Speech

Speech delivered before .School of Ranking, University of Wisconsin : Madison, Wisconsin " •" " " • «' September 1. 1QZ.8 FINANCIAL PROBLEMS OF Tiffi EUROPEAN RECOVERY PROGRAM Introductory Remarks The European Recovery Program can be distinguished from other types °f postwar assistance because of its main purpose - to bring about a balanced economy in Europe and throughout the world. It represents a unified approach to the over-all economic problems of Western Europe. American assistance under the program is intended to raeet the costs of imports of goods and services essential to maximize production within the participating countries and to expand their trade'among themselves a nd with the rest of the world. These long-range aims represent a great Progress over relief measures and wasteful methods of attempting to deal w ith short-term problems of individual countries on a piecemeal basis. To these ends, self-help and mutual cooperation on the part of the European countries are the necessary counterparts to American assistance, and the United States has a right to expect that the very large sums of money made available by Congress will be used in the most effective pos- sible manner. The basic economic problem in Europe today is without doubt the problem of producing more goods. The physical damage and disorganiza- tion caused by the war, as well as the deterioration of equipment caused by wartime wear and neglect have not yet been entirely overcome. Fur- thermore, monetary and price dislocations arising out of the war have proved to be serious obstacles to recovery. Production cannot be re- stored to maximum levels unless adequate incentives exist both for busi- ness and labor, so as to ensure a regular flow of goods through the economy. Finally, wartime destruction in areas which previously had been important sources of supply for Europe have further hampered full pro- duction, and have made it necessary for European countries to rely more heavily than before on the Western Hemisphere for needed supplies. This brings us to the problem of the balance of payments. 'Since few countries can produce for themselves all the kinds of goods they need, it is necessary for them to import certain things from outside, v hich they pay for, in effect, with surplus supplies of their own which a re exported. If a country is not producing enough or cannot sell enough to pay for what it buys from outside, its balance of payments gets °ut of equilibrium. If a country cannot increase its production, it may have to reduce its consumption or its investment, to bring its balance of payments back to normal. Both of these alternatives, however, would be undesirable in most European countries today; any cuts from present consumption levels would reduce the productivity of the working popula- tion, while reducing the rate of investment would defeat the main object y hich is to restore and increase the country's productive capacity. There are, of course, other reasons for the balance of payments Problems of Europe today. One is the fact already mentioned that, due ^o the war, greater reliance has had to be placed on the United States and other Western Hemisphere countries-for supplies. Thus,,.European countries have to redirect their trade so as to sell more to the Western Hemisphere, in order to be able to buy more. Another factor is the war- time loss or liquidation of large amounts of foreign investments, and the loss of a large part of European merchant shipping fleets, both of which facts have meant the loss of important, sources of- income which formerly helped pay for imports. Failing other means, countries might pay for their imports by using gold or foreign exchange resources accu- mulated in the past. Obviously, however, this can only be done for a limited time, and many European countries have been doing so for so long that their holdings are now reduced to extremely low levels. Under these circumstances, the best solution appears to be assist- ance to Europe in the shape of loans or gifts over a temporary period, during which European countries could take the necessary steps to revive their own production and place their economies on a self-supporting ba- sis. A program of four and a quarter years is contemplated for the pur- pose, and Congress has authorized approximately billion of aid to Western Europe for the first year of the recovery program. This author- ization was based upon careful and exhaustive studies by the technical staffs of the United States Government of essential European requirements and availabilities in the Western Hemisphere and elsewhere. It has been tentatively estimated that the total amount of aid needed over the entire period of the program might amount to £17 billion, but it i3 clear that estimates of requirements more than a year in advance must be very uncer- tain. American assistance is not intended to enable European governments to continue practices of deficit spending and trade restrictions. The avoidance of inflationary practices in government budgets and the self- financing of internal costs of production and investments are regarded as^ prerequisite to the stabilization of currencies and the adoption of multi" lateralism in foreign trade. In this connection, the Administrator of the program has concluded agreements under which all recipient countries have undertaken very substantial obligations. These agreements embody the basic principles of the Charter of the International Trade Organiza- tion, which was adopted at Havana last Harch by 53 nations. Recipient countries agree to reduce trade barriers, to eliminate restrictive busi- ness practices, and to avoid arrangements restraining competition in in- ternational trade, limiting access to markets or fostering monopolistic control of natural resources. In particular, recipient countries agree permit access to their natural resources by American investors and to put at the disposal of the United States scarce strategic materials in _ reasonable quantities and on reasonable terms. The financial problems in- volved in the European Recovery Program are examined in greater details the following parts of the paper. Local Currency Funds Of special significance is the provision requiring recipient countri^ to set aside in a special account local currency in amount equivalent to the dollar value of goods and services received from the United States * r the form of grants. These local currency funds are to be raised as pa^ of the general government revenue and their use3 are subject to approval by the Administrator of the px-ogram. In a number of cases the amount in question will be a very considerable portion of the country's tota'J.