Foreign Money We Can't Spend

As a result of its economic assistance programs to foreign countries, the United States has since 1954 accumulated $3 billion in foreign currency which cannot be used up in the foreseeable future. EDWARD S. MASON, a Harvard economist, has been dean of the Graduate School of Public Administration since 1947. In addition to his teaching, he has served as economic consultant on a number of government commissions.

Edward S. Mason

DURING the early days of the Marshall Plan in Europe, a comforting belief developed that a way had been found to make one dollar do the work of two. American dollars appropriated by Congress to promote European recovery were spent for U.S. exports of food, petroleum, and other goods to supply Europe’s needs. When these goods arrived abroad, they were sold for pounds, francs, or lire, and the proceeds of these sales accrued to the governments in question as additional revenues. Thus, the countries being assisted acquired American goods, and their governments received the dollar equivalent of these goods in the form of local currencies that then became available to finance reconstruction and recovery.

The currencies received by foreign governments as a result of these transactions were called counterpart funds, and although they were owned by the governments in question, the United States retained a veto on their use. The support in this country for the veto power arose in part from the belief that the United States should participate in determining not only the use of the “first” dollar, spent for American goods, but also the use of the “second” dollar generated from the sale of these goods. If two dollars’ worth in recovery was being accomplished for every dollar spent, why should the United States not participate to the full in what was, after all, a mutual recovery program?

Now it does not take much reflection — nor did it then — to discover that, in fact, one dollar cannot do the work of two. The only addition to European resources was the receipt of goods from abroad financed by the Marshall Plan appropriations. To be sure, the sale of these goods increased the revenues of governments in pounds, francs, or lire. But the receipt of these currencies added nothing further to available resources. Moreover, these governments were, in general, free to acquire additional quantities of their own currencies by taxation, by borrowing from their citizens or from the Central Bank, or by printing money.

The most conspicuous exception was Germany. The havoc of war had so disrupted the fiscal and banking system that the German government, initially in the hands of the occupying powers, was unable by taxation or borrowing to acquire control of adequate quantities of its own currency. The proceeds of sales of Marshall Plan deliveries provided a useful supplement.

In Britain the fiction of double-duty dollars was from the beginning recognized as a fiction. The United States wisely never attempted to influence the use by the British government of its revenue receipts. Elsewhere, and particularly in France and Italy, attempts to influence the governments’ use of counterpart were easily circumvented, and usually resented.

It is worth recalling this early experience with Marshall Plan counterpart funds because, in its current programs of assistance to underdeveloped areas, the United States seems to be engaging in a colossal piece of self-deception. The doubleduty dollars are back on the scene in a big way, and as American holdings of rupees, kyats, rupias, and rials accumulate around the world, all sorts of grandiose schemes for saving humanity through the use of these currencies are being concocted.

Counterpart funds, whatever their basic irrelevance to the problem of European recovery, had at least the merit of being self-liquidating. Although the United States possessed a veto power with respect to their use, once an agreed use was found they were spent and thus were written off the books so far as we were concerned. By the end of fiscal year 1958, counterpart funds held by European countries had been reduced to $255 million and were declining rapidly. And although counterpart funds held by Asian countries were substantially larger, their disposition represents no insuperable problem.

This is not true of United-States-owned foreign currencies, which in some countries are accumulating at a devastating rate. Currently we own slightly more than $3 million in local currencies, mainly Asian, and our holdings are, or will shortly be, increasing at the rate of $2 billion a year. In another four years we shall probably own $10 to $11 billion, and if our aid program continues at the present rate for another twenty-five years, we may well “own” all of Asia. Of course, this ownership is as phony as a three-dollar bill, but the potential political repercussions are not at all phony, either in Asia or the United States.

The large-scale accumulation of United-Statesowned local currencies may be said to have begun in 1954 with the enactment of current legislation to dispose of our agricultural surplus. This enactment more or less coincided with a rather pronounced shift in our foreign aid programs away from grants in the direction of loans. At present, Public Law 480, which governs the disposal of agricultural surpluses, and the Development Loan Fund are the principal generators of local currencies. Public Law 480 currently generates about $900 million a year, and the DLF generates $500 to 8600 million more. But this is not all. Local currencies once accumulated by the United States are lent and re-lent to the receiving countries at 4 per cent interest. Moreover, until recently Public Law 480 loans were accompanied by a “maintenance of value” clause, which said, in effect, that if the borrowing country depreciates its currency, the amount owed to the United States shall be increased proportionately. DLF loans still carry this provision. This combination of large annual accretions plus interest payments plus maintenance of value may be expected to increase American holdings of foreign currencies at an extremely rapid pace.

