can play
will be influenced by the type of development plan adopted by the
government. Where, as in India, there is emphasis upon direct
channeling of economic resources from both the private and the
public sectors for the purpose of development, the central bank's
advice is critical in every respect. Where, as in Korea, the
development plan consists mainly of goals for the private sector
to achieve, operating under a relatively free market system, the
central bank's specific role may be focusing essentially on the
adoption of measures to encourage private investment.
In conclusion, the evidence suggests that central banks
have generally been a good source of advice to their governments
on problems of economic development. However, in some countries --
especially where the overall planning machinery is quite elaborate --
the central bank may share the advisory role with other institutions.
&
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-19-
The method of sharing varies greatly from country to country, and
it is hard to make an assessment of the overall results.
Central Banking and Economic Development in the 1970's
Having surveyed the role of central banks in developing
countries during recent years, we should now try to look ahead to
see what course they may be expected to follow in the current
decade. It is my impression that expectations about the avail-
ability of foreign assistance are much less optimistic today than
they were in 1960 when the General Assembly of the United Nations
proclaimed a "Decade of Development." The Assembly stated that:
"
the flow of international assistance
and capital should be increased substantially
so as to reach
approximately 1 per cent
of the combined national incomes of the eco-
nomically advanced countries. "
This was a target for the total flow of resources,
private and official. It was endorsed by the industrial nations
in 1964, through the Development Assistance Committee (DAC) of the
Organization for Economic Cooperation and Development. In the
five years before 1964, the target was exceeded. But in the con-
cluding five years of the decade, net disbursements of official
development aid by the DAC countries rose only slightly, in dollar
terms, from just over $6 billion in 1964 to $6.7 billion in 1969.
In terms of percentage of gross national product, this was a
decline -- from approximately 0.5 per cent in 1964 to just over
0.3 per cent in 1969.
R.
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In contrast, the flow of private resources rose substan-
tially. Net disbursements of private investors, together with
private export credits, nearly doubled in dollar terms -- rising
from $3.2 billion in 1964 to slightly more than $6 billion in 1969.
This was a rise, in terms of percentage of the aggregate gross
national product of DAC countries, from 0.26 per cent in 1964 to
about 0.33 per cent in 1969. This increase in the flow of private
investment from the DAC nations was almost large enough to offset
the shortfall in official transfers. Therefore, total financial
resources moving to developing countries, as a percentage of gross
national product, declined only slightly. Moreover, the rise in
private flows accounted for two-thirds of the absolute increase --
from $9.14 billion in 1964 to $13.30 billion in 1969.
The reasons for the shortfall in official development
assistance can be traced to a number of factors. Widespread
inflationary pressures created by excess demand in industrialized
countries -- while public resistance to higher taxes was becoming
stronger -- seriously limited the amount of budget resources that
could be made available. In addition, some of the principal donor
countries were also plagued by balance of payments deficits, and
reductions in foreign assistance were a visible means of registering
improvements.
Expressed differently, there has emerged a worldwide
shortage of capital, arising from a strong drive for economic and
social advancement. The pressure for the use of capital to
GERALD R. FORD
-21-
finance these improvements has become as intense in the industrialized
countries as it is in the developing nations. This shortage of
funds cannot be expected to disappear at any time soon, and it is
forcing nearly all countries to reexamine priorities in the harsh
light of political realities. In this light, home needs increas-
ingly are registering the first -- and strongest -- claims on
resources.
Against this background, the Pearson Commission, sponsored
by the World Bank, recommended that the DAC governments nearly
double their official assistance during the 1970's. Many countries
have already pledged to do SO. If the goal is achieved, it would
raise official flows of development finance to the developing
countries to 0.7 per cent of their GNP, and the increase would
take place gradually during the decade ahead. Consequently,
countries expecting a flow of development resources in the 1970's
that exceeds the amounts obtained in the 1960's may have to do more
to attract private capital.
If developing countries do concentrate more directly on
efforts to attract private investment, their central banks will
have an enlarged opportunity to contribute to the development
process. The more influential they are with their governments,
the more successful they will be in supporting this effort. The
task of attracting scarce private capital to the developing
countries requires an investment climate that both domestic and
foreign investors find compatible. Here it must be emphasized
FORD & GERALD LIBRARY
-22-
that it is necessary to create conditions conducive to domestic
investors as well as to owners of foreign capital. Undoubtedly,
developing countries will want their own citizens to own a sub-
stantial share of privately financed enterprises. This means that
domestic investors will have to provide a sizable proportion of
the required resources.
Attracting scarce -- and expensive -- private capital
to developing countries also requires that the firms and indus-
tries financed must be able to survive under the pressure of
international competition. This means they must not be overly
sheltered from the winds of competition behind excessively high
tariff or other protective walls. To the extent that the indus-
tries of developing countries are able to export products that
are competitive in price and quality, they will have a better
chance of penetrating foreign markets.
As stressed earlier, efforts to attract private capital
also call for the careful building of capital markets. This
includes increasing the flow of savings to financial institutions --
as well as building institutions that provide liquidity to investment.
All of these -- the economic stability that provides a
good climate for investment, policies that avoid oversheltering
of industries and which make them fit to compete and earn in
foreign trade, the building of capital markets -- all are the
results of policies which central banks are particularly capable
of influencing through their own actions and through their advice
to governments.
FORD & GERALI LIBRARY
-23-
Concluding Observations
The answers to the series of questions posed at the
outset have been given at several points in the discussion.
However, the conclusions can be summarized briefly for greater
emphasis:
Central banks in developing countries, while experiment-
ing with innovations to promote economic development, have not
neglected the main functions traditionally associated with central
banking. In particular, they have tried to maintain domestic
price stability and equilibrium in the balance of payments. While
many of them have been fairly successful in pursuing this objec-
tive, a number of them have also found the results of their efforts
disappointing.
Central banks have adopted a variety of innovative steps
to encourage economic development. The mobilization of domestic
savings has been of primary concern. Where measures were taken
(such as lifting low interest rate ceilings) to assure that savers
received a realistic rate of return in the face of sometimes
serious inflation, the results were generally satisfactory.
Numerous arrangements to enhance the liquidity of financial invest-
ment have been fostered -- including the organization of stock
exchanges and the development of other capital market institutions.
In some countries, central banks were also authorized to
conduct a commercial banking business, and some of them were given
specific development assignments as well. However, most of these
FORD & GERALD LIBRARY
-24-
institutions have found such added functions to be incompatible
with their basic missions.
Instead, a number of central banks have provided strong
support to the formation of separate institutions to provide
development finance. Some of them supplied capital for agricul-
tural and industrial development banks; others extended credit to
them, purchased their securities, or helped to create a market
for their obligations. In general, it appears that most countries
have recognized the inflationary potential of heavy reliance on
central bank funds to finance development institutions, but in a
few instances this apparently was not the case.
Perhaps the greatest amount of innovative effort by
central banks has been concentrated on measures to influence the
flow of commerical bank credit away from traditional uses (such
as the finance of foreign trade and domestic commerce) and toward
development projects. In pursuit of this objective, a wide range
of instruments has been brought to bear. The most popular ones
have included preferential discount rates, differential reserve
requirements, guidelines on the composition of loan portfolios,
and ceilings on specific kinds of credit. A few attempts to allo-
cate credit seem to have been particularly successful -- but on
the whole results have been rather mixed.
