of the funds proposed to be appropriated for the 15-month period ending January 1949, it appeared that a modest amount of aid might be extended on a loan basis. 3. One billion dollars of total aid during the first 15 months of the program was made available by the Economic Cooperation Act of 1948 solely for loans and guaranties. In allocating these funds administratively, it was necessary to appraise the current positions of the several European countries and their prospects under the recovery program and later. The extent of physical destruction and disturbance of their economic systems as a result of the war varied substantially from country to country. Furthermore, some countries had already contracted heavy foreign indebtedness in connection with their reconstruction efforts. It was, therefore, necessary to weigh a wide range of factors in arriving at a judgment as to the allocation of these loans among the countries. 4. During November and December 1948 the Council reviewed the financial problems raised by ERP to that time and related these problems to the anticipated problems for the next fiscal year. With respect to the future loan policy of ECA, the following position was taken : "Certain European countries have accumulated a substantial indebtedness to the United States, including debts arising from war-account settlements, postwar credits, and loans extended by ECA during its first year of operations. A further large mortgage upon future dollar receipts would in all probability be a deterrent to the objectives of the recovery program. The imposition of further claims against European dollar earnings by the United States Government would lead to a smaller margin of flexibility in the international accounts of the debtor countries, thereby necessitating disproportionate adjustments in vital imports as earnings fluctuate. The probable effect would be to reduce to a corresponding extent the capacity of participating countries to service additional financing which they may require and to pay earnings on direct investments. Therefore, any substantial increases in dollar service charges resulting from the assumption of increased obligations to the United States Government would be scrutinized with particular concern by international lending agencies and private investors. "The Council consequently recommended that the Administrator for Economic Cooperation be authorized, in consultation with the Council, to determine when aid for the fiscal year 1949-50 should be on a loan basis and in what amount. Prudent use of this discretionary power would keep the field open for long-range investment prospects for private capital, for Export-Import Bank financing, and for International Bank loans." 5. The Council considered that assistance for fiscal 1950 and 1951 should be primarily on a grant basis, but recommended that the Administrator for Economic Cooperation seek discretionary authority with respect to the total amount appropriated for the program to extend such assistance on either a grant or a loan basis. For fiscal year 1950 Congress authorized $150,000,000 to be used solely for the purpose of extending loans to participating countries. * With respect to loan assistance to ERP countries for fiscal 1951, the Economic Cooperation Administration presented the following statement to the Congress: "In 1949-50 loans extended to the participating countries by the ECA will probably not total more than $150,000,000 As in this year, the United States National Advisory Council on International Monetary and Financial Problems is recommending that aid in 1950-51 be predominantly on a grant basis and the Administrator once again be given discretion to extend assistance either on a grant basis or on a loan basis. "It may be recalled that in 1948-49 the ECA loaned 972.3 million dollars to the participating countries, utilizing funds that were made available by the Congress only on a loan basis. These loans brought the total dollar indebtedness of the participants to, roughly, $11,000,000,000, which will require interest and amortization payments in dollars of about $500,000,000 annually in 1952 and thereafter. In view of the fact that Western Europe will continue to have difficulty financing dollar imports, let alone dollar debts, it is believed unwise to extend any substantial amount of loans in the immediate future. If the Congress grants the Administrator discretion in determining the allocation and quantity of loans in 1950-51, as it did in 1949-50, it is likely that only a very small total of loans will be extended * * (P. 16, April-September 1950 NAC Report.) 