The insistence on selling agricultural surpluses and the shift in economic assistance from grants toward loans represented a rather strong political reaction in this country against giveaway programs. Once political leaders who recognized the importance of economic assistance to the foreign policy of the United States became convinced that appropriations could be most easily maintained and increased by accenting loans and sales rather than grants and gifts, the line hardened. By now Public Law 480 and the Development Loan Fund are, speaking generally, the most acceptable parts of our economic assistance policy. And strong political forces have coalesced around them.

It may be useful at this point to reflect for a moment on the meaning of “giveaway.” The sale abroad of American goods for currencies that can be used to finance American imports is obviously not a giveaway. But the currencies now being accumulated by the United States in connection with economic assistance cannot be so used. A loan abroad in expectation of repayment of interest and principal in dollars is clearly not a giveaway. But DLF local currency loans are made with little hope of dollar repayment. Whether Public Law 480 sales and DLF local currency loans are giveaways in the economic sense of the term depends on whether the local currencies acquired have any economic value to us.

In fact, we are lending and selling for currencies which, in a number of countries, are of little present or potential future value. Regardless of the words used or their political connotation, we are still, in the economic sense of the term, engaged in a giveaway program. And in pursuit of the impossible economic quid pro quo, we are adopting measures and pursuing methods that inevitably sabotage the real objectives of foreign assistance. We continue to lend at a 4 per cent return in currencies that have no value to us, while the Russians lend at 2 or 2 1/2 per cent for currencies they can use. We are piling up our unusable holdings of these currencies on a scale that will inevitably cause alarm and resentment in the countries affected.

RUPEES, kyats, bahts, rupias, and the like look like money and feel like money, but in the form of U.S. holdings abroad and under the conditions on which they are held, they are, in the main, not money for our purposes. We can use this money for embassy expenditures, the local costs of economic and military missions, the acquisition of additions to our already redundant raw material stockpiles, and loans to American firms operating abroad. This may account for 35 per cent of our holdings. What about the other 65 per cent? American holdings of Indian rupees are now approaching the equivalent of $800 million. In the course of the next three years, these holdings can easily approach $2.5 billion. Now $2.5 billion in relation to the Indian national income is roughly equivalent to $35 billion in this country. Imagine the reaction in the United States if a foreign country, no matter how friendly, held $35 billion in our currency. The inevitable reaction to the currently much smaller holdings is already in evidence in Asia, not necessarily from governments, but from the Communists and from opposition parties.

Faced with this reaction, American representatives abroad make every effort to get these holdings off the book by lending them to the local government. It may be suggested in Delhi that, if the Indian government does not borrow the local currency proceeds of surplus crop sales, agricultural commodities may not be available for local currency purchases next year. The Indians must know, considering the anxiety in the U.S. Department of Agriculture to get rid of these surpluses, that this is a fairly empty threat. But the representatives of Asian governments in Washington are generally aware of the necessity of playing the game. If they borrow what they are told to borrow, then current American holdings of local currencies will not be so embarrassingly large.

It should be obvious that, at best, this is a temporary expedient. Why, apart from playing the game, should a country having an adequate fiscal and banking system want to borrow its own currency at 4 per cent and have to listen to American advice on how this currency should be used in the bargain? In Burma, a recent request that the government borrow from U.S. holdings that were getting uncomfortably large met with the reply that the Burmese government could borrow from its own Central Bank at one per cent.

The accumulation of American-owned local currencies not only causes anxiety abroad; it is the source of difficulties at home. When the Administration goes annually to Congress for foreign aid appropriations, the question is invariably asked: Why do you need more, when you already have $2-billion-plus uncommitted and unspent in foreign parts? Then begins the difficult task of unsaying what has been said on another occasion. It is explained that, although the agricultural surpluses were “sold" and not given away, the money acquired by the United States cannot be used to assist in further development. Local currencies accumulated are no substitute for dollars. If we attempt to use our stock of, say, Pakistani rupees for a world health program, in effect it means that the very scarce supply of resources available for Pakistan’s economic development is diverted to other purposes. This sort of diversion is tolerable within the context of a foreign assistance program only if it takes place on a very small scale, as, for example, in the Fulbright program. Here, small amounts of local currencies are used to cover the costs of American students and scholars abroad or the local currency expenses of foreign students coming to the United States, to purchase foreign books for American libraries, and for other purposes. This diversion of a country’s resources is tolerable because it is small, but any attempt to use our currencies on a large scale for these or other worthy purposes would be a serious negation of a development program.

