L- 8W0RKING PARTY RMPORT ON LUXENBOU

TFILE C`OIDP `4 N Page No.

Section I. Form of Application. 1

Section II. History of Luxembourg Loan Application. 2

Section III. Structure of Luxembourg Economy. 3

(a) General Survey of Luxembourg Economy. 3

(b) National Income. 6

(c) Finances. 7

Section IV. Economic Union of Belgium and Luxembourg. 9

(a) The Belgo-Luxembourg Trade and MonetaryAgreements, 9

(b) Balance of Payments 11

Section V. Rehabilitation Program. 13

(a) Consequences of the War. 13

(b) Plans for the Rehabilitation of theNational Capital. 14

(e) The Financing of the 5-Year Reconstruc-tion Plan. 18

(d) Recent Proposals made by Mr. Wernerfor the use of the Proceeds of theBank's Loan 20

(e) Assessment of Mr. Verner's Proposals 22

AN.EXES

Annex I. Memorandum from Luxembourg Government.

Annex II. Complementary Notes Nos. 1 and 2.

Annex III. Complementary Note No. 3.

Annex IV. Complementary Note No. 4.

Annex V. Complementary Note No, 5.

Annex VI. 1935 Agreement Between Belgium and luxembourg.

Annex VII. 1944 Agreement Between Belgium and Luxembourg.

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TNDEX (cont.)

TABLES

Table I. Evolution of the Public Debt.

Table II. Breakdown of Publio Debt as of 31 December 1946.

Table III. Luxembourg's Estimate of Indemnification for WarDamages by the State.

Table IV. Luxembourgts Estimate of Private Financial Investment.

Table V. Latest Estimates of Budgetary Expenditures in 1947 asPresented by Mr. Werner,

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SECTION I

FORM OF APPLICATION

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Page 1

SECTION I

FORM OF APPLICATION

Form: (a) Letter from Mr. Pierre Dupong, President of the

Luxembourg Government and Minister of Finance,

dated November 3, 1946, accompanied by memorandum,

(b) Complementary Notes Nos. 1 and 2 forwarded by Mr.

Le Gallais, Minister of Luxembourg in Washington,

on December 30, 1946, and Complementary Note No,

3 forwarded by lMlr. Le Gallais on March 18, 1947.

Complementary Notes Nos. 4 and 5 presented by Mr.

Werner after his arrival in Washington on May 26,

1947.

* Amount: $20 million, (at present exchange rate of 43.83 equiva-lent to L. frs. 876.6 million)

Term: Long term: 25 years suggested.

Purpose: Given in first memorandum as "the reconstruction of

the devastated areas in luxembourg and the restoration

of the Luxembourg economy."

Borrower: The Luxembourg Government.

Negotiators: Mr. Hugues Le Gallais, Minister of luxembourg in

Washington and Mr. Pierre W.rerner, Commissioner of

Bank Control.

SECTION II

HSOYOF LUUMJBOTJRG LCAAPPLICATION'

S

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Page

0 SECTION II

HISTORY tOF LUJVOURG LOAN APPLICATION

The Luxembourg Loan Application was in the form of a letter from Mr. Dupong,

President of the Luxembourg Government and Minister of Finance, which the Minister

of Luxembourg in Washington, Mr. Le Gallais, forwarded to the Bank on November

18, 1946. Subsequent information was received from the Luxembourg Government in

the form of Complementary Notes Nos. 1, 2 and 3. Complementary Notes Nos. 1 and

2 are attached hereto as Annex 2 and Complementary Note No. 3 is attached hereto

as Annex 3, Mr. Werner, the Commissioner of Bank Control, arrived in Washington

on May 26, 1947, to negotiate on behalf of the Luxembourg Government and subse-

quent information obtained from him is set out in Complementary Notes Nos. 4 and

* 5 and in the Latest Estimates of Budgetary FLxpenditures in 1947 which are attached

hereto as Annexes 4 and 5 and Table V respectively. It is to be noted from

these Complementary Notes that the basis of the loan was stated earlier to be

the necessity for the import of materials for (1) housing reconstruction, (c)

rolling stock, and (3) coke and coal. It was made clear before the arrival of

Mr. Werner and confirmed by him personally that the real necessity of the l.uxem-

bourg Government was for a loan in Belgian francs in connection with the Recon-

struction Plan which it was unable to finance without these means.

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.

SECTION III

STRTCTTTRE OF LUXEMBOURG ECONOMY

.

Ptage '6SECTION III

S

0 (a) GENERAL SURVEY OF LUXEMBOURG ECONOMY

GeoRraphy and _oplation

The Grand-Duchy of Luxembourg is a small independent territory covering about

1000 square miles and bounded on the west and north by Belgium, on the east by

Germany and on the south by France. The northern half of the Duchy is high and

rugged being part of the Ardennes while the southern half lies on the Lorraine

Plateau. Part of the Mqinette Field of the Lorraine Plateau, the richest iron ore

deposit in Europe, crosses the southwest tip of Luxembourg.

The population of approximately 300,000 is partiall-y of French and partially

of Germanic stock and the greatest density of population is around the capital,

Luxembourg, and the mining towns in the southwest. In 1937 it was roughly esti-

mated that the working population was distributed among the various occupations

O as follows:

Agriculture 44,000Innau9 tryMetal 20,600Others 33,650

Trade and Commerce 18,500Transport 7t500Public Services 4,500Salaried Employees 7,500Liberal Professions 2,350Domestic 1,400

Total 140,000

Political Stability

The Grand-Duchy of Luxembourg has suffered a varied political career due to

its position as a buffer state between France and the German states and later the

German Empire. It was elevated to the status of the Grand_Duchy by the Congress

of Vienna (1814-15) but came under the economic domination of Germany when it

entered the German Customs Union in 1842 though its frontiers were collectively

* guaranteed by the great powers in 1867. After Viorld 'Jar I the inhabitants in a

SECTIOT, III Pge7 '

referenclum nronouncedi for the maintennnce of the :or2.r2zchy with the C-rand Duchess

Charlotte ac ruler in -ilace of her sister wTho h.a6 aloclicatee'. The Grandc-Duchy is

a constitutional monarchy and. its -politics have showrn very mirr-ed stability since

the constitution s marie clemocratic in 1919. --cth Mr. Pierre Dturong, now,7 PresicIent

of the -overnment and. Iinister of Tinance, an.R Mr. Joseph Dech, 'oreign Minister,

have been in the Lu=-embourg Cabinet for the last trenty years, On the return of

the G-rand Duchess Charlotte to Lu-embourg ..fter the liberation in 1944 a ;eneral

election was held in 1945 resulting in a Chamber of Re-resentatives (the only

lerislative boc6y) as' followrs:

Christian-Sociaal Party 25Labor Party 11Democratic Cgroup 9Comnunist 5Ind,e-enc onts 1

0 Total 51

DJconomic Develoioment

As wrill be seen frorn the fiSures of -oula.tion set out above, ab'Oout one-

thirdc of the worl-in_-, -oulation of Lu:-embourg is enCaC,ed in a,,riculture which sup-

plies aoout three-fourths of the country Is neeC.s, The soil of LU:-embourg is in-

tensively cultivatecl and 40,J of her total area is -,ermenently uncer -o]o. HoI0ever

the economic immortance of Lu7-enbour - is duo to the hc. thr.t in the lcast fiftY

yarxs Luxembourg has built arouicnd her iron ore de-oosits a metallur-ical inCdustry

which, in spite of her small size, made her ran>--- as the eig;hth steel producing

country, in the world before '?.orlc ..ar II. Other inclustries which e.-ist such as

leather and tez-tile mrzufacture, oucxrying, end wine-mahing are all of very minor

importance.

The e--tent of the ircn ore orocluction can ba gathereed from the fCollowing

f igures;

SECTION III-Pageor

* 1922 22U8

Number of Mines 67 66Production 7,766,254 long tons 5,140,362 long tonsExports 3,639,892 2,505,797Undergroundworkers 2,489 1,993

Surface workers 2,104 2,083

There are two points to be noted in connection with the above figures: firstly,

although a substantial quantity of the iron ore mined in Luxembourg is exported,

an even greater amouint of iron ore is imported from France due to the fact that

one type of ore mined in Luxembourg is not suitable for smelting by the process

used in Luxembourg. Secondly, although other figures are difficult to obtain,

the suspicion that 1937 was a peak year for the metallurgical industry in Luxem-

bourg is strengthened.

According to Complementary Note No. 3 production of pig iron in 1937 was

2,512,507 metric tons (monthly average 209,376) and steel production was 2,510,234

metric tons (monthly average 209,186). This compares with figures for 1938 from

other sources of 1,709,700 short tons of pig iron'and 1,584,100 short tons of

steel. It is to be noted that all the coke and coal necessary for smelting the

iron ore has to be imported and is normally brought in mainly from Germany but

also from France and Belgium.

Exports of metallurgical products are said to constitute at least 80% of

Luxembourg' s exports.

The steel combines of ARBED and IADIR control the metallurgical industry.

&RBED (A ieries Reunies te rbch Esch DiidelanZe)

ARBED is the dominating economic force in Luxembourg. It not only owns two-

thirds of Luxembourg's pig iron production and steel production capacity but from

its power generating plant it supplies Luxembourg with most of her power and light,

And is olosely involved in other economic activities. However, ARBED's intere5+:

go far beyond the borders of Luxembourg. Of the 10,600 hectares of all mining

concessions held, only 1,200 are in Luxembourg. Other interests owned by

SECTION III Page +

ARBED are 31 blast furnaces; 30 steel furnaces or converters; 28,200 hectares of

coal mining concessions mostly in the Aachen District of Germany; rolling mills;

wire drawing plants; facilities for the manufacture of fireproof products; coke

ovens; structural engineering shops- iron, steel and bronze foundries; forging

shops; and slag mills. These interasts are divided between Luxembourg, France,

Belgium, the Saar, the Rhinelanlnc and South America.

According to a census takezl b>- the Luxembourg Government after the war, the

following breakdown of ARBED'Fs total share holdings of 250,000 can be given:

In3divid_ual_Holgs Percentages held by Countries

Schneider-Creusot 36,000 shares Belgium 56%Societe Generale de France 22%

Belgique 35,000 shares Luxembourg 13%Banique de Bruxelles 10,000 shares Holland 1%Individual family holdings Switzerland 1%

Belgium ? 40OpOO shares Miscellaneous 7%France ) 15,000 sharesLuxembourg) 20,000 shares

Miscellaneous 94,000 shares

Of the miscellaneous 7% it4 is thought that the German holdings are about 3%.

"ADIR (So4§te.dles Ha2LtsaE2rnrugtAcierLesde Differdg

Although smaller than AT3B:D, this is still a very important concern possessing

plants at Differdange with ar annual capacity of 750,000 tons of pig iron and

725,000 tons of crude steel. The Societe Generale de Belgique is the largest

shareholder in HADIR.

(b) NATIONAL INCOME

Luxembourg, prior to the war, had one of the highest per capita incomes in

Europe. According to the Iuxembourg preliminary computation, the 1938 per capita

income in U.S. dollars amounted to 375 against 266 in Belgium. The method used for

computing the national income figures differs considerably from those applied in

U.S.A. and U.K. Therefore, it waes not found advisable to make comparisons with

the national income of other countries. According to Complementary Note No. 3 the

1947 real national income will be about 30% below that of 1938, and may reach its

pre-war level in the course of 1948. The national income in 1946 is estimated by

SECTION III Page L

Luxembourg at 4,000 to 5,000 million of current francsp and in 1947 at 5,000 to

6,000 million francs.

The main reason for the decrease of income seems to lie in the reduced produc-

tioni of the iron and steel industry which in 1946 worked at only 53% of its total

capacity. If this assumption is correct, the restoration of the pre-war real in-

come will chiefly depend on the increased output of those two industries which is

conditional upon allocations of coal and coke to Luxembourg,

(a) FINANCES

Debt Record.

There has been no record of default of either principal or interest on the in-

ternal or external debt of Luxembourg prior to the German invasion on May 10, 1940.

During the war the Germans permitted payment on all obligations to Luxembourg and

German holders. In August 1945 arrears were paid up and service was resumed.

Public Debt.

Table I shows the evolution of the public debt from a very low figure pre-war

of approximately $102 per capita to an amount of $365 per capita. Table II gives

the composition of the public debt as of December 31, 1946. It illustrates the

great increase in the public debt to a figure of almost 5 billion francs which has

been brought about as a result of the var. This increase is due to three main

factors. Firstly, there has been the issue of a long-term loan and Treasury Bonds

in connection with the Reconstruction Program. Secondly, there has been the burden

assumed by the Government in connection with the monetary reform which accounts for

the greater part of the extraordinary items of the public debt. Thirdly, there is

the amount of 700 million francs, a short-term debt to Belgium, which is made up

partly of Luxembourg's share of the Economic tTnion's settlement of lend-lease

accounts and partly by Luxembourg's post-war purchases made on its behalf by the

Belgian Economic Mission. The Luxembourg Government has estimated (Complementary

Note No, 3) that during the reconstruction period the public debt will increase to

about 10 billion francs or $761 per capita which does not constitute a crushing

SECTION III Page,i

* burden for a country with a national income as high as that of Luxembourg in normal

times. However, the amount required for the servicing of the public debt, esti-

mated by the Luxembourg Government at 500 million franes, is approximately 25% to

33% of the expected post-war budget estimated by Luxembourg at l-' to 2 billion

francs.

In studying the evolution of the public debt it is to be noted that the short

and middle-term debt has increased much faster than the long-term debt. The only

two issues of external debt were made in the depression periods of 1930 and 1932

and no new issues have been made since that date on any foreign market. However,

a loan of 250 million francs is presently being offered to luxembourg nationals

for subscription in dollars and pounds sterling from their foreign assets. The

service of this loan will involve an expenditure of foreign exchange.

Foreig Assets.

According to the U.S. Treasury Census of 1941, the total value of U.S. assets

and foreign securities held by or on hehalf of Luxembourg owners was $34.4 million.

The following is a breakdown of this figure.

Bullion, Currency and Deposits $ 23.0Domestic Securities 3.5Interest in Estates and Trusts .1Foreign Control and Enterprises 5.1Other Assets 1.7

Total U. S. Assets 33.4

Foreign Securities l.O- 34.4

Slightly under a half of the value of these assets are held by ARBED and HADIR

which intend to use them for the modernization of their plants mostly by the purchase

of equipment in the United States,

According to information given by Mr. !Jerner the total amount of the foreign

* holdings expressed and payable in sterling amounted as of November 1944 to appro-

ximately Ll,458,000 most of which is owned by ARDED and HADIR.

.

SECTION IV

ECONOMIC UNION OF BELGIUM AND LUXEMBOURG

B

3

SECTION IV

* 1CO1OMIC thTIO0T OF BELViTTM L m LUUXEICTOURG

(a) THE BZLGO-LUXIETOURG TRADE AIM 1010BTARY AGPEE!vUTS

The 1921 Convention.

Luxembourg entered into an Economic Union with Belgii= by a Convention,

signed on July 25, 1921, wtrhich came into force on May 1, 1922 and which was to

last for a period of 50 years.

The trade -srovisions of this Convention provided for the abolition of all

custom boundaries and for an entirely free and unrestricted commerce between

Belgium and Luxembourg. Commercial treaties and economic agreements with other

countries were to be negotir.ted rnd concluded by the Belgian Government after

consultation with the Luxembourg Government. The recoipts of the customs duties,

plus the product of certain intornal excisc duties, were to be divided in the

then population r.tio of 28 to 1, after a dma1 decluction for the encoure.gemont

of cereal growing in Luxeimbourg.

By the moneta.ry erwvisions of this Convontion, Luxembouirg1 s provisional

note circulrtion, issued in 1919, was replrced by Belgir..n curroncy delivered. by

the Belgian Governmont to Luxembourg against r lorn of 175 million 3elgian francs

at l< interest.

The Luxemrnbourg Government was authorized by this ConGvention to issue in its

own territory, its own bank notes of ra freo value of les. tha.n 10 francs up to a

ceiling of 25 million francs. This Convention was strengthened by two subsequent

agreements in the years 1935 and 19L14.

The 1935 A-eGment.

This Agreemont was made necessr.ry by the devalurtion of the Belgirn franc

and denlt only with financial and monetary questions. The main provisions of

* this agreement were:

SECTION IV - page 3

- 1, Arrangements for the reimbursement of the 175 msillion

Belgian franc loan, provided for in the 1921 Convention.

2. Participation by the Luxemrbourg Government in profits paid

by the ITational Bank of Belgium to the Belgian Treasury.

3, The declaration of Belgian ban;k notes nz legal tender in

Luxembourg with the result that the rate of exchange became

1 Luxembourg fra,nc to 1.25 Belgian francs.

4. The setting up of Discount A-ency of the National Bark of

Belgium in Luxcombourg.

5. Authority for the Luxembourg Govcrnrnent to issue b.nk notes

with a face value less thnn 100 frnncs up to tho naount of 100

-million francs in place of the previous coiling; of 25 million

f rancs,

* The i944 Agreement..

Tho 1944 Agreement was signed ir, London in rnticipation of imminent liberation,

Thoug-^h never ratified, it has been giver the force of law7 i-n both countries as each

country hns passed similar la.ws promulCgrting its urovisions. The followin- arc the

main clauses:

1, The B3elgiaun and Luxembourg franc were plrced on p.rit7.

2. Similphr laws were to be :ppssed by both countries, giving

foreign excht1nr- control to a sinlle authority and which

resulted in tho setting up of ths Institut Bello-Luxembourg,eois

du Chn,-e (I.cC),

T. nc ceiling on notes which could be issued by the 1Luxembourg

G0overnment was ra,ised from 100 million francs to 150 :.nillion francs.

P ?rovision w.s made for the Lu-emabour- Government to benefit on a

new basis from n7ny future revrluation af the pold and foreign ox-

chanr.e reserves of the Notional Bank of BelJ,ium.

SECTION IV PageeK

I-Astitut Belao-Luxembourmeois du Chane (I.B.L.C.)

The result of the 1944 Agreement was the setting up of a single authority

to control foreign exchange operations; namely, the I.B.L.C. which consists of

a nine_mAn Board (7 representatives from Belgium and 2 representatives from Luxem-

bourg). The Board dictates the policies, but the day-to-day operations are

carried on by the National Bank of Belgium.

The Luxembourg Government has stated that the agreement between the two

eountries does not limit either of the Governments "'in taking engagements in

foreign currency as each is liable for its own debts." The 1944 Agreement is

silent on this question. However, in practice the allocation of foreign exchange

for the service of any loan granted by the Bank would depend on the decislon of

the I.B.L.C. As the I.B.L.C. does not possess any assets of its own, the foreign

exchange proceeds being sold to the National Bank of Belgium, it follows that even

if a favorable decision was automatic, the service of any loan granted to the

Luxembourg Government would in practice be dependent upon the amount of the foreign

assets held by the National Bank of Belgium which, in turn, are dependent on the

policies of the Belgian Government. Apart from the utilization of gold and foreign

assets presently outside the control of the I.B.L.C., the only method by which the

Bank could be assured that foreign exchange would be available for any loan

granted to Luxembourg would be to reaoh an agreement with the Belgian Government,

The textsof the 1935 and 1944 Agreements are attached hereto as annexes VI

and VII.

(b) BALANCE OF PAYMENTS

Since the official statistics of the Economic UTnion's foreign trade cover

both participants, no estimates of the balance of payments were made by Luxembourg.

Complementary Note No. 2 gives unofficial figures of Luxembourg foreign trade in

1935, 1936, 1937, 1938 and for the last quarter of 1945 and two first quarters of

1946, Figures for the last two quarters of 1946 have been submitted by Mr. Werner.

SECTION IV Page_Li

According to the figures covering the pre-war period, Luxembourg had a deficit in

its trade with Belgium and a surplus with all other countries sufficient to result

in a net positive balance of trade. The total trade in 1944 and 1945 was highly

deficitary but 1946 again resulted in a surplus. The economic structure of the

country would indicate that a positive balance of trade could be restored on a

permanent basis as soon as production of iron and steel reaches its pre-war levels.

No information was made available with regard to other current payments

except the service of the public debt floated in 1930 and 1932 in the NTetherlands.