- money supply. Thus, in these European'countries the Administrator will be in a position to exercise a great constructive influence upon their financial situations. The use of these local currency funds is to be de- termined 'in accordance with the principles and aims of the European Re- covery Program; namely, for retirement of currency or public debt as an a nti-inflationary measure; for supplementing existing savings in new in- vestments of productive character; for meeting certain government ex- penditures which would otherwise be financed in an inflationary way, and perhaps for financing net exports to other participating countries. It must be noted that while the use of these local currency funds for debt retirement would usually have an automatic deflationary effect, this may be offset by contrary inflationary forces if expr.nsionr.ry meas- ures (through private credit or budgetary deficits) were being taken at the same time. On the other hand, while expenditure of these funds on investment programs might ordinarily be expected to have an inflationary effect, yet conditions may arise under which the release of those funds for new investments would put to work available resources and manpower, ^n such cases the use of these funds would have no inflationary effect in the short run and would contribute to raise production and stabilise the economy in the long run. In other words it is the over-all finan- cial ana economic position of the country concerned that must be consid- ered. If a country proposes to use its local currency funds for debt retirement, the U. S. Government would be concerned to ensure that the debt retirement is effective debt retirement. In Italy, for example, lire deposits in the local currency account na y amount this year to as much as one-third of the Italian Government's budget. The Italian Government might propose to use these funds for debt retirement. But when a country, as in Italy's case, is operating under a heavy budget, deficit, it is not easy to see how any debt retire- ment carried out with the use of the local currency counterpart would be effective or "real". It is likely, therefore, that in most of trie coun- tries, an exception being the United kingdom where there is a budget sur- plus, the local currency counterpart will be used to meet one or another sort of government expenditure. A country might ask permission, for ex- a mple, to spend some of the local currency to subsidize miltc production, or to subsidize flour millers so that bread might be maintained at an a rtifj.cially low price as an anti-inflationary device. I.do not wish to venture an opinion as to whether these would be appropriate uses to which put the local currency counterpart, but I am sure you can see that some difficult policy decisions might be involved. Or, to take another example, a country such as France or Italy may wish to use considerable Pfcrts of the local currency counterpart for a general investment program- railways, port works, irrigation or reclamation, etc. Here the most im- portant aspect of the decision may be to reach a judgment as to the gen- e ral inflationary or deflationary situation in the spending country. might feel that the country simply should not spend the additional a mounts in view of already strong inflationary pressures; but the govern- ment of the country, for either political or economic reasons, might be Ve ry desirous of carrying out its program of investment. It may also be added that not all countries are subject to the same degree of control through the deposit of local currency counterpart, as such deposits are required against grant assistance, but not against loan assistance. Probably if the economists could have been left free to drat exactly the kind of European Recovery Program which thoy wanted, they would have wished to provide the entire amount of aid or. a grant basis, as to avoid adding to the dollar debt of Europe during this difficult per- iod of recover}'. This would have preserved the dollar borrowing capacity of Western Europe to meet possible needs at the end of the European Re- covery Program. Congress did nob feel that it could go quite this far. But the Congressional Committee did ask the Government's witnesses whethei they thought any part of the program could be arranged on a loan basis. The answer was that the amount which might be loaned would depend on the terms of the loans—that is, the rate of interest, the maturity, and the extent to which flexibility could be introduced to take account of tuations in the economic situation of the debtor countries in future year-' The Congress finally provided that one billion dollars of the total amoun of aid should be handled on a debt basis by the Administrator, i.e., he would borrow that amount from the Treasury and hence would loan that amcu to ERP participants. This is about 20 per cent of the total. Moreover, as much as ^300 million of this billion may be used to guarantee new in- vestments of American enterprises in Vestern Europe, provided they are a cepted by the Administrator and the recipient countries as part of the i covery program. The Government experts have endeavored to work out, loan-grant ratios country by country, which relate as accurately as can be determined to v* ing capacities of the ERP countries to incur additional dollar debt._ nS you may imagine, these ratios give rise to some touchy since^ situations, they result in some countries receiving all or nearly all of the aid in form of grants while other countries receive all or nearly ail of the ai 3 n in the form of loans. It has not been easy, moreover, to