THE disposal of agricultural surpluses abroad can, and frequently does, make a highly important contribution to maintaining minimum standards of living and promoting economic growth. Development programs in many countries are inflationary, and the injection into the economy of food shipments from the United States can have a moderating influence on the upward movement of prices. Countries like India and Pakistan which are deficient in food production find it possible, because of the U.S. disposal program, to save for development purposes scarce foreign exchange that would otherwise have to be used for food imports.

If we wish to make a further contribution to the development of the receiving country, we have a choice between financing, through local currency loans, either projects which the receiving country planned to undertake in any case or projects which lie outside the country’s own development program. If we do the former, we may, it is true, permit the receiving country to retire some of the domestically held debt in favor of increased local currency obligations to the United States, or perhaps to moderate the level of taxation, but so far as real resources are concerned, the picture is unchanged. If, instead of supporting a planned development project, we insist that our local currency loan be used for purposes outside the development program, we are probably promoting inflation as well as diverting scarce foreign exchange away from uses that the receiving country considers more important.

The development programs of almost every underdeveloped country are large enough to produce inflationary consequences. Almost all of these countries are attempting to invest more than voluntary savings plus tax receipts will permit. There is therefore a continuous upward pressure on prices. If we were content to supply goods under our foreign aid programs without spending the local currency proceeds, we could exercise a helpful moderating influence on this upward movement. If we lend these proceeds for purposes to which the receiving country is already committed, the moderating influence is still exerted, though we will in time accumulate large volumes of local currencies. If we lend for purposes outside the development program, we not only overaccumulate but we prevent our assistance from moderating serious inflationary tendencies.

All things considered, the best disposition of the vast bulk of local currency accumulations would be for us to grant them back for debt retirement or any other purpose deemed proper by the receiving country. Alternatively, we could burn them, though this would involve the country in the additional expense of printing new currency notes. A recent suggestion by Undersecretary Dillon that U.S. counterpart in Greece be used for debt reduction met with a storm of protest. Why, it was implied, should currencies held or controlled by the United States be used for debt retirement abroad when the American government is forced continually to add to its debt at home? This attitude is one of the consequences of treating local currency holdings or counterpart as something of value, as real money. Whether the Greek government uses American counterpart to retire debt or not, the American debt position remains the same.

THERE are, however, two matters of legitimate concern to Congress and to American citizens that frequently arise in local currency discussions. Since political objectives are of primary concern in our foreign aid policy, it is both legitimate and important that we make what political capital we can from our assistance. And since the chief route to all our objectives in the underdeveloped world is economic growth, we have a deep interest in ensuring that our assistance is reasonably related to economic growth. There is every reason that the citizens of these countries should know about our assistance and, so far as possible, be permitted to see its tangible results.

This does not, however, seem to be the way we go about it. Instead, we make every effort to convince ourselves and everyone else that we are not giving assistance at all but are engaged in a hardheaded program of sales and loans for value received. And we kid ourselves into the belief that with the local currencies we receive from these loans and sales we are in a position to exert great and favorable influence on public opinion and on economic growth.

Why can’t we, it is asked, use our local currency holdings to build a series of up-to-date hospitals throughout southern Asia? This would be tangible evidence for all to see of American concern with the well-being of the downtrodden, a great propaganda gesture. Certainly Asia needs hospitals. But more considerations impinge on a decision of this sort than meet the eye. First, the resources required for the building and equipping of modern hospitals are not all available in most Asian countries. A substantial part of these requirements would have to be imported, and U.S. local currency holdings are, by agreement, not convertible into foreign exchange. Second, although Asia needs hospitals, it needs everything else too, and a large hospital program, desirable as this may be, does not necessarily represent the best use of resources. Third, the construction of hospitals, and of almost everything else, originates a continuous requirement for maintenance and staffing that the host country may be unwilling or unable to assume. Examples are not lacking in Asia and elsewhere of United-States-encouraged enterprises that have fallen into disuse because the receiving country was loath to assume the burden of continued operation.

The point of all this is not that the United States should refrain from insisting on a use of its aid which is considered to be politically advantageous to us. But the assistance and the proposed direction of use should be manifested at the time that the host country is receiving something it considers of value. Furthermore, the bargaining position of the United States is likely to be better if our aid is recognized as aid and not disguised as a phony sale. In any case, the occasion on which the United States attempts to lend the receiving country its own currency is not the appropriate time for us to begin to throw our weight around.