Central banks have generally been a good source of advice
to their governments on problems of economic development. However,
R.
FORD
GERALD
LIBRARY
-25-
in some countries, the advisory role has been shared with other
institutions. Since the method of sharing varies greatly from
country to country, it is difficult to make an assessment of the
overall results.
Looking ahead to the 1970's, it appears that the devel-
oping countries can expect a considerable expansion in the volume
of official resources received from the industrial nations.
However, it also seems evident that they will have to concentrate
on attracting a substantial amount of private capital. Thus, they
will have to create an investment climate that both domestic and
foreign investors find compatible. If they adopt this course,
central banks will have an excellent opportunity to enlarge their
contribution to the development process.
GERALD R. FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date October 27, 1970.
To
Governor Brimmer
Subject:
From
Frederick R. Dahl
Attached are some notes on the prospective London visit
which you may wish to look over before our discussion this afternoon.
I shall bring with me the list of institutions and ideas of people
who might be contacted.
Attachments.
FORD & 938670 LIBRARY
International merchant banking in London
Background. The traditional London merchant bank combines
features of commercial banking and investment banking, with particular
emphasis on the latter. On the commercial banking side, merchant banks
deposit facilities and finance transactions on an acceptance basis.
On the investment banking side, they underwrite and deal in securities,
furnish venture capital, provide investment advice, and act as middlemen
in mergers and take-overs. In their commercial banking activities,
they differ from the clearing banks in that they do not accept deposits
generally from the public and do not provide the full range of credit
and other banking services. They are not the only issuers, dealers
and underwriters in the London securities markets; some other institu-
tions specialize even more than merchant banks in these activities and
are important participants in those markets. The recognized London
merchant banks are the 16 institutions which are members of the Accepting
Houses Committee, but a number of other smaller merchant banks exist
as well and, as indicated, some other institutions perform similar
functions.
London merchant banks emphasize their relatively small size, the
flexibility of their operations, and their consequent ability to provide
specialized and often tailor-made financial services to their customers.
Traditionally, they have been oriented to the London market; but in
recent years they have expanded their operations in international credit
and capital markets--notably the Eurocurrency markets, the Eurobond
market and offshore mutual funds.
GERALD FORD LIBRARY
-2-
The development of truly international markets for credit
and capital, with their centers in London, has bred a number of new
institutions. Multinational banks have been established by a consortia
of banks drawn from a number of countries. The impetus for their
establishment has been a desire to create larger institutions, backed
by substantial national banks, capable of operating on a multinational
basis in the Eurocurrency and Eurobond markets; in addition, these
new banks would purportedly provide an institutional link between
those short-term money and credit markets and the longer-term bond
and capital markets. A number of them have announced their intentions
to specialize in the medium-term lending area, with an emphasis on
the two-to-seven year maturity range, and to provide financing in
this area through short-term note issues and placements. Some varia-
tion in the coloration of these institutions exists, with some operating
more as commercial banks with emphasis on term lending and others
operating more as investment banks with emphasis on securities under-
writing and dealing. A half-dozen or so of these institutions have
been established with substantial American bank participation in partner-
ship with European banks and merchant banks; others are in the process
of being established; and still others, it may be presumed, are on
the drawing boards.
This larger group of institutions--the traditional merchant
banks and the newer specialized multinational institutions--make up
the international merchant banking community in London. (See attached
list.)
FORD is LIBRARY 938870
-3-
Object of visit. A short visit of the type contemplated
cannot hope to cover all the institutions in the international merchant
banking community nor to cover all the aspects of their activities.
One can hope to obtain a better general view of their activities,
a better feel of their role in the ongoing development of international
credit and capital markets, and the nature and consequences of the
involvement of American banks in this area. At the very least, this
introductory survey should provide direction to our continuing
observation, examination, and analysis of market and institutional
developments in this area as they relate to our interests in the
fields of international finance and supervision of the international
activities of American banks.
I would suggest that this time around, visits be made to
a few of the traditional merchant banks and to a few of the newer
institutions formed with American bank participation. This should
enable a sampling of broad spectrum of opinion and activities.
In the attached list, the institutions which might be visited for
this purpose are indicated, together with the persons in those insti-
tutions who might be the best to contact.
LIBRARY GERALD ? FORD
-4-
Questions for discussion. The following questions are
unpolished and vary in degree of generality, ranging from the technical
to the very broad. Some are more appropriate to the traditional merchant
bank; others are more suitable to the newer multinational institutions.
The questions are grouped by the areas of activity in which we have
particular interest.
Securities activities and markets
1. What is the relative importance of securities operations--
underwriting, dealing, and distributions of bonds, debentures,
and equities--in.your over-all activities?
2. In underwriting new international securities issues, do you
act as syndicate manager or co-manager? What is the nature
of your commitments in one underwriting operation? What
considerations determine the size of your commitment as a
member of a syndicate?
3. In arranging new issues, do the borrowers approach you
directly for investment advice and assistance, or are they
referred to you by their bankers and by your correspondents?
4. With whom do you place new issues? Institutional investors?
Correspondent banks in Europe? Individuals? Are your rela-
tionships with such sources of investment funds firm enough
that you have a pretty good idea of your ability to place
a new issue?
FORD is GERALD LIBRARY
-5-
5. On a securities offering, are you likely to hold your
portion for any period of time before it is passed on
for secondary distribution? Are you likely to hold onto
a portion in your own name after the breakup of a syndicate
pending delivery under firm or reasonably firm commitments
from your own customers?
6. Comment on recent trends and developments in Eurosecurities
markets as they affect your operations in those markets,
and your outlook on your future operations.
a. After peaking in 1968, the volume of international
bond issues has declined markedly. Recently there
have been some indications of a pickup in new issues.
Is there a significant backlog of demand waiting for
more favorable market conditions?
b. The volume of straight debt issues has held up pretty
well with most of the decline in convertible debentures.
After recent experience, is there a future for "convertibles"?
c. What is your opinion of floating rates on long-term issues
(e.g., in the $125 million Ente Nazionale and the $75 mil-
lion PEPSICO issues)?
d. Are other changes in issuing and distribution techniques
in process?
LIBRARY GERALD FORD
-6-
7. As opposed to debt issues of varying kinds, to what extent
do you participate in equity issues? What is your view
on the possibilities of the development of an international
equity market comparable to the Eurobond market?
8. Do you deal for your own account in international bonds
and equities? Do you help maintain a secondary market in
international issues?
Venture capital financing
1. Do you provide venture capital financing in the sense of
taking equity positions (in connection with debt financing
or otherwise) in new companies or companies insufficiently
established to put forward a public offering?
2. If so, over what period of time would you normally expect to
provide such financing and to maintain an equity position?
What equity position might you contemplate?
3. Would these be companies operating internationally or
companies operating in national markets?
4. What sources of funds would you rely on to provide such
financing?
5. Is this type of financing likely to grow in importance
among the activities of international merchant banks?
