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exempt from the Securities Acts. Our bonds are very much like those exempt securities and they should be treated by Congress in the same way. It is this latter market—the market dealing with exempt securities—which is now substantially closed to us and which we need in order to sell large amounts of our bonds. The banks will not only be large purchasers of our bonds when initially offered, but they will be interested in the secondary market. This will create an active market for our bonds and help maintain a steady price. The importance of those banks and dealers-particularly the banksto our marketing activities cannot be overemphasized. Many people, even those experienced in finance, are not fully aware of the major part that banks play in the buying and selling of Government and municipal bonds.

Why are banks so reluctant to buy our bonds now? In the first place, although under the National Bank Act the banks can invest in our bonds up to 10 percent of their capital and surplus, they cannot deal in them. 'Since they cannot deal in the bonds, the banks are reluctant to buy them in the first place, because they do not want their funds immobilized. Furthermore, as I have said, the banks are not used to dealing in securities which are subject to the Securities Act and are wary of the liabilities imposed by that act. Consequently, as a practical matter, it is necessary that our bonds be put in the same class—so far as the National Bank Act and the Securities Acts are concerned-as other bonds which the banks customarily handle.

Our proposal, therefore, for amending those acts is an integral part of a comprehensive marketing program. If the Congress does not see fit to pass this proposed legislation, the job I undertook to do when I came to the International Bank, that is, to sell enough bonds to permit the International Bank to become the great success it should become, will not, in my opinion, be possible.

The removal of the difficulties raised by those acts, I am convinced, will greatly facilitate the ability of the bank to borrow money in this country. At the same time, it will not jeopardize the interests of investors.

I want to make that point entirely clear. The exemption of the bank's securities from the Securities Acts and the National Bank Act will not be contrary to the interests of the United States or the public or investors. All the marketing activities of the bank in the United States will remain under the control of the National Advisory Council under the general direction of the President, in the same way they are presently so controlled. Under the Bank's Articles of Agreement, it cannot sell its securities in this country without the consent of the United States through the National Advisory Council; nor can it buy them or deal in them without that consent. Under the Bretton Woods Agreements Act, the consent of the United States can be given only by the National Advisory Council. As a practical matter, therefore, the National Advisory Council has a veto on whether the bank can buy or sell its bonds in this country. That all means that, as the Securities and Exchange Commission has indicated in its letter to this committee, the National Advisory Council has more control over the bank's marketing operations in this country than the Securities and Exchange Commission has over issuers of securities subject to the Securities Acts. Since the bank's securities are under such a great degree of control by the National Advisory Council, there is no reason also to subject them to the Securities Acts.

It is also important to note the position which has been taken on the proposed bill by the interested Government agencies. The National Advisory Council has unqualifiedly approved the bill. As you all know, the council has been charged by the Congress with the coordination of the policies of all Government agencies to the extent that they handle foreign financial matters. The council's conclusion, therefore, that this bill will promote the effectiveness of the bank is particularly significant.

In addition, the Secretary of the Treasury and the Federal Reserve Board have approved the bill. The Securities and Exchange Commission, the Comptroller of the Currency and the Federal Deposit Insurance Corporation likewise have no objection to it. The Securities and Exchange Commission did make one objection to the bill as it was originally introduced designed to make sure that the exemptions did not cover securities which were not fully guaranteed by the bank as to both principal and interest. That objection was endorsed by the bank and it has been incorporated in the bill as approved by the Senate Committee on Banking and Currency.

All of the interested Federal agencies have, therefore, either recognized the merit of this bill or have voiced no objections to its enactnient. Likewise, the Investment Bankers Association " has considered the bill and has decided to raise no objection.

The National Association of Securities Dealers recently raised some objections to the bill. We have, however, discussed their objections with representatives of the association and are suggesting a proposed amendment to the bill which they have advised us satisfies their objections. The proposed amendment is as follows:

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 2 years after the approval of this act and a report shall be made every 2 years aíter 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 exemptions 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.