work out & ° r t0 ble procedure for the handling of the loans. At first, it was tempting explore the possibility of maxing a series of individual loans to each^ try for individual capital projects, such as power plants or refineries, with maturities and rates oi interest possibly varying from project to P ject and country to country. £ It has now become clear, however, that at least in the first year the program it would be better to keep the terms of the loans substantia uniform as between foreign countries and, in effect, to set up general lines of credit. This having been done, it will be possible for the re- port-Import Bank, as manager of the loan side of the Program, to work^ou arrangements so that these funds are used primarily for capital goods projects. The ECA is at present negotiating with the ERP countries as the terms of the loans and it is not possible to indicate how these neg tiations are getting along. It is most important for the lending part the Program to move along in pace with the grant portion of the Program- It is doubtful if Congress would be very happy to learn at the endox first year that the Administrator had been quite successful in giving a billion but had not been very successful in lending <*>1 billion. Th© European countries, it is believed, have come to appreciate this probic* although some of them did not seem to do so in the early months of the Program. Financing Intra-European Trade a practical application of the principle of mutual In cooperation among Western European countries, a possible use of the local currency funds night be for the purpose of financing intra-European trade. Since the end of the war the financing of such trade has been Carried out largely through bilateral agreements, stipulating the kinds and amounts of goods to be traded and providing for the extension of reciprocal lines of credit. The restrictive nature of these agreements is obvious, as they tend to limit the volume of trade to the level of those countries v hich are least in a position to export. Moreover, the gradual exhaus- tion of the lines of credit has led creditor countries (such as Belgium) to insist on payments in gold or dollars for their surpluses or to bal- ance tirade on bilateral bases. Toward the Latter part of 194-7, this factor was apparently threatening a complete breakdown of intra-European trade. An attempt to solve this problem was made at that time, when a group of Western European countries agreed to set up a multilateral clearing system operated by the Bank for International Settlements. This mechanism proved to be workable, but its results were limited by the fact that settlement of Intra-European balances could not be made automatic and universal. In fact, with few exceptions, most countries reserved the right to accept or reject propositions for compensations made by the Bank for International Settlements according to whether or not they considered such compensations desirable. The European Recovery Program was designed primarily to meet the ex- traordinarily large deficit of Western Europe and the United Kingdom in its trade with the Western Hemisphere. At the same time, it was recog- nized that there are two other external deficits faced by the ERP coun- tries: one with respect to other perts of the world outside of^Western Europe, such as the Far East and Africa; the other arising within the ERP area, where a few countries (notably Belgium) are in a persistent creditor position with respect to the other participating countries. A/ To a limited extent, both of these deficits might be eased were the SCA to carry on some "off-shore" procurement outside of the Western Hem- isphere. For example, Pakistan jute or Belgian steel might be bought with dollars for delivery to France. In both cases, however, it would be reasonable to ask why Pakistan and Belgium could not themselves provide rupee or Belgian franc credits to France. The reply is that both of these creditor countries have their own dollar deficit problem with re- spect primarily to the Western Hemisphere. That is, both Belgium and^ Pakistan (illustrative of countries standing in a creditor position with other ERP countries) need dollars and, accordingly, tend to restrict credit to debtor ERP countries and even to divert their exports to coun- tries willing and able to pay dollars. The result within the ERP area is an intensification of efforts at bilateral balancing which leads to forc- ing trade down to limits set by the current export capacity of the debtor. The ERP countries have been struggling with this problem for almost a year and the plan which they have now put forward for consideration of the European and the United States Governments has the following mam features: First: the ERP countries, will work out some funding or "Stand still" arrangements for the debtor balances accumulated in the present Western European payments agreements. The creditor countries such as Belgium and the United Kingdom agree to set up adequate lines of credit in their own currencies with respect to their debtors in the ahP group. y See Append ix 100 Thpy also agree to work out as rapidly as possible some system of multi- lateral offset or clearing. Second: the ECA would agree that allocations of aid to the creditor countries in the ERP group would consist of two parts. One would be unconditional and the other, which would equal the estimated credit balance with ERP debtor countries in the subsequent per- iod of time, would be conditional on the creditor country giving equiv- alent aid to its various debtors. The local currency counterpart coula be used for this purpose. To illustrate, let us assume that the Paris Or- ganization for European Economic Cooperation (OEEC) and the LCA have ar- rived at an estimate of £80 million as Belgium's need for dollars for a given ouarter. Assume, also, that Belgium's debtors in the ERP area for the same ouarter are going to need £40 million worth of Belgian franc cred- it s or grants. The ECA would then make an unconditional allocation of v^ million and a conditional allocation of U0 million, the latter in consid- eration of equivalent aid to be given by