when we meet the needs of the underprivileged at home and abroad by effective measures to help remove their own poverty and frustration. These are difficult challenges, but they are also opportunities. We have sufficient resources. What is now required is the national political will to allocate these resources in the most effective manner.

I repeated that testimony, and then asked this question:

If so, will not the expenditures involved endanger our financial position and the integrity of our currency?

The answer here is also long. I ask unanimous consent that it also be inserted at this point in the record.

The CHAIRMAN. Without objection. (The answer referred to follows:)

It is necessary here to distinguish between our domestic economic situation, and our external balance of payments. So far as our domestic economy is concerned, we have considerable productive capacity which is either underemployed or can be redirected. Additional capacity can be and is being created each year by investment in new plant and equipment, and by training and retraining labor. A further increase in our efforts to rebuild the cities, employ the unemployed and upgrade education will result in increased costs, both public and private. But these costs will be more than matched by increased production, profits, wages and government revenues, and by reduced costs of crime, disease and civil disorder. And, given sufficient practical wisdom and political will, the increased flow of goods, incomes and revenues will permit us to move forward steadily without threatening our financial position or the integrity of our currency. So far as our balance of payments is concerned, none of the programs talked about involve greater outflows than we are already experiencing. This is true even for foreign assistance. In FY 1966, for example, $9 out of $10 of foreign commodity expenditures financed by AID went to U.S. suppliers. Moreover, the added growth of productive capacity abroad raises foreign incomes, and thus expands our foreign markets.

Senator SYMINGTON. I made this comment at that time, and all this was printed in the hearings of the Senate Armed Services Committee earlier this year:

By implication, the Department of Defense does say it believes we have sufficient resources not only to continue to defend the Free World, but also to finance the Free World, handle our domestic problems satisfactorily, and at the same time cure the ills of the "weak and underprivileged" in the other countries on this planet.

Apparently, along with the many of our previously or presently bankrupt neighbors, we too have now discovered the printing press as the source of purchasing power. In our case, however, we are substituting the printing of Government bonds for the printing of paper money. In this case, Mr. Chairman, it is even worse, because the bonds draw interest.

Because of the inevitable inflation which will result, this can only come out of the hide of everybody, but primarily those who live on a fixed income such as pension plans, life insurance, retirement plans and social security.

Those comments of mine, as against the answers, are also part of the printed record, Mr. Chairman.

WHY WORLD BANK RESERVES ARE NOT DRAWN ON

Secretary FOWLER. Mr. Chairman, could I make a comment on Senator Symington's question? He asks why doesn't the Bank simply finance this replenishment out of reserves instead of asking the part I countries for more money?

I think it is a pertinent question and a relevant one and I would like to give a full answer to it.

The size of the replenishment, $400 million a year, precludes its being covered out of the Bank's current earnings, which are the source

These funds are held in highly liquid form in the United States, where they are invested in U.S. Government bonds. Thus we have a truly extraordinary situation, namely the World Bank, having accumulated net earnings in part as a consequence of the full faith and credit of the United States, thereupon is allowed to hold these earning as reserves and increase its profits by drawing interest on them fror the United States.

It would seem the World Bank is about as close to a perpetu capitalmaking machine as we have been able to devise. It borro money from the rich, it guarantees repayment with interest, but th it loans the money to enterprises all over the world. When the rep ments with interest are received, the Bank pays off its bondhold and puts its profits into reserves.

The Bank could use these reserves for soft loans. It could loa those elements in developing societies; but it doesn't.

If this IDA replenishment should fail, there is no need what for IDA to be inactivated soon. As a recent newspaper story sugge the Bank itself is plenty capable of keeping IDA going. It has tre dous, totally unnecessary, reserves. These reserves are pra evidence of the heavy profit the Bank has been making over the

ADEQUACY OF U.S. RESOURCES

In January 1967, in a defense hearing, I asked the new Pre of the World Bank how long he thought we could continue sp $2, $2 billion a month in Vietnam, and his answer at that ti interesting. He said "Forever." To me forever is a long time.

When Secretary of Defense McNamara later testified bef Senate Armed Services Committee last January he testified quote:

I am convinced that we will judge the alternatives to a continued ded collective defense to be unacceptable. I am also convinced that emb obligations of leadership will not force us to divert badly needed reso the improvement of American domestic society. Our resources are su wisely allocated, to meet the needs of the weak and the underprivileg home and abroad.

I then asked this question against that testimony:

Does this mean the United States can continue to finance all of expanding domestic programs; and at the same time wage a major war and in addition defend at great expense and with hundreds of thou people other parts of the world such as Europe and South Korea; and "meet the needs" of the poor all over the world?

The answer received from the Pentagon is long. I would mous consent to put it in the record at this point. (The answer referred to follows:)

What is at issue here is both practical wisdom and political will. has sufficient productive resources to carry through to completion the right of the people of South Vietnam freely to decide upon the their own future, while at the same time meeting our obligations expanding the scope of the war against poverty and unequal oppo own society, and increasing by a considerable degree the scale of ou the poor nations abroad. Temporarily, because of the large effor Asia, we now find that it will require higher taxes to mobilize suff to do all of these things effectively without inflation. However, flow of private and public revenues results mainly from higher pri investment and re-investment in material and human capital. It task to keep available productive capasity and labor fully emp more difficult to create new opportu or those who are ur

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33

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swer here is also long. I ask unanimous consent that u also on this point in the record.

