·' HOLD FOR RELF.Asi HOLD FOR RELEASE ij()LD F'OR f~LEASE • INTERNATION4L BANK FOR RECONSTRUCTlON AND DEVELOPMEm' January 17,, 1949 NOT TO BE RELEASED VNTIL DELIVERY TIME; APPROXIMATELY 8:00 P.M., E.S.T., ----·----.JiEQNESDAY. {anuary 19, 1949 FOR THE PRESS Press Release No. 125 Address by John J. McCloy, President of the Inter- national Bank for Reconstruction and Development, before the Foreign Policy Association, Minneapolis, Minneso~~ru!_sday, Januarl,•9, 1949 In casting about to select from the limited field in which one might have anything worth while to ,say for a subject on which a gro~p such as this might like to be informed, I have been tempted not to confine my remarks solely to the subject of the International Ban..~, its operations and its objectives, but to venture some~ what farther afield. I have thought it might be more appropriate if I tarced a little about this elusive matter of international economic recovery as it strikes one who has been exposed to the necessity of thinking seriously a~out it for the better part of the last two years. At the close of the war we were all faced with the dangerous condition which afflicted an area that for the previous two centuries had grown to be the nerve center of the world's economic, political and cultural development. The two great wars that had been fought over E:urope were not solely responsible for ihe disruptions which occurred. There were seeds of disintegration apparent for those whose intelligence was keen enough to discern them ~ven before the wars took place. To be sure the process w1;1s, at least, vast:J.y accelerated and heightened by the work of the twentieth century.aggressors whose depredations it required so muc~ energy and wealth to eurb. The great cohes~ve influence of the British Empire was diluted by losses of a staggering character. This infl1.1ence had been sustained by a combination of the toughness of British human valueQ, very favorable terms of trade, large accumulated reserites, and the mainte~ance of a :rather complex nervous system of international trade and finance, of -which the l;l8rs seriously impaired all but the human qualities •. i,*,_i '. . • Germany, which f9r years had been one or th~ area 1 s chief suppliers and· purchasers, was almost completely destroyed economiCl;lllY. a;nd politically. Franc.a, · Holland, Italy, and to a con!:!;i.derably lesser· extent Belgium, were demoralized by · occupation and destruction to a point where people oould not be continuously fed ·. / . and clothed, much less be expected to esustain tJ'letr :fo;rmer economic vtgor. We rather blandlyassUJDed that aftel' tht~ deve;~tation there would emerge a period o! cal.Jll and cooperation. We tnight have lqiown better since the patterp ·of histor:y shows -.· ..• : /) that unity &bd COOperatiOl,l among the Victors seldom SUl'ViV8 the urgency of. ware In all thi.s welterot .donfusicn and despatr the United. Stated ~a emerged a.r the wealthf,est and, most potent 'eeonOlllic factor in the· world se.ene. This ::t.n itself carries great implications. Even were it not for the great political issue which the rise to power of the SQViet tJnion ha::i created, it was and remains !nevitable 0 · that the einounts and extent of' aid the United States might rerider to those les~ fortunate was bound to be ip the forefront or all men's minda., The United States wes faced with a somewhat similar si.tuation af'ter the 'fil's;t. world war and credits were then given - large government credits - very few ,:,f _;1o,1hich were ever repaid. And subs'tant;i.al private capital, graduaJ.ly gaining con- fj.dence in the then hope or ~opean recovery, moved to Elll'ope but ir1 large degree with disastrous results for the American investor. This tendency in the midst of disaster for the strong to aid the afflicted is a compelling human tendency. It is powerful and righteous. To fail to respond would be more unnatural than to do so. 'l'he fact that the United States responded in a manner unprecedented in history will stand as a great milestone in the march of human progress, despite all the. efforts of the villifiers to decry it. Whether ~,hat response has .been motivated ey self interest or pure l;tumanitarian;j,.am, or a mixture of both, it does not aeem:wi:,;rthwhile no\.[ to debate. The !mportant thing is to appraise objectively the effects of ~he aid given and to be given and take the measur.e$ best designed to ensw.·e that it accompli;.ihes the pw.