Foreign debt service in 1947 is estimated according to the figures included in the

budget to amount to Frs. 14.7 million (or $336 thousand). Payments of interests

and dividends were made to foreign creditors and shareholders of the iron and

steel industry. Their amount cannot be estimated without a detailed study of the

financial position of the industries in question. But it is known that in 1947

ARBED transferred almost 40 million francs to foreign shareholders for profits

realized in 1946. On the other hand, Luxembourg's nationals have holdings in

foreign countries (U.S.A., U.K., Holland, France, etc.) which have been bringing

in interests and dividends, On the whole it can be assumed that prior to the

war Luxembourg's current interiational payments resulted in a surplus. This

assumption is supported by the fact that the country exported capital abroad,

investing it in foreign securities.

SECTION V

PEHABILITAT ION F?0GRAM

13Page -

SECTION V

REHABILITATION PROGRAM

* (a) CONSEQUENCES OF THE WAR

Luxembourg was invaded by the Germans on May 10, 1940, and its occupation

was practically completed within 24 hours,

The Germans attempted to integrate the population and economy of Iuxembourg

into the Reich. The Luxembourg franc was replaced with reichmarks and at tble

time of liberation inflation had driven circulation up to 536 million reichmarks.

.Another measure was the conscription of Luxembourg youth into the German

army. Taking into account losses in action and deaths of deportees as well as

departure of foreign workers, Luxembourg manpower was depleted by about 7,000

mainly affecting agriculture.

Except for the devastation caused by the "Battle of the Bulge!' in the winter

of 1944-45, material damage was kept to a minimum, though the railroad system

X was seriously impaired by aerial bombardment. This meant that the great indus-

trial south (in the valleys of which is also situated some of luxembourg's best

agricultural land) escaped with little material loss. It was only the agricul-

tural economy of northern Luxembourg which suffered real devastation. The

memorandum from the Luxembourg Government stated that 18,000 buildings, or approxi-

mately 31% of the total buildings in Luxembourg were damaged which seems high

although it is claimed that only 3,655 were more than 50% damaged. The following

table was given in the luxembourg Government's memorandum:

Damaged Buildings

Proportion of damage Q_j .2 25 - Q 50 - 80 LO - 100%

Agricultural estates 3.195 991 453 798Private houses 7.158 2.560 1.064 1.224Dairies 59 27 12 5Schools 93 36 24 23Churches 81 48 21 16Factories 6- - 11 4

Total 10.650 3.690 1.585 2.070Grand Total 17.995

SECTION V page 4-

In the survey of devastatcd areas thie T'3'mporrary Subcom;7rission of the United

Nations declared that 22% of existing railroad bridges .and 20% of the tracks and

other installations were damaged or wiped out. In spite of German efforts, the

output of the metallurgical industry never reached pre-war production figures

under the German occupation and. all of Luxembouirg industry suffered through lack

of importation of raw materials and spare parts. Agriculture also suffered mostly

from the lack of fertilizer and necessary replacements of farm machinery.

(b) PLANS FOR TIE REHABILITATION OF THE NATIONAL CAPITAL

There are three plans for the rehabilitation of the National capital, namely:

(1) the 5-year Reconstruction Plan for repairing destruction to real property;

(2) the indemnificration of war dameges mostly to persons and personal property,

and (3) the capital renovation of priv!-ite industry,

(1) To make good the damage wrought by German hostilities the Luxemrbourg

Government has worked out a 5-year Reconstniction Program, the cost

of which is estimated at L. frs. 5,415,4 billion ($123,4 million)

or over ono billion francs per year.

The principal items of this program have been submitted to the Bank

in the following form: '

1. Reconstruction and repairs of the privately owned dwel-lings, schools, churches, factories, stables, etc. L.frs. 4,250 million

2. Reconstructioh of briiges "0 It

3. Repairs of roads and communications " 295 it

4. Repairs of Government buildings " 177.9 I

5. Repairs of electrical installations It202

6. Repairs of weater pipes and sewage system it 2S,5

7. Repairs of damaged railroad bridges, tracks, etc. " 467 "

Total L.frs. 5,415.4 "

(or $123,4 million)

SECT.ON V iage t

Out of the above total, L. frs. 1,366 million have been disbursed

in the course of 1946 and in the first three months of 1947 for the recon-

struction of buildings, roads and bridges (L. frs. 1,185 million) and

railroads (L. fre. 181 million).

(2) In addition to the above Reconstruction Plan, the Government made an

evaluation of other war damages the indemnification of which may become

an additional charge on the State's Treasury. The Government's estimates

of the war damage indemnification are shcur in Table III.

The total amount of war indemnities which will finally remain at

the charge of the Government is estimated at L. frs. 3,000 million, or

$68.4 million. Indemnities of L. frs. 435 million have already been paid

on this count.

If all indemnities are paid at the estimated amounts, the total

financial requirements of the State within the next five years would

reach the amount of about 8.4 billion francs, or about Jl92 m i2IL,

(3) Apart from the reconstruction program and the indemnification of war

damages, the Luxembourg Government estimates that the depletion of

privately owned capital due to lack of maintenance during the war

period is equivalent to another L. frs. 5,659 million, or $129 million.

This latter sum will not, at least directly, burden the finances of the

State, since the task of finding means to meet these expenses will remain

with the owners of the enterprises. The Government's memoranda do not

indicate domestic sources which could be used by the private sector of

economy to finance their requirements. A detailed breakdown of private

investment requirements submitted by the Luxembourg representative is

shown in Table IV,

In all, the cost of reconstruction, repairs and renovation of the

national capital is put at L. fr_.40Q74.8 million or $320 millioXi.

SLCTION V x'age 4

It is to be noted that the task of financing the public sector alone (L. frs.

8.400 million) is of extraordinary magnitude, especially if account is taken of

the fact that the reconstruction is to be completed within five year's time. TUe

total proposed outlay in the next five years of L. frs. 14,000 million can be

compared with the estimated national income over the five-year period of some

30,000 - 35,000 million francs.

General Information on Post-WarProduction.

A review of the post-war economic situation of Luxembourg and the Government's

economic policy indicates that prior to the .rar the production of the iron and steel

industries contributed about 80% of the total value of exports. In 1937 pig iron

and steel produotion amounted to 5 million metric tons (equally divided between pig

iron and steel). According to the official Luxembourg Statistics, the production

* of pig iron varied between L. frs. 500 million and L. frs. 900 million in the late

30's, wthereas the value of steel production varied from L. frs. 650 million to

L. frs. 1,200 million in the same period. (The combined pig iron and steel pro-

duction varied from $48 million to $88 million a year). In 1946 iron and steel

production reached only 53% of the 1937 figure. In view of the percentage con-

tribution which the iron and steel industry made to the gross national product

(some 50%) and to the export trade, (roughly 90%) the reduction of its output has

a very considerable effect on the whole economy of the country.

Agriculture seems to be in a much better shape as far as production goes.

Most of the damage to the soil has already been made good and output of the dairy

production may soon reach its pre-war level. However, percentage contribution of

agriculture to the Gross National Product is smaller than the proportion of the

population employed (12% of the GNP against one-third of the active total) in

* this branch of economy would indicate.

ilSECTION V Page f

L '1ics Post-ar Ec c oliev.

The following are the main features of the Luxembourg post-war economic policy:

(1) Consumption of certain basic foodstuffs is still restricted, whereas

other consumer goods are controlled only to the extent to which Belgo-

Luxembourg foreign exchange regulations have limited imports of foreign

consumers' goods.

(2) The prices of butter, flour and pork meat are being stabilized by means

of subsidies.

(3) The monetary circulation has been reduced through the blocking of bank

accounts.

(4) The Reichsmark notes in circulation were exchanged against Belgian and

Luxembourg notes. The exchange was made at the basic rate of 5 new

francs to 1 reichmark. (The Germ4ns had converted Luxembourg notes into

German marks at the rate of 10 Luxembourg francs to 1 reichmark).

(5) Capital tax and tax on war profits have been introduced. The two taxes

are expected to bring in 1946-48 L. frs. 1,500 million, or $34 million.

(6) Extraordinary tax proceeds (1,500 million), proceeds of internal loans

(about L, frs. 1,750 million) and liquidation of the enemy property

(L. frs. 500 million) are to be used to reconstruct public capital, to

pay war indemnities to individuals, and to supply the banks with liquid

funds for the gradual unblocking of deposit accounts.

(7) The indemnities in connection with the war indemnification plan have

been paid so far in amounts equal to the full cost of repairing the

damage but the categories of war damage to be indemnified are being

more narrowly defined.

(8) In February 1947 the Government authorized the issue of a loan of face

value L. frs. 250 million ($5.5 million) bonds expressed in U.S.

dollars and pounds sterling against surrender of dollar and sterling

SECTION V Page lg

holdings of Luxembourg nationals.

(c) FINANCING OF THE 5-YEAR RE-CONSTRUCTION PLAN

ZVUMrcUX f financing the 5--rYear Reconstruction Plan

The Luxembourg Government proposes to finance the five-year reconstruction

program of L. frs. 5,415 million as follows:

1. Internal means L. frs. 1.366 million

2. Extraordinary taxation it 1.500 "

3. Extraordinary revenue includingliquidation of enemy property " 500

4. Internal loans in 1948 - 1950 " 1.049 I

5. External loans " 1.000Q

Total " 5.415 "

Comments.

1, According to information submitted by the Luxembolirg representative L.frs.

1.366 million have already been paid out in 1946 and in the first quarter

of 1947.

2. L. frs. 300 million of extraordinary taxes have been paid in the course

of 1946.

3. The liquidation of enemy property and the raising of extraordinary

revenue is expected to begin in 1948.

4. According to the Luxembourg memorandum capital formation in 1947 will be

insufficient to enable the floating of internal loans. On the other

hand, luxembourg expects that in 1948 and later years the Government

may be able to raise on the domestic market about L. frs. 500 million

per year. This sum would represent about 8 - 10% of the estimates 1948

national income of I. frs. 5.000 - 6.000 million.

SECTION V Page i9

5. The external resources of L. frs. 1,000 million, or 'i22.8 million, are

expected to be provided mainly by the I.B.R.D. ($20 million).

Financina of Expenditures in 1947.

The 1947 expenditure for the five-year Reconstruction Plan and indemnification

of war damages has been included in the extraordinary budget. The total expenditures

in the extraordinary budget are estimated at L. frs. 1,318 million and the receipts

at L. frs. 750 million which consist of L. frs. 500 million of extraordinary taxes

and L. frs. 250 million of Treasury bonds. The deficit would, therefore, run at

L. frs. 522.7 allowing for the surplus of the ordinary budget. The principal need

for a loan arises out of luxembourgts desire to provide resources for financing

this extraordinary expenditure. (See Table V),

From an analysis based on data contained in the extraordinarv budget it

follows that:

(1) A sum of about L. frs. 453.5 million represents consumer expenditure.

(2) The balance of L. frs. 476.5 million including.L. frs. 25 million

for war damage and reconstruction administration and represents reconstruction

of capital.

SECTIOUi V FkGiS 20

(d) MOBNT PROPOSALS MADE BY b. WEMR FOR THEUSE OF THE FROCEEDS OF THE BANKtS LOAN

NJr. .ierner subr.mitted the follotring iteJ:,ized list of expenditures

to be financed 'by the Internationaal 3ank for '.econstruction and Devel6pnent:

L.Frs. I;illion L.Frs.'-llion

Reconstruction of Capital

IIousing, econsta'uc.ion 300

Post, Telegram and Telephone 1

Bridges and Roads 30

ubJ.ic 71orks (Buildings) 10

Railroad 1-Tar DavaLes 40

kgric'ulture O.5 381*5

Subscri ptioll of the liNel-,r FormedR.ailroad Company in the forn of Niew _Urent 138

519 * 5

(Approximatel.Y {,12 million)

In subrmitting the abbve list, Er. '..lerner enphasized the following

poinlts:

(1> As Ltuembourg's current foreig;n exchange requirements, other than

3elgian francs, can be supplied byr the I.B.L.C., the iL1n:S.ediate necessity is

for a loan in Delgian francs.

(2) The 1.econstruction Programx underta2zen so lfar and to be undertaken

in the course of the next four years has and i!ill adversely Cffect the bal-

ance of payments of the Economic Union since this Pro-rami causes and will

cause an increase of iiports by t;he Uniorn, the amount of wrhich cannot be

exactlv determined because of the Customs Union and consequent lack of

statistics.

(3) The domestic exp)enditure of Luxeembourg cannot be covered through

credits fron -th1e Bank of Issue since LuzeiAbourg has no Bank of Issue and

SECTION V PAGE 21

her control of currency and credit is lirmited by her agreements with Belgium.

(4) Strenuous efforts have been rmiade by the Governrment to finance the

reconstruction since liberation. Fron October 1944+ to the end of i!arch

1947, the Government spent for reconstr'Liction purposes and the payment of

war darages L.Frs. l.8OO million (j4l million), largely through e,:traordi-

nar:r taxation. During the same period of time the foreign participation

in financing the Luxembour- econony amounted to L.Frs., 700 million in the

shape of a short-term loan granted by the Belg,iumi Government.. Due to the

heavy taxes izrposed in 1946 the Luxenbour7 Government feels that the linit

of reasonable taxation lhas been reached and no new tag es can be imposed in

1947, The internal capital market has been eihausted k5r previous opera-

tions of the Treasury. Therefore, even to continue reconstruction work, in

progress, the Luxembourg Government must seek financial assistance.outside-

Luxembourg.

(5) The Luxembourg Government lhas refrained fron talking, any radical,

steps involving the use of financial reserves of the private se¢tor for

the financing of public expenditures. This should enable the private

sector to rehabilitate itself without assistence or direction from the

Government.

(6) Since the bu.dget ,!as presented consumer expenditures have been

reduced to a minimui. Further cuttin- down of tlhese expenditures might

entail social unrest in Luxembourg.

On the in±?ormation submitted bN jir. Werner, the total program

can be considered as falling wJithin the Bank-s definition of "productive-

ness." In the case of 1housing, the program, ilhitcl 1.' ! olnxeh ulv

to include only productive items, wrill &12 contribute to favorable con-

ditions for labor. The subscription of capital to the railroad company

is to be made in the form of new rolling, stocl: hich is to replace the

present totally inadequate equiprient.

SECTION V PAGE 22

* (e) A3Z_S3 i-TT OF lia. MHER IT S 01fO?Oo^S

The Reconstruction Pro,ram is mainly designed to make good the

destruction chiefly of farm buildings, workers' dwellings, and factories

for wrhich L.Frs. 4.250 million have been allocated. The balanice of L.Frs.

1.165.4 has been allocated as followis: 69.,.4 million for the reconstruc-

tion of the public capital (roads, wyater pipes, electrical installations,

etc.) and 467 million for reparation of danage to the fixed .quipment of

Luxembourg s railroads. An analysis made on the basis of data submitted

br Luxembolurg brings out the followring facts:

(1) The 5_year Reconstruction Plan involving a yearly public e-,end-

ituLre of over L.Frs. 1.000 million during the 5-year period

could not be considered as e::orbitant if nroduction had reached

its pre-war levelgs.

Howrever, thie itatels proposed 1947 expenditure(ordinary and

etrao:'dinar-Y combined is I..Frs. 2.600 million, represents about

50{; of t'he iIational Incone. Tlhis must be considered as a high

proportion especially in viewi of the fact t'nat sorm,e of this

e,xpenditure will not h1ave an irnnedliate effect on the productive

capacity of the country. If, at the sam!e time, account is ta'len

of t,he fact thlat there is a stringent dormiestic credit situation,

it becomes plain that tLhe Governmaenlt will run into diffictulties

in financing expenses of the ;:iagni.tudtQroposed.

(2) 1.ost of the reconstruction canl be done onlly withi domiestic physi-

cal resources (labor, construction Liaterial, transport, etc.).

Only a snall part (e.g. railroad equibment, sanitary inst.lla-

tions for dwellings and tia.mer) calls for imp?orts fron foreign

countries. Consequently, thie lar-est part of the financing is

required in Belgian francs rather than other currencies. Due

SEOTXOJ V -PAGE 23

to the provisions of the 1.944 agreement with Belgiuxm, the Lux-

ermbourg Government cannot have recourse to the expansion of its

otm monetary circulation to finance the Reconstruction Plan,

nor does it appear likely, at tLis tine, that further advances

fron the Belgian Goveranment can be expected.

(3) Since Luxemboura foreign trade in 1946 apparently resulted in

a surplus balance, and sinice there is no indication that Lu::-

en.lbourg experiences difficulties in obtaininr froti the I.B.L.C.

foreign e::change for le.itimate purposes, a loan in foreign ex-

change other than Dclgian francs can only be justified to the

extent of any deficit of the Economic Union caused b;: the ex-

ecution of Luxembourgfs Reconstructi3on Programa.

(4) The Reconstruction Y'rogrui,, as subraitted to the Bank, zill not

have the direct result of increasing Luxembourg's capacity to

exoort. The availabilit- of foreig,n ex-lchan,e for repayment of

debts contracted in forei-n currencies will depend on the in-

crease of sales to foreign countries of its main exports, e.g.,

iron and oteel, and on the anounts of foreign exchange available

to the I.D.L.C. The resources of the I,D.-.C. will be largely

determined b' the development of the balance of payments of the

Economnc Union as a wlhole.

(5) In the lonig run the reconstruction of farmi buildin-s, factories,

workers' dwellinvs, roads, bridges, and the sewage system and

the purchase of rolling stoc w;ill. have beneficial effects on

the country's productivity. In the inrlediot4 future thie national

out-Dut can only be increased substzanially by the utilization of

the total procluctive capacity of the iron and steel industry,

This depends not on tlle availability of domestic or foreign

SECTIONT V PAGE 24

financial means but on the amounts of coal and cojke allocated

to LuXenbourg and on the plant :-odernization of the iron and

steel industry.

(6) Tlhe special circumstances of Lu::embourg :-mst be emphasized. As

pointed out previously, it appears that the RLeconstruction P-1ro-

gram cannot be financed by internal Leans in 1947. hIeavy ta:a-

tion and the present strin-ency of croeit mal^e it imaprobable

that any further funds can be obtained' at present 'Dy either

increasing taxaticn or issuing further shlort- or lon,-term

loan, nor can expenditures be financed by an increase in the

currency since Lucembourg has no Banc of Issue and is lizited

b-y her r.onetary agreements with De1Cgiui.

Failure,. therefore, to obtain foroign assistance might

m,ean thle adoption of restrictive measures 'by the Luxemrbourg

Government., Such measures -mi,ght include the restriction of im-

0 ports fromi Belgiun and the requisitioninz of foreign assets at

the disposal of the metallurgical industry, which - if carried

through - wrould force this all-imnortant indus-tryr to seek a

foreijrn loan. Another consequence w7ould be the application of

a serious bra-e on the Reconstruction Programn, rhich might in-

deed amount to a stoppage, with a resulting waste of the wrorl

already in progress. Consumer enpenditures lhave been reduced

to a minimu= figure and any furthner cutting dowrn of such con-

sumer expenditures might entail social and political unrest.

SECTIOLT V PAGE 25

SU4ARY

(1) As the Grand-Duchy is an independent meraber of the tank, a

loan to Luxembourg woild be appropriate; bu.t its effect would be simi-

lar to that of a loan to the Union,

(2) A loan in foreign currentcies other than Belgian francs would

be justified only to the extent of the small extra burden on the Uniontis

balance of payments arising from Luxembourgts Reconstruction Progrram.

(3) The loan, if .made, should therefore be only to a small pro?or-

tion in dollars, the remaincder in Belgian francs either fron Belgiumls

subscription to the capital of the Bank or by the purchase of francs

from the Banik of Belgivm against payment by the International Bank for

Reconstruction and Development in dollars.

* (4) The basis for the loan would be Luxerabourgts difficulties

with internal financing arising frorm her Reconstruction Program.

(5) This program,although originally overgenerously conceived,

has been cut down to reasonable limits. The deficit still remaining

ca=not be financed fror resources at the disposal of the Liuenbourg

Governrent.

