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and we take that reserve and, at present, invest it in United States Government 1-year certificates. That is the second security.

The third security is a call on the unpaid 80 percent subscription of all the different nations.

Now, if you have $500,000,000 more than the United States' share, the United States will be responsible for all the amount of the bonds except that $500,000,000 and you have to get paid for that from your loans, your reserve fund, or from whatever you collect from the other 45 nations.

Mr. BENNETT of Michigan. The point that I make is that once you get beyond the point where you can no longer secure the American investor, he then has to depend upon the securities you sell upon the integrity of the other governments, plus the loans that you have made to these other governments, plus this 1 percent that you have been speaking about.

Mr. BLACK. That is correct.

Mr. BENNETT of Michigan. If anything goes wrong with the loans and they turn out to be poor loans, who is the loser then, the American purchaser?

Mr. Black. If all the loans you make are no good, and if you do not have any reserve fund, and if nobody puts any money up, then the investor would lose to the extent that he could not get the full amount from the United States Government.

Mr. BENNETT of Michigan. In other words, he would either be out the money, or he would have to come to the United States Government to look for reimbursement.

Mr. BLACK. The United States Government would be obligated only to reimburse the investor up to the amount of their 80 percent, which would be the $2,540,000,000, and anything above that the investor would have to get from these other sources that you mentioned.

Mr. BENNETT of Michigan. And, failing in that, they would be either out the money or they would come back to the United States Government and say, “Pay us off.”

Mr. BLACK. They would be out the money to that extent. They would get a large part of the money because they would get it from the United States Government's subscription.

Mr. BENNETT of Michigan. But when you pass the point of the United States subscription and sell bonds to the American investors, the security then is based upon the integrity of the foreign governments and the ability of those countries to pay them off, and do you not think from that point on that the Securities and Exchange Commission, or some agency here, ought to have some control over the sale of those bonds?

Mr. Black. In connection with that point, which is a very good point, at that time let us say the bank has decided that they want to sell bonds in excess of the American participation.

Mr. BENNETT of Michigan. Yes.

Mr. BLACK. We want to try to do it. As I point out to you, as an investment banker and a banker, and being familiar with the market, I do not think that we can do it. That is the practical answer. I cannot prove that to you, but that is the practical answer.

Mr. BENNETT of Michigan. That is a hypothetical situation because you go along for years and sell these bonds and everything goes all right. Then you reach the point where the bonds are no longer secured by the amount that this Government puts in; then, if you are successful in selling them, are you not leaving the American investor dependent upon foreign governments and their integrity in the matter of paying up their obligations?

Mr. Black. I would like to finish my answer to your first question, if I may. When we reach the point where the bank might want to sell bonds in excess of American participation, I, as the American director, have to go to the National Advisory Council and I have to get their permission to sell this issue of bonds which would exceed the American guaranty point. I have to get their permission whenever we sell any bonds as to the amount of the bonds, as to the timing of the issue, as to the interest rate, and all details of the issue.

I think at that point the National Advisory Council should be the agency which should determine whether or not bonds should be offered to the American public in excess of United States Government backing.

As a matter of fact, that was one of the reasons for our proposed amendment, that the National Advisory Council will have to report every 2 years on the operations of this act. It will be several periods of 2 years, in my opinion, before this point is reached that we are talking about. And when they get near that point, they will have to report at that time and will have to show that this exemption does not create any hardship on the investor or unduly affect the investor adversely. So, in my opinion, the National Advisory Council is the proper agency which was set up under the Bretton Woods Act to decide, at that time, whether or not the bank should attempt to sell additional bonds in the American market; because if they do, as you say, to the extent that they exceed the American subscription, they will not be backed dollar for dollar by the United States Government.

Mr. BENNETT of Michigan. Is the National Advisory Council in a position to do the same kind of job that the Securities and Exchange Commission does in approving securities to be sold by private firms?

Mr. BLACK. I think so. That was the agency selected by the Congress under the Bretton Woods Act that would have the supervision and the control of the vote of the American director on the International Bank.