LIBRATE GERAL FORD
-7-
Medium-term lending
1. How does the medium-term lending of international merchant
banks differ from the term lending of the international
commercial banks? Are the sources and types of customers
different? Or the projects or activities to be financed?
The source of funds? The risks undertaken?
2. Assuming satisfactory credit risks, what would be the
maximum amount you would lend to a single borrower? How
would this relate to your capital position?
3. In large medium-term loans to international companies or
governments, do you organize or participate in lending
syndicates? How are these arranged? In what respects do
they differ from syndicates underwriting new issues?
4. In lending at medium-term, do you attempt to match maturities
of the funds you obtain with the maturities of the loans?
How do you match currency risks?
5. Are there any limits (self-imposed or otherwise) on the
amount of funds you may borrow or otherwise obtain to finance
your activities--say, in relation to your capital position?
General
1. To the traditional merchant banks:
a. A number of new multinational banking institutions have
been formed in recent years. Has the emergence of these
institutions caused you to alter the scope of your
activities or to alter the services you emphasize to
LIBRARY GERALD FORD
customers?
-7-
Medium-term lending
1. How does the medium-term lending of international merchant
banks differ from the term lending of the international
commercial banks? Are the sources and types of customers
different? Or the projects or activities to be financed?
The source of funds? The risks undertaken?
2. Assuming satisfactory credit risks, what would be the
maximum amount you would lend to a single borrower? How
would this relate to your capital position?
3. In large medium-term loans to international companies or
governments, do you organize or participate in lending
syndicates? How are these arranged? In what respects do
they differ from syndicates underwriting new issues?
4. In lending at medium-term, do you attempt to match maturities
of the funds you obtain with the maturities of the loans?
How do you match currency risks?
5. Are there any limits (self-imposed or otherwise) on the
amount of funds you may borrow or otherwise obtain to finance
your activities--say, in relation to your capital position?
General
1. To the traditional merchant banks:
a. A number of new multinational banking institutions have
been formed in recent years. Has the emergence of these
institutions caused you to alter the scope of your
activities or to alter the services you emphasize too
FORD
customers?
GERALD
LIBRARA
-8-
b. What is your relationship or association with these
institutions?
c. A number of them have substantial American bank participa-
tion--either one or more. What is your view on American
commercial banks becoming involved in this way in inter-
national investment and merchant banking? Are there
any problems for them which you might foresee? In a
few of these institutions, the American participants
(while substantial and respectable banks) are not them-
selves substantially involved in international banking
and do not have a great deal of expertise: in the circum-
stances, can the American bank participation contribute
much except for capital funds to the effectiveness of
these organizations? Are there pitfalls for such banks?
2. To the newer institutions:
a. What role in international financial markets do you envision
for yourself (as for this class of institution collectively)
as opposed to the traditional institutions including
international banks, merchant banks, and investment houses?
b. What is the relationship between the institution and its
shareholding banks? As source of customers? As partners
in financing undertakings? As competitors?
c. What advantages accrue from multinational ownership? What
problems are encountered in trying to operate an institu-
tion with multinational ownership of this sort?
FORD & 076870 LIBRARY
-9-
d. (For those controlled by American banks). What impediments
or handicaps, if any, are posed by the Board's regulatory
requirements on foreign subsidiaries of American banking
institutions?
Attachment.
FORD is 076839 LIBRARY
Merchant Banks in London
Traditional merchant banks
Name
Known officers
Other contacts
Brown Shipley & Co.
Hambros Bank *
Wm. Brandt's Sons
Charterhouse, Japhet & Thomasson *
Hilton Clarke (BE)
Antony Gibbs & Sons
W.G. Underwood
Baring Brothers & Co.
Samuel Montagu & Co.
Morgan Grenfell & Co.
John Stevens (BE)
P. Coldstream
Hill, Samuel & Co.
Kennth Keith
Lazard Brothers & Co.
J. Rootham (BE)
M. Kelton
Kleinwort Benson
Guiness Mahon & Co.
Arbuthnot Latham & Co. *
Thompson-McCausland (BE)
N.M. Rothschild & Sons*
S.G. Warburg & Co.
Eric Roll
J.Henry Shroder Wagg & Co.
Gordon Richardson
J.R. H.Cooper
G. Bell
Keyser Ullman *
Ansbacher & Sons *
GERALD FORD LIBRARY
Multinational Institutions with U.S. Participants
Western American Bank (Europe) Ltd.
J.E. Baird
John Pryor
National Bank of Detroit
Wells Fargo Bank
Security Pacific National Bank
Hambros
International Commercial Bank
D. Robson
Irving Trust
First National Bank of Chicago
Commerzbank
Hongkong & Shanghai Banking Corporation
Westminster Bank
Atlantic International Bank
National Shawmut Bank
Manufacturers National Bank of Detroit
First Pennsylvania Bank & Trust Co.
United California Bank
Charterhouse Japhet & Thomasson
Banco di Napoli
Neuflize de Schlumberger
F. Van Lanschot
Rothschild Intercontinental Bank
Stonor
National City Bank of Cleveland
First National City Bank of Houston
Seattle-First National Bank
N.M. Rothschild
Banque Rothschild
Banque Lambert
Pierson Heldring & Pierson
Banque Privee
Manufacturers Hanover Ltd.
M. Zombanakis
Manufacturers Hanover
N.M. Rothschild
Riunione Adriatica
Bankers Stx Trust International Ltd.
C. Bridge
Bankers Trust Co.
LIBRARY GERALD R.FORD
Miltinational institutions with U.S. Participants (yet to be formed)
London International Bank
Northern Trust
Chemical Bank
Baring Brothers
Credit Suisse
United International Bank
Crocker Citizens National Bank
7 others
Unnamed
Mercantile Trust
Indiana National Bank
Maryland National Bank
First National Bank of Atlanta
First Western Bank
Keyser Ullmann
First Chicago Ltd.
First National Bank of Chicago
Crion Ltd.
Chase Manhattan Bank
Royal Bank Of Canada
National Westminster Bank
GERALE R. FORD LIBRABA
Dr. Burns:
8
Governor Brimmer dropped this by -- it
is an outline of the issues he will be raising
on his trip to London to talk about merchant
banking.
cm
LIBRARY GERALD ? FORD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date
To
Chairman Burns
Subject: VFCR Effect on Export Financing--
From
Governor Brimmer aMB
Proposed Comment to Secretary
Stans on FAC Discussion.
Following the last meeting of the Federal Advisory Council,
you said it might be useful for you to send the Secretary of Commerce
a letter on the FAC discussion of the VFCR and export financing.
I submit the attached proposed letter for your consideration.
Attachment.
cc: R. Solomon
S. Pizer
GERALD FORD
C. 11/13/70
Chairman Burns
VFCR Effect on Export Financing--
Proposed Comment to Secretary
Governor Brimmer
Stans on FAC Discussion.
Following the last meeting of the Federal Advisory Council,
you said it might be useful for you to send the Secretary of Commerce
a letter on the FAC discussion of the VFCR and export financing.
I submit the attached proposed letter for your consideration.