Apart from meeting the objections of the National Association of Securities Dealers, I believe that the provision that the National Advisory Council shall every 2 years review the operation and effect of

3 The Investment Bankers' Association is a national trade association composed of more than 700 of the largest investment bankers, securities dealers, and commercial banks in the country. Among the functions of the association is the furnishing of advice on legislative matters affecting its members.

the proposed legislation and report its recommendations to the Congress will constitute an additional assurance that the exemptions to be granted by the proposed legislation will not operate to the prejudice of securities dealers or investors generally. In the meantime it is not likely that the issues of the bank's obligations prior to the first of such reviews will exceed the amount of the uncalled part of the subscription of the United States to the capital of the bank which is $2,510,000,000. Up to that amount the obligations of the bank will be covered dollar for dollai by the subscription of the United States.

May I conclude by saying that I believe that the international character of the bank and its established reputation for open and sound methods of operation entitle it to a confidence which makes many of the restrictions that now impede its operations unnecessary in the public interest. As the National Advisory Council has said in its letter to the Congress, in view of the interest the United States has in the continued effectiveness of the International Bank, those restrictions should be removed.

I would like to make one additional statement. This is purely an opinion on my part. We have been in the business for 2 years and have sold $250,000,000 worth of bonds, so naturally we will not reach the point of American subscription in 2 years. Ily guess would be somewhere between 5 and 10 years. That is purely an opinion.

Mr. Scott. Does your last remark mean, Mr. Black, that you think it may be 5 or 10 years before the bank will be called upon to make loans in the amount represented by the figure that you use, the call of $2,540,000,000?

Mr. BLACK. Well, I can answer that question in two ways. First, I would like to answer it in a practical way. One of the worries that the investors and the legislators that we have talked to have is what would happen if the amount of bonds of the International Bank exceeded the American so-called guaranty point. That is the moot question.

What I said a minute ago was that I thought in view of the fact that we have sold only $250.000,000 worth of bonds in 2 years--that is our total debt-I think that it would take us at least 5 years before the amount of our bonds equaled the amount of the American participation, and it might take 10 years.

In other words, in order for the amount of our outstanding debt to be $2,500,000,000, we would have to sell $500,000,000 worth of bonds a year, and that is an awful lot of bonds to sell. There, again, we would not sell that many bonds if we did not have suitable types of loans to make.

On the other hand, let us assume that 5 or 7 years have gone by and that the amount of the debt of the International Bank is $2,500,000,000. Then suppose the bank decides that they want to sell some more bonds. When they sell bonds in excess of that amount, you do not have the dollar for dollar backing of the United States Government. We have to depend upon the other countries putting up their part when they are called upon to make their 80 percent.

Therefore, you might say at that point the security becomes somewhat diluted; it is not backed dollar for dollar by the United States Government.

On the other hand, let us assume that the bank wants to sell bonds in excess of that amount. If I am here, it is my job to sell the bonds. What I would do would be to go to the insurance companies, the savings banks, and the commercial banks and say, “We are thinking about selling another $250,000,000 worth of bonds. What about it? Will you people buy these bonds?" I think the answer would be “No,” because they would know if they bought some more bonds the bonds that they now have, which are backed dollar for dollar by the United States Government would be diluted if they aided and abetted by buying more. Do you get my point ? Mr. SCOTT. Entirely.

Mr. BLACK. So, I think the market has a complete veto over whether or not we can exceed the amount of the American participation in the bank.

On the other hand, I think that the opinion of this country that the other countries are not going to put any moneys up is an exaggerated opinion. There are a lot of good countries in this bank.

Mr. Scott. If the demand for loans increased it would signify that the recovery of the world has also increased.

Mr. BLACK. That is right.