Mr. BENNETT of Michigan. Is not the decision of the National Advisory Council based more on an over-all policy as to whether it is wise to go ahead and make loans as contrasted to the kind of investigation that the Security and Exchange Commission makes when they look specifically into all aspects of a particular loan?

Nr. BLACK. I would like to point out to you exactly what I have to do with the National Advisory Council. When a foreign country applies to us for a loan-I should like to give you the steps that we go through; the first step is, the bank appoints a loan committee to study this application. If the loan committee feels that the application has merit, we then send a mission to that country to make a study on the ground of the worth of the project that they are talking about. They come back and report to the loan committee. The loan committee, in turn, reports to the president of the bank as to whether or not they think this loan should or should not be made. The president of the bank then comes to the directors of the bank and he, say, recommends that the loan be made. Before I, the American director, can vote in favor of that loan, I have got to go to the National Advisory Council and describe this loan in detail and get their permission before I may cast the United States vote in favor of that loan.

The National Advisory Council, as you know, consists of the Secretary of the Treasury, the Secretary of State, the Secretary of Commerce, the Chairman of the Export-Import Bank, the Chairman of the Federal Reserve Board and the ERP Administrator.

In addition to the National Advisory Council, there is the staff of the National Advisory Council, composed of experts from those different departments. They constitute the National Advisory Council. Before they consider whether or not to give me permission to vote for this loan, the staff of the National Advisory Council goes over the proposed loan. We have got to discuss it with them and then they, in turn, advise the National Advisory Council whether they think it is a suitable loan for us to make. That is a very strong

check on the loans that the bank makes. The SEC does not study the loans that we make.

Mr. BENNETT of Michigan. Does the sale of the bonds that you make here come ahead of the loan that you make over there?

Mr. BLACK. I do not think I quite understand what you mean.

Mr. BENNETT of Michigan. Suppose you are out of money; do you have to go out and borrow here before you may approve any further loans, or does it work the other way around?

Mr. BLACK. We can only get our funds from the market. I have got to borrow the money, yes.

Mr. BENNETT of Michigan. I am referring to approval of a specific loan.

Mr. Blick. Surely, we have got to get approval from them for the loan.

Mr. BENNETT of Michigan. And that has to be made or vou have to have that authority before you can do any lending on the other side?

Mr. BLACK. That is right.

Mr. BENNETT of Michigan. Let us say you need more money in order to make more loans. As I understand, you go to the National Advisory Council and ask for authority to borrow say $100,000,000 or $200,000,000 ?

Mr. BLACK. Yes.

Mr. BENNETT of Michigan. Do you sell your bonds ahead of the time that you make the loan?

Mr. Black. That would not be very good business, because we would be paying interest on the $100,000,000 and we would not be getting any interest until we made the loan. So we try to do it the other way around. We try to make the loan first and then borrow the money, subject to keeping adequate reserves. We certainly would not like to borrow substantial amount of money ahead of the time particularly for this reason, too, that most of the loans we make, it takes these countries quite a long time to take the money down.

Mr. BENNETT of Michigan. The only thing that I am worried about is this. When you are going to foreign countries to make loans and you get the money with which to make the loans from the American investor, the place where that money goes is a considerable distance away, across the ocean

Mr. BLACK. Yes.

Mr. BENNETT of Michigan. The investor is not in the same position as he would be if he were loaning money against business or property in this country. For that reason it seems to me that instead of having less protection in the purchase of these bonds, the American investor ought to have more protection. There ought to be greater scrutiny made of the type of security that is going to be sold and for what it is going to be sold than in the ordinary case of the sale of securities by private corporations within the country. Do you agree with that generally?

Mr. BLACK. I certainly do, yes; I agree with it thoroughly. On the other hand, they certainly have greater protection than in any

other case that I know of, because you have the unpaid subscription of the United States Government; and as far as any possibility of exceeding that amount, I think the scrutiny will come from two sources; one, from the National Advisory Council and from the necessity of the National Advisory Council to make these periodic reports every 2 years. And therein there is the practical side of it which, as a practical investment man impresses me tremendously. We have got the market veto.