Belgium to her debtors within tn ERP area. is almost needless to remind you that these payments It arrangements robi for Western Europe cannot lead to a permanent solution of the basic P except insofar as the ERP area in the aggregate makes satisfactory progreb toward genuine international equilibrium. Exchange Rates and the Internatl^n^Jjone^^ The ERP agreements contain clauses obligating the recipient countries to pursue orderly domestic economic and financial policies, by balancing the government budget, creating or maintaining internal financial stabiii restoring confidence in the monetary system, stabilizing the anu currency establishing or maintaining a valid rate of exchange. These agreements P vide also for consultation with the United States on all mcluax matters, of course, exchange rates. Of course, it is not the desire oi this Govei ment to impose policies on other countries. Moreover, the Government na» expressed its intention to moke full use of the International Monetary i in dealing with exchange rate problems in connection with the European * covery Program. At the same time, the United States reserves the right initiate discussions respecting exchange rates. The Articles of Agreement of the Fund require each member country to agree on a par value for its currency before it can obtain assistance i t, the Fund; they recognize, however, that such par values need not be pew and provide a procedure for orderly changes through consultation with w ^ Fund. Before beginning exchange transactions on .-larch 1, 194-7, the tun proved the par values of thirty-two members 2/ and deferred determina^ in the case of nine members; subsequently it agreed on par values oi se ^ other members 3/ (including five new members). At the time when thes itial par values were established, both the Fund and the member coiintri ^ recognized that the acceptance of such par values was tentative and tna of the rates would need modification from time to time. The United States Government, through its interested agencies, ga^® ^ careful consideration to the problem of initial parities end wi ^ agreed Fund's view that par values established immediately after the end oi w could only be tentative. It recognized also that prevailing rates oi change may in some instances be out of line with relative wage and pri 2/ 3/ See Appendix levels, and that some adjustments in. -exchange rates, may prove necessary. There is general agreement that any action in Europe on exchange rates must be related to the steps taken toward internal stabilization of the economic and financial situations of the member-countries. It is also clear that the United States has a direct interest in the maintenance of proper exchange rates in Europe as long as large scale dollar aid is being provided. Obviously, however, the adjustment of exchange rates cannot be made simultaneously for all countries, since the requisite de- gree of internal stability is attained at different periods. Furthermore, the determination of what is a proper rate is by no means as simple as is often imagined.* Normally, a low exchange rate weans more exports and less imports; a high rate means just the opposite. Even when thi3 is true, of course, the inflationary effect of a deval- uation may be worse than any temporary improvement which may have oc- curred in the balance of payments. But in soiue cases, a. devaluation may not even have an appreciable effect or: the balance of payments. If ex- ports cannot be increased much due to production difficulties, and if imports were cut to the essential minimum anyway, the manipulation of exchange rates may not be beneficial. Moreover, even if it i.s believed that devaluation would be of advantage, the appropriate rate cannot be determined by simple price or purchasing power parity comparisons. This would be possible only if some base year could be selected in which a condition of perfect equilibrium had existed, and if in the interval since that year nothing had changed in the countries concerned except prices. There would remain difficulties of calculation even then, but it can be seen that the basic requirements are far from realistic. Problems have already arisen in connection with the exchange rates two important European countries, namely, Italy and France. At the time Italy was admitted to the Fund (March 1947) she had an exchange system based on multiple fluctuating rates and the Fund agreed to defer determination of the par value of the lira. Her exchange rate system had developed in this way: At the time of the Allied landing in Sicily 194-3 an exchange rate of 100 lire per U.S. dollar was established. In January 194o this rate was de facto discontinued and a system of pre- miums and surcharges was introduced to make the effective rate for all transactions 225 lire per U.S. dollar. Beginning in March 1946 export- ers were required to surrender to the Italian Foreign Exchange Office at this rate only fifty percent of their proceeds and were permitted to use the remaining fifty percent for their own authorized import needs or to dispose of it in a "free market" to importers of authorised commodities from free currency areas. It was this system which was in effect when Italy became a member of the 'Fund. On August 1, 1947, the premium of 1^5 pnrcant was abolished and the official rate was changed from 100 to 350 per U.S. dollar; the average rate for exchrnge transactions contin- ued to be determined on the basis of fifty percent at the official rate a nd fifty percent at the free market rate. In November 1947 Italy pro- posed to the Fund modifications in her exchange system, limiting spreads and fluctuations of rates. 4/ The Fund regarded this proposal as a step in the right direction, but could not give its approval because the new system was not made in accordance with the long-range objective of the *~"*See Internationa.'