(6) If a loan fron the Bank is not forthcoming, the alternatives

are:

(i) The dropping of further plans for reconstruction and

the probable stoppage of reconstruction work already

in progress, which miLght lead to social unrest in

Wuxeibourg aind political consequences as far as the

Economic Union and even BENELUX are concerned.

(ii) The requisitioning of the assets of ARBED and HADIR

wh,ch, these concerns being the real economic core

SECTION V PAGE 26

of Lu=erbourg, might again lead to trouble. Also

it is kmown that ARBED and 'HADIR have already placed

ordersin the United States for an amount of about

',10 million out of their total dollar assets of

about J',15 millions

0

Secretary?s Ucmorandwnl No. 26

ITTEBRN,TIOLNIL BA.NwK FORRECONSTRUCTION AND DEVELOPMENT

November 20, 19h6.

A;PPLICATION FOR LOC.AN - LUXE1BOURG

CoDies of the following correspondence

regarding the application for a loan by Luxembourg

fron the Bank are attached for informationi

(a) Copy of letter dated November 18, 1946 fromFugues Le Gallais, i.lternate Governor of theBank for Luxembourg.

(b) Copy of letter dated Novem.ber 3, 1946 fromP. Dupong, MHinister of Finance, together withcopy of memorandum referred to therein,

'2.i v, .io do. Is 1T.*I. Iv±l. .endcls

Secretary

Distribution:

Executive Directors and LlternatesPresident (144)Vice PresidentTreasurerGeneral Counsel (10)Loan DirectorResearch DirectorPublic Infornation Di'LcctorCh-iief of ComnunicationsSecretarySecretary, International l'onetary Fund (40)

Sec-ll1

Secretary s IMer.orandum 1N. 26

LCGATTOIj DU GRAND-DUCHEDE LUXEMBOURB

M`ashin,ton, D. C.

Novermlber 18, 1946

Dear Mr. Meyer:

I have the honor to enclose herewAith

a letter addressed to you from, Mr. Pierre Dupong,

Prime Mlinister of Luxembourg and M1iinister of Finance,

together with the Mlemorandwu mentioned therein.

I wish to aud that representatives of

t +he Luxembourg Government have made inquiries in order

to find out if a Luxembourg loan could be placed cn the

American market, but the terms oXered were not satis-

factory. Furthermore, the underwriters would9 .wan, to

obtain a guarantee from the international Bank for

Reconstruction and Development.

In view of the above, the project now

under consideration is a direct loan to Luxembourg made

from the funds of the Bank.

Yours sincerely,

(Signed) Hugues Le Gallais

The Lonorable

Eugene Meyer, PresidentS International Dank for Reconstructionan-d Developmeilnt, V,washinrigton, D. C.

Sec-ll1

Secretaryts I.;emorandum No. 26

Grand Duche de Luxermbourg*inistere des Finances Lu:-:em.bourg, Novemrber 3rd,1946

T'he .ion, Eu-cne l E Y E R,President of the Interna-,ional Bank

for Reconstructiion and Development,

VW a s h i n g t o n D. C.

1Ay dear Mr. Meyer,

Following our recent conversations I beg to confirm toyou that the Gover-ment of the Grand-Duchy of Luxembourg intendsto nmake appeal to the International Banikts assistance -vdith res-pect to the reconstruction of the devastated areas in Luxem-bourg anid to the restoration of the Luxembourg econo.y. Thereconstruction Dro,. ram elaborated by the Grand-Ducal Govern.lmentcan be finaanced for the greater part by internal means. It sup-poses howrever that external aid be granted for about cne fifti ofthe total amount. In this connection I take t.he liberty in thename of m.y Government to present an application for a loan of

20.000.000 Dollars.

In order to enable the Executive Directors to study- theproject brought before them i,with respect to the regulations ofthe Bank, I am enclos-ng a memorandlum giving details concerningthe purpcse of this application as well as the general f inan-cial Situation of Luxembourg.

It is the aim of tim Grand-Ducal Government to get a longte-rmn !;uan on reasonable terms * The Grand-DluchVy -w!rould be prepa-red to acceot a direct loan out of the funds of the Ban, butwould also, according to the appearance of the project afterfull study, accept the promilse of the Bank to guarantee a longor middle term loan, which could bc negotiated by the Govern-m.ent with private bankers.

I should be glad if you would give this project your kindconsideration and infolrn Mir. Hugues Le Gallais, linister ofLuxembourg in Yashington, of the decision taken by the Exec-utive Directors.

Yours sincerely.,

(Signed) P. Dupong

President of the Government,M,'-inister of Finance.

Sec-llh

Secretary's 1E.emorandum No. 26

i 2, 1n 0 R A N D U N

concerring loan-application at the International Bank 'or

Reconstruction and Development.

1. Purpose of the loan.

The purpose of the loan is to assist the Grand-Duchy in thereconstruction of its devastated aroas and in the rcconstruc-tion of its economr disrupted by the war,

A great part of the Luxembourg territory was devastated du-ri,ng the Rundstedt offensive in the months of December 19L)lhand January 1945. Tho fierce battlc in this sector turned eros-perous towi.ns and villages into heaps of ruins, thus affectinga substantial part of the Luxembourg national fortune. Thefollowing figures give ani idea of thils calamity.

In 1935 the number of buildings in the vhole country was58,096. After the last German offensive the total of war-da-maged buildlngs amountod to about 18.000, according to thefolloving survey:

Damaged buildings

Proportion of damage O 2, 25 - 50 50 - 80 80 -100 %

Agricultural estates 3.i95 991 453 798

Private 1houses 7 .5e8 2.560 1.064 1.2214

Dairies 27 12- 5

Schools 93 36 24 23

Churches 81 148 21 16

Factories 614 28 11 14

TOTAL 10,650 3,690 1.585 2.070

I.e have to add to t'heoe damages th;ose inflicted on railwTays,roads, fields,brid-es and public buildinrgs. Tore than onethird of the population is considered as sinistrated.

The Grand-Ducal Gov-ernmient has set up a program for thereconstruction of the devastated areas, This program amountsto approximately 5 bil'ions 4f lux francs (the Luxembourg francbeing equivalent w7ith tc Belgian franc and the dollar rate ofexchange being 1 $ 43=,8275 fraLos). This reconstruction pro-gram spreads over a period of about 5 ycars, causing an annual

Sec-

Secretaryts iemorandum No. 26

extraordinary expenditure of aibout 1 billion francs.

The chief items of this program are the following:

1. iReconstruction and reparation of the buildingsas specified in the above-mentioned survey )4.250.000.000

2. Reconstruction of Bridges 180.000.0003, Reoarativn of roads and comiiunications 295.000.000L. Reparation of electrical installations 20.000,0005. Reparation of water-delivery pipes

and canalizatiens 25.500.0006. Others 229.500.000

Follovring is a survey of the means w,rhich should enable theGovernnent to face the wrhole expendituresof its reconstructionprogramr:

a) Paid up to now by internal means 1,100,000.000

b) Extraordinary taxes (capital tax and war-profits tax) 1.500.000,000

c) Ex-traordinary revenue includingliquidation of onory property 500.000.000

d'. Internal loans (l948-1950) 1,000.000.000

e) Ext4wrnl loans 900.000.000

Total 5.000,00o.000

=It appears from, this survey that the Grand-Duchy is depen-dent on external aid for about one fifth of its progr,nm.

It is obvious that the coumtr-y could not by its omn meansw-ipe out within a few years the heavy losses incurred in thiswaar. For the time-being the savings-capacity could not be atpace with the abnormal expe.nditures. Before the war the 7yearlysavings capacity of the Luxembourg people Vw?.s estimated at500.000.000 francs. It may be expected that as soon as the econo-mic situation is about nonmal and the post-liberation deficitsare covered, this capacity wiill be brought up to more than1 billion francs. That moans that tho Governm.ent will be able toborrow for public needs at least 500 millions francs a year. Itseems thercfore that the item d) Internal loans, providing forloans up to 1 billion francs to be issued in three years, is arather cautious estimatc.

The inrternal capital-marhQet needs a rest of about one year,for several r-asons, chiefly in view of the accumulation -f extra-ordinazy tax payments in 19ph7. These payments wrill ease the situation

Sec-114

Secretary' s PYemorandum Ho. 26

6 -~~~~~~~~~~~3 -of the Treasury on wrhich a considerable strain was put duringthe first year after the liberation (s_e budgetary informa-tion under 3). For reconstruction purposes in 1947 the countryhas to count on an external loan.

W;Ee need not insist on the productive character of this loanas it is intended to facilitate the rebuilding of houses, stables,barns, factories, dairies of a busy agricultural and industrialpopulation.

The wrhole reconstruction pro-ram, is executed under the directionof a "Commissaire general a la Roconstruction.'"

2. Use cif the pr¢ceeds of the loan

With respect to the use of the proceeds of the loan attentionshould be paid to the special circumstances under -which this ap-plication is made:

A. The economnr of the Grand-Duchy of Luxembourg was disruptedat the end of the war by the destructions in the country, by thelack of some raw-materials and by the sequels of tho conversionof the Reichsmark monetary circulation. Nevertheless the reconstruc-tion business had to start from the beginning. On the other handthe International Baik for Reconstruction and Development is ina position to receivc applications fo.e loans onl,y since a fewmonths. The burden of rehabilitation -roighed thcreforc on thefinancial situation of Luxembourg and on the foreign exchangereserves of the Belgium-Luxembourg Economic Union for about twioyears. The present loan should in some regard correct thie aff-ectsof a period, during which a considerablc p.art of the productiveactivity of the LuxembQurg people had to be diverted to roconstruc-tion work, vwhereas normally this activity vrould have beeni employedin export industries.

B. The Grand-Duchy has entered an economic union viith Belgiumand byv agreement with this coun-try the foreign exchange reservcsof both countrics form a common pool.

It results from this remark that, as soon as the question ofpayments outside the Belgium-Luxembourg Union arises, thisquestion has to be considered in the frame of the Economic Union.

A great number of imaterials needed for reconstruction purposeis found in the country itself. A considerable part is also impor-ted from Bclgium. Other impoortations come from Sweden, F rance,Germany, Switzerland, U.S.A. and Holland. The statistical figureseoncerning the origin of the materials are ho rever in some degreefallacious. It may be that the production of goods imported fromBelgi:xn vwas based on raw-materials imoorted from outside the Union,

See-llh

Secretaryts Miemorandum No. 26

0 _ L _On the other hand a lot of ravr-m-aterials and goods, such as coaland food, cnter only indirectly in the reconstrulction expenses.It ought also to bc stressed that a big-er proportionXof theLuxembourg iron and steel industry as before the war has to bereserved for the inner market of the Unlon, so that normal exchal^ngeaccruals arc reduced in some way.

For all these reasons the exact specification of the foreignexchange requirements of the Grand-Duchy for reconstruction pur-poses is not easy.

The quoestion w,hat currencies are needed for tho Grand-luchyto bring about its reconstruction may how-ver be solved in thefollowing manner. Thle necd for foreign exchango in the Grand-Duchy may be measured by the importations of the chief raw-matorialsneeded for its industry i.e. coal and coke. The Luxelmebourgiron and steel industry has to import overy ton of coal and cokeneeded in its production.

Coke is imported chiefly from Germany (800) and has to be paidfor in U.S.A. Dollars. The average consimption oi coke before thQwar was 2.250.000 to. At present prices (about $ 10 to.) and cor-sidering the reduced sunply thne total annual cost of this inport-ation is about 500 millions franmcs.

The financial and economical recovery of Luxembourg dependsehiefly on the restoration of a normal trend in its big iron andsteel industry. It scems tl-herefore that the exchenge needed forthe importations of rawv-materials for this industry should be takenin consideration.

The loan grented by the Bank should have this doubvle result:

1) Repair partly thae hcavy loss of substance incurred by theGrand-Duchy.

2) Ease the foreign exchange situation of the common Belgium-Luxembourg foreign exchange pool.

The choice of the currencies to be put at the disposal of theLuxe_mibourg Governmrent should be determined with considerationto all these Lacts.

xSec11

Sec-llh

Secretary t s Mvemorandum No. 26

0 - 5-3. Budgctary information

The budget of the Grarnd-Duchy of Luxcmbourg has been in equi-librium for a long series of years. In this respect the follow-ing survey ovor budgetary estimates and effective income anidexpenses is fully instructive.

a) Budget estimates 1930-1910.

Receipts Expenses Excessfr fr fr

1930 41L8.iol0.817 10olt.958.531 * 13.146.2861931 505.6140.578 461.586.709 + 44L053.8691932 417.041.596 413,593.657 + 3.147.9391933 373.271.865 334.220.1141 + 39.051.72141934 377.224.o01i 3145.0433.751 + 32.180.2901935 317.6914.094 315.257.567 + 2.436.5271936 353.801.180 358.151.069 + 6,50.1111937 331,530.146 33(.936.173 + 593.9731938 344.356.518 33113458.634 + 9.897,8841939 360.741.133 357.253,078 + 3.4a8.0551940 365.3346.867 372,110.759 - 6.'763,822

b) Effective Receipts and Exeonses for the years 1930 - 1940.Receipts Expenses Excess

1930 440.576.936,69 433TW7o0,17 4 7.140-.376,521931 512.,131.695,38 453.724.527,37 + 581407.1681011932 399.320.743,18 393.801.222,54 + 5.519.520(,641933 373.986.3443,6" 296,886.614,69 + 77.099.720,961934 371.579.166,22 364.335.002,13 + 7.194.164,091935 267.896.441,22 313.903.671,30 - 46.6007.230,081936 388.725.751,95 373.915.2614,84 + 9,810.147,111937 338.129.185,64 332.835.138,614 + 5.294.047,001938 369.925.325,25 3514.549.881,55 + 15.375.4143,701939 379.465.386,69 359.4149595,63 + 20.015.791,061940 479.938,710,98 4515.565.6914,86 + 34.373.016,12

It was unavoidab'le, in f&ce of the tremendous losses incurredthrough the German occupation and the war, that the volume of thebudget should increase heavily and that during the first year afterthe liberation this budget could not be equilibrated.

So crzcur-tas sernorandunn No. 26

-6-

The first budg,et after the liberation covcring the 7eriodfrom September 1944 up to December 19),5 gives the folloviingaicture:

Receipts Expenscs Deficit

537.388.930 1,361,923.282 1.324.VOO.OOO

The expenses incluide an amount of 300 millions francs for gen-eral reconstruction purposes and 65 millions for reconstructionof the railway system.

The deficit was covered by the Goxvernments' borroving at s1hortterm (incrcease in post-chock accounts) and by the contributionof Belgium to the restoration of the monetary circulation.

The Budget of 1946 shows an amelioration, but is still ;n rA.e-sequilibrium, mainly with rŽsoect to reconastruction expenses.T.' figuaxres are:

Ordinary receipts Ordinary expenses Excess

718.375 570 1.09°7.920.199 379654 .629

Extraordinary receipts Extracrdinary expenses

1.300. 000.000 1.130.hhl64,000 + 113 9655)l.000

2.0133715$570 2.273.366.199 - 259.990.629

The accounts of the State for 1946 are supposed to be balancedby the more-vailue in actual ordinary recoCipts.

The extraordinary expenses- in th=r e Budg-et of 19lh6 include anrmiourt of 72TF r.illions frarncs for veneral reconstructicn purposesand 90 miillions francs for reconstruc on of the rail-,way syster.

The Bu,dget of 1947 is expected to be equilibrated as for asorCina-y roceipts and expenses are coneerned.

sec-ll4

SecretanrIs lioemorandun No. 26

0 - 7-L. Public Debt

A. Dovciopiae.nt since 1930.

Amount of the long and short terii debt at the end of eachyear and. August 31st 1946.

Long Term Short Tern

1930 293.l00-.208 6L.1ol.98o1931 323.832,795 61.242.9801932 451h 119.345 95.58h.2201933 659.699.926 4L4.423.9801934 652.849.o80 120.810,9801935 553.200.713 145.,381,600 xx1936 587?.528.4-2 49.033.0001937 616.431.547 71l233.0001938 624.703.615 100.238.2501939 618.235.497 100.275.000i/h4 599.2h3.720 75.295.0001941 592.319,300 75.295.ooo1942 585096.575 -1943 57 .225 j875 ----194L 797.288,587 ----1945 786.328.0G3 1167.276.0001946 31,8.4;6 1.111.996.63 1jo2,733.0OO xxx

xx Up to 1935 the amount of currency notes issued by the Govern-ment is included in the sl-hort tern clebt.

XDx Short and middle-term debt.

An imnortant liability of the State besides tho ordinary PublicDebt is the guaranty given t savings and comnmercial banks afterthe liberation concerning investments in Rfeichsmark made compul-sorJ by the Germ.an occupant. This guaranty amlounts to about1,8O5,000.000 francs.

It is expected that after payment of all losses the public debtmay be brought up, after five years, to 8-9 billions francs whichls a debt that seems bearable according to the national fortuneand income of the Luxembourg people.

*0.

Secretaryls M.emorandln No. 26

* -8-_

5. General inforrmation concerning the- Grand-Duchy of Liuxebourg.

1. Location and population.

The Grand-Duchy of Luxembourg is an independent territory si-tuated between approximately 50° 11' and 490 27t North latitude,and between 40 121 and 30 251 East latitude, East of Belgim,-West of Ger,mlany and North of France (Lorraine).

The population of the Grand-Duchy is Tproximately 300.000.Thie area of the Grand-Duchy aggregates 2586,36 square krIn = 999square miles.

2. Government

The Grand-Duchy is a constitutional monarchy.On Miay 10th, 1940, the Germians invacded the Grand-&Lachy. Duringthe occupation the Grand-Duchess and her Govcrnment ruled fromMTontreal (Canada) and London through decrets. The Government re-tuirned to Luxembourg in October 1944. As it results fron thenationa-l election held in October 1945 the present comnpositionof the Chamber of Representatives, by parties, is:

Christian-Social-Party 25Labo,ur-Party 11Democratic-Group 9Cormyrmunist-Party 5

.ndoepndents I

51

3. Legislative Power

The Legislative Power is exercised conjointly by the reigningsovereignr, at present Grand L)uchess Charlotte, and by the Chamberof Representatives. The members of the Chamber are elected forsix years by universal suffrage for men and i%olren ancd by the systemof proportional representation. The Chairman of the Chamber iselected by the Representatives.

The initiative in proposing legislation rests in the Grand-Duchess and in the Chamber. Every proposed legislatlve act is tosubinitted to the advice of tho Council of State. This Council iscomposed of 15 mlembers, w>ho are appointed by the Grand-Duchess.It is a purely advisory bocly. The laws have to be submitted totwo votes by the Chambcr at three m-onths' distance, unless theChanmber with the approval of the Council of State dispenses fromthe second vote. The bill becomes lavw upon promulgation afterapproval by the Grand-Duchess and signature by the linister orMainisters concerned. The law is obligatory only after publication

in +' "."m orial du Grand-DXuc'he de Luxembourg".

Secretary's lHemorandura No. 26

L:.. Th3 ohccutvla o;:i r

The Grand-Duchess DossewX the Executive Pow%-er (JiAdministrativeauthority) which i.s only exorcised through the MIinisters wtho areresconsible in this respec-t to her and to the Chamber,

5. The Judicial Power

Justice is adr-ministered in the nam.,e of the Grand-Duchess. Judqgesare appointed for life and their salaries are determined b'y law.

6. The MTinisters

The Assembily of all the MKinisters is called the Council ofMinisters and is -oresided over by the State MIinister, Presidentof the Government, who nornally is the person who has formied theCabinet on reTqest of the Grcnd-oucness.

The Tinisters are usua'Lly chosen from the majority party orparties inl the Chia-.m.ber of Recresentatives. Upon being chosen asa Minister, the member oust resign fron the Chamber of which heis a member. Each Minister is appointed by the Grand-Duchess andis the head of one or more Dowartments of the Goverrzient.

