As noted above, it does not appear that firms with large capital and a strong financial position have any difficulty in obtaining credits of this kind-just as they do not have difficulty in getting credits of other kinds for other purposes. Also, where the proposed import consists of staple materials that are quoted on commodity exchanges or enjoy a similar ready market, many banks are likely to extend credit with some degree of reliance upon the lien that they would hold upon the goods being imported. The problem of credit, therefore, seems to relate mainly to smaller or more specialized importing firms that deal in manufactured or other nonstandard goods.

From the viewpoint of the banks, of course, each bank has already been extending credit to all applicants that the bank considers creditworthy. Also,

as might have been expected, some banks appear in fact to have been more aggressive than others in finding ways to meet importers' problems.

It may be noted that for the same reasons that make it difficult for most commercial banks to extend more liberal credit to importers, it would also be difficult for any United States Government agency to operate on any large scale in this field.

It may be well here to review some of the characteristics of the importing business that make financing more of a problem for such firms than for firms dealing in domestic goods.

In the first place, because of the time required for physical shipment of most imports, the aggregate amount of goods that the importer has in his inventory, plus in transit at any given time, is likely to be relatively large in relation to his volume of business. Furthermore, there are various technical vicissitudes, not found in domestic transactions, which may delay the arrival of goods in transit and which therefore add to the normal business problem of having goods available at the time and place where they can be sold.

Even where the importer already has contracts to resell the goods on delivery, the financing may be considered risky if there is uncertainty as to his ability to obtain the goods and redeliver them in time to collect under the contract.

And, secondly, whereas a dealer in domestic goods may be able to receive lines of credit from his suppliers, the importer is likely to need a letter-of-credit arrangement whereby a bank or other financial institution guarantees payment to the foreign seller. This combination of circumstances causes the importer to have a greater need of bank accommodation.

It is said that in most European countries an importer is able to do business with banking institutions that have such a thorough knowledge of international trading, and of the markets for the particular lines in which the importer deals, that the bank can be relatively liberal in taking account of the value of the merchandise itself as a basis for extending credit. This may be possible largely because European banks have traditionally maintained large branch systems and widespread business connections in many parts of the world. It seems clear that most American banks are not prepared to extend this kind of credit, except in some cases on staple materials.

Apart from credits based in this way on the value of the merchandise in transit, bank credits are of course ordinarily based on the banker's analysis of the borrower's character, business ability, financial condition, and prospective resources out of which repayment must come.

Where the borrower is engaged in an import-export business, this kind of analysis requires a knowledge of the import-export business, the markets involved, et cetera, that most interior banks would not be likely to have. Thus, it is more difficult for an importer to obtain a line of credit if he is not in the locality of a bank that understands his business well enough to have confidence in its appraisals of the business.

In connection with this question of banks' willingness to extend credit lines to importers, it must also be noted that there are probably many would-be importers who have so little capital that they would not be considered suitable credit risks by any banks at all. It is worth pointing out that the promotional efforts of such people, if put to work on the sale of foreign manufactures needing to be introduced to American markets, might substantially increase the flow of some kinds of imports.

For whatever reasons, a considerable number of importers told the Commerce Department in its 1950 survey that they were unable to get adequate credit from their banks, and that this caused them to forego many import propositions that they considered safe and profitable. Many felt that American commercial bankers were overconservative with respect to import credits; but on the other hand, some were inclined to admit that the particular credits would not have been

safe enough for banks to extend with depositors' funds, and they felt that the only solution might be the developing of some other source of credit.

One of the ideas mentioned in this connection was that it would be desirable if this country had well-capitalized merchant banking firms that would be prepared to share in the risks (and in the profits) of a transaction.

Along the same lines, some importers reported the obtaining of credit from factoring firms or from other nonbank lenders, paying higher than bank rates.

Another idea was that the foreign exporters' terms of payment ought to be more liberal. A few felt that some arrangement for loans or guaranties by the United States Government would be a desirable solution.