! monetary Fund "Third Annual Report" to be available 9/28/48 U See Appendix Fund, the establishment of a single and stable exchange rate. Therefore, Italy is not entitled to draw on the Fund's resources. In January 194-8, the French Government proposed to change the par value of the franc, which had been agreed upon with the Fund at approxi~_ mately 119 per dollar, and to modify the exchange system to include multi- ple and fluctuating rates. A new official rate of 2±U francs per dollar (or the equivalent) was proposed for all currencies; but for the dollar a (and the Portugese escuuo, which is also a freely convertible currency) "free market was established which actually was soon pegged at about francs per dollar. Exporters to the dollar area could sell half their ex- change at the free rate, which gave an effective export rate of ?60 franco The most essential imports from the dollar area were to enter at the ZIU rate, but other imports would enter at the free rate. There was no inten- tion to maintain cross rates in line with the new dollar rate. While the Fund recognised the special difficulties of France, it was unable to agree 1 to a system which seemed unlikely to avoid uncertainty and instability if exchanges. Despite the Fund's objection, France put the system into ef- fect. This action disqualified France from using the Fund's resources hut- did not require France to withdraw from membership.* The United States Government has kept the Italian and French exchange system, as well as the exchange systems o? other countries, under close lt] and continual study. It believes that the pattern of exchange rates — Europe and elsewhere — is by no means satisfactory for all countries, is fully aware of the difficulties in establishing exchange rates which be maintained by the member countries without undue recourse to the Fund under the circumstances prevailing in the world today. The dollar resources of the International Monetary Fund as the result of a policy decision taken by the Fund last April are not available to countries participating in tne European Recovery Program for the present> unless in exceptional and unforeseen cases. However, participating coun- tries are free to draw one another's currency from the Fund. This decisi^J is in line with the Fund's objective of maintaining its resources at a * and reasonable level, and at the same time provides a means whereby Europe- A countries may help one another by lending through the Fund. Since April yC 194-8, the date of the Fund's policy decision above referred to, there ha . 1 been no dollar drawings on the Fund by EBP countries. However, in this ^ the Netherlands and Norway drew the equivalent of v6.8 million and -v9•56 roiri million, respectively, in Belgian francs. Total drawings on the Fund f • 0 the beginning of its operations to August 31 have amounted to the equina! of ^633.9 millions, of which 6l6.5 million was drawn in dollars. Of the v ol £633*9 million - 4,-558.1 million was drawn by present ERP countries, and this ?540.7 million was in dollars.5/ s The Problem of Vie stern Germany—Special Before the war Germany played a vital role in the economy of Europe^ 1 both as a supplier and as a market for other European countries; hence t-^, importance of Germany's reconstruction for the recovery of Europe as a v/h^ * See Fund's Third Annual Report to bo released September 28, 1943 5/ See Appendix In July 194.8 industrial production in the US-UK zones reached 60 per cent of 1936, as compared to 42 per cent of 1936 in July 1947. As a re- sult of the internal currency reform in the U.S.-U.K-French zones 6/ and the European Recovery Program, it is expected that a level of 70 per cent of 1936 probably will be reached in the near future. Even this ra- tio will be substantially lover than that attained by most other Western European countries. This lag justifies the expenditure of substantial &CA funds in addi.tion to the large US-UK appropriations for the rehabili- tation of the Western German economy. The OEEC (Organization for European Economic Cooperation) which has been given the task of dividing EGA funds between the participating countries over the first year of SEP, has announced an allocation of $414 million for Bizonal Germany and ^100 million for the French zone. The inflow of goods procured on the basis of these allocations is ex- pected to raise the level of total imports in the second half of 1943 to almost il billion for the US-UK zones alone, or almost three times the figure of the second half of 1947. The sum corresponds in terms of real purchasing power approximately to the prewar level of imports. Exports the US-UK zones', although also three times as large as in 1947, are expected to reach only about 40 per cent of imports and thus to remain still very much below the prewar level. The currency reform was carried through in the US-UK-French zones of Germany in the period between June 18 and June 26. The reform ended the stage of "repressed inflation" which had hampered the Western German economy especially by diverting labor and capital to the black market and causing the hoarding of raw materials and finished products. In conse- quence of the restoration of the value of money, price control and ra- tioning could be lifted for all but the most Important commodities. It is proposed to alleviate the scarcity of credit due to the cur- rency reform by use of the local currency receipts for the sale of goods imported under ECA and US-UK appropriations. As indicated, these re- ceipts are to be deposited in special accounts and it is proposed that these sums be used for establishing a reconstruction bank that will grant Productive credits to the Western German economy. Originally, the curroncy reform did not extend to Berlin, but the attempt of the Soviet authorities to force the currency circulating in the Soviet zone of Germany upon the Western sectors of Berlin without quadripartite action, forced the Western powers to introduce the currency °f the Western zones in their sectors. The problem of unifying the Berlin currency system is still under quadripartite consideration. lhe_Role_of_ the National Advisory Council Cooperation on financial matters pertaining to the European Recovery Program is required among the various departments and agencies of the United States Govern;,lent concerned with foreign financial activities. The medium for such coordination is the National Advisory Council on In- ternational Monetary and Financial Problems, which was created by Con- gress in 1945 under Section 4 of the Bretton Woods Agreement Act. The Council consists of the Secretary of the Treasury, the Secretary of State, the Secretary of Commerce, the Chairman of the Board of Governors ioi; of the Federal Reserve System, the Chairman of the Board of Trustees of the Export-Import Bank, and, now, also the Administrator of the European Recovery Program.