Go Slow on Crimea
Why Ukraine Should Not Rush to Retake the Peninsula
THE first Pan American Conference, in 1890, recommended the granting of charters which would favor the development of inter-American banking transactions, and particularly those which would lead eventually to the establishment of an International American Bank with branches or agencies in each constituent nation. With only one exception, in 1902, there was no further mention of such a bank for forty-three years. Then in December 1933 the seventh Pan American Conference recommended the establishment of an inter-American organization for economic and financial coöperation, to consist of a governing board, an economic advisory committee, and an Inter-American Bank. The Bank would aim particularly to establish and develop inter-American credit and capital movements, and it also would coöperate in monetary reconstruction in each nation.
These plans were discussed further at Buenos Aires in 1936 and at Lima in 1938, and again at the meeting of Foreign Ministers of the American Republics, held in Panama in 1939. On the last-named occasion it was decided to create an Inter-American Financial and Economic Advisory Committee, consisting of 21 experts in economic matters, to sit in permanent session at Washington, beginning in November 1939. Besides studying problems relating to monetary affairs, the regulation of exchange, balances of payments, etc., this Committee was given the duty of examining the need for an inter-American banking institution to promote financial coöperation between the treasuries, central banks and similar institutions of the American nations.
Bearing in mind these facts, the Mexican Delegate to the First Meeting of Finance Ministers of the American Republics, held in Guatemala in 1939, again put forward Mexico's proposal (already presented at previous conferences) for the creation of such an institution. It was to have the following functions: (a) To act as an inter-American clearing house, thus reducing international movements of gold and silver to a minimum. (b) To act as financial agent of the affiliated central banks in the international capital market. (c) To assist affiliated central banks in stabilizing the internal and external value of their respective currencies. (d) To make a systematic study of trade, exchange, and other problems which concern or interest the affiliated banks as a whole. (e) To undertake, subject to a contract with the Government of the United States, to accept not only gold in settlement of international balances owing by any country, but also silver, in amounts and at prices considered appropriate. All these functions were implicit in previous Mexican proposals. But on this occasion the Mexican Delegation expressly added the following: (f) To act as a channel for the investment of capital which will promote sound economic development in the American Republics.
After considerable discussion the meeting decided that it was "desirable that the necessary capital be invested for the promotion of the agricultural and industrial development of the various countries in this hemisphere," and requested the Inter-American Financial and Economic Advisory Committee to investigate the desirability and possibility of creating the necessary institution. This the Committee set out to do. With the constant coöperation of the Mexican Delegate, a Convention and by-laws for an Inter-American Bank were drafted and sent to every nation on the Continent.
On May 10, 1940, the Convention was signed by the following countries: Bolivia, Colombia, Dominican Republic, Ecuador, United States, Mexico, Nicaragua and Paraguay. Brazil signed three days later. In order that it may become law the Convention requires ratification by Congress in each of the signatory nations; and, in the case of the United States, the granting of the Charter in order that the Bank may start business.
According to its by-laws, the Bank will be a corporation constituted by the signing and ratifying nations. They will subscribe shares, each worth $100,000, in proportion to the importance of their foreign trade in 1938. For this purpose the signatory nations are divided into eight groups, each of which must subscribe a minimum number of shares as follows: 5 shares, Costa Rica, Ecuador, El Salvador, Haiti, Honduras, Nicaragua and Paraguay; 10 shares, Guatemala, Panama and the Dominican Republic; 15 shares, Bolivia; 20 shares, Uruguay; 25 shares, Peru; 30 shares, Chile, Colombia and Cuba; 35 shares, Mexico and Venezuela; and 50 shares, Argentina, Brazil and the United States.
The Bank's head offices will be in the United States, with branches or agencies in each of the signatory nations. It will be governed by a Board of Directors consisting of one director for each participating country, appointed for a period of two years. The Board, meeting at least four times a year, will appoint a President and one or more Vice-Presidents who will hold office for a period of two years; and it may appoint an Executive Committee, and, by a four-fifths majority vote, it may delegate its powers to this Committee, or to any other committee, or to its officials.
To carry out its purposes the Bank is given the powers usually exercised by commercial and investment banks, as well as those exercised by central banks. It may deal not only with the participating governments, their fiscal agencies, central banks and local governments, but also with private individuals and business firms. In dealing with private customers the Bank's powers are limited by provisions that loans and other credits made for longer than two years must be guaranteed by the respective governments. Subject to these provisions the Bank can make short-term, intermediate and long-term loans in any currency; deal in securities or bonds of any of the participating governments (provided the interest services are not in default); guarantee credits and loans made to any participating government; act as a clearing house for banking funds and credit instruments; deal in precious metals, currency and foreign exchange on its own account, and on account of others, and secure the availability of foreign exchange at agreed rates; issue or sell debentures or other bonds or securities of the Bank; borrow in any other manner from the participating governments and from local governments, banking institutions or nationals of the participant countries.