Attachment.
cc: R. Solomon
S. Pizer
BN:bbs
O.K.afk
FORD & BERALD LIBRARY
FILE COPY
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
DATE 11/13/70 of
TO
Chairman Burns
FROM ANDREW F. BRIMMER
Attached is a draft of my
reply to the letter from Bill Lawson
at the Bank of Canada. I would
appreciate any comments you might
have.
The Joint U.S. -Canadian
Cabinet Meeting on economic policy
will take place toward the end of
next week. Consequently, I would
like to send my letter to Bill as
early as possible -- hopefully
today before I go off to Europe.
The staff in the Inter-
national Finance Division worked on
the letter, and Bob Solomon has also
seen a copy of the draft.
Attachment
AHB
FORD & GERALD LIBRARY
DRAFT
SP:AFB:1as
11/13/70
Dear Bill:
In the light of the comments in your letter of October 16,
I have been reviewing my remarks in Montreal of September 28. As I
indicated in the speech, my principal aim at the time was to speak
of long-run tendencies in our respective balance of payments positions,
to try to look ahead a bit as to our own balance of payments, and, of
course, to examine how these tendencies fit into the relationship
between the United States and Canada.
I judge from your letter that, insofar as the discussion
dealt with the change in the Canadian current account with the United
States, there is not a basic difference of view -- although you would
perhaps have wanted to stress more than I did the reduction in your
surplus with us after mid-year. As to my discussion of your trade
with other countries, I would agree that -- to the extent I considered
1969 as the terminal point for comparisons -- the analysis tended to
overstate the deterioration that had occurred. On the other hand, it
is also unlikely that 1970 would yield a satisfactory rendering of
trends. However, I did take note of the dramatic change in your trade
accounts this year. If one were to use the period from mid-1969 to
mid-1970 as a more suitable terminal point for comparisons, one would
find that the overall current account in the Canadian balance of pay-
ments had improved by $1.3 billion since 1966, of which the gain
vis-a-vis the United States would be $1.5 billion. I do not advocate
this as a very satisfactory way of viewing this extremely complex set
&
FORD
GERALD
LIBRARY
-2-
of transactions, but it illustrates the kind of tendency in current
transactions I had in mind.
Respecting Canada's access to the U. S. long-term capital
market, I wanted to stress very clearly that I was not calling this
into question, and as far as I can tell this was accepted. In
speaking about short-term capital flows, although I tried to put
this in a very low key, I was impressed by the shift in the flow of
Canadian funds toward Europe. You are quite right to emphasize that
borrowing by U. S. banks in the Euro-dollar market was a dynamic
element, and this should have been said. On the other hand, I would
like to note that -- although U. S. banks drew large amounts of funds
from their foreign branches in 1969 -- those branches were at the
same time adding sizable amounts to their claims on and loans to
non-U. S. borrowers.
My sketch of the understandings between the United States
and Canada is very brief, and I regret that I failed to refer to the
exchange of letters between Mr. Fowler and Mr. Benson in December,
1968. It was certainly not my intention to express a rigid attitude
toward the arithmetic involved, and I do not believe that is the
impression given by my remarks viewed as a whole. I did not state
that there was any formal U. S.-Canadian agreement in the matters
referred to in that paragraph, but I was expressing at least my own
view of the underlying rationale of our arrangements.
FORD is LIBRARY
-3-
As I said in the paper, the relations between Canada and
the United States -- fortunately -- are such that we have been able
to speak to each other with considerable candor about our mutual
concerns. This I tried to do in Montreal. In that speech -- as I
stress in all of my speeches -- I was speaking for myself -- and
not for the Federal Reserve -- and certainly not for the U. S.
Government.
If I may, I would like to follow your suggestion and
defer discussion of the questions you pose at the end of your
letter. I hope I have succeeded in at least disspelling some of
the questions that my talk seems to have raised.
Sincerely yours,
AFB
LIBRARY GERALD R FORD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date November 25, 1970
Chairman Burns
To
Subject: VFCR Program
From
Governor Brimmer asB
I thought you might like to see a copy of the
memorandum which President Hayes sent to Secretary Samuels
in the State Department with respect to the VFCR program
for 1971.
Attachment
FORDO is LIBRARY
MISC.140A.2-1/70
FEDERAL RESERVE BANK OF NEW YORK
NEW YORK, NEW YORK 10045
November 24, 1970
The Hon. Nathaniel Samuels
Deputy Under Secretary of State
for Economic Affairs
Department of State
2201 C Street, N.W.
Washington, D.C. 20520
Dear Nat:
When I had the pleasure of calling on you in
Washington a few weeks ago, you asked for any thoughts I
might have on the subject of possible relaxation of restrictions
on capital flows to foreign countries. While you were thinking
pr. ncipally of the OFDI program and the interest equalization
tax, our own area of primary interest 18 of course the Voluntary
Foreign Credit Restraint program for banks and other financial
institutions. Recently we had prepared in this Bank a brief
memorandumpoutlining the reasons for our feeling that the VFCR
program should not be relaxed in 1971. While we have not dealt
specifically with the OFDI or the interest equalization tax,
ve would feel generally that the line should be held on both
of these for essentially the same reasons.
I recognize that this memorandum is a bit stale for
your purposes, but perhaps it may be of some interest.
I enjoyed very much hearing you at the Council on
Foreign Relations the other day. Your remarks struck me as
lucid and very much to the point, and my impression was that
the audience as a whole felt as I did.
With warm regards,
Sincerely,
03
Al
LIBRARY
Alfred Hayes
Enclosure
cc: Governor Brimmer
Determined to be an
Administrative Marking
CONFIDENTIAL--F.R.
By TMH
NARA, Date 4/18/22
THE VOLUNTARY FOREIGN CREDIT RESTRAINT PROGRAM FOR 1971
There is a considerable temptation to relax the Voluntary Foreign
Credit Restraint (VFCR) program for 1971. Although financial institutions
have adjusted their operations to remain without much difficulty inside program
limits and there is no substantial evidence that the program has hurt
United States exports or long-term credits to less developed countries,
such a selective control is out of tune with the main thrust of our post-
war economic policy - -freer international trade and payments. This
"temporary" program appears more permanent as its ending "as soon
as possible" is put off for yet another year.
To relax the program at this time, however, would entail very
serious risks. Relaxation would come on the heels of exceptionally
heavy dollar reserve gains by foreign central banks and at a time when
the dollar has been quite weak in the exchange markets. This action
would precede a probable worsening of our trade balance, as European
demand slows and the pace of our economy quickens. It would take place
when widening interest differentials and improving liquidity of United
States financial institutions would favor large new outflows into the
QERALO FORD LIBRARY
Euro-dollar market and European national markets. Relaxation thus
carries the risk of enlarging the balance of payments deficit at a time
when it is already large. There is, furthermore, another important risk.
2
Relaxation could lead the E. E. C. countries to speed plans for increasing
their independence from the dollar. These countries are in the process of
making major decisions about future economic and political relationships.
If these decisions are made in a climate of anger or spitefulness over
U.S. policies, the results could hardly be calculated to favor U.S. interests
and could lead to a weakening of the international payments system.