The following sections of this paper will undertake to discuss two of these possibilities somewhat further. One is the use of factoring firms which, charging higher rate, are often willing to assume credit risks that banks would not be willing to take. The other relates to the obtaining of credit by an American importer from his foreign supplier, especially where the foreign country has an export credit insurance arrangement, as most European countries have.

Staff members of the Federal Reserve Bank of New York in November 1952 conducted a survey of nonbank sources of credit available to smaller importers in the New York area. There were about 10 firms in New York engaged in the financing of foreign trade, with a combined capital of around $15 million; the lending potential of such factoring firms can normally be expanded about threefold through bank credit available to them. With some additional capital supplied to foreign traders by customs brokers and freight forwarders, a total of over $50 million was probably available from nonbank lenders.

These firms seem to have had enough funds at their disposal to finance all the business offered to them which they considered sound enough to take. While a large part of their financing done by these lenders has been exports, their volume of import financing has also been substantial, fluctuating over a range of perhaps $35 to $75 million a year.

These sources of credit have been used not only by small and medium-sized importers who do not have access to bank credit but also as an additional or alternate credit source by other importers. These include, for example, importers who specialize in commodities with a marked seasonal pattern and who need more credit at certain times of the year than their banks will allow them.

While some banks may be reluctant to have importers use their lending facilities and those of factors at the same time, other banks have referred customers to factoring firms for additional amounts that the banks were unwilling to finance. A bank may refer an otherwise entirely creditworthy client to a factor if the bank feels that the proposed financing would go beyond the amount warranted by the importer's capital and general creait standing, and hence would rely too heavily on the successful resale of the particular goods, or if the proposed transactions fail in some other way to fit the traditional pattern of the transactions usually financed by the bank, such as exports or imports involving switch deals.

A factor depends, of course, on his knowledge of commodities and of supply conditions and his contacts in the foreign-trade field, to put him in position to extend credits where a commercial bank would not feel able to assume the risks. Frequently these contacts also enable the factor to give the importer special advice and guidance on the details of the transaction.

It should be borne in mind that the discussions here relate to firms that operate in New York exclusively, that is, extend credits only to foreign traders who are near enough to New York for direct contact with the factoring firm. It is believed that similar firms are active on a smaller scale in a few other cities, but no estimate is available as to the size and importance of their business.

Charges by factors for the extension of credit usually consist of two items. Α flat fee, ranging up to about 11⁄2 percent of the amount involved, is charged for the opening of an import letter of credit through the factor's regular bank, whether the credit is used or not. Once the letter of credit is drawn upon, the charges on the amount outstanding may run anywhere from three-fourths of 1 percent to 2 percent per month, or 9 to 24 percent on an annual basis.

While costs of factor financing are thus far in excess of those incurred under bank financing, these charges probably do not often prevent a transaction from being consummated, since the kinds of import transactions that are customarily financed by factors would ordinarily involve high enough profit margins to support such charges. These imports have consisted in the main of consumer goods, such as toys, giftware, and household articles, and certain textile and nonperishable food products. Imports of raw materials are rarely factor-financed, partly because they tend to be made in great bulk by a few established firms and partly because the small profit margin on these commodities makes recourse to factors too costly.

Under normal arrangements, as outlined in the first part of this paper, foreign exporters have most often expected payment on a letter-of-credit basis, whereby the importer must provide a guaranty of payment by a bank before the goods will be shipped. Sometimes the exporter may be willing to ship goods against payment on delivery, but even in this case the importer would have to arrange for financing from United States sources by the time the goods arrive.

The biggest obstacles to the more liberal extension of credit by the foreign exporter would seem to be (1) his difficulty in getting information as to whether or not an ordinary American customer is creditworthy and (2) the difficulty, expense, and delays of collecting an account at long distance, if any kind of difficulties or questions should arise. Even if an exporter abroad has plenty of capital or credit available, he may not want to risk his own funds by extending credit to American purchasers about whom he does not know very much.