It may also receive demand, time and custody deposits, paying interest only on deposits of national or local governments, fiscal agencies and central banks; discount and rediscount bills, acceptances and other securities and credit instruments; rediscount with any government, fiscal agency or banking institution bills, acceptances or other instruments of credit taken from the Bank's portfolio; open and maintain sight, time and custody deposits and accounts for governments and banking institutions, and arrange for both the latter to act as agents or correspondents of the Bank; act as agent or correspondent of any participating government or of fiscal agencies, central banks and local governments; buy, sell or deal in cable transfers, accept bills and drafts drawn upon the Bank, and issue letters of credit.
Evidently the Bank's scope is very wide. The Board of Directors can set it upon a policy of preferential aid to governments, or upon a policy of aid to private investments. Which seems the best for it to follow?
Let us consider first of all the possibility that the Bank will make loans to Latin American Governments to meet budget deficits.
Throughout history, but above all in recent times, governments have encountered budget difficulties. Their nature varies. There are the difficulties of extremely poor countries which can barely meet the essential expenditures connected with the insignificant services of their governments. And there are the budget deficits of richer and more developed states which have large outstanding public debts.
Sometimes budget difficulties are due to the sudden loss of a country's main export market, following the opening up of new centers of production in other parts of the world.[i] In other cases, they may be the result of a general falling off of exports, due to a world depression, or to the collapse of markets due to war; or to the loss of crops or to military, political or labor troubles at home.
At other times governments find themselves in difficulties as a result of wasteful spending, or corruption, or, finally, because they insist on paying interest on their foreign debt in spite of the fact that revenues are meagre, a procedure which may render the treasury unable to meet important domestic services.
Now it does not seem advisable for the Inter-American Bank to grant loans for the purpose of balancing budgets -- except, perhaps, in times of world depression when they are one of the means of meeting the situation. The mere recital of the causes which may give rise to a budget deficit suggests that once the Bank started to grant loans of this type they would exhaust its scanty resources. After a few years the capital would have vanished, and for all practical purposes the Bank would have gone out of existence.
Then there is the possibility of loans to central banks to assist them in maintaining their exchange rates.
This is one of the operations which attracts special attention both in the United States and in Spanish-speaking countries, since it appears in every way to be a sound technical measure which allows a central banking institution to escape the hazards of a passing danger until the foreseen recovery is under way. Moreover, it appears to be one of the procedures expected of the Bank by many of the advisers who can help form its policy. Thus Mr. A. A. Berle, Jr., Assistant Secretary of State of the United States, has said:
It is interesting to note that the Inter-American Bank, proposed fifty years ago, is now at length nearing reality. Such a bank has many uses; but its most important use would be to free the exchange between the American countries from the necessity of balancing up every few days, or every few months, or even every year or so. When it is fully developed, as I hope it will be, the Inter-American Bank should be a means by which dollars may be made available to, let us say, Brazil or Chile; and by which Brazil or Chile may repay the debt not in dollars, but in milreis or pesos, which can be converted into dollars, if, as, and when there is a suitable opportunity, but which need not be converted into American dollars unless it is convenient and sensible for both countries to do so. It should be the beginning of a system in which finance is the servant of exchange and development, and is adjusted to that commerce and that building which serves the various countries -- in direct contrast to the older system, which insisted that the development and the commerce must serve finance, or it could not go forward.[ii]
In my opinion, however, this is precisely one of the great dangers which might be encountered by the Inter-American Bank if it should decide to grant this kind of loans. And certainly it would be a danger for countries whose central banks resorted to this expedient in order to uphold their exchange when trade conditions did not warrant it. In fact, the assistance which Mr. Berle expects the Bank to give the central banks of any participating nation seems to aim at maintaining the exchange rates.
With regard to stability there are, generally speaking, three schools of thought.
One prefers to keep the exchange rate stable even at the cost of losing gold and impoverishing the country, since this procedure makes possible the purchase of foreign goods which cannot be paid for from the sale of the country's own produce. The result is a sort of domestic depression, a general impoverishment due to overbuying, alike in business, in domestic production and in the Government's revenue.
A second prefers to maintain home prices and abandon the exchange rate, because it considers that any hardship brought about by depreciation is less than the impoverishment and depression which would ensue if the exchange rates were kept stable. In this case, a loan granted to the central bank would be of no avail, and we therefore need not deal with this point.