The tendency of E. E. C. countries to seek, collectively, a greater
degree of economic independence from the dollar has greatly accelerated
this year. Spokesmen for E. E. C. member governments and central banks
have increasingly referred to a buildup of dollar reserves as a problem
in the management of their economies. The view that our seeming inability
to bring either inflation or the balance of payments under control has been
the major cause of inflation abroad, while simplistic, has struck a responsive.
chord both in foreign political circles and with foreign public opinion.
Attention on the problem of the dollar has been strengthened by the
better alignment of European currencies following parity changes in
Britain, France and Germany. At the moment, with the E. E. C. currencies
all at or near their upper intervention points in relation to the dollar, the
exchange market itself seems to suggest common action.
The plan of common action is set forth in the Werner report. This
report envisages gradual transition to a unified E. E. C. monetary and
exchange policy. The first step, proposed to begin on January 1 of
next year, is a narrowing of the exchange rate variation of these
GERA
3
currencies with respect to the dollar. This step need have no practical
consequences for the moment sinc e E. E. C. currencies are now clustered
near their ceilings and the exchange markets might not even note an
effort to maintain a narrow variation among them in relation to the
dollar.
But other decisions have yet to be made. One step which has been
raised for discussion is for the E. E. C. countries to widen the permissible
range of variation of their currencies collectively with respect to the
dollar, whether within or expanding upon I. M. F. limits. Aside from
the eventual merits of such a move, European proponents speak frankly
of using it as a means of "bipolarization" between the dollar and E. E. C.
currencies which clearly means in their minds an effort to weaken the
dollar's relative position internationally. A broader discussion of the
E. E. C. margins at this time might induce already uneasy exchange markets to
anticipate overnight or over any given weekend a widening of the E. E. C.
bands, if not perhaps a general revaluation of the E. E. C. currencies.
Given the freedom of investors to shift funds internationally and the
immense dollar resources provided by the Euro-dollar market and our
economy, these anticipations could result in a massive speculative flight
from the dollar. Such a disruption could prejudice future foreign holdings
of dollars and have far-reaching economic and political consequences
for this country.
FORD
GERALD
LIBRARY
4
These plans are thus now in a critical formative stage. E. E. C.
countries are, of course, finding their natural divisions an impediment
to rapid development of a unified currency bloc. It would thus seem
especially important at this time for the United States to avoid actions
that might result in E. E. C. decisions prejudicial to our interest.
A decision to relax the VFCR program for 1971 would no doubt
be seen by many Europeans and other foreigners as additional evidence
of our inability to come to grips with the balance of payments problem.
Even if speculative snowballing does not develop, the decision to relax
the program would almost certainly be followed by additional outflows.
As the decline in United States interest rates precedes those aborad,
a substantial shift to lending from United States sources would, in the
absence of the program, be expected. Furthermore, with liquidity
positions improving here, our financial institutions should become
more willing to lend additional funds. The wish of some non-bank
IDAARY GERALD
financial institutions to diversify their portfolios with a greater
proportion of foreign securities is also strong. These probable outflows
would surely augment the reserve gains of foreign central banks and
put downward pressure on the dollar in the foreign exchange markets.
Even without such additional outflows, we may have some serious
balance of payments financing problems next year. While the flow of
funds into foreign monetary reserves next year may be smaller than
the extremely large flow of this year, the dollar gains may be less
acceptable abroad. The consequences of dollar reserve gains this
5
year have been attenuated, because the accruals have generally been
by countries needing to repay debt, desiring to rebuild reserve lost
earlier, or willing to hold them. Continuing large reserve gains are
weakening these motives.
Maintaining the VFCR program another year will by no means
resolve our international payments problems. But it will avoid an
inappropriate and risky change at this critical time.
GERALD FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
RESERVE THE OF SYSTEM
WASHINGTON, D.C. 20551
ANDREW F. BRIMMER
MEMBER OF THE BOARD
December 4, 1970
To:
Federal Open Market Committee
From: Andrew F. Brimmer
Enclosed is a report on the meeting of the
Economic Policy Committee of OECD, held in Paris on
November 16-17, 1970. I promised to make such a
report at the FOMC meeting of November 17, 1970.
andrew F.Brimmer
Enclosure
LIBRARY GERALD GERALD R FORD
Economic Policy Committee Meeting, November 16-17, 1970
The Economic Policy Committee of OECD met in Paris on
November 16 and 17. I was present on the first day, and Mr. John
Ghiardi covered the meeting for me on the second day. The Committee
discussed the problem of inflation in OECD countries and efforts to
improve policy coordination among member countries. Other agenda items
included the status of OECD studies on fiscal policy and the coordina-
tion of export credits.
Much of the meeting was spent in discussion of the report
prepared by the Secretariat on the present problem of inflation.
The main theme of the report is that there should be a
concerted effort to deal with the problem of inflation in all OECD
countries. Each country should, as far as possible, adopt a global or
multi-policy approach, encompassing not only firm demand-management
policy, price-income policies, active manpower policies and competition
policy, but also intensified efforts to identify and eliminate ineffi-
ciency and waste throughout the public and private sectors.
Surveying recent wage and price trends, the report notes that
while signs of an easing of price increases have become manifest in more
recent months, the pressure on wages seems to have strengthened further
in most of the countries. Fourteen out of sixteen OECD countries have
of late recorded much higher year-over-year wage increases than in 1969.
As to prospects for 1971, the general picture is that the pace of inflation
should abate somewhat, particularly in the United States, Canada, and
Germany, but only to a rather moderate extent in the rest of the OECD
area. The Secretariat forecasts that the aggregate price rise will slow
GERALD FORD LIBRARY
- 2 -
down from 5-1/2 per cent this year to around 4-1/2 per cent in 1971.
This would still be unsatisfactory by earlier standards, particularly
since it follows a lengthy period in which all the major countries
have been pursuing restrictive demand-management policies.
The Secretariat report stresses that the present inflation
may prove more difficult to stem, particularly through demand-management
policies, than would have seemed likely on the basis of experience in
the earlier part of the 1960's. Although in the short run the prospect
is for some improvement in price performance, unless it is more marked
than now expected, a serious inflationary problem could reemerge. Govern-
ments will have to make it clear that they are prepared to pursue
restrictive demand-management policies until there are signs that better
price stability is being restored. A permanent and significant rise
in unemployment would not be acceptable; nor would it necessarily be
an effective barrier against inflation over the longer run. What is
needed, however, is that all segments of the public -- and especially
employers and trade unions -- should be more conscious of the inevitable
link between the moderation they exercise in price and wage decisions
and the demand-management policies followed by the authorities. In the
present situation, a major reduction of inflationary expectations during
the cooling-off period is a prerequisite for the resumption of normal
growth rates and the return to higher levels of employment. The essence
of the problem today is that the cumulative economic, social and political
FORD :- LIBRARY 07V839
- 3 -
consequences of inflation, which up to now some may have regarded as
tolerable, could begin to build up rather quickly. This is why such
a heavy responsibility lies on informed opinion to stress the dangers
in the present situation and the urgent need to give a higher priority
to price stability.
There was general agreement with the broad lines of the
Secretariat's inflation report, but committee members were outspoken
and unambiguous on their insistence to avoid any public interpretation
that specific elements of the report were accepted.
