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WHITE SULPHUR SPRINGS, W. Va., May 28, 1948. Hon. CHARLES WOLVERTON, Chairman, House Interstate and Foreign Commerce Committee,

House of Representatives: I have been instructed by the board of governors of the National Association of Securities Dealers, Inc., to advise you that while we do not oppose provisions in bills H. R. 643 and S. 2636, which would exempt direct obligations of the International Bank from the requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934, we do oppose bills H. R. 6413 and S. 2636 insofar as the bills as presently drafted exempt obligations or securities guaranteed by the International Bank from the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and insofar as such bills as drafted make obligations or securities issued or guaranteed by the International Bank eligible for underwriting and dealing by national banks and members of the Federal Reserve System.

The board of governors believes the provisions so objected to raise the whole question of dealing in the underwriting of securities and obligations by the banks as expressly forbidden by section 5136 of the Revised Statutes and the Regulations of the Comptroller of the Currency. While we understand that it is the intention of the present administrators of the International Bank not to sell publicly through banks and without registration under the Securities Act of 1933 issues of foreign corporations or foreign governments when guaranteed by the International Bank, the bills by their terms would permit this, and furthermore, the administrators of the International Bank admit that if the bills were passed, banks would not be bound to hold such securities and would be free to sell them as underwriter and distributors.

The board of governors is frank to admit that in the short time the association has had to study the bills all the implications and consequences thereof have not been thoroughly covered and thought out, but with the possible drastic implications of change of public policy involved, the board of governors believes the matter deserves thorough investigation and consideration.

L. R. BILLETT, Chairman.

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.,

Washington 6, D. C., June 3, 1948. Hon. CHARLES A. WOLVERTON, Chairman, Committee on Interstate and Foreign Commerce, House of Representatives, House Office Building,

Washington 25, D. C. DEAR MR. CHAIRMAN : On May 26, 1948, a telegram was addressed to you by L. Raymond Billett, chairman of the borad of governors of the National Association of S curities Dealers, Inc., wherein was expressed our views with respect to H. R. 6 143 and S. 2636, presently pending before the Congress.

It is our understanding now that an amendment to said legislation is to be presented to your committee for consideration. I have been instructed to state that if this amendment is approved and becomes a part of H. R. 6413 and S. 2636, the National Association of Securities Dealers, Inc., will withdraw its objections to such pending legislation. A copy of our understanding of said amendment is attached hereto.

In view of the withdrawal of our objections, based upon the foregoing, we do not believe that it is necessary to appear before the committee. We wish to thank you for the opportunity to appear before the committee afforded in your notice of May 29, 1948. Yours sincerely,

WALLACE H. FULTON,

Erecutive Director.

PROPOSED ADDITION TO H. R. 6443 AND S. 2636

SEC. 4. In order that the Congress may from time to time review the operation and effect of the provisions of this Act, the National Advisory Council on International Monetary and Financial Problems shall transmit to the President and to the Congress special reports on the operation and effect of the provisions of this Act as hereinafter in this paragraph provided. The first report shall be made not later than two years after the approval of this Act and a report shall be made every two years after the making of the first report. Each report shall cover

and include: The extent to which the exemptions herein provided for have accomplished their purposes; the operations and the policies of the bank in the marketing of obligations issued or guaranteed by it; the extent to which such exemptions have aided the bank in the marketing of such obligations; the extent, if any, to which modifications of this Act may be advisable in the opinion of said Council in order adequately to protect the interests of investors and securities dealers; and the recommendations of said Council with regard to the advisability of continuing, modifying, or terminating such exemptions, with particular reference to the extent to which the discontinuance or modification of such exemp tions may affect the bank in respect of the aid which it may be able to afford under its Articles of Agreement in the financing of European recovery and the reconstruction and development of the economic resources and facilities of its members. Before making any such report said Council shall afford to any association of brokers or dealers which shall be registered with the Securities and Exchange Commission as a national securities association under section 15A of the Securities Exchange Act of 1934 an opportunity to present to said Council its views with regard to the matters to be covered and included in such report as hereinbefore provided.

The CHAIRMAN. The first witness will be Mr. Eugene Black, executive director for the United States of the International Bank for Reconstruction and Development.

I will say to Mr. Black and others who are here that we are unfortunate in that the House convenes today at 10 o'clock. There is important legislation before the House relating to appropriations for the ECA. However, there will be members of the committee who will be back as the hearing progresses.