The third school of thought is prepared to sacrifice the exchange rates, and even the domestic price level, so long as an uninterrupted rate of economic growth is maintained within the country. In such a case, a loan granted to a central bank need not necessarily be wasteful or dangerous, provided the country's state of economic development allows it to increase its exports, for these would replenish the central bank's reserves and enable it to repay the loan without any further difficulty. In this case the country's comparative prosperity would probably attract private capital, so that the original loan would actually be no more than a forerunner of subsequent investment.
Let us revert for a moment to the first case, when the loan is granted with a view to maintaining the exchange rate at a level convenient for other countries, but not convenient for the borrowing country. There is every reason to believe that such a loan, granted to uphold an unadvisable rate of exchange, would not be repaid for a long time. In this connection I might quote from a statement of the Mexican Delegate to the First Meeting of Finance Ministers at Guatemala, made when the Finance Minister of Honduras sought a remedy for that country's lack of foreign exchange:
I believe it will be very difficult to alter the nature of a balance of payments merely by borrowing foreign exchange. In my opinion, you can solve balance of payments problems only through measures that go deeper, rather than through the obvious one of obtaining loans which will bring about a temporary equilibrium at the most.
In Mexico we call such credits -- that is, those granted to the central bank at a given moment in order to correct what at first appears to be a temporary disequilibrium in the balance of payments, but on closer examination turns out to be a more permanent disequilibrium -- "phantom credits." We call them phantom credits because they do not increase the country's economic capacity. . . .
If you have, on the one hand, the purchasing power of a country, and, on the other, the purchases which it makes in a given period of time over and above the amount permitted by its exports, that country, in fact, has but two alternatives: either it reduces its debit items, such as imports, or it increases its credit items, such as exports.
On reaching this state of affairs, one of two measures may be adopted: exchange control, or exchange depreciation. The former restricts imports to the extent to which the central bank permits purchases from abroad with part of its foreign exchange holdings. Depreciation is a way of restricting the nation's purchasing power and of stimulating exports. But if we assume that neither measure is desirable, then the only solution to these problems is to achieve, through careful, adequate, and sound organization, a more rapid internal economic development, in order that the purchasing power of the country may increase. In debtor countries it is not possible for such development to be brought about by domestic capital only. . . .
If the economic development of a country does not proceed on sound bases, any measure taken will do as much good as aspirin does in cases of typhoid fever. You may relieve the headache, but you do not kill the disease.
Making allowance for possible inaccuracies in this oral statement, I think the argument still holds.
Let us now consider loans to Governments for carrying out public works in periods of depression with the aim of promoting recovery. This is the type of credit which I consider desirable for the Bank to grant. On one side there is certainty of repayment; on the other, such credits benefit the borrowing nation.
The South American Continent is backward economically, and economists still point out that in the main it is important as a producer of raw materials only.[iii] It contains untouched natural resources which could be utilized to increase economic activity generally and to further state enterprises for which capital is not available. The type of enterprise which the state should undertake has tended to become more clearly differentiated from that which should be assumed by private investors. Among the former are highway construction, the building of dams to provide water and hydroelectric power, the modernization of ports, etc. Latin American countries often are unable to carry out such schemes due to their inability to obtain long-term credit at moderate rates. If the plans submitted are carefully studied, and if the country's ability to pay is considered as a function of its future economic development, then I think the Bank will be able to invest its capital in such projects safely and that it will play an important part in the economic development of the Continent.
When such works are carried out in times of depression, experience in many countries, notably Sweden, shows that they have the advantage of preventing the slump from becoming more serious. They may even reverse the downward trend in economic activity, and may initiate, sometimes spectacularly, a period of sound recovery. This is of interest not only for the country directly concerned but for all the countries with which it trades.
Professional bankers may have their doubts regarding the wisdom of the Bank's making investments in the form of credits to central banks. They might feel similarly skeptical about the safety of loans for promoting public works. But I do not think they ought to refuse to consider such loans in view of the experience of other countries besides Sweden. The United States itself emerged from its worst-known depression by means, among other things, of a vast public works program. Even Mexico adopted a similar policy, with the result that the Government has been able to cope with a serious lack of new foreign and national investment and with the difficulty of the economic war launched against Mexico in 1938 by the expropriated foreign oil companies.
New enterprises require a spirit of adventure which individual investors do not always possess. The new types of investment which I have in mind may offer more safety, and still yield higher returns than many of those more generally known to the market. I think particularly of improvements to the land, and the establishment of new factories and the provision of new equipment for old ones. In such cases, the Bank could either grant the loans directly (when the amount is small) or it could re-sell the securities of the enterprise to the public and, if necessary, guarantee them.