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here to distinguish between our domestic economie 872shion hase of payments. So far as our domestic economy i odn masentue productive capacity which is either underémavovať apa capacity can be and is being created each post dy And equipment, and by training and retraining labor refors to rebuild the cities, employ the unemplovod and increased costs, both public and private. Bat amatebed by increased production, profits, war and by reduced costs of crime, disease and civil dis real wisdom and political will, the increased flow

en the integrity of our currency. So far as our permit us to move forward steadily without pose of the programs talked about involve ty experiencing. This is true even for foreign * De Kuppliers. Moreover, the added growth of Out of $10 of foreign commodity expendi fang incomes, and thus expands our foreign

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from which the Bank's reserves are built up. These earnings have been at a level of $170 million per year, almost all of which had to be retained last year for use in the Bank's own lending operations.

Now, as for drawing on the Bank's accumulated reserves

The CHAIRMAN. Could I ask a question before you go on? You refer to the Bank's own lending operations. If they are reserves they are used only for temporary purposes pending the selling of their bonds, aren't they?

Secretary FOWLER. I am coming to that because I think it is a good question.

As for drawing on the Bank's accumulated reserves there is a widespread misconception; these are in liquid and idle form. This is not the case. Except for the Bank's special reserve of somewhat under $300 million, which its charter requires it to maintain in readily available form against possible default, the balance of the Bank's total reserve of roughly $1.3 billion has been reinvested in the Bank's lending operations. In other words, loan commitments are being made against it, and it will, in effect, be invested in the form of loans to Bank member countries.

Use of these supplementary reserve funds in this manner reduces the amount that the Bank has to borrow annually in the United States and elsewhere to finance its current level of operations. In other words, for each dollar that the Bank transfers to IDA the Bank must borrow a dollar. In the tight bond markets of today, this is difficult.

Although the Bank has a substantial portfolio of investments in Government securities, these represent funds that are already committed on loans and are awaiting disbursement. They cannot, therefore, be granted by the Bank to IDA or otherwise disposed of.

Through March 31, 1968, for example, there were $2,353 million undisbursed against commitments that had been made, and the Bank held only enough cash and investments to cover about half of this

amount.

A further consideration is the fact that the Bank's ability to borrow in the private markets has depended to an important degree on its solid financial position of which its reserves are an important element. If the Bank commenced to divest itself of its reserves, even for a worthwhile purpose, such as funding IDA, it would undermine a fundamental assumption on which the present holders purchased the bonds and would severely jeopardize future sales of bonds.

It has been our policy to encourage the maximum transfers of the World Bank annual earnings to IDA consistent with meeting the needs of the Bank itself. We will continue to encourage the Bank to give IDA the maximum possible support in the future.

But as I said earlier we would not do that in lieu of, or as a substitute for, this necessary replenishment.

Senator SYMINGTON. I note it was only after congressional pressure that up until 1967 the Bank put $200 million of its reserves into soft loans. I do not agree with all the details of the statement the Secretary just made, and ask unanimous consent to submit a reply for the record to said statement.

The CHAIRMAN. Without objection it is so ordered.

(The reply referred to follows:)

COMMENT BY SENATOR SYMINGTON RE SECRETARY FOWLER'S STATEMENT ON IDA HEARINGS BY SENATE FOREIGN RELATIONS COMMITTEE, MAY 21, 1968

It appears that there are two major arguments advanced for the World Bank not replenishing IDA from its accumulated reserves: (1) a substantial portion of the $1.3 billion in liquid holdings of the Bank have already been committed to hard loans; (2) these reserves are an important element in maintaining a solid financial position on which the Bank can continue to borrow in private markets. In the first instance, as the officers and directors of the World Bank and IDA are one and the same, these managers have an option to use these liquid holdings for either hard or soft loans. There would appear no reason why said officers could not have used the $900 million committed to hard loans for replenishment of IDA funds.

Secondly, the Bank's borrowings are guaranteed two-fold: (1) by the governments who borrow; (2) by the more than $20 billion in callable capital. It is difficult to understand why a third guarantee is required in the form of reserves, particularly as the annual rate of net earnings is about $170 million.

In addition, the April 1962 report of the World Bank and IDA, in explaining the 1959 request for an increase in the callable capital to the present $20 billion level, stated, "the Bank's future borrowing in the investment market would be facilitated by an increase in the uncalled portion of member's subscriptions." Accordingly, it would seem the "security" for the future sale of World Bank bonds is the callable capital, not the liquid holdings which could be used to make soft loans through IDA.

DEFENSE EXPENSES FOR RESEARCH

The CHAIRMAN. I just wondered why the Senator from Missouri, when he got such a favorable answer from the Secretary of Defense, Mr. McNamara, now President of the Bank, didn't ask the Pentagon to put up this money. They are spending $304 million for irrelevant research and a lot of other things. I don't know why you don't ask the Pentagon; they seem to have a lot more money than they know what to do with.

Senator SYMINGTON. You saw the article this morning?

The CHAIRMAN. I did.

Senator SYMINGTON. Investigation by this committee has revealed some gentlemen formerly working over at the Pentagon are doing pretty well. One of them is now getting $90,000 a year running a defense set up nonprofit organization. That is nearly as much as Willie Mays or the President receives.

The CHAIRMAN. Almost.

You don't wish to comment on the Pentagon furnishing the money? Secretary FOWLER. No, I have got enough troubles of my own, Senator. I don't borrow any.

The CHAIRMAN. Senator Aiken.

HOW WOULD U.S. SHARE OF NEW IDA FUNDS BE USED?

Senator AIKEN. Mr. Secretary, assuming that Congress approves this legislation promptly, and assuming that the Congress appropriates $160 million to IDA for the first year, what would be done with the $160 million?

Secretary FOWLER. We would supply noninterest bearing letters of credit to IDA to meet disbursements out of loans made against this replenishment, and as those disbursements are made to the borrower for use in connection with whatever the loan project may be, they are drawn down against those letters of credit. That amount of