The committee members felt that the situation varies from
country to country and the general prospect is for improvement in price
performance. The problem is widespread and serious, however, and the
committee agreed on the urgent need for further progress. The committee
agreed that it was necessary to bring about a significant reduction in
inflationary expectations in the near future. There was general apprecia-
tion that, first, there should be a concerted effort to deal with the
problem in all OECD countries; and, second, that each country should
pursue a range of measures appropriate to its situation and institutions,
encompassing effective demand management, and other policies designed to
improve price performance and to increase competition and efficiency in
their economies. The committee, without taking a position on the various
recommendations, was sympathetic to the general approach, in the light
of the problems faced by all countries in reconciling high employment
and price stability.
FORD is LIBRARY 0FRALO
- 4 -
In order to get the committee's agreement to send the
inflation report to the OECD Council with a view to publish it on
Secretary-General Von Lemep's responsibility, he had to accept some
key revisions in the report that softened the reference to the need
for creating unusual resources in order to combat price increases
and the implication that price stability should have first priority
among member countries' policy objectives.
The Committee expressed general appreciation for the broad
principle of improving coordination among OECD governments with regard
to economic policies, but stressed that such consultation should avoid
too formalistic arrangements and should be pragmatic. We and several
other delegations stressed the importance of the consultation that
takes place in the Economic Policy Committee and in the Committee's
Working Parties.
FORD & GERALD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
of
Office Correspondence
Date December 11, 1970
To
Chairman Burns
Subject: Conversation with
From
Governor Brimmer
representatives of IT&T
Because of your unavailability, I met with representatives
of IT&T on Thursday, December 10. In the group were Mr. Hart Perry,
Senior Vice President for Finance, Mr. Lyman Hamilton, Treasurer,
Mr. William Merriam, Director of IT&T's Washington office, and
Dr. Raymond Saulnier.
Their principal concern focused on the impact of OFDI's
regulations on IT&T's overseas operations. The arguments they
advanced are spelled out in substantial detail in the attached
letter addressed to you and a number of other government officials.
Cutting through the entire argument, IT&T would like to
see OFDI's regulations relax to the point where companies would be
allowed to retain 50 per cent of earnings as opposed to the 30 per
cent provided for in the existing regulation.
The visitors fully understood the nature of the U. S.
balance of payments problem, and they fully understood the impos-
sibility of scrapping the program at this time. However, they
also believe that some modest relaxation could be justified.
Attachment
LISRARY GERALD R. FORD
INTERNATIONAL TELEPHONE AND TELEGRAPH CORPORATION
320 PARK Avenue
NEW YORK, N. Y. 10022
GERALD
HAROLD S. GENEEN
CHAIRMAN AND PRESIDENT
December 8, 1970
Honorable Maurice H. Stans
Honorable George P. Schultz
Honorable Henry A. Kissinger
Secretary of Commerce
Director, Office of Management
Assistant to the President for
Department of Commerce
and Budget
National Security Affairs
14th Street and Constitution Avenue
The White House
The White House
Washington, D.C. 20230
1600 Pennsylvania Avenue, N.W.
1600 Pennsylvania Avenue, N.W.
Washington, D.C. 20500
Washington, D.C. 20500
Honorable Paul W. McCracken
Honorable Arthur S. Burns
Honorable Paul A. Volcker
Chairman, Council of Economic
Chairman, Board of Governors
Under Secretary of the Treasury
Advisers
Federal Reserve System
for Monetary Affairs
Executive Office Building
Washington, D.C. 20551
15th Street and Pennsylvania Avenue
Washington, D.C. 20506
Washington, D.C. 20220
Dear Sirs:
The mandatory control of foreign direct investment transfers was imposed on January 1, 1968 as an
emergency measure. At that time, when the U.S. balance of payments was deteriorating rapidly as a result of the
war and inflation, it was understandable that restraints on U.S. foreign investment were necessary. In fact,
the large U.S. corporations with affiliates abroad had been cooperating with the Government under a voluntary
program to secure the greatest possible improvement in the U.S. balance of payments. In many respects, the
voluntary program was a more practical and more effective means of maximizing the balance of payments
benefits of U.S. direct investment enterprises than the present much more restrictive mandatory program.
The United States now has three major methods of controlling capital outflow, but the incidence applies
unevenly for portfolio investment, bank loans, and for direct investment. A U.S. purchaser of foreign
securities for portfolio is not seriously affected by the Interest Equalization Tax, for there is no serious cost to an
investor if he must place his funds in domestic rather than foreign securities and, in fact, foreign share prices have
not done as well as U.S. shares since July 1963 when the IET was enacted. Nor is there any real burden on banks
if increases in their foreign loans is limited under the Federal Reserve guidelines and, in fact, with the tight
credit situation U.S. banks were more concerned with their own borrowing abroad rather than with foreign lend-
ing. The effect of controls on direct investment, however, are far more complex and far more onerous.
U.S. direct investment affiliates are operating companies. They must meet the requirements of foreign
markets and, if they are to retain their competitive position in their industries, they must continue to expand.
What is jeopardized by the foreign direct investment controls is not merely additional profitable investment
abroad, but the efficient operation of a vast network of enterprises with a book value of $71 billion at the
end of 1969 that yielded income of $9,109 million in that year ($1,369 million in license and royalty fees
remitted by the affiliates to their parent companies, $5,639 million of remitted earnings, and $2,101 million
of reinvested earnings).
Remittances from U.S. direct investment enterprises abroad have been and must be a basic element of
strength in the long-run payments position of the United States. While the trade surplus fell from $6.8 billion in
1964 to $600 million in 1969, and the deficit on services (excluding military transactions and investment
income) rose from $800 million in 1964 to $1.1 billion in 1969, the remitted earnings from foreign direct invest-
ments (including fees and royalties) increased from over $4.4 billion in 1964 to $7.0 billion in 1969. Further-
more, there is good reason for expecting earnings of foreign direct investment enterprises, if not impeded, to grow
at the same or a better rate in the future. To impair the earning capacity of U.S. foreign direct investment enter-
under legal compulsion to invest sufficiently to provide the necessary output and to retain earnings for that
prises through excessive restraints in order to secure a temporary and nominal improvement in the balance of
purpose. It can remain in effective competition only if its operations abroad are in the forefront of technological
payments is to risk an important national resource.
innovation, and this requires adequate new investment.