If the exporter's country has an export credit insurance system, and if the system can arrange to accept the burden of collection problems and collection risks, then it would seem possible to obviate these difficulties.

In further exploring this general subject it would seem useful to have in mind especially the British Export Credits Guarantee Department. This is not only because of Great Britain's importance as an exporter but also because the British guaranty system is the oldest and probably the best developed of these systems and has, to a considerable extent, served as a model for other European systems. A British exporter can submit all or a part of his foreign credits for inclusion under one of these guaranties. Each proposed debtor is subject to acceptance or rejection by the department, whose representatives in the United States can check on the credit standing of American debtors. However, if the exporter has an overall policy covering all his export credits, or all credits to American importers, he need not consult the agency in advance regarding any small credit where it is below some agreed amount and where the exporter has obtained a favorable report on the importer from an American rating agency or banker.

If a credit is accepted and a loss occurs, the percentage covered by the guaranty would be typically 85 or 90 percent. The rest of the loss would fall on the British exporter, but this would correspond roughly to his profit on the transaction, with the guaranty assuring reimbursement of his out-of-pocket costs.

The department seems to have been resourceful in finding ways by which it can help exporters to extend credit beyond the usual orthodox arrangements. It is not uncommon for it to guarantee credits with maturities running to several months after the arrival of the goods, where this is necessary to enable the British exporter to compete with the terms offered by American domestic competitors.

The department also makes special arrangements for such cases as a desirable importer who has only $10,000 of capital and who proposes to buy British goods requiring a credit of perhaps $50,000; the department will make the necessary special investigations and in appropriate cases will approve such credits, subject to the collecting of a higher rate of premium from the British exporter.

It may now be asked whether the Department could properly go any further than it already does in guaranteeing credits of types that a conservative banker would not be inclined to accept. It would seem to be in the British interest to go as far as possible in extending credit wherever this will increase the flow of exports, and particularly where it may be instrumental in opening up new channels of trade, provided there is reasonable expectations of the credits being repaid.

On the other hand, it would obviously be undesirable if credit standards were lowered to the point where a large volume of defaults would result. Furthermore, of course, if a policy of liberalization proceeded to the point where the premiums collected could not reasonably be expected to cover the prospective losses, this would amount to a subsidization of the exporters concerned, which would raise questions of conflict with other governmental policies.

Such questions of further liberalization are matters for continuing examination by the various foreign guaranteeing authorities. A relevant factor in each case would be the existing relationship between the premiums collected on guaranties of American credits and the losses sustained on this category of business. If it appeared that the premiums were considerably in excess of the losses, this would suggest the possibility that credit standards could be further relaxed.

Apart from the possible question of more liberal credit standards, there may be other respects in which present export credit guaranty arrangements could perhaps be changed so as to increase their effectiveness.

First, increased publicity for the available credit facilities might be helpful. There must be many potential importers in the United States who have the impression that imports necessarily involve complicated arrangements for letters of credit, foreign exchange remittances, or the like. If businessmen generally were

aware that a foreign exporter, with the backing of some insuring agency, might be in a position to ship goods on open-account terms, as so much domestic business is done, this might be very helpful.

Arrangements by foreign insuring agencies for collaboration with the local bank where the American importer does business, might also be worth considering. For example, some arrangement might conceivably be worked out whereby the importer's local bank would extend credit to him under a guaranty arrangement, with the export credit agency of the foreign country agreeing to reimburse the bank for some percentage of any loss.

Such an arrangement would bring in more fully the local bank's knowledge of the local standing of the debtor. It would also result in an earlier transfer of dollars to the exporter's country, and it might help to arouse wider interest in foreign trade on the part of American banks. However, the arrangement might be too complicated to be worthwhile unless a very substantial volume of transactions were foreseen.