7. The lMunicipality

The kIunicipal Council which varies in number in accordance,w;ith the size of the municipality, constitutes the representativebody of the municipality, and is charged with thc control and super-vision over the municipal econo-r. Members are elected diructlyfor six years on the basis of prQportional representat-on, by thequalified voters for the Chamiber. The College of Burgormster andAldermen consists of a Chairman, the Bur-omaster, and of two A.lder-men (four 'or the City of Luxembourg). The Burgonmaster, appointedfor six years by the Grand-Duchess, executes the decisions of theMunicipal Council and the College of Burgomaster and iAldermen,

8. State Finances

Taxes are direct nr indirect. The vote of the Budget by theChamber is brought about by the same procedure as any othe-+r law.Supervision over State Finances resides in a Chanber of accounts,consisting of a President and two counsellors appointed by theGrand-Duchess on a lis9 of candidates proposed by the Chamber ofRepresentatives. They may not be revoked without the agreement ofthe Chamber of Representatives.

Annually, the iinister of F'inance presents to the Chamber ofAccounts an account of receipts and expenditures for the service-year just ended witlZich;, after approval as such by t}nChaniiber ofeccounts is submitted to the Chamber of Representatives,

Sec-114

Secretary's >iemorandum No, 26

-10-

9. Mlonetary Situation

The LuxeTrbourg franc is on parity w,rith the Belgian frnmc sinceOctober 194L. Before the war and since 1935 the parity wras 1 fr.lux = 1,25 belgian francs. Both the Luxembourg and Belgian francsare legal tenders. By ,igreement with Belgium the Grand-Duchy issuescurrency-notes only up to an amount of 150 millions. The BelgianGovernment delivered Belgian francs to the Luxembourg Governmentin via; f the exchange of German money in circulation in theGrand-DucIy as a result of the German occupation, Up to this date,the total of Belgian frarcs thus delivered amounts to 1.L76.562.500francs.

A4 , 1/ex

Complementary Note Er. 1.

to Memorandum concerning loan application at the InternationalBank for Reconstruction and Development.

(ad 2, Use of the proceeds of the loanY.

Three great economical problems were set before the Govern-ment of Luxembourg after the liberation of the country by theAlliedl Armies:

1. Reconstruction of the devastated areas;2. Restoration of a disrupted. economy;3. Equipment and modernization of the industries.

In the Mvemorandum the Luxembourg Government did not insistuntil now on this third point. But it seems necessary now to lookat the financial problems of the country as a whole and some in,formation has to be given also concerning the modernization program.

1. Reconstruction of the devastated areas.

The proper reconstruction-program is definite and clear, Asset forth in the memorand.um, the expenses incurred (the chief ma-terials and the salaries of workers) constitute on a large scalea problem of internal financing. On the other hand the Governmentis now in a situation to detail approximately the imoorts for re-construction purposes for the year 1947*

Belgium: 1on-ferous metals, tubes,sanitary and heating in-stallations, electricalequipment, wood, glass,granite, marble, fr.55.96l.o65=$ 1.277.650

France: Tubes, sanitary instal-lations, wood, granite,marble, fr,30.300.ooo-$ 691.780

Holland: Sanitary and heatinginstallations, fr. 2.020.000Q$ 46,118

Finland: Woode fr, 2.000.000=$ 45.667Italy: Electrical material,

marble, fr. 393.750=$ 8.990Polands: Wood, fr, 7.500.000=$ 171.230Sweden: Woaodd fr. 6.000.000o $ 136.985Switzerland: Sanitary and heating

installations, tubes,taps, fr. 766.oo0=$ 17,490

Total: fr.104,940.815=$ 2.395.91L0

In the general reconstruction program as met forth on page1 of the Memorandum is included oDopart of the equipment program0 of the Luxembourg Railways Company (items 1.2.3. and 6.). The

railway system suffered heavily during the hostilities. The lo-comotive- and waggon-park was reduced by bombardments and othermilitary action. The Societe des Chemins de fer Iuxembourgeois isa national company created after the liberation in order to amal-gamate the three former railway nets (Guillaume-Luxembourg, Prince-Henri, Voies etroites). It had to face immediately, with the helpof the State, a tremendous reconstruction problem. In 1947 an ex-penditure of 400,000.000 francs is anticipated for reparation andnew equipment. Here are some figures concerning the program ofimports in relation with this program:

1. Locomotives (including one part of 1946program) 115.000.000 fr.=$ 2.685.190

2q Other rolling stock 119.750.000 fr.=$ 2,796.1003. Other material, instruments, tools,

electrical equipment, 25.000,000 fr.4 583.735

259.750.000 fr.=$ 6.o65.o25

It is not possible to give at the present moment definiteindications concerning the currency needed for these imports asthe material will be ordered according to the still changingaspect of the international market. But it is expected that im-ports under 1. and 2. will come chiefly from France, Belgium, Swit-zerland, while the material under 3. will be imported from Swit-zerland, U.S.A., France, United-Kingdom, Belgium.

In relation with transportation problems, it is perhaps use-ful to note the fact that the number of motor-cars and trucks wasconsiderably reduced after the war as a result of the requisitionsmade by the occupant, The stock of cars has also to be rebuilt.Importations of cars (chiefly from the U.S.A.) are expected. togrow up to 190.000.000 fr. = $ 4,335.200 in 1947.

2. Restoration of a disrupted economy.

Wlhen the Germans were driven out definitely, they leftbehind them a wholly disrupted economy.

During a few years this economy had by all means at the dis-posal of the occupant been incorporated in that of the Reich. TheLuxembourg franc was replaced by the Reichsmark and the total mone-tary circulation (including deposits in banks) soared up to Rm.470,000.000 i.e. at that time fr, 4.700.000.000. So the Grand-Ducal Government saw itself before a gigantic monetary problemwhich was solved by adopting a rigorous system of conversion(1 RM - 5 fr. for all new accounts) and by blocking money accordingto the policy adopted in Belgium. iNevertheless the money-conver-sion increased the public debt considerably and is a burden weighingon the Treasury for years.

The Rundtstedt offensive had swept over the northern part ofthe country, which plays a great role in the agricultural produc-tion of Luxembourg. The live-stock was considerably reduced. Agri-cultural machines and tools were destroyed,

3

The chief industries were without raw-materials. The bigiron and steel-industry, located in the extreme south of the coun-try, fortunately escaped the devastations of the Rundtstedt offen-sive. It would have been in a position to take up production soonafter the liberation, if it had not been for the entire lack ofcoke and coal. The stocks of this essential raw-materials had tobe refilled. But the importations in the first year were at anextremely low level. As an illustration we cite following compara-tive figures for the years 1945 and 1937'

Production of big-iron 1945: 318.157 to1937: 2.512.507 to

Production of steel 1945i 259.091 to1937; 2.510,234 to

This decline in the production is all the more impressive,when we consider the role of the iron and steel industry in theLuxembourg economy. The iron and steel industry with the iron-oremines occupy two thirds of the workers. The exports of metallur-gic products constitute at least 60%c of the whole exports-figure,This role of iron and steel is not only primordial in an industri-al respect, it reflects largely on the agricultural production.The bad, non-calcareous earths in the Ardennes are fertilized bythe use of an important by-product of the metallurgic production,the Thomas-scories. Besides the relatively dense population ofworkers in the south is the best buyer for agricultural products.

During this period of under-production the companies concer-ned brought heavy financial sacrifices by not dismissing theirworkers. The Luxembourg Government on the other hand had to importfood and textiles for a population that was in great want ofthem after a long war.

The recovery of the Grand-Duchy depended therefore chieflyon the recovery of its big industry. For this recovery the firstarrivals of coke were essential. Coal and coke enter directly in-to the production of some materials needed for reconstructionpurposes such as steel, cement, chalk, plaster, bricks, flooring-tiles, heating installations, etc, It is however rather difficultto calculate the exact proportion. But the indirect effect ofincreased coal importations on the recovpry of the luxembourg countryis far more important. This is the reason why the LuxembourgGovernment would ask the International Bank to take into con-sideration the financing of a part of its coke imports.

It is not possible, as long as the production and export-policy of the Allied authorities in the Ruhr-basin has not ta-ken a definite sh,.pe, to give exact figures for our imporationof coal and coke in 1947. On the basis of t'ae 1946 figures, wemay give the following survey:

a) Cokefrom Germany: 900.000 to=fr. 540,ooo.o000$ 12.321.000Poland:(Silesia)84.000 to=fr. 50.400.000=$ 1.150.000Holland: 70.000 tofr. 49.000.000=$ 1.118.000Belgium: 200.000 to=fr, 140.000.000=$ 3,194.340

total fr. 779.400.o000$ 17.783,340

4 -

b) Coal 25.000 to

3. Equipment and modernization of industries.

Productive equipmenthas suffered through lack of repairand maintenance during four years. In some industries it vas outof date even before the war. In order to meet the heavy financialburden left by war, the prod-activity of the Luxembourg economyhas to be increased. Both the small and middle-sized as the bigindustry have set up modernization programs.

a) The middle-sized industries, including foundries, leathertextiles, food and ceramic industries are to spend in 1947 forequipment purposes (chiefly machinery) on the whole about100.000.000 francs = $ 2.281.680.

b) The program of the big industries is far more importantand exceeds the total amount of this loan application. It pro-vides for reparation and modernization of blast-furnaces, rolling-mills and steel-works.

4. General considerations.

Reading the foregoing relation leaves the impression thatthe general financial problem of after-war Luxembourg is vastand intricate. The different problems act one upon another andtheir isolation after a two-yearst effort of the Luxembourgpeople seems in some respect artificial. The outstanding factis the heavy loss of substance through military action and ene-my occupation. The purpose of this loan is certainly one theconsideration of which is expressly recommended to the Bank inSection 1. (b) of Article III of the Bank Agreement: "facilita-ting and expediting the completion of the restoration and recon-struction of the economy of members whose territories have suffer-eOi great devastation from enemy occupation or hostilities.1"

As set forth in the Memorandum, from the point of view ofpublic finance, external help is needed chiefly for the year 1947.The country should find in this year a relief in its importationprogram after having faced the abnormal importation expendituresafter the liberation. The internal capital-market could gainstrength during this period, Above a survey has been given onseveral importation programs for the year 1947. Of course theseprograms have to be detailed later on. According to the economicevolution, these figures giver as well as the nature of goodsmay undergo some changes. The provisions of the loan-agreementshould therefore be broad enough to permit the substitution ofitems as far as this substitution does not contradict with thegeneral purpose of the loan.

Negotiations concerning use of the proceeds of the loancould start on the following basis.

5

1. Impoxtation of goods and materials9 for housing-reconstruction purposes $ 2.400.0002. Importation of rolling stock and

other materials for railway-recon-struction purposes $ 6.ooo.ooo

3, Importation of coke and coal in viewof the general restoration of theeconomy $ 11.600.000

$ 20.000,000

The Luxembourg Government would also agree with the con-sideration of part of the industry-equipment program insteadof one of the items above. As it has been pointed out, thethree problems detailed above act upon the financial situationof Luxembourg, at certain moments sim-ultaneously, The reliefbrought by the International Bank should therefore as far aspossible extend alternately to the three orders of purposes.Eventually the Bank coulad consider the a-plication of this projectof the provisions of Art. IV Section 3 (ID) and (c) of the BankAgreement.

The Luxembourg Government asks for a long term loan. The termcould be 25 years, with regular annual amortization beginningwith the fifth year after use of the proceeds.

tLuxembourg, I)ecember 19, 1947.

/

Complementary Note Nr. 2

to Memorandum concerning loan application at the InternationalBank for Reconstruction and Development.

1. Pool of foreign exchange between Belgium and Luxembouro.

The observation under 2. that the foreign eZchange reservesof both countries form a common pool requests some explanationt

The Belgian and the Luxembourg Government.signed an agree-ment on August 31st 1944 in London, according to which the Lu-xembourg Government took the commitment to set in force on theLuxembourg territory the same legislation as Belgium concerningforeign exchange control, This control had to be entrusted toa common organism, the Institut belgo-luxembourgeols du Change)the decisions of which should be obligatory on the territory ofthe Economic Union. This agreement is executed de factoi but hasnot been published in either of the cbuntries, nor have up-to-nowthe Parliaments of both countries been seized with the question.The common institute of foreign exchange has been created accor-ding to a Belgian law and its decisions have been made obligatoryin the Grand-Duchy according to a Luxembourg law. The managementby this institute of the foreign exchange implicates de factothe existence of a common pool. This situation exists as long as0 both governments entrust to the same institute the control offoreign exchange. The agreement does not involve that any of thegovernments concerned is limited in taking engagements in foreigncurrency, as each is liable for its own debts. Because of thespecial structure of the foreign trade of the Grand-Duchy thiscountry has normally an excess of foreign currency other thanBelgian francs. This excess is sold to the Belgian National Bankand the proceeds in Belgian francs practically finance the importsof the Grand-Duchy from Bolgium. For this reason the apportionmentof disposable foreign exchange reserves between the two countr.iesgenerally arises no special difficulty and has not beon the objectcf special provisions in tho agreement.

The original Agreement of the Economic Union (July 25, 1921)does not deal with any such question.

2. Reimbursement of the loans

The ability of the Grand-Duchy to reimburse the loan of $20.000.000 derives from the final observations under 1. above.

Selling its iron ard steel products orn the world-market,the Grand-Duchy has a permanent and important resource of fo-reign currency. As a result of the free trade between Belgiumand Xuxembourg it is not possible to give officiallyT controlledfigures concerning the foreign trade of the Grand-Duchy beforethe war. Private reliable statistics, as far as available} give

*.-2

the following picture for the years 1935-1938*

Iinnorts Exports Balance in francs

Belgium 650.o00o000 320,000,000 -330.000.000Othercou,ntries 490.700*000 844.200.000 1353.500.000

_ _ _ _ _ _ _ _ …__ _ _ _ _ _ _ _- _ _ _ _ - - - - - - - - - - - - -

1.140.700.000 1.164.200.000 4- 23.500,000

1936

Belgiu,m 700.000.000 375.600.000 -324,400.000OthTercountries 564.500.000 952.900.000 1388.400,000

1,264.50o.00O 11*328.500,000 4- 64.ooo0000

1937

Belgium 750.000.000 518.800.000 -231#200i00O0 Othercountries 805.100.000 1.556.300.000 4751.200.000

1.555.100.000 2.075.100.000 4-520,000.000

1938

Belgium 650.000.000 437.300.000 -212.700.000Othercountries 874.600.000 1.0584100.000 +183.500*000

1.524.600.000 1.495.400.000 - 29.200.000

After the liberation there axe no statistics available untilOctober 1945. Since then foreign trade is developing according tothe following figures:

Imports Exports Balance

IV Quarter 45

Belgium 582.221.456 171.555.586 -410.665.870France 115.723.797 51,578.259 - 64.145.538Germany 215.592.627 775.085 -214.817,542Holland 46.790.435 59.949.340 + 13.158.905Switzerl. 79.100.745 129.619.122 + 50.518.377Other count. 23.015.827 166.293.435 4143.277.608

…-- - - - - - -- - - -- -- - - - - -- - - - - - --_1.062.444,887 579.770.827 -482.674.060

_ _ _ _ _ _ _ _ . _ ________ _.…____ ____

3

I Quarter 46

Belgium 545.179.630 289.345.211 -255.834.419France 57.370.678 43.696.615 - 13.674.063Germany 245.835.806 3-975.834 -241.889.972Holland 36.518.566 200.555.602 4-164.037.036Switzerl. 67.680.422 201.541.281 +133.860.859Other count.1 4 4 .708.713 418.578.216 +273.869.503

1.097.293.815 1.157.662.759 4- 60.368.944

II Quarter 1946

Belgium 644.842.182 483.604.158 -161.238.024France 244.346.068 58.847.080 -185.498.988Germany 150.688.099 10.552.209 -140.135.890Holland 14.904.765 241.884.767 4-226.980.002Switzerland 154.942.054 221.202,513 4 66.260.459Other count.169.435.092 677.036.158 +507.601.060

1.379,158.260 1.693.126.885 +313.968.625

This list gives an idea of what LuxoTnbourg contributed tothe common pool of foreign exchange. It shows also that fromSeptember 1944 to the end of 1945, Luxembourg had to face a heavydeficit in its foreign trade and certainly also in its-balance ofpayments.

3. Some more detailed information is given hereunder concer-ning the financial plan developed on page 2 of the M4emorar,dum.

A. Extraordinary taxes.

Those are: 1. Tax on 'War Profits.

The amount of the war profits under imposition isobtained by deduction of the imposed revenue during the periodgoing from 1936 to 1940 from that of the period goirg from 1940 to1944 (2 periods of 4 years). The rates vary from 50% to 80% (thelatter amounts higher than 1.000.000 francs).

The tax is supposed to bring in fr. 250.000.000.

2. Extraordinary Capital-tax.

This tax is levied on the capital or fortune as itstands by January 1st 1946. The paymert is spread over throe years.Rate: 24 for the part up to 200.000 fr.

5N0 from 200.000 to 5 million fr.6% from 5 million to 10 million fr.ffi 7 for the part exceeding 10 million,

9.-4-Companies of more than 5 millions capital pay uniformly 5%.The tax is supposed to bring in fro 1.300*000.000.

B. Liquidation of enemy property and participation of theGrandf-Duchy in reparations will bring in at least 500 million francs.

C. Internal loans in the years 1948-1950 may cover at least1.000.000.000 francs, The payment of war damages other than thosedetailed in this project will on a large scale be made in govern-ment securities. The Budget of 1947 shows a provision of 250 mil-lion francs.

As far as can be foreseen, the service of a public debt afterfive years of 8-9 billion francs, is still in a reasonable pro-portion with the annual budget of 1,5 to 2 billion francs.

Luxembourg, December 19, 1946

Legation Du G'rand-DucheDe Lu-cembourgWashington,D.C.

Makrch 18, 1947

Dear Mr, Pineo,

With reference to your letter of January 23rd,

1947 concerning the loan aplication of my Government, I

am glad to be able to send you herewith enclosed a third

memorandum which I have just now received from Luxembourg.

I trust the contents of same will enable you to

bring soon to a successful conclusion the loani a-polication

of my Government.

Yours sincerely,

(signed) Hugues La Gallais

Mr. C. C. PineoLoan DirectorInternational Bank for Reconstruction DevelopmentWashington, D. C.

COICLZ EDNTRY NIOTE NO- 3

to Memorandum concerning loan application at the InternationalBank for Reconstruction and Development.

1. Objectivez of the economic molicy of the GrvernmQnt 2

2. Fiscal requirements for the rehabilitation period * . 2

3. Financing of needs specified under 2 , . . . . , 4

4. National income . . . . .. . . . . . 5

5. Development of Public Debt . . .. 8

6. Monetary relations 'between Belgium and Luxemtourg , 10

7. The balance of trade and balance of payments . . 14

8. Production of pig iron and steel . , . . .. . 15

9. Bank deposits and savings accounts . . . , . 16

10. Taxation x . . b t . . . . . . . . . . . . 16

11* Budgetary Estimates for the years 1946 and 1947 . . 18

12. Conclusion . . . . . . . . . . . 19

* * * * * * **

-2

In order to show how the reconstruction program developed iL

the previous notes is integrated in the whole rehabilitation plan

of the Luxembourg Gcvernment and what appear to ke the financial

means intended to meet the situation, the following general sur-

vey may prove useful.

1, Objectives of the econiomic oclicy of the Government.

The economic policy of any government is necessarily deter"

mined mainly by local conditions. The Governmelnt of Luxembourg

believes that the immediate objectives of its economic policy

should be to assure:

a) that the fullest possible use is made of the countryls

human and material resources of production, so as to

raise the national output and efficiency, which will

permit to wipe out the losses incurred by the war, and

to attain a higher standard of living;

b) that in the use of these productive resources, the prc_

vision of goods and services to meet the essential reeds

of reconstruction is a prime consideration.

The Government is under no illusion about the diffi-

culties of attaininag these objectives, The rapidity

with -hich the objectives can be attained will largely

dependl on the availability of the necessary financial

means. The Government feels that it is under moral ob-

ligation to make good the damage wrought by war as far

and as quickly as it is humanly possible,

2. Fiscal requirements for the rehabilitation period.

The chief items of the rehabilitation i:rogram are the following:

A. Recoastruction and reparation of real estates, roads, bridges,

etc. as roughly set forth on page 1 of the Memorandum submitted to

International Bank.