We can, of course, refuse to lend for what we consider to be undesirable purposes, through the Development Loan Fund, Export-Import Bank, and such influences as we have on the International Bank. But it is always possible for the country in question to use our loans and grants for mutually agreed purposes and divert its own resources into channels considered by us to be inappropriate. If we are to exercise any substantial influence on the overall direction of a development program, it can only be through the process by which goods and services are provided via loans, grants, or “sales.” The local currencies accruing from these loans and sales provide us with no additional bargaining power.

Finally, the lending of local currencies is accompanied by legal restrictions that are frequently a source of extreme irritation. Since the fiction is maintained, at least in the United States, that these currencies have value, loans are made with all the usual conditions laid down by Congress and applied by the General Accounting Office. A sizable percentage of these loans are made to finance publicly owned enterprises. And since these enterprises are tied in closely with government departments and ministries, a close exercise of the auditing functions is likely to lead U.S. investigators rather deeply into the affairs of the borrowing government — a situation which engenders further resentment.

IT HAS been implied so far in this discussion that the United States can make little use of the local currency generated by aid shipments, either to help countries receiving assistance or to help us. In general, this is true. But there are exceptions. In a number of Far Eastern countries lackingadequate fiscal and banking systems, the local currency generated by the sale of U.S. goods is the principal support of government services. In Vietnam, for example, approximately three quarters of the minimum import requirements are covered by the shipment of U.S. goods. And the sale of these goods for Vietnamese currency provides the local government with about two thirds of its revenue receipts. In the absence of this source of funds the government would collapse, with serious consequences to our security position in Southeast Asia. The situation in Laos and Cambodia is roughly similar.

Assistance to these three countries and to certain others mainly takes the form of defense support. Here the local currency generated by the sale of assistance imports is granted as counterpart to the countries in question. But defense support, as a category of foreign aid, is meeting increasing resistance in Congress. I he predilection for loans, even when repayment is out of the question, continues to grow. If its own currencies were lent rather than granted to the Vietnamese government, its source of revenues would be the same as at present. The only difference is that the United States would accumulate these currencies at the rate of about $250 million a year, with no hope of repayment now or in the future.

At the other end of the development scale are countries to which local currency loans offer some — albeit remote — prospect of repayment in dollars. These countries are few, and the amounts involved are small. Yet these highly untypical situations tend to be used as the general justification for local currency loans. The advantage of such loans, the argument runs, is their flexibility. Developing countries, it is true, are unable to service loans in dollars at present, but with development their ability to do so will increase. At some future time, the argument runs, we can reassess the whole situation, take our repayments of principal and interest in dollars where it is possible to do so without checking development, and write off the rest.

This might be a plausible course of action if the continuous accumulation of massive local currency holdings had no adverse repercussions at home or abroad, if the fiction of loans and sales were not an obvious impediment to the attainment of our political and security objects, and if the persistent process of lending and accounting for local currencies could be carried on without irksome intervention and surveillance in the borrowing countries. As it happens, however, none of these conditions can be fulfilled. The fact that certain small quantities of local currencies in certain countries can perhaps be recovered in dollars can no longer be used as a justification for the accumulation now looming on the horizon.

The first and most obvious corrective step that needs to be undertaken is to eliminate the phony sales of agricultural surpluses. Although this form of economic assistance needs to be used with careful regard to the interests of other exporting countries and to its impact on agricultural development in receiving countries, there are enormous opportunities here for an effective contribution toward meeting the problems of the underdeveloped world. A wise use of our agricultural surpluses can contribute not only to our long-run objectives but can yield more immediate political capital. But a sale of these surpluses, followed by attempts to lend the local currency receipts, goes far to cancel most of these potential advantages while piling up large stocks of unusable money.

The other principal generator of United-Statesowned local currencies, the Development Loan Fund, can lend both for dollars and for local currencies, but four fifths of the loans made to date are of the latter character. And they should be, if the Fund is to make its proper contribution to economic development. The Development Loan Fund is a relatively new institution, and therefore the process of repayment and relending of local currencies at 4 per cent, which will inevitably accentuate our excessive accumulation, is not yet well under way. Consequently, if we take immediate steps to cancel the effect of the sales of Public Law 480 surpluses, we shall have time for a serious reconsideration of the terms on which economic assistance through the DLF can effectively be provided. But unless and until this is done, Uncle Sam’s foreign funny money will continue to expand like a tub full of Asian steamed rice.