U.S. direct investment enterprises operate under numerous and complex regulations. The regulatory pattern
An emergency measure restraining foreign direct investment and requiring remittance of a high proportion
of the Office of Direct Investment (OFDI) is set forth in approximately 89 pages of the Federal Register, 20 of
of foreign earnings is tolerable if it is temporary. The OFDI Regulations are basically inequitable to the com-
which are Regulations and 69 are equally important explanations of the Regulations. Domestic business would
panies that complied faithfully with the voluntary program and most inequitable to the companies that have a
suffocate under such regulation, and in the long run U.S. foreign enterprises abroad will be stifled unless these
high rate of growth in their foreign operations. At great cost and with considerable difficulty, ITT and other large
Regulations are changed. The most oppressive aspects of these Regulations are the ban on the transfer of new
American enterprises have hitherto made the necessary adjustment to the Regulations of OFDI. Our capacity to
funds from this country for direct investment in the highly developed countries (Schedule C) and unrealistic
operate under the Regulations as they are now administered is being rapidly exhausted. Unless there is relief from
requirements for repatriation of earnings.
these arbitrary Regulations, our business will suffer injury, and the contribution that ITT has been making to the
Until recently, the limitations on the transfer of new funds for foreign direct investment did not have a
long-term strength of the U.S. balance of payments will be reduced.
seriously adverse effect on the efficiency and profitability of the foreign affiliates of most U.S. companies. That is
When OFDI was created in January 1968 it was presented as a temporary measure to meet an emergency,
because U.S. companies are permitted to undertake foreign direct investment, provided they finance their require-
and it was stated that "as in the voluntary program, overall and individual targets will be set." That position was
ments for additional funds by borrowing abroad. From 1965 to mid-1970, U.S. corporations issued nearly
repeated in the January 1968 Report of the Treasury Department, "Maintaining the Strength of the United States
$5 billion of debt, often through foreign subsidiaries formed primarily for this purpose, and the borrowed
Dollar." Despite these assurances, the administration of the program is marked by inability or unwillingness to
funds made it possible to maintain foreign direct investment at a fairly constant level since 1965. The fact that
take into account the problems of particular companies. As a result, the highly complex OFDI Regulations have
U.S. companies were willing to pay large underwriting costs (about $150 million), very high interest rates, and
been applied to all direct investors, except those whose annual foreign direct investments are below the exemption
offer attractive convertible securities to raise these funds indicates the importance they attach to enabling their
figure, or are engaged in international air transport and international construction, which activities have been
foreign affiliates to operate efficiently. As Professor Houthakker, a member of the Council of Economic Advisers,
granted special dispensation in the Regulations.
said in a speech at the Louisiana State University on May 4, 1970: "In fact we should be grateful that these
Whatever its temporary usefulness may have been in compelling U.S. companies to finance their foreign
measures [limiting direct investment] were not far more effective, and that they did not prevent an increase
direct investments by huge borrowings abroad, the OFDI Regulations have by now become counter-productive.
in the balance of investment income from $21/4 billion in 1960 to nearly $5 billion in 1968."
The "mining" operation in foreign financial markets has become very costly and is near an end. The
It will be impossible for U.S. companies to continue to borrow on the scale of recent years in order to finance
inability of U.S. companies to finance their most urgent foreign direct investment needs has initiated demands
their foreign affiliates. The capital structure of their subsidiaries is heavily burdened with debt and this has reduced
for greater national autonomy in the fields in which U.S. foreign direct investment has been most successful. One
their creditworthiness. In any case, foreign investors have been saturated with securities issued to finance U. S.
expression of these views is a recent report of the Commission of the European Communities entitled "The
enterprises abroad, and some brought large losses to foreigners in 1970. It is worth noting that since the
Electronic Industry of Countries of the Community and American Investments." One of its conclusions is that
peak of such issues in 1968 ($2.14 billion net of underwriting costs), the new issues of U. S. corporations in the
the role of affiliates of American electronic companies operating in the Common Market must be kept under
Eurobond market fell to $1 billion in 1969 and to $422 million in the first half of 1970. More and
control. In March 1970, another report of the EEC, "The Industrial Policy of the Community," recommended
more, U.S. corporations have had to depend on short-term borrowing in the Eurodollar market. The large
measures to increase the competitiveness of EEC companies, including some form of discrimination against award-
amount and high cost of foreign borrowing to finance direct investment is itself harmful to the balance of
ing contracts to subsidiaries of companies based outside the EEC. These threats to American companies abroad
payments. The interest rates are high (recently 9 per cent or more), they increasingly take the form of a variable
are intensified when they are unable to invest enough for their foreign affiliates to remain in the forefront of
rate dependent on the London interbank rate and often without any ceiling, and the payments are invariably
technological advance.
free of withholding taxes by the United States.
We submit that reconsideration of the policies on U.S. foreign direct investment is essential at this time. It
The repatriation requirements on earnings have also become more burdensome. They do not take into
is impossible to continue to operate indefinitely on the basis of a temporary measure instituted for an emergency
account the fact that the proportion of earnings remitted, and the form they take, has traditionally varied
and applied by inflexible formula to companies with different economic problems. The inequity of the present
considerably from country to country because of tax considerations. A high rate of remittance from a country
Regulations is aggravated by the fact that it imposes the heaviest penalties on companies that were most faithful
because of tax advantages was of no importance when the same funds could be sent back for investment. With a
in cooperating under the voluntary program. The 1969 change in the Regulations to make it possible for a
ban on the transfer of new funds and the limitation on use of reinvested earnings for direct investment, the regu-
direct investor to retain up to 30% of annual earnings of the preceding year was a modest step in the right
latory compulsion to remit earnings has become a heavy burden in some countries. Moreover, the requirement to
direction. An increase of that percentage at this time to 50% would further recognize the need of companies
remit earnings to the full extent of the Regulations takes no account of explicit or implicit limitations placed by
with increasing foreign earnings and would encourage further increases of foreign earnings, with attendant
foreign countries on remittances of profits, or on contractual commitments to reinvest earnings, or on pressing
increases of remittances from abroad.
need for reinvestment to expand output and service. Unless such needs and commitments are met, the value and
While continued limitation on U.S. foreign direct investment may be necessary for a time, the Regulations
profitability of large investments now in place may be lost.
should be made more liberal to reflect greater concern for (i) the special needs of some companies because of
International Telephone and Telegraph Corporation has encountered great difficulty in its foreign opera-
their foreign commitments, and (ii) the special benefits to the U. S. balance of payments from investment
tions because of the restrictive manner in which OFDI Regulations are applied. Foreign affiliates of ITT are
by companies whose remittances are large and are growing rapidly. Unless the program is administered with
very large remitters of funds to the U.S. in the form of dividends, interest, and license and royalty fees. The
great consideration to the long-run importance of foreign direct investment to the U.S. balance of payments,
earnings brought to this country by ITT have increased at an average annual rate of 17% and for 1970 are
earnings from this source will grow at a declining rate, and at the very time when payments on the enormous
estimated at $111 million. We are confident that the earnings remitted to this country will continue to grow
foreign borrowings caused by the OFDI program will be growing at an accelerating rate.
at a very high rate, provided our operations abroad are not undermined by the restrictions on new investment
and the requirements for excessive repatriation of earnings. ITT's principal activity abroad is the manufacture
Sincerely,
of telecommunication equipment. In this activity, ITT must deal with the foreign governments whose communi-
cations administrations are its customers, and compete with their own domestic companies, often under adverse
conditions because of actual or possible Government preferences to its competitors. In some countries, ITT is
2
3
BOARD OF GOVERNORS OF THE FL RAL RESERVE SYSTEM
12/21/20
governor Brimma
I have estimated the
I xpansion at double the
short- term credito now outstanding
under the short. team ailnj
)
Phatis, on expansion 6*220
million.
It may will
prove generous.
an expansion (liber aly ation)
fio. might he reasonable.
BW
FORDO i 076939 LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date December 21, 1970
To The Chairman
Subject: Possible Liberalization of the
From Andrew F. Brimmer
VFCR
Problem
If the Administration decides to liberalize the Commerce Department's
Foreign Direct Investment Program (FDIP), what change, if any, should be made
in the Voluntary Foreign Credit Restraint (VFCR) program?