. -3million francs

1. Danage caused to privately owneddwellings and to other buildings suchas schools, churches, factories,stables etc. 4.250.-

2. Reconstruction of bridges 180.-

3. Reparation of roads and communications 295.-

4. Damage to Governament buildings 177,9

5. Reparation of electrical installations 20,

6. Reparation of water-delivery pipesand canalizations 25,5

7. Damage caused to railroad, bridges,tracks, etc. 467.-

5,415,4,

B. Other war-damages the reparation of which may be in charge

of the Treasury.

1. Damages to producers1 goods 1.000.-

2. Damage caused to vrivately owned seni-durable consumers t goods, such asfurniture 1.913.-

3. Damage to Government owned semi-dur-able consumers' goods 100.-

4 . Damage caused to agriculture 140.-

5. Danage caused to the forests 500.-

6. Corporeal damages (casualties, infirm-ities, pensions), loss of wages of de-ported persons. This figure relates onlyto expenditures to be met during thenext five years. This charge, which maytotal 2.000 millions is spread over alonger period (20-30 years) 700,A

7. Damage caused to railroad material 679,60

Total: 5.032,60

-4-

Concerning the figures under X, reservations must be made, as

the kinds of war-damages, that will be finally included into the

law-project presently under discussion, are not yet established.

C. Financial requirements for private investments, reparation-s,

modernizations,

1. Net depletion as a result of failure to r.make

repairs and provide for obsolescense:

a) Residential and other buildings 280.-b) Privately owmed producers' goods 240.- 520.-

2. Modernization plan:

a) Iron and steel industry 2,700.-b) Other industries 110,-c) railroads 839,4 3.649,4

3. Construction of new dwellings 1,000.-

4. purchase of motor vehicles 240.-

5. Agricultural development 250.-

5.659,4

Recapitulation of financial requirements to meet the most urCent

sequels of war and occupation.

1. Public finance: 5,415,4

5.032.-

l0,44(,4

2. Private finance: 5.659,4

rmillion france 16.106,8

3. Financinz of needs specified under 2.

As far as Governrment expendittures are concerned, the following

plan car be stressed:

A. Reconstruction-proXran (see p.2. of Memorandum)

a) Paid up to now by internal means for

(March 1947) real estates

-5-

million francs

-- reconstructionof buildings 1.200

-- of railroads 187 1.387.-

b) Extraordinary taxes (Capital tax andwar-profit tax) 1.500.-

c) Extraordinary revenue including liquid-ation of enezy property 500.-

d) Internaliloans 1948-50 1.028.-

e) External loans lt000.-

Total: 5.415.-

B, Other war-danages.million francs

1) Paid up to now 400.-

2) Payment in seQurities in 1947 250_-

Total: 650.-

The financing of the reimaining part depends on several factors

which are not accurately determinable at the present time:

1. .' Law-project presently under discussion will define the

kinds of damages admitted for indennification.

2. The estimations made according to the declarations of the

sinistrated people are partially to be revised,

3. To some degree the final settlement depends on the evolu-

tion of prices.

4. If we estimate the savings capacity of the Luxembourg people

as set forth under the Conclusion to the present note, there remains

after the consideration of the needs of the Reconstruotion program the

possibility to borrow at least 250 million francs a year for this purpose.

5. To some extent external financial aid may be needed.

4. iTational income.

The question arises whether these expenditures are in proportion

with the Luxembourg national incom.e.

6

If the adjustment be made by the cost of living index, the real income

in 1947 will be roughly around 70 per cent of the 1938 income. It is -ore-

cisely the missing 30 per cent, coupled with war devastation, which, for

the time being, place the LZuxembourg economy under considerable strain.

The preliminary calculations which have been made to estimate the

nati3nal income of Luxembourg can be summarized as follows:

National income and its composition in 1938.

million francs

Wages, salaries, pensions, etc ........... 1.022,7Profits of industry and commerce, earningsof professional men and of craftsmen..,.. 491,3Prcperty incomes.......... * . .* 314,5Interest ...... 63,6

Total assessed income ...... 1.892,1

Additions.

Income below the tax exempotion limit ....... 168,6Evasion from income tax ......... ....... 440.-Yon distributed profits of corporations,incomes of charitable institutions, founda-tions, social insurance companies, etc....._ 160.-

Total additions ....... 768,6

Net national income ....... 2.660,7

(Before income tax, after allowance for depreciationand maintenance and after indirect business taxes)

The probable amounts after the war of each of the various types of

income listed above are not yet available. Estimates of the global national

income for each of the years 1945, 1946 and 1947 are given below, Al-

though these figures are only rough estimates, with a rather wide margin

of error, they can in any case contribute to an ap-?raisal of Luxembourgls

present financial canabilities.

Estimates of the national income of Luxembourg.

in million francs with- in million francs ad-Period out adjustment for chan- justed for change in

ges in the level of prices the level of prices (1)

1938 2.660,7 2.660,71945 1500 - 2.000 710 - 9501946 4.000 - 5.000 1,500 - 1.9201947 5.000 1.870-oossibly 5.000 - 6.ooo 1.870 - 2.250

These figures show clearly that the main problem is to restore and

increase national income, This is in a sense the critical problem, for

the solution of all other economic and financial problems, in the years

to come, is directly related to the size of the national income. The

implication is twofold: first, that the higher the income, the more

readily can the problems be solved; second, that there is a level of

income below which the problems cannot be sFlved at all.

It may be interesting to compare the prewar per ca-Ata national

income Luxembourg's with those of other nations. In making this com.-

Daarison, the money incomes of 1938 have been calculated in U#S.A. dollars.

Total income Per capita incomein dollars

Luxembourg 2.660 million frs. lux. 375Belgium 65.200 million belgian frs. 266U.S.A. 64.200 million dellars 493United Kingdom 4.610 million pounds 466

(1) 1938 = 100, 1945 = 210, 1946 = 261, 1947 presumably 268.

Since the methods of compuitation emoloyed and the level of prices were

not the same in these countries, their per capita incomes are not comparable

without adjustment. The figures give nevertheless some idea of the magrni-

tude of the per capita incomes in these countries and indicate that the

rrewar national income of luxembourg was relatively high.

For the first time a provisional and rough evaluation of the national

-8-

* income of Luxembourg has been carried out and that for the year 1938. This

evaluation is based on the income tax statistics and various important

additions. The Luxembourg income tax statistics offer very valuable

material for the evaluation of the national income and for the study of the

income distribution. Unfortunately, 1938 is the last year for which figures

are available.

The income so arrived at is the net national income before direct

taxes, but after indirect business taxes and after allowance for deprecia-

tion and maintenance,

The following comparison of governmental expenditures, or fiscal

requirements, to national income is especially significant.

Governmental expenditures and national income.

(in millions without adjustment for changes in the level of prices)

1938 1945 1946 1947Ordinary expendi-tures 332,5 848,1 1,097,9 1.325,2Extraordinaryexpenditures 22.- 682@6 l.l8O Q

Total expendi- 354,5 1.537,7 2.278,3 2.630,7tures:

Net naticnalincome 2.660,7 1.500-2.000 4.000-5.000 5.000,-

It is obvious that a budget of 2.630 millions can hardly be met, if

the national income should attain only 5.000 millions in 1947.

There is a prospect that the extraordinary budget will last for about

five years. Afterwards only the ordinary budget of about 1.600-1.700

million francs will have to be met. The expenditures of the State will

then be again in accordance with the national income.

5. Developoment of Public Debt,

On page 7 of the Hemorandum we stated the following figures as on

-9-

August 31, 1946:

1. Long term debt 1.112.-2. Short and middle-term debt 493.-3. Compulsory investments by 1.865.-

baxnks in Rm 3.470,- million francs

On December 31, 1946, the figures have undergone some changes or

can be stated more precisely according to the following lines:

million frs1. Long terrm debt: Status August 31, 1946 1.112.-

Issue of bonds 50 years 4% December 46 165.-

Status on Dcccrmber 31,46 1.277.-

2. Short and middle term debt:Status on December 31, 1946

1. Treasury bonds 504.2. H It bound to rerlace 1.502.-

bank investments in mm (issue 1947)3. Treasury 3onds agnirzst postal-

check-accounts 500.-4. Blocked accounts (money exchange) 320.-5. Sh3rt-term debt against Belgian

Government 700.-

Tota.>l: 3.526.-

Total Debt: 4.803.-million frs. -------

Pe.r capita debt: 16.010.- francs ; $ 367,35

It is assumed that this debt may increase during the period of

rehabilitation by 4 - 5 billion fr-a.ncs. The amount needed for the

service cf a public debt of 10 billion francs, i.e. about 500 million

francs is within a reasonable proportion to the whole normal budget of

12 - 2 billion francs.

6. Monetary rela-tions between Belgiun and Luxembourg.

Foreign exchange situativn.

It seems necessary to give some more details cn the evolution of

monetary relations between Belgiumn and Luxembourg. This will enable the

reader to have a clear view of the soecial foreign exchange situation of

Luxembourg.

On July 25, 1921, the Grand-Duchy of Luxembourg concluded a Treaty

of Economic Union with Belgium for a duration of 50 years4

On the monetary noint-of-view, the consequences of this Union were

the following:

1) The Belgian franc was -,out in circulation in the Grand-Duchy be-

sides the Luxembourg freac. Although the Belgian franc was not legal

tender, it was nevertheless accepted in payment by the population;

2) No official rate of conversion was stated, but de facto both

currencies circulated at par value;

3) The circulation of Luxembourg francs was limited to 25 nillion francs;

4) A Belpian loan of 175 million francs in notes gave the Luxem-

bourg Government the means to put in circulation Belgian francs exchanged

against provisional bank notes formerly issued;

5) No special provision foresaw the convertibility of Belgien francs

into Luxembourg francs.

The situation remained unchanged until 1935, when the Belgian franc

was devaluated.

On May 23, 1935 a. new agreement was signed, the chief provisions of

which are the following:

1) Reimbursement of the loan of 175 million Belgian francs by the

Luxembourg Government according to the fcllowing lines:

a) the Grand-Duclay was admitted to participate in the more value of

gold and foreign currencies held by the Bacnque NatiQnale de Belgique;

b) the Luxembourg Ggvernment had to pay 10 million francs in

securities of the aforesaid loan;

c) the Belgian Government took in charge the remaining part of the loan.

- 11-

2) As of December 31, 1927, the Grand-Ducal Government participated

in the profits which the Belgian Treasury draw from the Banque Nationale;

3) the Belgian franc became legal tender in Luxembourg;

4) thle rate of exchange between the two currencies was fixed as

follows: 1 Lux. franc = 1,25 Belgian francs. The convertibility of one

franc into the other was however not foreseen;

5) establishment of an agency of the Banque Nationale de Belgique in

Luxembourg, chiefly in view of facilitating discount operations;

6) the ceiling of the Luxembourg currency circulation was 100

million francs.

Besides the circulation of the currency-notes issued by the Luxembourg

Treasury, there existed a small circulation of notes of the Banque Inter-

nationale a Luxembourg.

It has to be emphasized that since 1921 unto May 10, 1940 the Grand-

Duchy never knew foreigr. exchange restrictions.

During the German occupation the circulation of Belgian and Luxembourg

francs was reolaced by a circulation in German marks.

Anticipating the imminent liberation of their territories, the two

Governments, desirous to reinstate the Economic Union interrupted by wvar

as soon as possible, signed an agreement on August 31, 1944 adjusting that

of May 23, 1935 to the new circumstances.

This agreement stipulates:

1) that the Belgian franc and the Luxembourg franc will have the same

parity against gpld and foreign currencies;

2) that the Grand.-Duchy will introduce on its territory the same

legislation as Belgian concerning foreign exchange control. This control

has to be entrusted to a common organism, the decisions of which will be

binding on the whole territory of the Economic Union;

3) against remittance of non-interest bearing Treasury bonds expiring

at the end of the Economic Union, the Belgian Government puts at the disposal

of the Luxembourg Government the Belgian currency necessary to eliminate the

mark circulation;

4) the ceiling of circulating Luxembourg franc notes is

brought up to 150 million francs, this cipher being subject

- 12 -

to revision if the BelgE.ian Government should essentially alter the value of

its currency;

5) The Luxembourg Government was granted a participation in the more-value

of gold and foreign exchange held by the Banque Wationple;

6) The Luxembourg Government should shape its monetary policy as far as

sossible on that to be ftllowed by the Belgian Government;

7) The Luxembourg Government should share in the benefits and other

advantages of the Banque Nationale de Belgique;

8) The Luxembourg Government will partially pay off the Treasury Bonds

mentioned under 3) with the prewar Belgian notes taken out of circulation and

with its share in the benefits of the Banque N-ationale de Belgique.

After the liberation an exchange control legislation was set up bsth in

Belgiumn and Luxermbourg. Both countries entrusted the execution of this control

to a common institution, called "Institut belgo-luxembourgeois du Change".

The complete liberty of financial relations before the war as well as the

measures taken according to the agreement in london after the war had the same

result; the exchange on a large scale of cAmitals circulating freely between the

two countries and the interpenetration of the foreign exchange holdings of

their banks.

Since foreigrn control has been set up, Luxembourg exporters are under the

obligation of selling their foreign exchange arising from their exsorts to a

Luxembourg or a 3elgian bark. On the other hand the Luxermbourg banks, as soon

as they have no utilization fzr the foreign currencies thus acquired can practi-

cally only sell themi to the Banque Nationale de Bel,7ique to make francs of them,

Inversely Luxembourg importers purchase foreign currencies they need at a

Luxpmlbourg or a Belgian bank. A Luxembourg bank that does not dispose of foreign

currency may buy it at the Banque Nationale de Belgique,

There exists no restriction for the Grand-Duchy to acquire foreign exchange

frcm BelCium, as long as the motive of acquiring it lies within the Ceneral pro-

visions of the reg-ulations of the Institut belgo-lux-embourgeois du Change,

- 13 -

There exist no special arranCer.ments between Belgium and luxeobourg;

regarding their respective participationa in clearing; and pay:ients ag,reem-ents.

These agreeme-nts are sic,ned by the Belgian Governm,ent, but the Grand-Duchy.

takes advaita-e of them as they generally include payments to be na'de to or

by the Grand-Duchy.

It results fron the precedinrg descrirtion that the foreig,n currenicy re.

serves of both countries can practically not be serarated under the present

conditions and that with resoect to these reserves both countries forn a unity.

It has to be er.phasized however that frnom the ooint-of-view of -public

finance, the Luxembourg Government is entirely independent. The loan applied

for by the Grand-Duchmy is a liability of the only Gra-nd-Ducal Treasury. The

Belgian Government is not enligatged. The Grand-Duchy has to fincd in its own

income the means to reim-.burse the loan. The forei,n currencies w'hich the

bank puts at the disposal of the Grand-Ducal Governrlent for its reconstruc-

tion proCraio ney be specially reserved for this pror.,ra n -- d their utiliza-

tion may be submitted to the control of the International Pank. The Insti-

tut belgo-luxembourCeois diu Change could only, if necessary, have to assure

the Bank that its regnalations will not in the future inpede the transfer of

foreign currency which would be necessary for the paynent of interest and.

amortization.

TlC- ILuxembourn, Governmenet has been asked to state clearly whether the

fundamental purpose is to relieve the strain on internal fin.aancing in francs

or to cover an expected shortag-;a in foreign exchacne, Becauso -O 4 r *

ial relationis of the Grand-Duchy with Belg;ium the rn;swer tc be '-iven is not

sir.le. In fact it is prinarily the *train on internal financin which in-

duces the Luxenbourg-: Govermnent to apply for external aid. But there is

no doubt that the disruption of the Luxembourw, economy contributes to weak-

en the foreign exchan,ge situation of the Economic Union as a whole, There

are less exports thxan before the war, so nore goods have to be iiVorted dur-

in, the first years after the liberation,

- 14 -

7. The balacnce of trradc .eand balance of pav0n1ts.

'When considerinig the btlcnce of trade, the balance of payments and Pthor ccono-

mic and financiral problems of Luxembourg, it is inportant to bear in mind:.

a) that Luxembourg -,nd Belgium form an econol-lic unior so t1Lat no custom barriers

exist between the two countries and. Bolgian currency circulates as legel tend.er in

Luxembourg;

b) and that the foreign exchlange resources of Luxemibourg are largely depending

onI the export of steel.

Under these circumsta.nces, the compilation of a bala.nce of trade and. especially

balance of -payments i-s not ai sinple undert.aking. Tho problem has interested and

perplexed the Luxembourg authorities.ana economists for many years. An attempt is

now beinig made to clarify the matter. Unfortunately, the statistical data necess-.ry

are yet fragmentary or lacking.

In any case, all the data Ivailable utp to now shlow th.t normally there must

* be an excess 'f exports over imports. It is however certain that during the five-

year reconstruction and modernization period (1947-1951), this tendency will be

moderated by extraordinary imports. This will -aadly influence the balalnce 'of

payments, as foreign investments are very imuort-nt in Luxembourg.

The required. im-ports will consist mainly of food stuffs,,fertilizers, seeds,

raw materials (coke, ores, tanning materials, hides, wood, etc.), cppital equipment

(locomotives, rolling stock, rollin- mill equipment, motor vehicles, industrial

and aagricultural machinaes, construction equipmnr?t, etc.) and. materials needed. fcr

reconstructioen

Even if the reconstruction work could. be performed sololy with domestic labour

and raw narials (which of course, is not the case), it is ovident, th.t a buidget of

2.600 millions cannot be net by taxrtion ̂.nd from internal sr.vings if the natiOnal

income is only 4.000 to 5.000 millions; the contraction of current consumption

*0 (lwering of -the staFndard of living) to such an extenlt is imipracticablo in a democra-

tic country. It is believed. tha.t this considerration weighs in favour of foreign

lending, even if the purpose of the loa.n would be to obviate the necessity of ex-gg-erated domestic saving.

15 -

8. Production of -pi iron and steel.

In Luxembourg, the statistics on iron and steel production are of

basic importance, and can be regarded as the barometer of the industrial

activity of the country. In 1946, the iron and steel production was

only about 60% of the 1937 level. This fact alone shows how far the

economic life of Luxembourg was in 1946 still removed from anything

like a normal state. The following figures give a picture of the pig

iron and steel production in 1945 and 1946.

Production of Dig iron and steel(in metric tons)

;1=945 1946Pig iron Steel Pig iron Steel

January 9.616 3.646 76,232 70.383February 18.363 16.441 72.800 73.887March 26.624 23.669 93.344 88.653April 23.968 20.671 97.020 96.807May 17.710 15.502 108.795 103.415June 14.282 11.479 111.251 104.336July 7.274 2.795 123.857 118.027August 25.491 19.146 133.077 125.115September 23.494 15.420 140.938 130.352October 25.277 19.850 142.065 135.349November 54.272 44.646 137.774 129.500December 71.786 65.827 126.969 119,470

Totals: 318.157 259.091 1.364.622 1,295.294

Monthly .average 26.513 21.591 113.718 107.941

1937

Monthly aver,a...ge 209.376 209.186

The immediate and only cause of the low rate of ope.ration is

shortage of coke. Accouunt must be taken of the fact that every ton of

cokce and coal used in Luxembourg hias to be imported. And since this

vital factor is almost completely outside her control, it is obvious

- 16 -

that estimates of the probable production of iron and steel in the years

to come have little value.

In order to show the relative importance played by the iron and

steel industry in the economic life of Luxembourg, it may be of interest

to recall that the prewar per capita steel production was about 20 times

the per capita production in the United States. These considerations

shot: clearly that the quantities of coke arLd coal allocated to Lusxem-

bourg by the European Coal Organisation (ECO) influence not only the

rate of operat ion of the Luxembourg iron and steel industry, but affect

decisively the rehabilitation and development of the entire economy.

9. Bank deuosits and savings accounts.

Total deposits were as follows ona September 30, 1946:

Demand deposits ............................. 1,877,0 million frs.Time deposits ............,*.*.-.-.239,6 fl U

Savings deposits ....................... 2. 045,9 Postal cheque service. .l.626,9 "

The following figures, showing the variations in savings deposits

held by the National Savings Bank of Luxembourg, corroborate the opinionl

that variations in comparable deposits are insignificant with reference

to prewar status:

Deposits in Adjusted to changesPeriod million francs in the level of prices

December 1936 663,71937 668,91938 709,7 -

1945 1.700,8 773.-1946 1.844,6 710.-

10. Taxation.

Not very much can be hoped from a possible increase in taxation,

Direct taxation together with local government taxes are on the whole

already about 4 times as heavy as in 1938. As a matter of fact, the

- 17 -

* burden of taxation is so heavy, that some relief will probably prove

a psychological and political necessity. The fcllowing figures show

the increase in taxation since 1938 and the proportion of direct and

indirect taxes.