Mr. Scott. And, with world recovery, other nations feeling more solvent, might show less resistance to meeting the calls which then would be proposed to be made on those countries. Mr. BLACK. That is right. In my opinion, the only way we

could ever possibly sell bonds in excess of the American participation would be that the conditions in the world improved so much that the market would come to us and say, “Sure, go ahead and sell some more bonds." The chances are that if things were that good they would not want to borrow any money. I think that the market has a complete veto on anything exceeding that amount.

Mr. Scott. I thought it was extremely interesting to hear you testify on page 3 to the effect that the recovery in Europe would lead to an increasing participation on the part of the bank and might thereby relieve the American taxpayers of some future burden in refinancing the recovery of Europe, because it seems to me the sooner we can get good loans rather than relief or camouflaged grants, or whatever they may be called, the sooner we are acting in the interest of the general public--the American public.

I would hope we could have increasing participation. I would like to see you in a position to sell more and more bonds. That is what I am getting at.

Mr. BLACK. I think it is very important that we be given the tools to raise the money. This is an unusual agency. We do not operate on appropriated money except to the extent of $635,000,000. We have to get our money in the market, and that was a very good provision that was put in the bill. We do have to get that money in the market because it means if we make a lot of poor loans the market just will not buy our securities; they will not have confidence in the bank.

Mr. Scott. Let me go just a little further and raise the question of the status of the occupied countries; Germany, first, and then let us say Japan. Western Germany, as I understand it, is one of the Marshall plan countries.

Mr. BLACK. That is right.

Mr. Scott. There are, I assume, at present obstacles to the extension of any loans to the rebuilding of Germany; is that right?

Mr. BLACK. The International Bank can make loans only to countries that are members of the bank. Now, we have 46 members. We have pretty nearly all the countries in the world except, in the most important instances, Germany, Japan, Russia, Spain, Argentina, Switzerland, Sweden, and New Zealand.

Mr. SCOTT. And Korea.

Mr. Black. That is right. None of those countries are members. Some of those countries may join at a later date.

Mr. Scoit. You cannot assist through loans in the rebuilding of Germany until a German state is set up which could become eligible and actually be admitted to the bank?

Mr. BLACK. That is correct.
Mr. SCOTT. The same thing would apply to Japan.

Mr. BLACK. Yes. As a matter of fact, Italy has joined the bank, and Austria has an application. Some day Germany may join the bank.

Mr. Scott. The point I am making is that we cannot help relieve the taxpayers of part of the occupation cost of Germany and Japan until a peace treaty is set up, or a state is created ?

Mr. Black. That is right. They have to have a regular government; they have to apply for membership, and then it is decided whether or not they shall be admitted in the bank.

Mr. SCOTT. I have one other question. Has the State of Pennsylvania passed the necessary laws which you referred to on page 7, where you say that some States have passed legislation authorizing such an investment?

Mr. BLACK. Insurance companies in the State of Pennsylvania can invest in our bonds.

Mr. SCOTT. Thank you, Mr. Black.

Mr. BENNETT of Michigan. When you reach the point in your borrowing where you exceed the amount that the United States will guarantee, then, as I understand it, the securities that you sell have as their security the loans that you make to these foreign countries?

Mr. BLACK. No. This is the situation: Let us say that we have sold $500,000,000 of bonds in excess of the amount that the United States has to put up if called upon. The security back of those bonds would be three things—first, the loans that we have made with that money. We have to make loans for productive purposes; we cannot make political loans. I think that the loans that the International Bank has made so far have been sound loans. I think it would be the policy of the bank to make sound loans, and I think that we have to make sound loans under the articles of the bank. They are the only type we can make. You have those loans as security.

You have also as security the 1-percent reserve. Every time you make a loan to a foreign country, in addition to the interest they pay, we have to charge them from 1 to 112 percent for handling, to set up a reserve against possible losses. At the present time we are charging 1 percent.

For example, if we have $2,000,000,000 worth of loans outstanding, they have to pay us $20,000,000 a year, and that reserve is set up and has to be kept as a contingency against future losses, and we cannot relend that money at all. That reserve is building up rapidly now,

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