·:poses intended, • In our experimentation with these problems during and after tbe first war we rel:i,:ed primarily on loans - government and private. If those then responsible had then know the relation of exports and imports and invisibles to the prospects of loan repayment they gave little evidence of it and the result was the il1--will which the debt repudiation period engendered. The United States by a numbe:r' of examples has shown that it bas now accepted the doctrine that the necesaity or the urge to give aid may out-distance the possibilities of repayment, at least in tangible form. The lend lease legislation, the UNRRA gran1?s, and more recently the large ECA grants are the chief examplee or the new thinking in tro.s rega;rd. But all admit that this cannot be carried to an e;;ctreme and there are some things which a mere plenitude of dollars cannot aclrl,eve. There comes a po:1nt when both th~ granter and the receiver of aid :must think in terms of the grantee supporting •.. himself, unless we are prepared to accept the concept that bis wea_kness is fatal and there i~ no hope of any recovery. In such a case only death can relieve the burden of dependence fro:in the shoulders of both the give:r and the taker. But we lmow that there is vitality :J.n the hu.T-an :race of a rather extra- ordinary character. All the ravages of war have failed to quench the ever prese,~t hmnan instinct to restore and repair, to stand erect and unsupported. We may talk with some reason of inadequate effort and lack of cOQperative spirit among the European countries and of assumptions too easily made concerning continued and easy aid, yet we have to bear in mit1d that in spite of the vast assistance which the United States has rendered to other areas of the world in the post-war period, by far the largest contributions to recovery ha~e been ~ade by the recipients them- selves. The greatly increased production figures which Sit' Stafford Cripps was able to announce to the House of Commons and to the world, the general accomplish- ments of the bulk of the European countries in arriving at pre-war or better pro- duction figures, is d~e primarily to this 1,nstinct •. It hi:i~ nnly hA,..,, ~+.r1=>ngthened and stimulated by the aid which has thus far been given from the United. States. Many people have attempted to estimate the total figure external aid must . '. .-· .3, ..":!"' • ·rea.ch in orQer to gen.f\l:r~.te the proper ta)te.".'Q;t°f_. a.peed .t.o enable countries to recon- struct and to develop on .their ow ~Qcor-d. · .Thie. (igw::e is not. cap~ble' or as nice ·Qalcul.ation as can b.!9.. applied, let ~s say, ~o the; amoUl').:t _or thrust that is needed tre~_~aa jet. boost. er_ in .oraer_._· t·o .a.nab.l.e a_.Pl_ane, ot_.· c_ert_._a:Ln _r1y1n.g char_._acteri.sti-os to be malntained :f,.n flight. . The United States ·:l,n relation to .one section ,qf the world, Western Europe~ has ·taken El good ~se. .~·t the amottnt or extra ~.$pttlsioll i ·,. ·~ that· is needed and the length of time tha_t 1·t should .be applied. ·in order to make Western Europe air borne. Though the real test of -flight has yet to beme.de,·there seems to be as yet no clear indication.tl;lat the guess is not a reasonal:>le one. There is ~ch disoueaion now going on in Washington as to how much Congress ought to appropriate for the second year of E.~.P. - whether it shou;L.d be the full $4,.3 billion f'i~e suggested by the E.• R;.P. countri.es themselves, or some figure sl'ightly less. I do not propose to enter into that discussion he;re. For the solution of Europe's long-term problem. depends,, as I see it, not so much upon the precise size of the apprc;,priation to be made., important as that may be, but rather upon .action on both sj,des of th.e .Atlant~,Q to rectify the fundamental economic maladju~rtments which create the need for that approprietion. I say both sides or the Atlantic because obviously this :Ls a oo~on problem. Much money has been ma.de available by the United. States and more will. probe bly be forthcoming, but anyone vho knows anything about giving away money or lending money knows that money itself never solves the whole problem. There are many steps to be taken, by both the giver and .rece.ivers of. the aid, i.f t~e money- made available is to be tul.11 effective. , • ,$$ l think my first suggestion for the re9ipient countries would be to avoi,4, one would ,avoid the plague, the tendency to rationalize the solution or -all or most or. thej.r problems in terms of ft1rther aetion on the part of the grantc:;,r!t, One of the major problems harassing the administrators .of the.recovery program is the nega.t:i;ve incentive which it partially induces. Those who have the greatest ;ne~, that is those nth the greatest deficits, r(:!.ceive the larg~st grant_s. Those who' have the least need, in many cases dufil to their own determined effort.s, receive the leas~. The political nettles attending upon ·straightforward financial steps- seem the mCI' e difficult to gl."