Direct and indirect taxes (in million francs without

adjustment for changes in the level of prices),

1938 1945 1946 1947(provisional (bud-et) (nrovisionalaccounts) budget)

Direct taxes (centralGovernment)

Income tax 65,6 182,5 468,6 454,3Property tax - 27,6 20.5 30.-

Total: 65,6 210,1 489,1 484,3

#Local Goverment taxes

Tax on the yieldfrom trade or industry,land-tax, etc. J,5 75,- 120.- 150.-

Total: 146,1 285,1 609,1 634,3

Indirect taxes

Customs, internalrevenue tax, turnovertax, etc. 20S,5 233.8 Q3.6 539,4

Total tax liabi-lities (withoutsocial insurancecontributions ofempf,loyees) 351,6 518.9 842,7 iL123,1

Income tax on sala-ries, wages, pensionsetc. 11,4 115,1 315.-

Income tax on' earn-ings of commerce,industry etc. 54.2 67,4 153,6

Total: 65,6 182,5 468,6

0 *-0

Receipts Expenditures

1946 12947 i9 4h 12L7

1.. Ordinary. 1. Ordinary.

Taxes: 444.340 567.380 Public debt: 72.807 143.750Customs: 87.814 200.907 Social ex-Registration penditures: 122.782 146.290fees and taxes: 70.300 295.990 Equipment: 109.159 157.550Others: 115.921 239.856 Public Ser- 793.172 877.621 !p

vioe ___ __

Toial: 718.375 1J304.133 1.097.920 1.325.211 |

'CDt31

2. Extraordinary. 2. Extraordinary. 0{

War profit 250.000 __ Reconstruc- + H

tax tion & War- i(D

Capital tax 300.000 500.000 Daaages 735.273 930.738 R

Internal loan 750.000 250.000 Extraord.__________ ________ subsidoesto C C

railway &1.300.000 750.000 economy 361.500 267.560

' .. ;,;,-S' , ,:,,.,, . .. ...... v _Money ex-change 75.000 100.000Others 8.673 7.242

1.180.446 1.305.540

- 19 -

12. Conclusion,

The necessity in which the Grand-Ducal Government sees itself to

aptly for external financial aid is caused by:

1. Destruction of an important part of national fortune;

2. Diminution of national income;

3. Yundamental disequilibrium of balances of trade and

payments especially in the years 1944 and 1945.

Even a favorable evolution of national production and of exports

d.uring the coming years would constitute only a contribution to the

restoration of the countryts former wealth. The aim of the economic

policy must be to increase national income. Wfith an annual income of

6 billion francs, the savings capacity could be brought up to 600-900

million francs a year (10-15ffi). But this will be possible only after

the flow of capital, presently disturbed by extraordinary taxes and

by disruptions in the price-levels, will be regularized. It is hoped

that after another year of rehabilitation, this will be the case. Tax

rates can presently not be increased, as they are already very high

com-oared with those prevalent before the war.

At the beginning of this note, it has been stated that the primary

economic objective of the Government is to increase the national output,

to improve the efficiency of agricultural and industrial production and

distribution, and thus raise in the long-run the general standard of

living. For paramount social considerations, the immediate objective

is to repair, step by step, the physical damage in the devastated areas,

and thus restore in these areas the standard of living now seriously

depressed.

Materials and manpower are available to bring about the proper

0 - 20 -

Reconstruction program at the presentrhythm of work. A period of five

years is foreseen for the achievement.

Whether these objectives will be attained depends not only on the

efforts and sacrifices made by the people of the Grand-Duchy of Luxem-

bourg, but also, and primarily, whether the necessary financial resources

can be found abroad. It is believed that the figures and arguments pre-

sented in this note will help to make the position clear in thhat respect.

There remains to be added that, as a result of the war, the national

wealth of the country had decreased, at the time of liberation, by not

less than one-fourth to one-third of the prewar amount.

In view of the variety of factors, which have to be taken into

account in estimating future fiscal requirements, it is obvious that

the estimates cannot be precise. But it is not likely that possible

errors will be so serious as to affect materially the general picutre.

March 15, 1947.

COi\LEU ARY '1TOTE iTO. 4j

to Memorandum concerning Loan Application at the International

Bank for Reconstruction and Development*****e**s****ef.* <***~****7 *******>s***********e********s***7s7*****k*****e**e***

A. Reconstruction Plan

1. Reconstruction of privately owned propoerty.

The repairing and rebuildling of war-damaged real Property is oneof the most important parts of the Luxembourg rehabilitation pro-gram. Besides being an act of national solidarity in the faceof a disaster which had befallen about one-third of the noru-lation, the considerations of urgent economic need and socialwelfare weigh in favor of a speedy execution of the reconstruction.The impnact of the ruins oil the whole economic structure is indeedanparent. It has been stated that the Germar offensive in theArdennes affected mostly an agricultural aree. In our Country,where -oroduction is based on small estates, this means that dev-astation struck at a great number of producing units. The soilitself was turned up during the fighting. The live-stock was re-duced,agricultural machines were destroyed or carried off. Inthe vineyards of the Moselle river, a whole crop was lost. Be-sides, some of the devastated areas are -prominent. tourist centers.The hotel industry the importance of which had been constantlyincreasing before the war is very seriously affected by destruc-tion. The equipment of the leather ind-ustry located in the Ardennesalso suffered heavily. The replenishing of its stocks of raw ma-terials meets a lot of difficalties (hides). Finally, it must notbe forgotten that the efficiency oi the -productive effort of in-dividuals, who are obliged to live amidst ruins and under thestrain of daily impediments, is lessened.. In this respect, too,it is im-oortant to restore a normal standard of living.

The figures g,iven in the first I,emorandum of the LuxembourgGoverns-eiit show the magnitude of the task-. The evaluation ofthe cost of the reconstruction was given on pages 2 - 3 of Corn-plementary NTote. No. 3.

The -oronosed law concerning indemnification of war damages isat ,present under discussion and. will probally be voted before theend of this year. Later on in this note details are given onthe economy of this law. If opinions may differ concerning thegood or bad reasons of indemnifying some kinds of damages, ab-solute agreement seems to be rennched as far as repairin, and re-building of war-damaged real prooerty is concerned. The Gov-ernment has acted accordingly from the beginning. It institutedin February 1945 P. Commiss)riat Generael la Reconstruction (Gen-eral Commissioner for Reconstruction) in order to centralize andto coordinate the efforts to be made. During the first year,

0

-2

the most urgent task seemed to be the removal of ruins and rubble,the repairing of F.ll easily reparable habitable houses. Every-thing was done to Drevent that the existing deinages shouldl growworse through the influence of the weather and other factors.Temporary reparrations of roofs, windows and doors etc. were madeunder difficult conditions (comm.unications disrupted, lack ofmaterials and trans ortation, difficulty of lodging and feedingthe workers). Aside from the 5300 skilled reconstruction workers,2800 workmen were supplied by the big industries to the Commissioln-er for Reconstruction. This was possible because, at that time,(1945) the iron and steel production was hamnered by lack of coke.

A Grand-Ducal decree of April 30, 1945 stated that the expensesof the demolition and the conserving measures ta.ken had to besupported by the State, The devastated area was divided into 41sectors at the head of which an architect, appointed by the Com-missioner, directs the reconstruction work. The work itself isdone by private firms under the direction of the Commissioner forReconstruction and the architects. The bills and contracts ofthe contractors are submitted, to the control of the Commissionerfor Reconstruction. Since February 1946, a committee has beenset up in every damaged village or town. This committee called"Conference Communalet' has to fix the priorities according topublic usefulness and economic considerations. It also super-vises the whole local reconstruction in regard to the qualityof work and the fairness of prices. Different committees evenundertace the reconstruction job themselves with good results.Temporary wooden or concrete houses were erected at some pointsof the territory. The cost of these temporary houses is ratherhigh and the Luxembourg authorities think it would be moreeconomical to begin, as soon as possible, with the constructionof more permanent buildings. Nevertheless, the total sum spentfor temoorary houses, which are occupied by only 177 families,reaches 27,000,000 francs.

If on the whole the year 1945 brought only repairs, the realrebuilding of houses according to a priority system was begunin some towns. It became more and more imnortant in 1946.

Under what conditions is this rebuilding taking place?

The orinciple adopted by our Government is that the State isin charge of the reconstruction of the buildings which it turnsover to the claimant. The reconstruction is carried on underits direction by construction firms after public bids -re sub-mitted. At the choice of the claimant, another alternative hasbeen recently introduced. The claimant chooses to rebuild hishouse by his own means and on his own responsibility, againsta comoromise indemnnity. Tvhis latter is based on the value ofthe building in 1940 multiplied by a coefficient which variesaccording to the location of the building, but which on the nverageis between 3.5 - 4. It apoears that about 50 per cent of theclaimants choose the second alternative, In both cases recQn-struction can only be undertakzen on license from the Commissionerfor Reconstruction and if the building falls into the prioritiesestablished.

3-

In order that reconstruction be most efficient in the sanitaryand economic restect and with consideration to -oublic useful-ness) the Government has set up the followinig priority list:

1. Sanitary establishments, hosuitals, pharmacies2. Schools3. Churches4. Stables and bariis, all buildings in connection with

agricultural production, such as dairies5. Hotels in tourist centers6. Factories, shops and stores in connection with food

oroduction and distribution7. Pesidenti,l houses;

a) deported peopleb) famiilies with numerous childrenc) poor peopled) others.

In fact, the policy of granting priority to buildings connectedwith agricultural production ( 2/3 of the damaged stables arefinished) before even the farmers! dwellings has -proved to behighly uroductive.

In spite of the heavy losses of cattle incurred in the Battleof the Ardennes, the live-stock of the Country seems to be whollyre-olenislhed as far as the number of heads of cattle is concerned(the quality and weight are still below pre-war level).

To give an idea of the orogress of reconstruc.tion, it may bestated that out of the 3600 buildings destroyed from 50 to 10Cper cent, 600 are now completely or nartially rebuilt. Somefactories and an important number of hotels in tourist centershave been rebuilt or repaired.

The State has -paid, up to ',ay 10, 1947, for the reconstructionof orivately owned property:

a) Reparation 954 million francsb) Rebuilding 130 million francs

Total 1,084 million francsIn order to realize the program, are still needed:For

a) Rebuilding 2,450 mr.illion francsb) Reparation 550 million francsc) Other erDenses 166 million francs

Total 3,166 million frarcs

The s-)ecial nature of the reconstr.ction task, which affectsthousands of different items, the organization set up by theL.uxembourg Government, which tries to combine the advantages ofurivate initiative with the necessary State-control, do -not makeit easy to establish at a given date statistics concerning th1eimu?orts of matel:33's needed in the reconstruction. Theoretically,the breaking down ought to be made for every one of the thousandsof bills paid by thie Commissioacr for Reconstruiction, which isindeed impossible,

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According to an all-round calculation of the Commissioner forReconstruction, LuLxembourg has to import for the reconstructionof privately owned real property a total of about $10,000,000:1, Amount to be spent in 7elgiuim $5,760,0002. Amount to be suent in hard currency countries 620,0003. Amount to be s-oent in soft currency countries 3,620,000

$10, C00, 000

2. Reconstruction of Communications.

On page 3 of Complementary Nlote No. 3 is stated the cost of thereconstruction of bridges, roads and communications, sewage andwater su-o-,-oly, as follows:

Reconstruction of bridges 180 million frs.of roads and communications 295 million frs.

It II of water suunly, pipes & 25.5 million frs.sewage 500.5 million frs.

It is necessary to stress the importance for the national economyof the restoration of the countryls communication and transportationsystems. NPot only are easy communications of great im0ortance tothe whole reconstruction work, but they also further internationaltransit transportationi and tourism, wfhich is of great value to theLuxembourg economy.

Luxembourg was famous before the war for its good auto-roads.This branch of reconstruction is under the Administration des?onts et Chauassees (Public Administration for Bridges &.d Roads).The above-mentioned figkirus m?.y be cletailed as follofs;

1. Roaclst 270,000,000Materials: 40 per cant 110,000,000 frs.Ilkges, salaries etc. 60 per cent 160,000,000 frs.

2. Bridges: 180,000,000Wages, salaries etc. 50 per centMaterials: 50 per cent 90,000,000 frs.

Cement: 22,000 to 15,000,000)lime: 700 to 500,000)steel: 3,000 to 13, 000,000) 30,000,000 frs.bricks: 1,200 to 1,50C,000)

stones 30,000,000 frs.temporarzy bridges & reparations 30,000,000 frs.

3. Sewage & wa4or sp3o1 y: 25,000,000'ages, salaries etc. 50 per cent 12,500,000 frs.';aterials: 50 per cent 12,500,000 frs.(chiefly tubes, pipes, meters, etc.to be imported)

4. 3uildings: 3t500,000Wages, salaries etc. 50 per cent 1,750,000 frs.Materials: 50 per cent 1.750,000 frs.

478,500,000 frs.There have been spert on this program so far:

1945: 449000,000 francs1946 46t1: 4 000000

Total:- MT6-11-7Ifrancs.

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The balance could be done within 5 years. The techrical outfitof the administration allows spending 80 million francs everyyoer for this item. The Budget of 1947 has a nrovision of only30 million francs and the administration expressed the desirethat a sux-olementary finiancial effort be made in 1948,. This monieyis mostly spent within the country. Imported are; tubes, pines,meters, water supply equipment. Coke and coal of course are neededfor the production of most materials and have to be imported. Imnortsunder this item come from Germany and Belgium, each country contribu-ting about 5.0 per cent,

3. Damage to pablic buildings.

On the progranm of 177.9 million francs (see nage 3 of ComplementaryNote 'Yo. 3) an amount of 55 million francs has been spent so far.

B, Railroads

The railroad question has always been in our Country of outstand-ing importance. It has undergone, during the past 90 years, manyvariations and the solutions found up to 1944 were never entirelysatisfactory to the Luxembourg people. The unification of railroadlines in a national company irn 1945,, approved this year by Pnrlia-ment, gives a new start to the exploitation of our railroads.But at the same time, the Luxembourg State and the new companyhave to face a difficult financial problem_ The Co-untry has tomake a great effort to get out of the present situation. Thefinancial qoaestion has a triple aspect:*

a) Reparation of war damageb) equipmentc) temporary exploitation deficits.

To understand the situation., it is necessary to show briefly thehistorical develo-oment of the question and to describe the newsolution foiund after 1N.orld. War 114

The railroad lines of the Grand Duchy have a total length of400 lcn (250 miles), these are of normal gauge; 142 Lkn. (obout 90miles) are of narrow gauge. The exoloitation of the normai gaugelines was conceded before the war to two companies, the Soci6teRoyale Grand-Ducale des Chemins de fer "Guillan-ne-Luxembourgifand the Societe des CLemins de fer et Minieres "Prince HNenritt.The narrow gauge lines were run by the State.

The most important net w,-as that of the "Guillaume-Luxembourg%,but this net was in a peculiar -oosition, for the compazny "C-uil-laume-Luxembourg", to which it had been granted in 1856 neverexoloited the concession itself, The compcany entrusted theex-loitation to other foreign com-spanies against pnayment of anannual sum,, This arrangement had great disadvantages for theCountry, as necessaxily the exploitation by a foreign compenyinvolved diplomatic, political and military difficulties. Infact the story of the "lGill-aume-Luxembourgtt railroads is thatof the ups and downs of German-French relations. The ezploita-tion had first been entrusted to a French company, the Compa iedes Chemins de Fer de lt'st* After the Franco-Prussian tIear of1870-71 until 1919, it wa-s in fact run by the Deutsche Reichs-bahn? for which was substituted from 1919 to 1938, the Com-pagnie des Chemins de fer d'Alsace et Lorraine, and in 1938

the Societe Nationale des Chemins de fer Francais. From all thesechanges arose considerable legal difficulties. The whole situationwas complicated after the last wpr by the Drovision of the Treatyof Eoonomic Union with Belgium, In this Treaty it was providedthat the railroad lines of Luxembourg should be unified and theirexploitation entrusted to the "Prince Henri" comnany in which Bel-gian shareholders had a majority* But a law which was to effectthe execution of this vrovision, was rejected by the Luxembourgparliament in 1925, During the occupationp the Germans in factunified the lines by transferring the ownership to the DeutscheReichsbahn. Paced with this situation after the liberation, theLuxembourg Government thought the moment had come to make effectivethe long aimed for solution of the Luxembourg railroad question.It entered into negotiations with the French and the BelgianGovernments. An agreement on the railroad question was signed onApril 17, 1946. Here are the chief 1)rovisions of this agreement:

1. A new company shall be established, the capital of whichhas to be furnished eip to 51 per cent by the Grand Duchyof Luxembourg, 24.5 per cent by France and 24,5 per centby Belgium. The duration of the company should be 99 years.

2. Provisions are made that no traffic, which normally wouldgo through Luxembourg, could be diverted by a foreignneighboring line,

3. Application of a degressive tariff for transit-transports,4 , Creation of internatlonal frontier stations is foreseen,5, Substitution of the Luxembourg Government for the former

exploiters of the railwaoys in all rights and obligations,6, The new company is to be run on a sane commercial basis

i0e, that the income should cover, as far as possible,the expenses. All measures taken by the Luxembourg Govern;-ment which do not follow this line, are at the Govern-mentls expense.

This agreement has been ratified by the Luxembourg Parliament.The statute of the new company forms an appendage of the law. Thecapital has been set at 800 million francs to be naid in cash.Out of the 1000 shares, the Luxembourg Government subscribed 510,the French and Belgian Governments 245 each. The Council ofAdministration has 21 members, of vhich 11 are appolnted by theLuxembourg Government and 5 by each of the French and Belgianpartners.,

It is repeated in the statute that the railway has to be run oncommercial principles, i.e. the equilibrium of receipts andexpenses has to be reached. The Luxembourg Government is notliable for exploitation deficits after June 1, 1945, except inthe following cases:

a) If the Piinister of Transportation does not approve theincrease in tariffs proposed by the new comnoany, theState has to cover the less-value arising from thisrefusal.

b) If the M4inister of Trans-portation asks the comnany toreduce the tariff, the State has to bear the financialconsequences of this measure*

What is the oresent. real. financial- situation?