6. With respect to the fiscal year 1952 program, the NAC recommended that extraordinary assistance to Europe should be on a grant basis. Economic assistance to Europe during fiscal year 1952 will generally take the form of raw materials and finished products used to expand military production directly or to provide materials to enable these countries to sustain the economic burden resulting from the defense effort. The lesson of history is that loans incurred during a military effort are harmful from the standpoint of debtor to creditor, to long-range political and financial relationships. It is the view of the Administration that it would be unwise to require the European governments to assume additional debt burdens arising essentially out of the current defense effort. To do so would place an exceedingly heavy burden upon the European economies through additional principal and interest charges on the European balances of payments, and would tend to prevent, for many years to come, a return to a rational pattern of private investments and world trade and payments. There may be some exceptions to this principle for special projects which give rise to additional debt servicing capacity, for example, certain loans for colonial development or for other projects which may yield direct returns in the forms of strategic or scarce materials. Generally, however, assistance in support of the mutual defense program as proposed will not give rise to an increased ability to service debt and so should be financed on a grant basis. 7. The position has been taken by the executive branch that where the financial situation of the aid-recipient countries warrants, aid ought to be made available on a loan basis but that these loans ought to be sound and repayable; not questionable or "fuzzy" loans. If sound and repayable loans cannot be made in terms of the over-all position and prospects of the country, then aid ought to be on a grant and not on a pseudo- or quasi-loan basis. The making of other than sound and repayable loans would lead to deterioration in the entire institution of foreign lending and might result in borrowing countries treating loans from the Export-Import Bank, International Bank for Reconstruction and Development, and private sources as not being firm obligations. CAPITAL INVESTMENT PROJECTS, FAR EAST PROGRAM The attached listing shows capital projects of a permanent nature included in the ECA Far East programs for fiscal year 1951. This listing in one sense exaggerates the capital aspect of ECA programs in these countries, since repair and maintenance are included along with modernization and expansion. Capital investment projects approved in the Far East as of June 30, 1951 STRATEGIC MATERIALS PROJECTS OF A CAPITAL-INVESTMENT NATURE ECA assists the participating countries in financing strategic-materials development projects through loans and grants for specific projects. The great majority of the contracts are on a loan basis; calling for repayment of the amount advanced, plus interest, in the form of materials acceptable for United States stockpiling. In addition, most contracts provide an option for purchases by the Emergency Procurement Service. As of June 30, 1951, ECA dollars totaling $23.5 million had been committed for strategic-materials projects of a capital-investment nature. Of this total, $1.8 million was in the form of grants. The attached tabulation lists all such strategic-materials development projects financed by ECA with dollars, whether on a grant or loan basis. Strategic-materials development projects of a capital-investment nature financed with ECA dollars-Contracts signed as of June 30, 1951 NOTE. The commitments shown are the dollar amounts only, excluding commitments from the fivepercent counterpart fund which are involved in many of the projects conducted on a loan basis. EUROPEAN INDUSTRIAL PROJECTS ECA industrial projects are approved for major construction, modification, rehabilitation, or equipping of plants, installations, or facilities where substantial amounts of integrated engineering or dollar procurement are required. In practice, the projects are generally confined to those involving $1,000,000 or more of ECA funds. The ECA dollar assistance has covered only about 25 percent of the total costs of the projects, with the participating countries or private firms financing the remaining 75 percent. It is not possible to identify specific projects as being made on a loan or a grant basis, as the loan-grant ratio for any country is based on total ECA aid to that country, rather than being identified with individual projects. ECA aid goes to the government of the country in which the projects are located rather than to the private companies involved. It may be pointed out that while many of these projects, such as power plants, help increase industrial production, they are not necessarily a source of dollar earnings. The attached list (Congressional Record, July 25, pp. 9086-9088) covers all European industrial projects approved by ECA through June 30, 1951. Industrial projects approved in ERP countries (in Europe) as of June 30, 1951 Industrial projects approved and ECA-financed costs as of June 30, 1951 Alpine Montan (OAM), Donawitz, Austria (blooming mill). United Austrian Iron & Steel Works (VOEST) (slabbing and blooming United Austrian Iron & Steel Works, Linz, Austria (hot strip mill). Paper..... 26, 017 9, 144 Nettingsdorfer Papierfabrik, Nettingsdorf, Austria (pulp and paper).... Ley-Kam-Josefsthal A. G. at Gratwein, Austria (pulp and paper mill)__ Natronzellstoff-Und Aktiengesellschaft, Nettingsdorf, Austria (paper Arland Paper-Und Zellstoffabriken A. G., Andritz & Rechberg, Austria. Raw materials extraction.. 8,060 3, 081 Oil drilling: Rohoel-Gerwinnungs Aktiengesellschaft at Vienna, Austria Iron ore mining: Alpine Montan, Eisenerz, Austria Iron Ore Mine |