Recommendations
If a significant liberalization is made in the FDIP for 1971, some relaxation
should be provided in the VFCR. In particular, if the Commerce program is lib-
eralized to permit an outflow on the order of $300 to $350 million above the
outflow that would take place with no change in the FDIP regulations, I would
recommend a VFCR liberalization of $200 to $250 million. Furthermore, I would
recommend the VFCR liberalization take the form of exempting export credits from
a subceiling on short-term credits to developed countries of continental Western
Europe.
Discussion
Reason for VFCR liberalization
A significant liberalization in the Commerce Department FDIP - $325 million
being the figure we have heard as the outflow to be permitted over what would
occur with no change in regulations - should call for a corresponding liberal-
ization in the VFCR. The two programs are complementary (along with the IET).
There should be equity between corporate direct investors and the financial
institutions in bearing the burden of balance-of-payments restraints.
I believe something on the order of $200 to $250 million in VFCR liberalization
would be accepted by the public as, in a broad sense, equivalent to the FDIP
liberalization.
VFCR bank guidelines
Within the VFCR guidelines, the focus of attention continues to be on the
provisions applicable to banks. The provisions applying to insurance companies,
pension funds, and other nonbank financial institutions restrain only a minor
fraction of the foreign assets of those institutions. Any modest liberalization
should be confined to the provisions for banks, the so-called bank guidelines.
GERALD
FORD
-2-
TO: The Chairman
SUBJECT: Possible Liberalization
FROM: Andrew F. Brimmer
of the VFCR
Overall increase in ceilings - not meaningful
Of the alternative means of liberalizing the bank guidelines, the most
obvious - but not necessarily the most desirable - would be an increase in
the General Ceiling or in the Export Term-Loan Ceiling or in both. But this
would not make much sense, given the magnitude of the change we have in mind
- about a quarter of a billion dollars. The nominal leeway under the two
ceilings amount to almost $2 1/2 billion. Probably about half this is effective
leeway. That is, if banks were faced with greater demand for foreign loans,
they might use about $1 1/4 billion - the remainder being made up of amounts
kept by some banks as a safety margin, or representing leeway that some small
banks do not have the capability of exploiting. To add some $200 million to
this leeway, whether that leeway is considered now to be $1 1/4 billion of
$2 1/2 billion, would not be meaningful.
Export exemption from Western Europe subceiling - proposed
Of other alternatives, I believe one of the simplest, most meaningful, and
most compatible with VFCR principles would be to exempt export credits from
the so-called Western European subceiling. Within each bank's General Ceiling,
there is a requirement that short-term credits (not over one year maturity)
extended to residents of developed countries of continental Western Europe be
held to 75 per cent of the amounts of such credits outstanding on December 31,
1967. This ceiling was established some time ago as one of several supplemental
restraints on credit to those Western European countries.
a. Size of subceiling and outstandings. At present, the aggregate
ceiling on short-term credits to those countries amounts to $413 million.
(Outstandings in the aggregate are in fact in excess of the ceiling. They are
$560 million.) By way of comparison, the aggregaterceiling is equivalent to
less than 10 per cent of the aggregate General Ceiling.
b. Estimated amount of liberalization. If we exempted export credits
from the subceiling, such exempted credits might increase by $200 or $250 million.
This projection is based on an estimate that one fifth of the credits charged to
the ceiling are export credits. This means about $110 million of the $560 million
are export credits. I would guess that exemption might be followed by an increase
of double the amount of export credits now charged to the subceiling. Thus,
there could then be $330 million in short-term credits to developed countries
&
FORD
GERALD
LIBRARY
-3-
TO: The Chairman
SUBJECT: Possible Liberalization
FROM: Andrew F. Brimmer
of the VFCR
of continental Western Europe, with $110 million already outstanding and
$220 million in new credits. (The net increase would reduce correspondingly
the leeway under the General Ceiling, of which the subceiling is a part.)
c. Minimum adverse announcement effects in Europe. This liberalization
should not have significant adverse announcement effects on governments abroad,
despite its applying to Western Europe.
First, the proposed measure would modify one of two parallel supplementary
restraints on Western Europe but not abolish either one. One such restraint pre-
vents banks from extending to residents of those countries any new term loans
(with a qualification I will mention); the other requests banks to keep short-
term credits to those borrowers to 75 per cent of the banks' end-of-1967 level.
Second, the proposed relaxation would introduce into the second restraint
(the short term subceiling) the same exemption as already applies to the first
restraint (the prohibition ofnewterm loans), namely, an exemption for credits to
finance exports.
Third, the exemption would apply only to the Western European sub-
ceiling; the export credits exempted from this subsidiary restraint would still
be subject to the General Ceiling.
d. Reinforce established priority. Exemption would be compatible with
the long-standing VFCR request that banks give priority to export financing.
e. Practical benefits. The exemption would respond to widespread
demands inside and outside the Government (not necessarily well founded) for
further exemption for export credits. It would also assist some banks which
are participating in the CCC Export Credit Sales Program for "surplus" agri-
cultural products. Furthermore, it would relieve the subceiling's tightness,
due at least in part to overdrafts connected to Eurodollar transactions and to difficul
culties in handling working balances.
f. Administrative factors. We have often explained that one problem
in exempting short-term credits from restraint is the difficulty of distinguishing
such credits from non-export credits. We would have to make known - in the
announcement, in guidance to banks, or in reporting instructions - that export
credits, to be exempted, must be clearly identifiable as financing exports for
LIBRARY GERALD FORD
-4-
TO: The Chairman
SUBJECT
Possible Liberalization
FROM: Andrew F. Brimmer
of the VFCR
example, be bankers' acceptances or other "documented credits" and not open lines
of credit drawn on for unidentied purposes).
g. The revision might run along the following lines (changes shown
by brackets and underscoring):
VFCR Guideline section II-A-3, as amended March 17, 1970, concerning
credits to residents of the developed countries of continental
Western Europe
"3. Western Europe
*
*
*
*
*
"b. RESTRAINT ON NEW NONEXPORT TERM LOANS. A bank should not make
new term loans to such residents, except loans that finance U.S. exports.
"c. SHORT-TERM CREDITS. A bank should hold the amount of non-export
short-term credits (having a maturity of not over 1 year) to such residents
to not more than 75 per cent of the amounts /of such credits/ outstanding
on December 31, 1967 of all short-term credits to such residents."
Attachment
VFCR Position of Banks, October 31, 1970
cc: R. Solomon
Lowrey
GERALD R. FORD LIBRABA
Attachment
VFCR - Position of Banks
October 31, 1970
Number of banks reporting
170
General Ceiling
Aggregate ceilings
$9,985
Leeway
1,182
Western Europe Short-Term Credits
Aggregate sub-ceilings
$413
Overage
148
Estimated export credits outstanding
110
Export Term-Loan Ceiling
Aggregate ceilings
1,384
Leeway
1,237
General and Export Term-Loan Ceiling
Aggregate ceilings
11,369
Leeway
2,419
FORD :- 938839 LIBRARY