The Luxembourg Government has made since the liberation, thefollow*ing payments to the railroads:

In 1944: 77 million francs1945: 29Z47 million francs -1946S 3j.7 illion- francs

Total- -7l44millon francs

These payments were made on different grounds and they do notrepresent entirely a mere deficit-financing. In the statute ofthe new company it is stated that the Luxembourg Governmenthas to hand over the railways to the compan- "in a good stateof exploitation", whlich means that the Luxembourg State has torepair war damage incurred by the railroads. -

After the deduction of an extraordinary income of 132 millionswhich the Office of Mutual Aid pays to the State Lreasury onaccount of allied transportation} the remaining 582,4 millionsrepresent-the following items}

a) War dama£e in charge of the State- 181,872,243b) Zxploitation deficit for the perlod between

Sept. 10, 1944 and May 31,.1*945,-which remainsat the charges of the.State as the tripartiteagreement enters-into-force only on June 1,1945 - 45,246,850

a) First establishment expenses advanced by theState (equipment and su:polies) 108,224,899

d) Exploitation deficit of 1945 from June 1,1945 in charge of the company 65,056,119

e) Exploitation deficit of 1946 in charge ofthe company 178,499,889

Installation payments to the formerexploiters on account of the indemnity-.which will be allotted to them 3.500.0O0

Totel- 582,400.O00

The exploitation deficits after-June 1, 1945 (d) (e) are to-be,reimbursed to the State by annuities, the number of which wrillbe fixed later, The question remains open whether a part of-these payments may be imputed on the Luxembourg Government sub--scription to the capital of the company. The first establis4ment.-payments (c) are to be reimbursed to the State in 60 annuities.The exploitation defic1ts (288.8 millions, on Dec. 31, 1946) haveto be considered as serious. The reasons given to explain themare the followings

a) After the liberation of the Luxembourg territory about20 per cent of all installations and railroad construc-tions were destroyed,. 86 per cent of the locomotives, 91per cent of freight cars, 65 per cent of passenger cars,were either destroyed or damaged or were missing, .

b) The situation was worsened by the fact that the equipment -

and materials could not be imported according to the pro-gram set forth, as the industrial-capt.city of Luxembourgand the neighboring countries remained at.a low level. -

c) The production in the metallurgic industry, vwhich influencesmostly the railroad income, at no time exceeded 65 ioer centof normal standard and generally remained belov,. As amatter of fact the traffic reached in 1946 only 195 million ton-km. against 404 million ton-km. n 1938, If,:.for instance., the

traffic had been the same in 1946 as in 1938, the exploitationdeficit would have been entirely covered,

The budgetary estimates of the railroad company for 1947 providefor an expected deficit of 254,720,000 francs of which about 125millions would be in charge of the Luxembourg Government. It ishowever probable that this deficit will be much lower, as animportant event has somewhat altered the situation. The heavycoke imports for the Luxembourg industry are normally importedby the line 0oblence-Treves.Wasserbillig (Luxembourg). Thisline had been interrupted by military action and remained so upto April of this year. The traffic of co1e transportation wasformerly diverted over Belgian lines which had the effect thatthe length of transportation on Luxembourg soil was much shorterthan on the normal lines, Since April 26, 1947 the normal linehas been repaired and the coke transportation$ now take theirnormal way. This means an increase in the receipts of the Luxem-bourg railroad company which cannot yet be determined, but theinfluence of which appeared already in the income figures of thelast month, On the wqhole, traffic showed an upward trend sincethe beginning of this year, The receipts of M4arch; 39,5 millionfrancs. are somewhat higher than the receipts of the best monthof last year- which were 38,9 in August. It may therefore beassumed that on condition that economic factors remain favorable,the deficit may be reduced, this yearp and practically dioappearnext yearo But this depends mostly on the trend of the metallurgicproduction and of the availability of coke supplies.

The equipment and modernization of our railroads puts forth anotherfinancial problem, In order to understand the urgency of thisequipment, the following remarks are of importance:

1. The "Guillaume-Luxembourg" line never disposed of rollingstock of its owm.

2. The "Prince Henri"1 saw the best of its rolling stock(especially, special freight cars for the transportationof iron products and iron ore) carried away by the enemy.

3. Bombardments and other military action damaged a greatnumber of locomotives and passenger trainse

The Luxembourg railrgads have at their disposition at the presenttime that enemy rolling stock left on Luxembourg territory, whichis in custody0 If it is finally disposed of, in such a way thatthe Luxembourg Government might keep it as reparation, good, onepart of xhe equipment program waald be solvedb

Here is a survey of the existing material on October 1, 1946S

Locomotives (normal gauge) in service 74to be repolred 54

IliiiltinIitiiitIt (narrow gauge) in servIce 17

to be repa4-ed 7

Freight oars (normal gauge) in service 4,521to be repaired 1,220

It It t It Itit"" it ItI (narrow gauge)in service 275to be repaired 9

Passenger cars (normal gauge) tn service 201to be repaired 73

-9.

Passenger cars (narrow gauge) in service 39to be reoaired 5

All this material is, on the whole, in a bad state. On the otherhand, it is not sufficient in respect to the industrial outputof Luxembourg. The exploitation ought.to be modernized. Thepresent unification furnishes the opportunity to management toeconomize and increase the efficiency of the railroads.

The railway administration has been asked to give a survey ofthe sums that would be necessary to. restore.to the whole ofour railroads a normal exploitation standard corresponding to

-that of May 10, 1940.

Enclosure l. shows a five year plan elaboratedby the Administration

Xncloeure 2 shows the same plan, vrithspecification of the countries -where theequipment expenses would be incurred.

The Lunzembourg Government asks the International Bank to assistit in the financ,.ng of the equipment of the railruads, Thefirst establishment expenses have already weighed heavily on itsfin.ancial oosition, in addition, to the substantial -..ayments ithad to make for exoloitation deficits. The Government thereforesuggests that the International Bank~ reimburse, vrithin a shorttime, to the Government, the equipment expenses already made.

Enclosure 3

It seems to the Luxembourg Government that this measure wouldbe justified by the really extraordinary sitvation in which the

'war and the previous evolution of the question has left the rail-roads. The total or partial financing of the future equipmentp.urchases would also be of great value and of high productiveeffect. The execution of the equipment program depends on theloans that the company will be able to contract either withinthe country or abroad. The internal market is not in a positionto absorb at present a large loan. The;help of the InternationalBank for the 1947 and 1948 program would enable us.to overcomethis impasse. In this way, the new comoany would have time toorganize 4itself and to strenglthen 5its stlucture with the collabor-ation of the French and Belgian partners.

C. The indemuification of war dasmages

The reconstruction of real property is only one part of therehabilitation plan of the Luxembourg Government. The proposedlaw :agariltlng 5.ndemni. ?cation of war damages is at present u*derdi scuss.ion, Thrlp,ie tC S forth in this nroject may be sum-med up accordiig to the follavi1ig .Lineq.

The project recognizes the following categories of war damages:a) Damage niid loss of revenue or salary incurred by reason0 of a natJriotic attitude towvard the- invader. It relates

only to persons who have been the victims of ispecia1measures taken indi\<-illy by the occ-apant against t,hosewho dared oppase his requests or plans for pa.;i,ticreasons. General measures taken by the inVader especially

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in tho ocononic fiold doInot fbll under th'isc-tegoryeb) Corporal damage, i,e, the considerable (more than 10 per cent)

injury to the body or the mind of a person by military action,as a result of sabotage or of resistance to the enemy, em-prisonment, transfer to concentration camps, The indemnifica-tion is made on the whole according to the rates and condi-tions prevalent for social insurance payments.

c) Damag, caused to property of all kind situated on the terri-tory of the Grand Duchy by reason of military action, looting,evacuation, deportation, volunteering in the Allied forces,forced enrollment in the enemy forces, flight or hiding fromthe enemy0

The enforced sale of gold, foreign currency or securities to theenemy, requisitions and other confiscations with indemnification inthe enemyls currency are not taken into consideration for indemnifica-tion,The indemnity is based on the official price of the property at thedate of the decision of the competent authority. That means thatthe claimants are put in a position wihich enables them to replace theproperty by its equivalent. This indemnity is diminished, however,by the less,value his property had with consideration for technicaldepreciation, use, wear etc. Goods and articles which representobjects of luxury or speculation, such as gold., silver, jewelry,precious stones, furs, rugs, laces, statues, art collections andothers, the loss of which is fully proved, have the right only toan indemnity representing double value of the selling price on May10, 1940. Furthermore, this indemnification, which is of necessitypaid in securities, is made only after all other kinds of wardamages will have been settled.

No indemnificationis foreseen for indirect or moral damage as wellas for that arising from the impossibility of using or derivingrevenue from the property. Those who are entitled to avail them-selves of the benefits of this law are:

a) Persons of Luxembourg nationality, who since May 10, 19,40suffered damage to their property situated in Luxembourg andall persona who being domiciled in Luxembourg, suffered corporalda.mage.

b) Aliens who were of Luxembourg nationality on May 10, 1940 andwho later accepted the nationality of an allied nation inorder to be able to fight the enemy. Other aliens Te eligibleto avail themselves of the provisions of this law only if areciprocity treaty has been concluded with their country.

c) Por the purpose of this law, corporations and companies areconsidered as being of Luxembourg nationality only if theforeign holdings in its oapital are less than 30 per centw Ifthe Luxembourg participation is at least 25 per cent, a pro-rata indemnification may be taken into consideration. Thehead office and the administrative offices have to be, in anycase, located in Luxembourg.

The indemnification is made in accordance with the financial meansat the disposal of the Country. The law gives a priority to thosewar damages which are caused by Nazi repression and those of whichthe reparation is of economic int"r.est to the Country.

All indemnities payable in cast, may by decision of the Commissaire

- 1lr _ _

General aux Dommages de Guerre,be .- aid in securities. For thetime being7 the bonds delivered are neg,otiable only ..ath .the.ap-proval of the lMinister of Finance. Special provisions for the dis-counting of these bonds are at present not necessary, as the secur-ities are delivered only w:h'aen there exists-no need of liquid fundsand wrhen the claimant cen hold the indemnity -:.ermnanently as caoital.

Since the liberation in anticipoation of the settlement of the war-damage 1roblem by the project under ciscussion, the LuxnembourgGovernment took the followring temporary measures as to -paTfent ofwar damages according to a list of priorities to be set up b'r thelocal authorities following instructions from the Governrment:

Eovables: Payment of advances uo to 50 per cent of value in.1940. The project foresees indemnification of the19410 -ralue writh ap?lication of a coefficient of 2.5

Loss of salaries, wvages ancl revenue:a) Persons havin-, been in concentration campos, 50 per

cent of their salary at the time of their incarcera-tion

b) -ersons dep!?orted to Germany, 25 per cent to 30 percent of their salary at the time of their deportation

Corporal damage: minimum salary at present in force in Luxem-bourg, from 2400 francs oer month.

e). udzet .stimates for 1 and 14

The parliamentary discussions of the 3udget for 1947 have theresult that a certain number of figures of the bud,-et-estimates ascommunicated to the International ?snk have under.one some altera-tions.

The ordinary ezeenses are increased by 29,940,000 from 1,325,211,000to 1,355,181,000 francs and the extraordinary exoenses are diminishedby 94,908,000 from 1,305,5,40,000 to 1,210,632,000 francs. Thetotal deficit is therefore reduced from 576 to 475 million francs.To cover this deficit no substantial contribution can be erxectedfrom the internal dollar alnd -oound sterling loan. Subscri-tions tothis loan so far are less than 20 million francs. The subscriptionremainis o-oen. Th-e reason for thnis is that the forei ,:n dollar andnound sterling assets are mostly ovned by the industrial com-omies,which need them for currenlt iayments or for their equinDment enpenses.Another imp3ortant fraction is owned by holdinr- comnanies which areonly noniinally Luz-embourg assets. For instance, the total declared $assets- 829,294,970 (includin- $ accounts in cotuntries other thanthe USA) is owrned by the followin.g. categories of owners:

1, Industrial com-nanies $ 18,359,2202. M-Holding- comoanies 7,641,2003. PanWhs and oublic institutions 436,ooo4. Trade 4L.0, 5005. Others 1.913,050

.$ 29,294,970

It w.rould be fallacious to inter-oret- the bud,.;et deficit fig-.ure asbeing, equirvalent to thie financial needs of the Country. It is onlyone part of it, as, for instance, the equipment needs of railroad

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and industries are alsb to be talen into consideration. Besides,the ?mount of credits to be allowed in the budget for reconstruc-tion is determined by the financial situation and the financial out-look. It is with consideration to the uncertainty of the internationalcredit market that credits have been reduced as far as -oliticallyadvisable. In order to give the Government the possibilit,r of adan-ting oredits for reconstruction to the changing financial situation,the creditJs are now on the Budget as beoin; awrarded "sans distinctiornd'exercice" that is to say that the credit of a special budget yearcan be used, to meet exccess expenses of a previous year. This measureis also of economic ralue, as works that have been begun, cannot beinterrup,ited because credits are exhausted.

Enclosure 4 shows the com-^arative extra-ordinary budget exmenditures accordin-, tothe schedule proposed by the InternationalBank as they were proposed for 1947, as theyare probably voted for this year, as they mightbe for 1948.

T'e ordinary budget of 1948 on the wrhole will not be very differentfrom that of 1947. It is not yet nossible to give now precisefigures, as it is only from July every year that public servicesare askced by the Goverrment to furnish estimates for the next budget.A short inquiry made by the financial erpert reveals that the ordin-ary tax revenue may be increased by the following amounts.

Imp&t sur la fortune ...... . 30,000,000Imp'o't sur les revenuies descollectivrites ............. ;P, 0,000,000Oustoms & turnover tax..,.ii.l00.000.000

Total 180,000,000

On the other hand, an increase in expenditures is expected for theservice of the public debt? 50,000*000 francs.

In any case the ordinary budget w!ill most likely be definitelybalanded in 1948 and may even show a moderate surplus.

E Fublic Debt and Currency

1. Treasury 3onds bound to re-pl.ae bank investments in Rm.

The German occunant made the German marl; exclusive leral tender inFebruaryr 1941. He took out of circulation and confiscated an amountof about 800 million Belgian francs in notes. The L"xembourg, franccurrency and notes were cancelled. The important purchases of goodsmade by the enemy and his -rowin- inability to furnish newJ stockshad the result that the bank deposits in Thm soared. Loans were re-imbursed on a lar-e scale, as people disnosed of a lot of liquidfunds. Through the control of thne German Reichsbank, the banks anfdsavings institutions were forced to make heavy investments in im.When the Luxembourg Government tookl its money-exchang-e measures andintroduced the luxembourg and Belgian franc again, it saw itself ob-liged, in order to avoid the ruin of trade and of savers, to

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furnish the ban!ks with the countervalue of their de-,osits convertedfrom Rm. to francs. To some degree the banks themselves contributeto the sunmort of losses arisin- from tihe German investments, asfar as their fortune was increased since iiiay 1940. The Governmentdelivers to the b!nks treasury bonds tith maturity terrmls rangingfrom 9 months to 5 years and bearing interest from 1 3/4 ner centto 3 per cent. The bank takes the commitment to renew the bonds attheir rmaturity dates. An amortization plan foresees reimbursementby the Government from 1951-1961.

Here are a few fi,-;ures concerning this settlement:

German investments of State Savings Bank ...... ... flm.196,000,000of other institutions ........ . 65,ooo.ooo

Totel2 Rm.261,000,000

(The rate of exchange fixed by the enemy was 1 Sm. = 10 frs. lux. = 12.50 frs. belges)

Countervalue to be furnished by the Government:State Savin,~s Bna ..... l............ . 1,295.000,000 francsOthler institutions . .370,000,000 II

Total 1,671,000,000 francs

(The aoove figure may undergo slig-ht c,e aes as the settlement isnot finished with a few beanks).

e2. Shiort-term debt. against 3elgian Government. (700 million francs)

This debt, the definite figc,ure of which is not yet fixed., comprisestiTo items:a) The settlement of accounits concerning Lend-lease, Reverse Lend-

lease and liutueal Aid,b) The nartici.jation of the Grand Duchy in the purchases of the

3el^;ian Economic 1Hission.T'hese twro items are based on an agreement signed by both Governnientsin London on AuLgust 31, 1944.

Accordin-g to these agreements the 3elgian Government assumed thecharges of the -nmrovisional financiag of Lend-lease o-oerations foraccount of thlie =uxembourg Government. The liquid2ation of thaeseaccounts shall take place in such a manner that the Grand Duchyshall bear 1/29 of the common ezunenses and share for 1/29 in thecomnensations, Belgium has not yet settled its Lend-lease accountsirth all countries. Therefore, the definite figures caulnot be stated..An estimate shows that the reimbursement to be made by Luixembourgto 3elgium may amount to-about 145 million francs.

The 3elgian Government had also assumed the financing of the quotaof the Grand Duchly in the ur-,ent si-only purchases (food, textiles,agricultural material etc.) made by the Belgian Economic Y"ission(I,ission IKronack-er) after thle liberation. These advances made tothe Lu:embourg Government shall not beer interest up to thie sum of100 million francs and shall bear interest at the rate of 2 per centabove this figure.. A definite agreement as to the time of the re-imbursement has not yret been made.

*'. Equipment of Agriculture and of l;iddle Industries

It has been stated that an im-)ortant oart of the agricultural machinesand tools were destroyed or danp.-ed durinrr the off^ensive of the Ardennes.The small and. -iiddle-sizec' ind.ustries hr.ve an urgent need for equipmentand modernization.

See nclosure 5

Washin-ton, june 5, 1947

0

fnclosure no. 1

Five Year Equipment of Railwrays.

To restore net to existing state of 1940 with some modernizations

(It is sunoosedc that the German material ce.n be retained as re-parations

good.)

Francs

1945/1946 1947 1948 1949Reparatinof., 1951e:isting aterial 46,724,815 39,714,432 69,400,000 15,600,000

Niew material 47,005,820 266,554,933 610,600,000 604,400,000

93,730,635 306,269,365 60,ooo0,ooo 620,000,000

Grand Total 1,700,000,000

Enclosure no. 2

3reakdoi,wn according to countries w..There expenditures are likely to be

incurred:

Luxembourg 46,724,815 37,061,662 170,000,000 155,000,000

Belgium 34,361,2C0 97,089,770 170,000,000 155,000.000

iard Currency 230,000 66,137,500 20.,000,O00 186,000,000Countries

Soft CurrencyCountries 12,414,200 105,980,433 136,000,000 124,000,000

93,730,635 306,269,365 68o,ooo,ooo 620,000,000

arand Total 1,700,000,000

Er.nclosure no- 3

0 ~~~~~D6-oenses pour mat-6rie-I d6 ja' engage'as pour compte des cheminis de fer:

Acauisition de, mvte5riel Prix de la PeAemonts Taiements res-de traction ?apr6s la commande effectu-es tant a effectaerlib6ration au 15.5.47

fre. b frs. b. frs, bo

1. 10 locomotives ~ 6,ooo,ooo 3~2,000,000 3,612,800belges ty-pe 52 lfrais de

trans-port,Pilotage

… 2. 10 locomotives 28,369,365 32,465,587 neant

anglaises type 4.frais deLiberation transport, Olouane

assurance, etc.- - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - -

3. 10 locomotivesfrancalses tppe 52 24,166,600 22,259,843 6,751,010

4.frais detransport, douane,plus-value p. r.augmentation desalaires et dematie'res

T?otal G6~n(ra1:: p8,555,965 87,2!4o,630 10,363,810*i transpottdouane, assu-rancepolus-value

Chemins de fer 1-=~embourgeo2.s

Mat(iriol et T.raction

Luixembourg, le 15/5/L!7

s) Le Chef du Service MI.Ts ff.

Enclosure no. 4

EB:traordinary 3ud-ets 1947 and 1948, (in millions of francs)

0 1. Consumer Expenditures 1948proposed voted estimated

Subsidies to maintainfood prices 200 200 100Subsidies to covercurrent railroad deficit 45 125 -Unblocking of frozenaccounts 100 .00 100SWoplies and economicadministration 22.5 22.5 22,5Repatriation, militarymissions 7 16 5Payments of war damages 300 325 300Reconstruction ofchurches, historicalmonuments, etc. 24 15 20

Total 698,5 803.5 547.5

2. Expenditures for the Reconstruction of Capital

Administrative expenses(war dzme.nges end recon-

struction) 27.5 25 25Housing recoiistruction 450 300 600.Post, Telephlone & Telegraph 2 1 1Bridges & Roads 40 30 80Publ)ic works 17 10 15

70 40 80Agriculture 0.5 0.5 0.5

Total 607 40S.5 801.5

Grand Total 1,305.5 1,210 1,349

.

Erclosure no, 5

0 E T A T RZCAP;TULiT IF

des credits de re"quipement demandes par llindustrie luxembourgeoise.

(resultats dlune enqu&te de la Fed6ration des Industriels Luxembour-eois).

Secteu.r dlindustrie Total des CrŽdits Cr6dits Credits dlincredits demandes destin6s destinle's vesti5ssement

aux bati- a lToutil- actuellementments lage contractes

Pr. Fr. Fr. Pr.

1. Industries 7,000,000 1,500,0001 5,500,000 7,000,000extractives

2. Industries des trans-formations metall-*ques 70,425,000 19,600,000 50,825,000 11,205,000

3. Industrie du bois 12,500,000 4,950,000 7,550,0004. i-Iateriaux de con-

struction 14,500,000 7,650,000 6,850,000 5,800,0005. Industrie du cuir 25,100,000 10,000,000 15,100,000 500,0006. Industrie textile

et d1habilement 8,000,000 2,300,000 5,700,0007 Industrie chimiaue 4,10o,0oo 1,300,000 2,800,000 100,0008. Industrie duv batti-

ment 500,000 250,000 250,0009. Industries cera-

miques 32,500,000 20,000,0002 12,500,000 2,000,00010. Industries alimen-

taires 43,400,000 18,900,000 24,500,000 1o,600,ooo11 Industrie des

tabaas 25,100,000 15,0?0,000 10,070,000 -

12. Gaz et Electri-cite 100,000 - 100,000 -

Total 243,225,000 101,480,0Q0 141,745,000 37,205,OOO

4 ^ _ _ _ _ - _ _ _ __

1) destines au financement de la construction de logements ouvriers.2) dont 8,000,00o fr. pour l. construction de fours tunnels a effectuer

par une firme allemande specialisee.