* Since its creation, the Council has played an active part in the de- termination of the foreign financial policy of the United States and in insuring consistency of action on the part of all Government agencies deal- ing with foreign financial matters. In particular, the Council has main- tained constant consultations with the United States Directors of the In- ternational Monetary Fund and the International Bank, and has given advice to the Administrator of the European Recovery Program on matters of local currency funds, loan-grant ratios, and. all other financial aspects of the program. It has been a primary concern of the Council to make certain that the domestic and international policies of the United States are ef- fectively coordinated in a mariner designed not only to insure the attain- ment of our foreign objectives, but to insure also that our actions in this field do not threaten the stability of our economic system. The American Economy and Foreign_/a_d a It must be recognized that our foreign economic program in the gS^e- gate imposes a very real burden upon the United States—a financial burden upon our Federal budget and an economic burden upon our people who are called upon to export to foreign countries far more goods and services than they receive in exchange. The European Recovery Program is the most, c important, though not the sole item of our foreign aid. Other °ngressi° appropriations have provided assistance to areas occupied by United State* forces, such as Germany and Japan, and to other countries such as China, Greece, and the Philippines, while the Export-Import Bank 7/ and the Int- national Bank for Reconstruction and Development 8/ (the latter thus far making little except dollar loans) continue to finance sound economic pro jects in Europe, Latin America, and other parts of the world. The predo inant character of the European Recove 17/ Program may be gauged by the ia that the amount authorized and appropriated on its account—v5 billion-- represents about four-fifths of the total appropriations by Congress ior foreign aid for the current fiscal year. 2/ Because of the large depend- ence of Europe on world trade, the role of the European Recovery Program goes far beyond any geographical limitations—in fact, it is intended tn a substantial part of the dollars made available to European countries will be spent in Canada, Latin America, and countries outside the Westen Hemisphere. In this way our aid to Europe will also serve to provide Canada and Latin America with dollars, which they in turn can use to pay for goods they need from this country, and will help to alleviate baiano- of payments problems in a wide area. n The Administration's recommendations on foreign aid were decided upo in the light of careful and comprehensive studies of our capacity to b e^ this burden. These studies were undertaken in the second half of 194/* a time when taxation remained at wartime levels and defense expenditures ^ were declining. The general conclusions were that the amount of contemplated for the current year would not impose any greater drain up * and/or their alternates. 7/, 8/, 9/ See Appendix American resources than occurred during past years, 'and that this drain would not unduly affect the standard of living of the American people and the stability of the American economy. These conclusions were based on certain assumptions,, mainly that there would be no overall increase in Government expenditures or decrease in taxation, and that the infla- tionary impact would be held in check by appropriate domestic measures. The most important of these domestic measures is in the realm of budge- tary policiesj it is supremely important that Government expenditures, including those on foreign aid and national defense, be covered within a balanced budget. If this practice is followed, the purchasing power created by these expenditures will be withdrawn from the market through taxation. At the same time, in view of the inflationary pressure aris- ing from domestic as well as foreign sources it is important to carry out a monetary policy designed to restrain the expansion of banic credit. To achieve the proper combination of budgetary and monetary policies re- quires the close cooperation of the United States Treasury and the Fed- eral Reserve System. This I shall develop further this evening—in the Seminar discussion. The cost of the foreign economic program as a whole represents a substantial measure of genuine sacrifice and subjects the American people to further inflationary pressures on the domestic economy in the short run in order to contribute to international, security and economic stabilization in the long run. The cost of foreign aid seems to be small indeed compared to the cost of the alternative. If we should re- fuse to extend assistance to foreign countries in critical need, we would run the risk of precipitating foreign developments of the most sinister character. We would be confronted with revolutionary economic and political changes throughout the world. All hope of a democratic .international order would be gone. War-wrecked countries in Europe and the Far East, deprived of the hope of a return to tolerable living stand- ards, would become- the easy prey of regimes which promise economic se- curity in exchange for the surrender of political freedom. Confronted Kith the world largely made up of dictatorships of the left or right, the United States would find itself isolated in a cold and hostile world. To maintain even a pretense of security under these conditions would re- quire a level of expenditures for defense vastly greater than any now contemplated. The present and prospective sums spent for foreign