To save time, and in order to conclude our hearings today, it will be necessary for us to start.

Mr. Black, do you have a statement that you wish to make to the committee.

STATEMENT OF EUGENE BLACK, EXECUTIVE DIRECTOR FOR THE

UNITED STATES OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Mr. BLACK. Mr. Chairman, my name is Eugene R. Black. I am executive director for the United States of the International Bank for Reconstruction and Development. I have been a banker for the past 30 years and resigned as vice president of the Chase National Bank when I took my present position. During a large part of that period I was the head of the bond department of the Chase National Bank and was in charge of its investment portfolio. I was also responsible for handling the merchandising by the bank of large amounts of State, municipal, Federal land bank, Federal intermediate credit bank, and Federal home-loan bank obligations running into several billions of dollars. I have also been a special consultant to the Federal Land Bank System in connection with the refunding of about $1,500,000,000 of its bonds.

As you know, the National Advisory Council has proposed to the Congress legislation to exempt securities issued or guaranteed by the bank from the Securities Act of 1933 and the Securities Exchange Act of 1934, and also to amend the National Bank Act to permit member banks of the Federal Reserve System to deal in securities of the bank.

I should like first to discuss briefly the importance and urgency of this proposed legislation. It is important because it may well represent the difference between the bank's being able to raise adequate

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funds in the market for its lending operations and its being unable to provide sufficient funds for all the sound reconstruction and development projects which it should finance. We think the bank's bonds are the highest grade security. We believe the market is beginning to share our view. But without this legislation it is going to be extremely difficult, for purely technical reasons, for the bank to market its issues.

At this point I want to step out of my role as the United States representative on the bank and speak to you plainly and frankly as a United States citizen and Government oflicial. In that capacity I want to say this legislation is urgent from the point of view of the interests of the United States.

Congress has just enacted the Economic Cooperation Act, pursuant to which we have undertaken an enormous financial obligation in order to get western Europe back on its feet. Right now the Senate and House Appropriations Committees are considering how many billions of dollars will be required just to cover the first years' operation of the program. And each of us has a real stake in seeing that while we do the job right, we put up no more money than is absolutely necessary,

It is squarely at that point that this legislation for the International Bank becomes urgent. For, as the report of the Senate Committee on Foreign Relations on the European recovery program indicates,' some part of the financing of the recovery of western Europe, particularly in the later years, can be handled by the International Bank if conditions permit. Those conditions are twofold. One, the bank has got to have the money to lend. Two, the bank has got to be convinced that its loans are sound investments.

This much is clear: To the extent that the International Bank has the funds available and can make sound businesslike loans in Europe, we are going to reduce the total amount the United States Government is going to be called upon to provide in one form or the other. You can understand therefore why it is important to all of us that these unnecessary marketing obstacles be cleared out of the bank's way immediately so that it can pitch in and do its reasonable share in financing the recovery of Europe.

I want to add one word of caution, however. Even if we get this legislation promptly, there is no guaranty the market can or will immediately be prepared to absorb an unlimited amount of our bonds. And in any event, we will not borrow any more money than we can use for constructive, sound loans. Furthermore, I don't want you to feel that with this legislation the bank can do any very substantial part of the job, particularly during the first year or so. The fact is that we can't move any faster than the economic recovery of Europe warrants, for our loans must be good loans and not just camouflaged grants. All I can say with assurance is that with this legislation removing the technical illiculties, our task will be easier.

I think it may interest the committee for me to discuss for a moment the structure of the bank, for there is considerable misconception about it. The bank, as you know, operates under Articles of Agreement drawn up at Bretton Woods. The United States became a member pursuant to the Bretton Woods Agreements Act. At present, there are 46 member governments.

1 Rept. No. 935, 80th Cong., 2d sess., pp. 51, 52,

The bank is often referred to as an $8,000,000,000 institution. Although the subscribed capital of the bank is over $8,000,000,000—it is now $8,263,100,000 to be exact-it is an unusual type of subscription. The bank does not have that amount to lend by any means.

Only 20 percent of the total subscribed capital is paid-in capital, and of this only a relatively small amount may be used for loans. The other 80 percent of the bank's capital is subject to call to meet obligations of the bank and is not available for lending. It is, therefore, in the nature of a guaranty fund for the bank's obligations.

As far as the subscription of the United States is concerned, it totals $3,175,000,000. This amount has been appropriated by an act of Congress. Only 20 percent of this amount, as I have said, or $635,000,000 can be used for loans. The remainder, $2,510,000,000, can be called by the bank to meet the bank's obligations but is not available for lending.