Mr. BENNETT of Michigan. Mr. Chairman, I should like to ask several other questions, but there has been a call for a vote in the House.

The CHAIRMAN. I think it might be advisable for us to recess until 1:30 in order that we may answer the roll on this important matter. I hope, Mr. Bennett and Mr. Black, you will find it convenient to be here at 1:30, to pursue the discussion you are having. I think you are asking some very fundamental questions, Mr. Bennett, and questions I know are in the minds of a good many of our committee.

The committee, therefore, will stand in recess until 1:30.
(Whereupon the committee took a recess until 1:30 p. m.)


(The committee resumed at 1:30 p. m., Hon. Charles A. Wolverton (chairman) presiding.)

The CHAIRMAN. The committee will be in order. You may resume, Mr. Bennett.

Mr. BENNETT of Michigan. I understood you to say this morning, Mr. Black, that when we reached the point in the sale of these securities where the Government guaranty of the security no longer applied, then you felt that the investors of this country would be reluctant to purchase the securities, or at least there would be sufficient protection to the public just by reason of the cancellation, if I may put it that way, of the Government guaranty, investors just would not buy, thinking the obligation was not good. Mr. Black. That is correct, sir.

Mr. BENNETT of Michigan. If you got to the point where we were out of the picture, or the Government was out of the picture, and these loans did not look too good, then the bank would be through, anyway, would it not?

Mr. BLACK. Yes, that is right; they could not raise any more money.
Mr. BENNETT of Michigan. And they could not operate?
Mr. BLACK. That is right.

Mr. BENNETT of Michigan. Then it seems to me that there should not be any real objection, if this is a wise move, if these amendments are proper to safeguard the investing public—there should not be any real objection to having the amendments terminate as of the time that the Government no longer guaranteed the payment.

Mr. BLACK. I would like to answer that in this way. There are two problems. One problem is how to get up that much; that is a real problem. I think it would be quite difficult for us even to raise that much money and do our part in the European recovery program if we did not have these technical obstacles removed that we have today. I think it would be a great mistake-and I speak now as an American citizen-to have that specific limitation, because if you did that, you would remove the international flavor of the bank which I think is a very important thing to have.

I think it would be almost advertising the fact that the United States Government does not think that the other nations when called upon will put their pro rata share. I think it would be a great mistake to advertise that feeling on the part of Congress.

Mr. BENNETT of Michigan. Of course, if we go by the experience we have had in the past, they should not be too much offended if we did feel that way; at least, that is my opinion.

Mr. BLACK. I think there has been a disposition to assume that these countries will not do anything and I think that the record has shown that there are a number of very good countries that are members of this bank. As a matter of fact, of the member nations in the bank that contribute 75 percent of the total capital funds of the bank—those nations have never had a default on any bond floated in the American market.

Mr. BENNETT of Michigan. Included there, of course, is the United States?

Mr. Black. That is right. Of that total amount, 75 percent have not had defaults; 10 percent, the countries that contribute 10 percent of the capital, have had what you might call an involuntary default, such as was the case with Denmark. Denmark sold bonds in the American market. They always paid their interest and principal promptly when due, but when Germany occupied Denmark, they had à maturity of their bonds and naturally they couldn't make that payment when they were being occupied by the Germans. In spite of that, they continued right on through to pay the interest on their bonds and they are paying the interest today. Countries like that make up 10 percent of the capital.

The remaining 15 percent is subscribed by countries that have not had good records, have had default records. But the bulk of the capital has been supplied by nations that have had excellent debt records.

Mr. BENNETT of Michigan. The type of loan that you make, as I understand, is not what you would call the highest grade security risk; is not that true?

Mr. BLACK. The type of loan we make-we are making every attempt, the management of the bank, and the management of the bank regardless of who it may be is forced to make loans that are what you call productive loans. We cannot make political loans. I think that the type of loans we make will be sound loans. I cannot guarantee that they will all be paid, but a great many of them will be paid.

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