aid should be measured against these alternatives. Conclusion It is premature to attempt any quantitative estimate of the progress toward domestic recovery and international equilibrium which is being made by the European Recovery Program countries. The Administrator and other Government officials are very keenly aware that the Congress will expect a full statement at the time a request is made for an appropria- tion to cover the second year. But the EGA did not come into existence until the first part of April and in the five intervening months a cert- ain amount of time inevitably has had to be spent on getting started. According to the latest available figures, as of September 3, 1948, ECA Procurement authorizations 10/ for Europe have reached a total of ^->369 million but, of course, by no means all of this amount of aid has ST See Append ix yet actually reached Europe in the form of food, materials, and equipment. There is, of course, no certainty that our foreign recovery program will achieve all that we hope for it. Difficulties at present unforeseen mav arise to disappoint and thwart us, but such possibilities should not_ blind us to the certainty of disaster if we shrink from the task. In this connection, there is grave danger that we shall set too much store by the results achieved in the first year and, if these results are disappointing take the short-sighted step of discontinuing or greatly curtailing the pro gram. In fact, the objectives sought by the program cannot possibly be achieved in one year. To expect more than a sound beginning of the desirea recovery would be to misunderstand the nature of the problem and of the remedy. It should be remembered that after the first World War, which was vastly less destructive and disruptive than the recent conflict, it was not until 1925, or seven years after the defeat of Germany, that European economic activity was restored to the pre-war level. To a very large degree, the success of our foreign economic program will depend upon our own future actions. This applies not only to our ac- tions directly relating to the program itself but to our decisions in the e broader field of economic policy as a whole. For example, we cannot exp either the recovery of world trade or the recovery of Europe if, after £ short breathing spell, we attempt to re-instate pronibitive tariffs and thereby prevent Europe from selling the exports it must sell if it is to pay for the imports it needs and thus become self-supporting again. Jor Europe to pay its way, it is not enough that European countries are able to produce the necessary volume of exports; they must also be able to jafUj them. This means that other countries, including oar own country, mast prepared to increase imports. In the second place, we cannot expect Europe to achieve economic an political stability if our own economy, which is such an important segm of the world economy, is characterized by severe booms and depressions a comoanied by equally drastic fluctuations in our purchases from abroad. Much depends on our ability to keep our own house in order - particular^ a t l 0 on our ability to avoid the evils of inflation and deflation. I n f l ^ is the immediate problem, and this we must fight at the source, which maintaining maximum production and restraining as well as reducing exce^ purchasing power. To a degree which is almost impossible to exaggerate, the future do^ pends on the type of leadership shown by this country. Of the major co ^ tries which were engaged in the recent conflict, our country was almost J in being able to keep it3 productive capacity intact. It has been ^Sti that the United States at present accounts for roughly half of tne wori $ industrial production. Thus, without asking for the role, we find our* catapulted into a position of great power and influence which carries it a great responsibility, both abroad and at home. m Appendix - Footnotes In 1947, Belgium had a favorable trade balance with respect to the other participating countries of v>99 million. However, including in- visible items (shipping, tourism, interest and dividends, etc.) as well as trade, Belgium's favorable balance with participating coun- tries on current account amounted to only $81 million. Net credits for the third quarter of 1948 are estimated at ^28 million. Bel- gium's over-all trade deficit with the world as a whole, however, has been estimated at i>441 million and her deficit with the United States at C476 million. Par values announced by international Monetary Fund, December 18, 1946: Country Par Value omments (0 per unit of ^ (local currency foreign currency) units per dollar) Belgium 43.83 Bolivia 42.00 Canada 100.00 1.00 Chile 3.23 31.00 Colombia 57.14 1.75 Costa Rica 17.81 5.62 Cuba ±00.00 1.00 50.00 Czechoslovakia 2.00 4.80 Denmark 20.84 Ecuador 7.41 13.50 Egypt 413.30 E.1 Salvador 40.00 Ethiopia 40.25 France .84 /There has been no agreed par value for the Franc since France instituted its new exchange system on January 26, 1948/ Guatamala 100.00 1.00 Honduras 50.00 2.00 I Iceland 15.41 6.49 India 30.23 3.31 5 Iran 3.10 32.25 Iraq 403.00 .25 Luxembourg 2.28 43.83 20.60 4.86 Mexico Netherlands 37.70 2.65 Nicaragua 20.00 5.00 Norway 20.15 4.96 Panama 100.00 1.00 Paraguay 32.36 3.09 Peru 15.38 6.50 Philippines 50.00 2.00 108 Country Par Value Comments South Africa 403-00 .25 United Kingdom 403.00 .25 United States 100.00 1.00 3. Par Values announced by International Monetary Fund subsequently: Country Par Value Comments (;£ per unit of (local currency foreign currency) units per dollar) Australia 322.40 .31 New member; par announced 11-17-4' Brazil 5.41 IB. 50 Par announced 7-14-48 Dominican Hepublic 100.00 1.00 Par announced 4-23-48 Lebanon 45.63 2.19 New member; par announced 7-29-^ Syria 45.63 2.19 New member; par announced 7-29-4" Turkey 35.71 2. BO New member; par announced 6-19-4-' Venezuela 29.85 3.35 Par announced 4-18-47 4. The Italian system of exchange rates which was established then, and which is presently applied, is as follows: The official "fixed" rate of 350 lire per U. S. dollar was re- placed by a fluctuating rate determined monthly on the basis