Incidentally, this $2,540,000,000, which is the United States share that can be called by the bank, the Secretary of the Treasury has to make this payment regardless of what any of the other countries do. It is a call upon the United States no matter what any other country might do.

At the moment, the bank has about $475,000,000 available for loans. Demands upon the bank total far more than that and these demands should become increasingly larger.

It is clear, therefore that the International Bank must rely mainly on private financing to raise funds for use in its lending operations. That means, of course, that the bank is now and will for some time to come be dependent primarily on the securities markets of the United States. In that respect, the International Bank differs from other lending agencies like the Export-Import Bank and the International Monetary Fund, which have their own funds to lend and do not have to sell securities in the private market.

Now let me talk for a moment in another capacity-that of bond salesman. And I have the highest grade bond to sell. The bonds of the bank are its general obligations. In this country we have sold $150,000,000 of 25-year 3-percent bonds and $100,000,000 of 10-year 21/4-percent bonds. Our bonds have behind them the entire resources of the bank. These resources are:

First. The bank's portfolio of loans, which are made only after thorough investigation and only for productive purposes.

Second. The bank's liquid assets in cash and marketable securities, including the special reserve built up from the 1-percent commission which, in addition to interest, the bank charges on all loans.

That 1-percent reserve can only be used as a reserve against losses. We cannot relend that money at all.

Finally, if the above assets should not be sufficient—the 80 percent of the bank's wcalled capital stock which can be called only when needed to meet the bank's obligations. This 80 percent now totals $6,610,480,000, of which $2.540,000,000 is an obligation of the United States Government.

As Senator Vandenberg said to Mr. McCloy in the hearings on the European recovery program, our bonds are backed by the most astounding formula of security that exists in the world.?

* Hearings before Senate Committee on Foreign Relations, January 16, 1948.

It is anticipated that the International Bank will be faced with a pressing need for loans during the next few years. In fact, the greater the success of the European recovery program, the greater should be the opportunity of the bank to make effective, sound loans. To sell bonds in the magnitude required for the bank to do its job is one of the largest and most difficult marketing assignments ever undertaken in this country. And I know, because I'm trying to do it.

At Bretton Woods this Government and all the other governments who took part did a good job in setting up the International Bank. The concept of the bank as a new vehicle for international finance was very carefully and intelligently considered and it has great possibilities.

But the articles of agreement prepared at Bretton Woods did not purport to answer the technically difficult, but extremely important, question of how the bank was going to sell its bonds.

When the bank started to operate 2 years ago, the bank's bonds were not eligible for investment in States in which the largest institutional investors in the country were located. Without those institutional investors—the big banks and insurance companies—the bank might just as well not have opened its doors for business. It was necessary, therefore, to obtain State legislation authorizing such investment. Now, I am glad to say, many States have passed such legislation. In addition, the Comptroller of the Currency has ruled that national banks can buy our bonds up to 10 percent of their capital and surplus; also, our bonds have been declared eligible to secure United States Government deposits.

But there is still one very large obstacle, and that is the technical difficulties which the securities acts and the National Bank Act place in the way of selling our bonds. I am not going to burden you by repeating these technical difficulties. They are described in my letter to Secretary Snyder. I will, of course, be glad to answer any questions you may have about them.

I would like to mention, however, that securities of the bank are within the spirit, if not the letter, of the exemptions specified in the securities acts. The Securities and Exchange Commission tacitly recognized that fact when, prior to the offering by the bank of its bonds in July 1947, the Commission adopted a number of rules which in effect exempted the bonds from certain provisions of those acts. Those exemptive rules, which went as far as the Commission could go, did not remove the technical difficulties which arose in attempting to apply those acts to the borrowing operations of the bank.

These technical difficulties prevent the large banks and others from dealing in our bonds. If the International Bank is to sell its bonds in the amount necessary to fulfill its functions, the banks must be permitted and encouraged to deal in our bonds. That means, as a practical matter, that not only must the banks be permitted to deal in them under the National Bank Act but the bonds must also be exempt from the securities acts.

These are the reasons why I say that:

There are two major markets for securities publicly sold in this country. One market, principally the investment bankers and dealers, deals in the securities of the ordinary industrial and utility companies. The other market, principally the banks and some specialized dealers, deals primarily in Government and municipal bonds, bonds which are

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