&$p the grEt_~ter the ~oupt ·Of externr;il aid available; N8,tion.f3, like individ.uals, postpone· 1difficuJ.~ decisions, so.me longer than pther;~f rr it :Ls poi.nted out that the United States itse;l..f' is strongly subject to th~e i;e;nde~ey, tbit=i sg$;rcely conetitutes justif':i.cation fOJ" procrastination on the pa.rt of the ~ecipient if only for the reason tna.t it is a greater haza.rd fo1" the re'r" cipient t~n . !tis for the g:rantor.. 0 There is need to correct a tendency to feel :that 1952·1s. a long way ott and that therefore a relatively long period remains in which to make the adjust.,. ~ent.s which it is recognized must some day be made. In respect of non-European countries the same tendency exists though i~ takes·a somewhat different but equally dangerous form. The fact is that 1952 is just around the corner for Europe and for th,e nop...European countries the period of peak export prices may be even shorter~ One of the most encouraging things about the recent interim report of the prganiza9\' tion ,for European lfoonornio Cooperation is that the European nations thcm,elves are beginning to recognize that they llO'W have to make determined readjustments in tbeir ptograms if' they are t9 avoid~ m1,1ch more serious readjustment a ;later dat~, Itat needs no similar report to demonstrate that if nop_-European countries are not ,; 1 .taking steps to put their fiscal and ~conomic affaiTs i.n order in a period wh~n '}. ~port ·prlces are :Jhe highest in history~ it will lJe J11U.ch more painful to do $6 when this may Jl9 1ong"'.i:- 'bP t.1,p ca.:,e,. · - 4 - The Western Euronean countries have achieved some striking increal'3es in • production e,l'ld exports. · In some countries the standard of living has risen sharply, in a few cases perhaps too sharply. These are important gains, btlt they must not be allowed to conceal the need for even more sustained and· intelligent effort in the direction of increasing production, stimulating\ e:(ports, which, of course, includes the necessity of facing the problem of costs;,and less resiste11ce to ohange in method. These things require readjustments which can be effected smoothly only if there is a broader education of the people of Europe as to the realities of their position. It is not sufficient that the econom5.st or even the politician should know these realities. It is i!Pportant that the workers should know and understand them. Barring a few areas I think the sirnificance of the Marshall Plan has been much m0re widely discussed and expounded in the United · : . ;_ States than has been the case in EUl'opes yet the need for a full understanding of its necessity and its implications is much more important to Europe than to the people of the United States. · When so much depends upon attaining a balance of trade, pa.rticularly with the Western Hemisphere, one would expect that greater steps would have been taken by the European countries to reach the American market. During the last three year,<; the proportion of European ex})orts going to the Western Hemisphere has been srnal1.er than before the war even though the exporter has enjoyed a seller's market here- European exports have been attracted to other regions where prices were higher and market conditions easier. I realize that there are many difficulties in the way of exporting to the United States but it is a mistake either to exaggerate the obstacles or to underrate the extent of the American demand. British automobile sales in the Uniter:! States were greater than anyone expected in • 1948. · There were special circumstances to be sure but the fact thi:tt British cars in any quantity could sell in the United States, particularly with the relatiYely high cost of the cars, shows the pof1sihilities which exist. Sustained effort, good quality, reasonable prices, will find a response in the American market, and when it is borne in mind that the problem for Eurnpe is not to cap+ure large share of the market but only to achieve a volume of saleii amounting to a fringe of the American demand it would seem that greater efforts in this direction could profit- ably be made. It has frequently been urged that the recovery of Europe ana the develop- ment of other areas is a matter of ad.justing exchange rates - it is true and I think no one can seriously deny it, that the dollar is under-valued in relation to many other cµrrencies, or to put it another way that such currencies are over-value in rf.dation to the dollar, This means the.t the foreign importer is frequently stimulated to buy