An inquiry among the New York banks doing business actively in Latin America would yield an important list of opportunities which those banks are not in a position to undertake now, especially when it is a matter of long-term investment. Under this heading I would include, broadly speaking, the following:
1. Land improvements designed to increase the yield of commodities readily marketable either at home or abroad. I have in mind especially cases where the new investment would lower the cost or better the quality. The production of rubber in hitherto idle regions is an example of the sort of investment likely to attract attention in the United States.
In this group we may also include settlement schemes, whether involving internal readjustments of population or immigrants from Europe. Mr. George L. Warren, Executive Secretary of the President's Advisory Committee on Political Refugees, has pointed out two essential conditions which must be met if settlement schemes are to succeed:
First, specific projects of settlement must be carefully planned and documented on the basis of reasonably exhaustive scientific inquiry. A cycle of investment and eventual return over a period of years must be convincingly worked out. Such a cycle might include an original contribution of land by the receiving government; other benefits and advantages special to the area to be settled; the issuance of bonds; the guarantee of interest by the receiving government; plans for the distribution of the increment in the value of the land to the government, the settler, and the private investor through the settlement corporation; definite plans for specific crops; information about internal and export markets; the selection of competent settlers; the methods of allocating land; the settlers' prospects of repayment in time; and the distribution of income to the different parties at interest. This is a difficult but not necessarily an impossible condition to meet. . . .
The second condition is that private investors must have some reasonable assurance of government coöperation to warrant the hope that if private funds are invested initially the greater share of the investment burden and risk will be assumed by the government to carry on what has been started. Furthermore, private funds must come in the first instance from general public subscription. It is too large an undertaking for any specially interested group to undertake alone.[iv]
Mr. Warren's remarks were made with particular reference to refugees from Europe, but I think they are equally applicable to the problems that arise in connection with schemes of internal settlement.
2. The establishment, improvement, or modernization of factories producing commodities with an assured home market and with possible markets abroad, and which might be able to lower production costs as a result of securing cheaper labor and raw materials.
3. The establishment and development of hydroelectric power plants, preferably for industrial use.
4. The establishment and development of hotels in ports and towns likely to attract tourists.
5. The establishment and development of steamship lines. The Bank's assistance might be highly important in providing sea connections for regions now rarely visited by ships. The new lines need not necessarily be of the same importance as the large international shipping companies now in existence. I think of small ships, partly freight and partly passenger, plying between small places on both coasts of America, as well as of larger ships to provide direct transportation between various Latin American countries which now either have no such facilities or very poor ones. Shipyards to build the ships might also be constructed.
6. The establishment and development of air routes for passenger transport to places not yet touched by the large American airlines or their subsidiaries. In Mexico, numerous short lines could be established profitably and operated in connection with the larger international lines.
In this analysis of the courses open to the Bank I have dwelt particularly on the type of operations which I believe should be preferred. I also have tried to indicate some possible dangers. It is true that the possibility of obtaining loans to relieve government financial difficulties operates as a strong stimulus for the foundation of the Bank. And it also is true that the Bank might find difficulty in abstaining from this type of operation when commencing business. Yet I believe that to follow the line of least resistance might rapidly use up all the Bank's resources.
On the other hand, if from the beginning the Bank is able to establish a sound policy, if it extends credits only for the type of investment which leads to the economic development and improvement of the peoples of America, then it will assure its own life for a long term and it also will create a continental community of interests which is not yet entirely evident. The American Continent must increase the value of its resources, both by increasing the action of capital as well as by increasing human efforts. Unless it does so it will continue, in contrast to its geographic unity, to suffer from a definite cleavage between closed and quasi-primitive economies on the one hand and progressively international and highly developed economies on the other.
[i] A typical example is that of Mexican henequén (sisal), which for years enjoyed a monopolistic position in the world market, but which has been largely ousted from European and American markets by the production of colonial countries where plantation workers receive such low wages that they resemble slaves.
[ii] "Peace Without Empire," Survey Graphic, March 1941, p. 107.
[iii] In a recent article entitled "Hemisphere Solidarity," published in Survey Graphic, March 1941, Mr. Nelson A. Rockefeller notes that one of the major objectives of the Office for Coördination of Commercial and Cultural Relations between the American Republics is to lessen the dependency of Latin America upon Europe as a market for raw materials and to foster North American coöperation in enterprises of mutual interest for the American nations.
[iv] "The Prospect for New Settlers," Survey Graphic, March 1941, p. 168.