of tnc free market quotations of the previous month. The old rate ol 3 5 0, per dollar was discontinued for current exchange transactions, alt* it has been retained for certain internal valuations and for deternu ing rates applicable to certain payment agreements. Current i transa tions are conducted at the following rates of exchange: (1) an SU-j^ rate determined each month by the average of the rates prevailing ± ^ the free market during the preceding month; this average is -united quotations within a range of 350 lire to 650 lire per U. S. dollar. Fifty per cent of exchange proceeds from free currency areas are so at this rate to the Italian Foreign Exchange Office, while on the £ ^ ing side exchange is supplied at this rate for certain governmental ports and for imports under all payment agreements; U) A lre| rate at which the remaining fifty per cent of exchange proceeds iro free currency areas is sold. All non-governmental imports from n currency areas are made at this rate; (3) The average of the above rates, which is the effective rate for all exchange proceeds trow currency areas. The exchange rates of lira per U.S. dollar have the remained stable throughout the first part of the year, as indicated by the following quotations reported by the International Monetary Fund: Exchange Rates (lire per U.S. dollar) Jan. Feb. March April May June July (1) Official 576 573 573 574 575 575 575 (2) Free 573 573 574 575 575 575 575 (3) Average 574 573 574- 574 575 575 575 5. Total drawings on the Fund to July 31 > 1948, by country are as follows: ERP Countries Quota Drawings (In millions of U.S. dollars) In U.S. dollars Other Total Belgium 225 33.0 — 33.0 Denmark 68 10.2 10.2 — France 525 125.0 125.0 — Netherlands 275 62.5 ( 6 a/ 75.3 (6.8 b/ Norway 50 5.0 4.6 c/ 9.6 Turkey 43 5.0 — 5.0 United Kingdom .1,300 300.0 300.0 — 540.7 558.1 a/ Dollar equivalent of purchase of sterling b/ Dollar equivalent of purchase of Belgian francs c/ Dollar equivalent of purchase of Belgian francs Other than FRP countries Chile 50 3.8 — 8.3 Ethiopia 6 .3 — .3 India 400 44.2 — 44.2 Mexico 90 22.5 — 22.5 75.8 75.8 The reichsmark currency in Western Germany was converted into the new "Deutsche Mark" at the rate of 1 new for 10 old marks. Only 60 new marks were paid out in cash, however, (40 marks immediately and 20 marks on August 20); the remainder had to be deposited in bank accounts, of which one-half was temporarily blocked. All accounts exceeding 5,000 old maxics were released only after investigation of the owner's tax status. Holdings of public agencies were not con- verted, but public agencies (including the occupation authorities) received amounts sufficient to provide for one month's operations. The German authorities were instructed to enact legislation and im- pose special levies for the equalization of the burdens imposed by the currency conversion. No official exchange rate has as yet been established for the new currency, but in foreign trade (with the exception of food 110 imports) a factor of 30 cents per mark Is used for the convsrsion of dollar payments and proceeds into German currency. 7. As of July 31, 1948, the Export-Import Bank had outstanding leans amounting to $2,224 millions, and undisbursed authorizations of &6.16 millions. This, out of a total lending authority of <?3500 millions, left $660 millions of uncommitted lending authority. 8. The following table shows loans extended by the International Bank as of June 30, 1948: Loans Disburse- Unused balance authorized ments of commitment.. (Millions of U.S. dollars) France 250 250 Netherlands 195 195 Netherlands shipping companies* 12 12 Denmark 40 16.4 23.6 Luxembourg 12 8.6 3.4 Chile 16 0 16 * $8.1 million of this loan was extended by 10 U. 3. com- mercial banks and guaranteed by the International Ban'^' (For further information on International Bank operations v 8 see Third Annual Report to be released September 29, J-94' r 9. The amounts appropriated or authorized by Congress for foreign aid f° the fiscal year 1948-49 are as followst (In millions of dollars)_ European Recovery Program ^ 5>055 a/ Government & Relief in Occupied Areas b/ 1,300 Revolving fund for purchase of agricultural commodities for occupied areas 150 c/ Greek-Turkish Aid 275 China Aid 400 d/ Philippine Rehabilitation 116 International Refugee Organization 71 International Childrens Emergency Fund 35 ; a/ v4,000 million appropriated for use from April 3; 1948, to June 30, 1949, but may be spent in period ending April 2, 1949. v55 million represents a deficiency appropriation for fiscal 1948. I,000 V million represents authorization to the Economic Cooperation Administration for extension of credits through the Export-Import Bank. b/ For Germany, Japan, Korea, the Ryuku Islands, and a small sum for occupation costs in Austria. c/ Credit authorization d/ Available to April 2, 194-9 10. Procurement authorizations are issued at the request of the European countries, in accordance with the fund allocations made by EGA at the beginning of each quarter to each recipient country. Total fund allocations by ECA to ERP countries for the period April 3 to September 30, 1948, amount to ^2,595 million, of which v£,080 is in the form of grants, and £515 in the form of loans. The ECA has so far extended only one loan, to Iceland (v<-3 million). Loan negotiations with other ERP countries (U.K., France, Belgium, Italy, etc.) are in course and will be concluded shortly. It is quite possible that procurement authorizations will reach by September 30 a figure close to that of grant allocations (2,0S0 V million). Procurement authorizations on loan on the other hand, will not begin until after the signing of the lean agreements and, therefore, the total amount outstanding at the end of September - if any - will possibly be small.

M.S. Szymczak (1948, August 31). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19480901_szymczak_2

@misc{wtfs_speech_19480901_szymczak_2,
  author = {M.S. Szymczak},
  title = {Speech},
  year = {1948},
  month = {Aug},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19480901_szymczak_2},
  note = {Retrieved via When the Fed Speaks corpus}
}