.

ANNEX V

COMPLEENTARY NOTE Nr. 5

to Miemorandum concerning Loan Application at theInternational Bank for Reconstruction and Development

EXTRAORDINARY BUDGET 19L7.

The financial expert delegated by the Luxembourg Government tocarry on negotiations with the International Bank for Reconstruction andDevelopment was asked to submit to his Government for consideration, thepossibility of reducing some credits of the extraordinary budget of 1947,which in the eyes of the experts of the Bank are of less productive impor-tance than the reconstruction expenditures. The credits concerned weremainly the following:

a) subsidies to maintain food prices 200 millionb) unblocking of frozen accounts 100a) payment of war-damages 325 "

After having referred to his Government, the expert is in a posi-tion to make the following statements:

a) Subsidies to maintain food p!ricG.

The intention of the Luxembourg Government is to cut as far as itis possible with respect to the whole financial situation of the countrysubsidies intended to keep prices of bread, butter and pork meat low. Theproblem is studied since a few months, Several alternative solutions havebeen proposed to the consideration of the Government. A decision was notyet taken when the credit of 200 million had to be voted, The problem isnot simple, as the Government has to consider the repercussion of themeasure on other budgetary credits and on the production-cost for exportgoods, In fact the cut of the 200 million credit would mean that theliving-cost index number, at present at 1913 (June 1914 = 100), would riseby about 200 points. There would certainly occur an increase of tax ineome,compensated however to some degree by the adjustment of wages and salariesof public employees to the new index-number. In fact gliding scale salariesare introduced as well in public service as in the most important privatefirms. The question is to know to what degree it is advisable to shift theburden of higher prices from the public to the private sector. The solutionthat has the favor of the Government is that of maintaining the subsidiesonly for the consumers whose income does not exceed a certain amount tobe fixed. This measure would not increase the index-number. In any case,the Government intends to bring about reductions in subsidies already thisyear so that it may be expected that the credit of 200 million francs willnot be entirely used.

0

2.

b) Unblocking of frozen accounts.

This credit of 100 million francs is used not only for the partialunblocking of accounts out of the exchange of bank notes (Fr. 303,000,000),but to some extent for correcting hardships resulting from the application ofthe unfavorable rate of Rm. 1 = Fr. 5. The Government intends to pay theclaimants of the latter kind nearly exclusively in bonds. The defreezing ofblocked accounts is granted only when urgent need for liquid funds eitherfor personal expenditures or for urgent economic needs (such as purchase ofgoods for refilling depleted stocks) is proved, no other cash being available.Besides, frozen accounts may serve to pay extraordinary taxes. The policy ofthe Government is to avoid as much as possible that the defrozen funds add aneconomically not justified purchase-power to the presently existing demand ofgoods. Nevertheless the frozen accounts are a definite debt of the State,that can hardly be eluded, as soon as the conditions set forth exist. Thepayment of extraordinary taxes with frozen accounts results of course in aless-value of the expected tax-receipts. It is assumed however, that the pay-ment of a certain number of expenditures under this credit is made in bonds,which represent a receipt compensating this less-value.

a) Paymnt of yar-damages.

In spite of the Government's policy to avoid every cash payment ofwar-damage that could reasonably be postponed, a further reduction of thiscredit does not seem advisable. In fact this credit, as far as it impliescash payments, is the result of cuts already made. The following explanationsshow the relatively moderate character of this credit,

On the whole rehabilitation expenditures made up to March 31, 1947,of Fr. 1,620,000,000 (this figure does not include railroad war-damage;Fr. 181 million), Fr. 1,185,000,000 have been spent for reconstruction ofreal property, communications and agriculture. The balance of Fr. 435 millionrepresents advances on other war-damages from October 1944 to April 1, 1947.liere is a breakdown according to categories:

1 - Movables Pr. 298 million2 - Bodily damage 763 - Loss of income or salary

through nazi repression 61 "

Total: 435

The 125 million credit of 1947 (credit after deduction of damagespayable in bonds) is supposed to be spent according to the following lines:

1 Movables (furniture, equipment) Fr. 60 million2 - Bodily damage 453 - Loss of income or salaries 20

* Fr; .25

3.

The first item eomprises mostly expenditures which are in closeconnection with reconstruction (equipment and furniture). They participatein the productive character of this work. In 1946, an amount of Fr. 160million was spent on this item.

The indemnities for bodily damage, the pensions for the victimsof nazi repression, the expenditures for re.-educating invalids or givingthem the opportunity of restoring their shattered health, are a sacred debtwhich cannot be eluded. The multifarious and urgent needs of displacedpeople justify also the third suberedit.

d) Call en capital of Railroad Oompany.

The definite ratification of the Railroad Agreement and the consti-tution of the new company make it necessary to add to the present budgetaryestimates for 1947 a prQvigion of Fr. 137,803,375.85 as payment of the Grand-Ducal Government on its subscription to the capital of the company. Thefigure of Fr. 137,803,375.85 results from the probable balance sheet of theco,mpany on December 31, 1946, which has been forwarded to the International'Bank.

The foregoing explanations give a new aspect to several items ofthe extraordinary budget estimates as set forth in Zinclosure No. 4 ofComplementary Note Nr. 4. Hereafter a tentative breakdown of the probableeffective expenditures is made according to the precisions contained in thisnote.

0

4.

EXTRAORDINARY BUDGET 1947

Probable effective payments with breakdown according to nature of expenditures.

1. CONSUMER EXPENDITURES , (in million francs)

Subsidies to maintain food prices(reduction 30 million assumed) 170

Subsidies to cover current railroad deficit 125Unblocking of frozen accounts 20

(it is tentatively assumed that 50 million arepaid in bonds and that of the remaining 50million, 30 million are for direct productivepurposes)

Supplies and.economic administration 22,5Repatriation, military missions 16War-damages(it is assumed that the credit of 60 millionfor movables covers expenditures for re-construction of capital for at least 40 mil-lion)

125 - 40 - 85Reconstruction of churches, historical monuments, etc. 15

435,5

II, EXPENDITURES FOR T1Z RECONSTRUCTION OF CAIAL,

Administrative expenses (war damages and recon-struction) 25

Housing reconstruction 300Post, telephone and telegraph 1Bridges and roads 30Public works 10Railroads: War damages 40

Subscription to capital 138Agriculture 0.5War damages _ Reconstruction of capital 40Unblocking of frozen accounts for productive

purposes 30_614.5

Grand total: 1,068

Effective receipts:Capital tax: Fr. 500 millionDeficit: Fr. 1068 million - 500 million - Fr. 568 million

0

AIMEX w YEl

193 AdflED'NT ~BT;. BMGIt3 AM~ LU=M20URG

WAG3ZBMWWT REATIVE TO lOqiggARY AO-D FIflAWIAL QUESTIONS

EI ROM.L HIGWESS THE GRAMD DUCHEBSS OF LUK4 OURGand

HIS MAJESTY THE KING OF BELGIU4,

Desiring to adapt to nresent conditions in a spirit of cooperation.the pro-

visions of Article 22 of the Convention of Economic Union signed July 25, 1921, have

decided to conclude an agreement and have for that purpose designated as their

plenipotentiaries,

EER ROYAL HIGHlESS TM GRAIM DTUcIESS OF LUXEMBOURG,

Mr. Joseph Bech, M4inister of State, President of the Government, and Mr. Pierre

Dupong, Minister of Finance of Social Security and of Labor,

and

HIS MAJESTY TM KING OF BEGIUM,

7 Mr. Paul Van Zeeland, Prime Minister, Mlinister of roreign Affairs and Foreign

Trade, and Mr. Max-Leo Gerard, Minister of Finance, who having communicated to each

other their full powers found to be in good and proper form have agreed as follows:

A.

1. The Belgian Government will give to the Luxembourg Government a portion of

the increased assets resulting from revaluation of the gold and exchange reserves

of the National Bank of Belgium, as well as those resulting from any sale of gold

made by the latter institution.

The aforesaid portion will be calculatea on the basis of the ratio of the

respective populations of both countries, using within the framework of present

agreement what has been fixed for the repartition of the joint income provided

for by Article 11 of the Convention of Economic Union#

* 2. The National Bank of 3elgium will open in the name of the Luxembourg Government

ANITEX IV Page 2

an account named "Reimbursement Fund of the Ilonetary Loan of 192211, in view ox the

anticipated reimbursement as of 1st of June 1937 of the 6% loan of 178,118,000 Frs,

issued the 1st of June 1922.

In this account will be deposited as soon as the present agreement is ratified:

a) tuxembourg's share of the increase of assets of the National 3ank

b) an amount of 10,000,000 Frs. to be provided by the Luxembourg Government

in securities of the Monetary Loan calculated at par of Its nominal value.

The National Bank of Belgium will invest the liquid assets of the Reimburse-

ment Fund in agreement with the Belgian aAd Luxembourg Governments. The balance

of the account will be increased with the income from these investments,

3. The Belgian Government will pay to the Reimbursement Fund the balance neces-

Q40 sary to reimburse the total loan.

B.

1. From January 1, 1927 the Belgian Government will give to the Luxembourg

Government a portion of the profits paid by the National Bank of Belgium to the

Belgian Treasury.

This nortion will be calculated on the basis of the ratio of the respective

populations of both countries using within the framework of poresent agreement

the ratios agreed upon for the division of joint income provided for by Article 11

of the Convention of Economic Union.

2. The Belgian Government undertakes to pay the interest of the Luxembourg

Monetary Loan at the full rate for the maturities from june 1, 1927 to June 1,1937.

On the other hand the Luxembourg Government will abandon its shere in the

annual profit paid by the National Ban1h to the Belgium Treasury from June 1, 1927

until such time as that share will be equal to 2, interest on a c=ital of

175,000,000 Frs. for the maturities from June 1, 1927 to June 1, 1937.

AflTiU7X IV -nage 3

0 C.ITotwithstanding any other agreement the bank notes of the XJational Bank of

Belgium will be accepted in the Grand Duchy of Luxembourg as legal tender by

oublic offices and by private persons, the gold parity of the Belgian franc being

determined by royal decree in conformity with Articles 2 and 3 of the Monetary Law

of MIarch 30, 1935.

D.

The National Bank of Belgium wTill open a branch in Luxembourg, A discounting

Bureau wttill be attached to that branch.

SI

The Luxembourg Government is authorized to have, within the limits of its

territory, circulation of treasury notes of denominations not larger than 100 Frs.

a up to a total azount of 100,000,000 Frs. This limit may, however, be increased

temporarily with 25,000,000 Frs. it being expressly agreed that the maximum amount

in circulation will be brought dowin to 100,000,000 Frs. not later than October 1,

1942.

F.

The present agreement will have a duration eaual to that of the Convention

of Economic Union. It will be ratified and the ratifications will be exchanged in

Brussels as soon as possible.

In accordance herewith the respective plenipotentiaries have signed the pre-

sent agreement and have put their seals thereon.

Brussels, May 23, 1935.

(sgd) J%OSSPH BECH P. Van Z=AXDPIERRE DUPONG MAX-LSO GBRARD"

ANNEX SL

194i AGREEMENT BETWEEN BELGIUM ,1 LUXEMBOURG

"AIMENMENT BETWEEN LUXEM3OURG AND BELGIUM

In view of adapting to present conditions certain provisions of the agreemnent

relating to monetary and financial questions signed in Brussels on May 23, 1935,

the Luxembourg and Belgium Governments have agreed as follows:

I.

As soon as the present amendment comes into force the Luxembourg franc and

the Belgian franc will have the same parity vis-a-vis foreign currency and gold.

II.

The Luxembourg Government will take and put into force on its territory the

same legislation as Belgium as far .s toreign exchange control is concerned.

This control will be operated by a single institution the decisions of which

will be compulsory on the whole territory of the Economic Union.

The Grand Duchy of Luxembourg will be represented on the Board of that

institution.

III,

The Luxembourg Government may have within the limits of its territory a

circulation of treasury notes of denominations not larger than 100 Frs. up to a

total amount of 150,000,000 Frs. If after the liberation the Belgian Government

have to make an importent change in the value of its currency, the latter amount

can be modified in proportion to the value of the franc.

IV.

If the gold and exchange reserves of the National Bank of Belgium were

revaluated the luxembourg Government will benefit from it in the proportion

a) of the amount of Belgian notes withdrawn from the circulation in the

e Luxembourg territory at the moment of the liberation (minus those old or new

that would have been imported by the Allied Forces)

b) to the amount of the total quantity of Belgian notes deposited in Belgium

in view of their withdrawal.

ANNEX V page 2

In the amount of Belgian notes withdravm from circulation in the luxembourg

* territory at the moment of the liberation will be included the Belgian notes that

have been exchanged in the Grand Duchy against Reich marks and that would be given

back to Luxembourg by Germany.

v.

The present amendment will be of a duration equal to that of the Convention

of Economic Union. It will enter into force when ratifications are exchanged,

which will be done as soon as possible.

London, August 31, 1944

(Sgd) JOSEPH BECH (Sgd) P.H.SPAAKPIERRE DUPONG GIUTT"

0

TARLES

0

.

TABLfl I

EVOLUTION OF PUBLIC DEBT(in thousands of francs)

EstimatedPe.ak during

1938 1940 1944 1L46 next 5 years

Long TermInternal & External 624,704 599,244 797,289 1,274,848

Short and MiddleTerm 100,238 75,295 - 3,526,453

Total Public Debt 724,942 674,539 797,289 4,801,301 10,000,000

Total Public Debtper capita L. fr. 2,416 2,248 2,658 16,004 33,333

Total Public Debtper capita $ 102 95 112 365 761

Rate of exchange usedfrancs to $1 U.S. 23.75 23.75 23.75 43.8275 43.8275

Source: Luxembourg Memorandum and 1947 Budget Estimates.

.

TABLE II

BREAKDOWN OF PtUBLIC DEBT AS0 OF 31st December 1946( frncs

External Debt-

AmotutandinfOriginal Pre-War _Present Approximate

_aan itrntv PrinaiRaAmount Francs Eoufvalent Totals5% 1930 3.1 1980 Florins 7,000,000 89,588-,6551/ 111,985,819

@ 14.43 France101,010,000

5% 1932 10.1 1982 Florins 8,000,000 104,776,9502/ 214,415,550@ 14.45 Francs

115,600,000Total External Debt 326,401,369 326,400,000

Internal Long Term Debt

Issued Pre-War 358,773,00Ci/ 44$,466,250

Issued after Liberation 500,000,000Total Internal Long Term Debt 948,466,250 948,500,000

Inte rnal Short and Middle Term Debt

Treasury Bonds 504,400,000

TOTAL 1,779,300,000

r Its e Debt

Short and middle term TreasuryBonds i'sued in redemption forinvestments in RM 1,502,000,000

Blocked aceounts 320,000,000Treasury Bonds sold to the Postal

Savings Bank 500C,00,OOOShort Term debt to the Belgian

Government in settlement oflend-lease accounts and post-war purchases from Allies 700,000,000

3,022,000,000 ,Q Q009Q000TOTAL PUTBLIC DEBT 4,801,300,000

/ Pre-War Francs; present value obtained by multiplication with 1.25:/ Interest and principle payable in Florins (1 Fl = .604798 gr. fine gold)

or in Lfes. or Swiss Frce. at current exchange rate. Coefficient: 2.0464

Source: 1947 Budget Estimates and Complementary Note No. 3.

TABLE III

0LUXEMBOURG ESTIMATES OF WAR DAMMIGES WHICHMAY HAE To BE INDEIFIED BY THE STATE

1. Damage to producers' goods L.frs. 300 million

2. Damage to private chattels 1,900 it

3. Damage caused to agriculture 100 i

4. Bodily damages (injuries, infirmities,loss of"working capacity, death, 1ossof wages of deported persons} duringthe next 5 years only 700 "

Total L.frs, 3,000 million

(or $68.4 million)

0 _i

0

TABL2J IV

hU:i:;G ZSLIM ATJS OF FIITATCIAL '. - IST1'iiT RnTJI_l:IiMITTS02 T3" VA SlICTOR 0C 0 0 1CO1.7iY

1. Renairs of resicential tn,nJ othtr builclings,-.nd. of 7-roc?uceris g,oods I.fr8. 520 million

2., .ociernization of:Iron ant. stoel industry L.frs. 2v700 million

Other inclustries f 110

Railroad.'s H 839.4 t 3 j649 6-4

3. Construction of neW .w'elling7s 1,000

4, Purchase of motor vehicles 240 It

5. Anricultural develoomcnt 250 tt

0 Total L.frs, 5,65.4 million

(or $129 million)

Source. Third 0om:lementary :Tote.

0

'ABIw V

LATEST ESTIIATZ OF BUDGETAJRY EXPENDITUR0S IN 1947AS ̂ -'.3¢Ti I1 IS, !7.E

(in thousand francs)

A. ORDITTA7Y RECEIPTS A. ORDIN.Y_ MXEU1 DIU 3

1. Ordinary taxes 567.3`0 1. Public Debt 150.5562. Custoras 200.907 2, Social expenditures 156.0813. re-istration fees and 3. Equipment (public works,

taxes 296.140 public buildings, coia-4. iiiscellaneous 241.08l nunications, not in-

cluding war damages) 138.5454. Public service and

n__iscellaneous 909.999!.~315.5-78 1.355.181

Payment of social Balance of actualeX,penditures (see ordi- receipts 45.327nary expenditures Item 2)in bonds 85.0_ _

1-.M00. _50 1.1.00.508

B. EXT1,AoRDIiRY DECEIPTS B. EXTRAORDIMiRY _E2X'3JDITUR2S

1. Bonds issued for paynent - nof war darages 200 payments

2. Bonds issued for paynent 1. War daamages 200of defrozen account or 2. Unblocking of frozenmonetary hardships ______220 accounts 50

250 2503. Extraordinary capital - requirini cash pavments

tax (less value of 500 3. Consumer exp)enditures25 million by pay- a) Subsidies to main-mnents in frozen tain food prices 170accounts) b) Current railroad

deficit 125c) Unblocking of frozen

accomnts for no di-rect productivepurposes 20

d) Supplies and economicadministration 22.5

e) Repatriatioin,-Alii-tary missions 16

f) Wlar damages paid incash for consumerstpurposes 85

g) Reconstruction ofclhurches and historicnonumenta 15 453.5

750 703.5

750 703,54. Expenditures for the

reconstruction ofcapital:

a) Administrative ex-penditures, wardanages and recon-struction 25

b) Housing reconstruc-tion 300

c) Post, tolegraph andtelephone I

d) Bridges and roads 30e) Public works

(buildings) 10f) Railroads war

damages 40g) Agriculture 0.5h) War damages-Recon-

struction of capitalother than buildings 40

i) Unblocking of fro-zen accourts forproductive purposes 30 476.5

5. Subscription of capitalR.ailroads comnany l38

750 L.310

Balance of receipts inordinary budget 45.327Extraordinary receipts 750Q00

795.327

Deficit 1.318.000795.327522.67,3

The btudget of 1947 co,prises besides t1he receipts and expendituresshown above the regularization of monetary operations and of coverin3' the deficitof the years 1944-1946:

EOEI PTS :PE2D!I)I12S

1. Bonds as investm-iient of 1. lIoney exchange and de-postal check-accounts 500,O000000 freezing of accounts 840.150.000

2. Issue of 100 fr. notes 150.000.000 2. Deficit 1S44-1946 1,590.000,0003. Issue of smaller cur-

rency 225.735.0004. Belgian notes furnislhed

by Belgian Governmeit 1.475.00-13005. Exchange of mar1cs 15.900.000

Deficit 63.513.700A* 2.430.150.000 2,430.150.000

This deficit may partially be covered by the presently issuedbonds in $? and i.