The CHAIRMAN. By unanimous consent we will have these documents placed in the record which we considered the other day. They are: The United States and Its Foreign Trade Position, prepared by the National Electrical Manufacturers Association; Analysis of Legislation, Treaties, and Regulations Affecting the Ability of American Manufacturers to Compete With Foreign-Produced Goods, prepared by Donovan, Leisure, Newton, and Irvine; The United States Electrical Manufacturing Industry and Its Relation to the Security, Health, Safety, and Welfare of the Country, prepared by Stone & Webster Engineering Corp.; The Foreign Trade Position of the United States and the Electrical Manufacturing Industry of the United States, by O. Glenn Saxon, and a summary entitled, "The Foreign Trade Position of the United States in the Electrical Manufacturing Industry."

(The material referred to will be found in the appendix, p. 399.) The CHAIRMAN. Are you finished, Mr. Arey?

Mr. AREY. I am unless there are questions.

The CHAIRMAN. At 2:30 this afternoon we are going to have a motion picture in room 457. That is a motion picture in color, with sound, of many of the Export-Import Bank projects.

Then at 10 o'clock tomorrow morning we are going to have a number of domestic bank witnesses. They are bankers who have

had experience with the Export-Import Bank.

We will again on Friday hold hearings. Then on Monday and Tuesday we will hold further hearings, having as witnesses men who have had experience with the Export-Import Bank. At the end of those hearings we will recess until further notice, at the call of the chairman.

Unfortunately, I was ill, as you know, for quite a period of time and this whole hearing got off schedule. It was unfortunate, but could not be avoided.

We will hold hearings on this whole subject from time to time during the entire year. We appreciate your cooperation. As time goes on we may want to change the type of study we are making, the type of inquiry and the type of questioning.

Í again want to say to you, and I wish you would help us, that we are looking for a new formula, if we can find it, so we can better promote the private enterprise system in the world. I think that would be in the best interests of everybody concerned.

We now stand recessed, unless there are further questions.

(Whereupon, at 12:10 p. m., a recess was taken until 10 a. m., Thursday, January 28, 1954.)

STUDY OF EXPORT-IMPORT BANK AND WORLD BANK

THURSDAY, JANUARY 28, 1954.

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C. The committee met, pursuant to call, at 10:30 a. m., in room 301, Senate Office Building, Senator Homer F. Capehart, chairman, presiding.

Present: Senators Capehart, Bennett, Bush, Beall, Payne, Maybank, Robertson and Sparkman.

Also present: Henry F. Holthusen, general counsel; H. K. Cuthbertson, Jr., Raymonde Alexis Clarke, and Donald L. Rogers, assistant counsel.

The CHAIRMAN. The committee will please come to order. Our first witness will be Mr. Andrew L. Gomory, vice president, Manufacturers Trust Co. of New York City.

Mr. Gomory, will you proceed in your own way.

STATEMENT OF ANDREW L. GOMORY, VICE PRESIDENT,
MANUFACTURERS TRUST CO., NEW YORK, N. Y.

Mr. GOMORY. I have a very short statement. I am sorry I did not prepare a number of them. I am going to have it multigraphed so that everyone will have a copy.

The CHAIRMAN. You may proceed in your own way. Maybe we will have some questions.

Mr. GOMORY. Mr. Chairman, my name is Andrew L. Gomory and I am vice president in charge of the Foreign Department of the Manufacturers Trust Co., New York. I am also chairman of the American Committee of Short-Term Creditors of Germany; and in that capacity I represented the American banks at the German Debt Conference in London. I am also a member of the board of the Far East-American Council, the American Council of the International Chamber of Commerce, and other trade organizations.

My institution received a letter dated September 10, 1953, from the chairman of the United States Senate Committee on Banking and Currency, the Honorable Homer E. Capehart of Indiana, under authorization of Senate Resolution 25.

This letter has been answered by my institution on October 6, 1953, setting forth our replies to the questions in Senator Capehart's letter. My institution has no objection to including this letter as part of the record of the hearings. With your permission, I would like to read that into the record.

The CHAIRMAN. You may proceed.

Mr. GOMORY. The letter is as follows: