/19 ., • HOLD FOR RELEASE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT HOLD FOR RELEASE Washington TO BE RELEASED AT APPROXIMATELY 3:00 P.M., Monday, November 8, 1948 FOR THE PRESS Press Release No. 119 Address by Mr. John J. MeCloy, Presi.dent, International Bank for Reconstruction and Development before the Thirty-Fifth National Foreign Trade Convention, Grand Ballroom, Waldorf-Astoria, New York City, at 3:00 P.M., Monday, November 8, 1948. THE IN':t'ERNA.1'I0NAL BANK A1"D WORLD TRADE • I am very pleased to have the opportunity to be here with you at this 35th National Foreign Trade Convention. Apart from the immediately pressing political difficulties which seem to bedevil mankind in almost every corner of the globe, there are no problems more urgently in need of solution nor any whose soluM.on would be more conducive to both political and economic stability, than the prob- lems connected with foreign trade and international finance which you have assem- bled here to consider. I believe that I can perhaps best contribute to your discussions by review- ing with you briefly what the International Bank has done and is trying to do to help solve those problems and by analyzing soma of the difficulties we are con- fronted with in discharging our responsibilities. I would like, too, on the basis of that review and analysis to suggest some of the steps which I consider to be necessary if lasting progress is to be made towards the creation of a healthier world economy. As most of you doubtless know, most of the loans granted by the Bank to date have been for purposes of European reconstruction. In the spring and s,~nmer af 1947, we made a series of four European loans -- to France, the Netherlands, Denmark and Luxembourg - aggregating $497 million. 'l'hese loans came at a time when European resources of dollar exchange had fallen to dangerously low levels and credits from the United States and other Western Hemisphere countries had largely been exhausted~ They served, I believe, their intended purpose of help- ing to prevent a disastrous drop in the production of the borrowing countries and possible economic collapse • I • 1 -2- • We were fully aware, of course, that these loans, vital as they were, pro• vided only a partial solution to Europe•s problems. The physical devastation, the disruption of trade and the industrial and governmental dislocations caused by the war left~ tar wider crevice in Europe's economy than any but a very few bad anticipated. Financial aid on a scale far beyon~ anything the Bank could conceivably afford was clearly necessary. Fortunately for Europe and for the world, ~he seriousness and urgency of Europe's situation was recognized by far- sighted leaders or the United States and as a result of their efforts, combined with a really hopeful display of initiative and coope:rati<>n on the part of the Western European Countries themselves, the European Recovery Program was brought into being. That program, in my judgment, happily combines the best qualities or the American tradition -- generosity, daring and realism. There ~s a misconception in some quarters that, with the enactment of ERP, the Bank is temporarily out of business in Western Europe. In every stage of the formulation and administration of ERP, participation by the Bank in the fi- nancing of European recovery, on a modest scale at least, has been recognized to be both necessary and desirable. Indeed, far from interfering with the Bank's operations·, ERP should greatly facilitate them through improving the economic position of Western Europe and ther.eby increasing the security of Bank invest- ments in that area. Furthermore, the very existence of the recovery program re- lieves the Bank of pressure to make general balance-of-payments loans and enables it to concentrate on its intended Sphere of activity, the financing of specific productive projects. We are at present discussing with a number of ERP countries • many different projects which they would like the Bank to finance -- projects which are an essential part of their long-range investment programs but which they could not afford to undertake unless they secured the benefit of Bank loans in addition to ERP aid. The story in Eastern Europe is somewhat different. The Bank has four member countries in that area -- Poland, Czechoslovakia, Y~goslavia and Finland. To date, the Bank has not been able to grant loans to any of these countries because or the ;tmpact of the existing political tensions and uncertainties i.;pon thei:r economies and upon their credit. We are fully aware, however, of the 5.mportance to these countries of the development or their productive resources and of the importance to Europe as a whole of an increase in East-West trade. While the extension of long-term credits to Eastern Europe at the present time involves many hazards, the short-term financing of East-West trade on a a\!¥! L!r2 g!!Q basis affords some very constructive possibilities which we are actively exploring.• A ease in point is the proposed timber loan, which is no~ in an advanced stage of negotiation. Finland, Poland, Czechoslovakie., Yugoslavia and Austria a:re all timber-exporting countries. They are badly in need 01· about $17 million or additional lumbering equipment, roughly half to be procured in the United States and half in Western Europe. If they get this equipment, it is estirnated that they can expand their timber exports by about $60 million annually. Most of the Western European countries, on the other hand, are urgently in need or addi- tional timber imports, and particularly imports from non-dollar areas. The deal we are now trying to work out contemplates that the Western European countries will • • -3- furnish to the Eastern European countries equipment worth about ~8.5 million, which for the most part will be paid for by timber exports, The purchase oft.he equipment needed from the United States would be financed by the Bank, the loan to be repaid over a period of about two years, also from the proceeds of tilnber exports from East to West. The whole transac·ti.on would be based upon an agree- ment by the Eastern European countries to make available to the West the addi- tional supplies of exportable timber result~ng from use of the equipment. I believe that if this financing eventuates, it may provide a hopeful pattern for other comparable operations and may thus contribute substantially towards in- creasing the yolume of East-West trade. The Bank's activities in the development field, mainly in areas outside of Europe, a.re not easy to generalize a1)out because they vary so greatly from coun- try to country. We are presently carrying on discussions concerning development projects in more than 20 of our member countries. These discussions cover a great many different types of proposed undertakings, such as power development, the construction of transportation and communication facilities, irrigation, reclamation and other agricultural projects, migration programs and inuustrial and mining development. As you can well imagine, the work involved in investiga- ting all these projects, not only on their intrinsic merits but also in relation to the sound economic development of the particular countries concerned, is both immense and time-consuming • • We are faced with a great many obstacles in trying to bring this wo:rk to fruition. Although our underdeveloped member countries are impelled by a tremen- dous desire to improve their situation, they generally lack the technical know- ledge as to how to go about it. Few of them, for example, have any well-formu- lated concept of the over-all lines along wldch their development is most likely to make progress. The projects they present to the Bank are all too often in- adequately planned or prepared, reflecting in large part the severe shortage of technical persunnel. Furthermore, many of the under-develo1:ed countries are su.ffering from chaotic monetary conditions which must be rectified if any in- vestment in their further development is to be eithe~ productive or safe. I mention these difficulties because of their irnportance to an understanding of the Bank's activities in the developn1ent field. In order for the B~1nk to assure that its resources are effectively used for development, we have to do more than merely pass upon loan applications as they are presented to us. Most of our underdeveloped members need technical assistance at leust as much as they need financial assistance. They are coming more and. more, therefore, to look to the Bank not only for loans but also for help in determining what projects they should put forward for financing, in mapping out an appropriate over-all pattern for their economic grolo.rth, and in formuleting +.he econorolc and fiscal measures necessary to put their economies on a stronger and more stable basis. This im- poses.a heavy responsibility nn the staff of the Bank, but it is one which I believe we must assume if we want to assure that our funds are wisely invested in practical, productive projects • • • -4- To date we have been able to grant only one loan for development purposes; we have made commitments to Chile, aggregating $16 million, for hydro-eleetrio projects and £or the importation of agricultural machinery. However, several other developmental loans are now in an advanced stage of negotiati.on and I am confident· that, during the course of the· coming ·y-e-ar, "·vre spEtl11 ··be~ab!"e· :tof'lnake a number of additional such investments. In the long run, of course, the de- velopment field will be the Bank's principal sphere of act~vity. I would like to turn now from this general review of the Bank's lending operations to consideration of some of the larger problems whieh I believe must be faced and solved if world trade is to be reeatabl:1-{3hed on a firm and lasting basis. For one thing, there must clearly be some relaxation of the knife-edged politicaliensions which now pervade the whole world scene. The prevailing political uncertaj.nties and unrest have undermined the confidence necessary for long-term productive investment and for monetary stability. They have disrupted normal trade relations and have necessitated a serious diversion of manpower and materials from productive pur~uits to the maintenance of large military establishme11ts. In the case or some of the Western Europe.an cou11tr.:i.es, for ex.- ample, military expenditures are absorbing as much as 20 to 25 per cent of their entire national budgets. Politically-inspired strikes, such as those we have been witnessing in France, have seriously interfered with production in key • sectors of the economy, Without some alleviation of these conditions the most enlightened economic statesmanship will find it difi'icult to succeed._' It would be a mistake, however, to attribute all of our economic diffi .. culties to the disturbed political scene. There are many steps of a predominantly economic character which urgently need to be teken irrespective of political de- velopments, So f'ar as the under-developed areas of the world a:re concerned, there is need for a new attitude and a new atmosphere in relation to foreign financing, I have found in too many quarters e disinclination to take those measures necessary to attra~t private capital from abroad and, instead, an insistence that inter-governm~ntal or International Bank credits should be ma.de available in large amounts end should be allocated primarily on the basis of need, with- out too critical an analysis of the prospects for repayment. That approac:h, in my judgment, is neither realistic nor sound. No amount of foreign loans will be or lasting benefit unless domestic conditions in the borrowing country provide both a firm economic base for development end reason- able prospects for repaymen~. Bad loans may serve temporary political ends or bring temporary relief, but in the end they leave behind only disillusion. ment, debt and ill will. F1.1rthermore, although public sources may bear the burden of financir.1g development for a time, sustained investment in the sub~ stantial amounts required can reasonably be expected only from the free flow of private capital, particularly equity capital. I would urge, thererore, that • the under~developed countries place leas emphasis on their need for extraordinary • types of public assistance from abroad and more on the necessity for creating an environment attractive to the investment of private capital through balancing their budgets, stabilizing their currencies, overhauling their tax systems and c©nserving their foreign exchange resources. These measures involve hard work and sacrifices, but the process of opening ~ew economic frontiers is never easy. I wish to make it olear, as I hope I have on previous occasions, that the Bank is prepared to move concurrently with the development countries in this direction. We do not demand that everything be !)'lt in such order that no loan becomes necessary. We only demand that the environment be such as to make the loan effective and we are prepared to match local progress with International Bank aid. Much the same is true of Europe. Financial assistance through ERP cannot by itself bring European recovery. The most that it can do is to help the ERP countries in their own efforts to effect a fundamental readjustment of their productivF.: and trade mechanisms. Self-help is the very essence of the program. The ERP countries have already made substantial progress in the expansio~ of their total production. They have established, through the recent intra- iuropean trade and payments agreement, a means of moving a substantially in- creased amount of goods among themselves. However, these accomplishments, en- couraging as they are, are just a beginning. Perhaps the most urgent need in Europe today is for financial stability. • It is hard to over-emphasize the i..l'J1portance of' this. Production, trade and in- vestment plans, no matter how well conceived on the national or international level, are worth little unless they are translated into action through the ef- forts and initiative of millions of individuals. A pre-requisite for that is confidence on the part of the business man, the farmer'and the laborer in the value of the money they receive for their goods or services. Given such confiderroe, seeming miracles of production can be accomplished~ Without it, true recovery is impossible. Equally important, financial stability is necessary for the free flow or international trade which is the life-blood of the ERP countries' economy. It profits little to produce more goods unless they can be freely sold in the mar- kets of the world. Yet we can only progress from the refined barter techniques which still characterize 'too much of intra-European trade and re-establish it on a healthy multilateral basis if confidence is restored in the currencies in which such trade is conducted. The prevailing lack of confidence in European currencies is perhaps most dramatically reflected in the flight of capital now going on. The eaus.es, ot course, are both political and economic. There can be no financial stability in the absence of sound financial policies, but there can also be no financial stability without confidence on the part of the people in the political future of their country. This explains why the problem of military guarantees, now so widelt discussed, has such direct and vital economic implications. It isn 1 t necessary, of course, that all political tensions be removed before we can • take firm constructive steps in the economic field. But the minimum we mus~ have is a situation in which there ie not a common belief that war is inevitable. • -6- The financial policies essential for stabilit!r are botp simple and well understood. They involve a balanced governmental budget, or, preferably~ even a surplus; credit controls to ensure that the banking system does not create excessive means of payment; and appropriate price and wage adjustments internal- ly so that productive resources are not diverted into non-·economic output as a result of price maladjustments. I~ this connection, it is interesting to note the development of whet has been called the "ashtray economy". With the price structure maladjusted and prices of essential items rigidly con·trolled in many countries, people frequent- ly have more money to spend than they can use to buy rationed comrn"dities. Two results flow from this, The first is that. a premium is placed on the manu.:'a,c-· ture or ashtrays, knicknacks and other non-economic products which c:.u, be Sr:'ld at free prices but which cause a diversion of labor, mate1~ials and power from the production of more essential items. '!'he second result is 'that domestic demand for all goods, both essential and non-essential, is so strong that there is no incentive for the manufacturer to look to foreign markets f~r the sale hf his products. This situation can only be remedied by creating conditions of' monetary stability wmch permit of realistic price readjust1pents through the normal mechanisms of the marke·t. In short, restoration of financial stability will increase the over-all volume of' production, will result in n10:-·e production of essential goods, will • increase t,he availability o~ goods f'or export and will put European t rad.e on a firmer and more stable basis, Another pre-requisite for European recovery which I should like to mention briefly -- <"ne which is perhaps less immediately urgent than financj_al stability but which in the long-run is equally essential -- is greater integration of the economies of the various ERf, countries. I mean by this the lowering of trade barriers among them and the planning of their investments in the expansion and modernization of their productive facilities on a regional and no·t solely on a . national basis, In order to accomplish this, more is required than a recon- ciliation of conflic·ting nat.ional claims. The basic need is for a reva.mpin'$ of existing mechanisms so as to provide for u~ified thinking, planning and action in terms of the best interest of Western Europe as a wholeo It may well be that the ultimate an~wer is a complete enonomic union or the Western European couutries, But such an economic union, involving as it does centralized control of such vital matters as currency~ investmGnt prograllis, wages, prices and foreign trade, cannot, in my judgment, be accomplish.sd without political union as well. And in view of the historical and deep-rooted dif'- ferenoes in language, customs, traditions and national habits and prejudices among the Europt~an countries, it is not realistic to e}:pect that such a political union can be quickly achieved~ I believe, therefore, that it would he a serious mistake if, through undue emphasis on the ultimate objective of a political federated ~urope, we should • be led either to overlook the very real accomplishmente already made in the -7- 0 direotion or Europe~n.eeonomic ceoperation or the many additional measures or integration, short of complete union, which are possible of' prompt realizat.ion, There is already app~rer.i.t a new attitude .of mind, Q recogniMon ot the essential interest o:f' each ERP country in the common fate· of all. Thert: is also gradually developing in the OEEC, I believe, the type of integrated thinking and planning which is neoessary. The gradual -development of these trends, accomplished by a corresponding willingness to relinquiish national sovereignty to the e:xten1; necessary to make integra·ced action pc>ssibl~, seems to me to hold the best hope for the achievement Af our ultimate goal, I want to turn now to one final subject -- the steps which the United States itself can, and in my judgment must take to supplement recovery and development ~fforts elsewhere. The United States may justifiably take pride in the-finan- cial assistance it has already made available and is proposing to make available to permit increased production in many areas or ·the WRrld. But increased world production will contribute fully to a healthier world economy only if it re- sults in a corresponding increase and a greater balance &n international trade. Whether or not it will dA so depends very largely on the trade policies of the United State~., The enormous export surplus of the United States today plainly cannet long cwntinue, dependent as it is on emergency measures of extraordinary assistance and on the use or dwindling gold and dcllar reserves. In the long-run, the 5ther countries or the world will be able to purchase the volume of goods from the United States which they would like to buy here and which the United Statee CJ i,,ould like to sell to them, and at the ae.me time ser,rice their dollar obliga- tions, only if the United States follows policies designed to enoourage a great increase in American imports. I refer not me~ely to government policies, important as these are. Certain- ly a f\u~ther reducr:iion of tariff's would be or substantial v~lu,~. But at least @qrn3P y important is the attitude of the American commercial community and con- ~uming publio. A joint British and American group of industrial and labor leaders wss reoer.1tly appointed, as rou all know, to promote an exchange of in- formation l:etween the two countries with respect to the latest production tech• rn.iques., It would be eq~lly approp~iate, I believe, if in the next few years similar means were developed so as to make available to producers and traders information on how they might most e:ff&otively reach the American market,· ~broe:id Certainly there is no 1·1eed to 1:c11press on a group sue!. as this that f~eign t~ade, far from being a one"!9way street, can flourish only as a vieorous two-wa.y t1raffic_. That means, in the case of the United States, that the zra.inte11ance ·et the present high level of exports depends very largely on the promotion of gTeater imports. Indeed, I think it is fair to say that the United States is rapidly approaching the cros.-road~ at which it must choose between the path or iutarchy marked by such signposts as ''Buy B:ritisn" or "Buy American", which characterized the last depression, and tha'~ leading to a healthy era of inter- national CC"mme·rcial cooperation. Given general acceptance in the United States that au~~~chy i~ inefficient and destructive, that a prosperous world is pos- sibld only if there is a g~y volume of international trade and that the prosperity of the Unitad St&tes is indi,risible from that of its neighbors, the choice shciu+d not be difficult,