go<;>ds in the United States and conversely the prospective export- er is induceo to sell his goods not :i,n the United States but in the areas where prices are higher~ To reverse this tendency is one of the great objectives of the recovery program. But this recovery problem can.not be solved by the appli.cation out of hand of a single exchange rate form-ula. The condit:i,on which creates such rates and not the rates themselves must first be dealt with. lt would serve no purpose to adjust rates without first coping wit~ the prob].em of inflation.by recognizing the homely need of living within yo\:f income. An adjustment of foreign exchange in relation to the dollar would spell real harm if such an adjustment could not be mde to stiek, as it certainly would not, if national ~xpenditures constantly out distanced na!;ional revenues, The important thing is to move toward • the sol't~tion of the. problem on both fronts and not postpone act:ton on each front because of failure to act on the other. One particul~rly effective m~thod or deaU,ng with inflation is by means of the imposition and enf;orceznent or e.n ,ppropr:i,.ate system of taxes. lt bas been . /{ , - 5 - . • proven that appropriate taxes can be ievied :l.n a free society. It is the essenoe or a free sbeiety that they be fairly levied. Ce;rtainly:lt is true that nations which do not impose a fa~r system of taxation upon their citizens cannot in the long run rely upon the ta:x: coll.eotions 'Of other. rw.tions that do so. I am not fully con•·· vinced that. all colllltries have re~og¢zed this truism. For a time I think most of the news from Europe was discouraging insofar as it' related to cooperative action, Long established patterns of trade diverse and isolated national traditions blocked all efforts to bring out into the open national plans for recovery~ However, in the last few months through the pressure of logic and the grad'Qal realization of the necessity, officials of the r!;lspective recipient countries finally have put their plans upon the table where they were subjected to real scrutiny apd cross e~amination by the experts of the various nations~ :Xt is not to be wondered· tn.at the plans disclosed many incongruities $nd that each was poised in the direction of selling much and ouying 1ittl$. ijor ·:l,s it surprising that they disclose a contir1uing deficit of $3 billion for l95Z. tt ie disappointing to be sU17e. l;rut now the E.c.A.· and the nations themselves can see by how muc.h their plans are inadequate. With this approach we can feel we really are beginning to get somewhere and if it is continued it ~y wel,l mark the turn of Europe to~rd true recovery•. l'. have referred only briefly tQ the non-European area, yet a11 ereas are related economically in this recovery prograi:n. As Europe recovers more purchases can be mad.e tram non-European areas and converseJ.y as underdeveloped areas expand • their productivity they be·come t,oth a better source of suppJ,.y and a better customer for Europe. To take part in a vigorotis trade the non..:.Europeatl countries have l;ike... wise many things tQ do;.· '.l'hey mQ.st check inflation, press exports·, ~U,.ver~ify their products; they must t:ruly encourage the flow of· private cap~tal, and th~y nn1st not. incur over burdensome debt. I havQ \alked of what other countries must do if recQvery is tt:> be ~ch:i.eved · but, as I have indicated, there are steps wfiich the United States itself ea-n well · afford to take to complement the efforts of its neighbors aeross 'the Atlantic,. If we are disposed to fee.l that having given such large sUJIJ.i, of money tl}e United· Atates 'cannot reasonably be called upon to do anything else, ther~ :h aome just!,..· ficatioll- for that attitude •. But. if we look at the matter p1.u..-ely from the point ot view ot fundam.ent~l-United States interest~ this is not really the answer, We muf:lt never forget ·that Europe's dollar problem j,s ,Am.erj,c;a '·$ dolla~ probl• as wellJ the extent of' Europets deficit in its dollar balance of payme~ts is a mea~n.:ire of the a.mount of goods and services this country is sending to E\l?'QJ:)e for which it is not receiving Pfiyment., rt follows that any steps which the United States ean ta~e to enable ~u.rope to reduce its dQllar deficit w~il mea~ a Slllflller overall. drain on t,hl,s country 1.s resources. Such ~tep~ cannot be regarded s:i,mp;ly as an added measure of g~nerosity to Europe •. , They are jµstifiable only as the1 conform to the e¢onomic self-interest of the Un:l.ted States~ Let'~ take a look l:l,.t what ·some of these steps ~re. ·The f:i,rst and most obvious· :$.s action ta stimulate impo:r'ts into the Uni tad States ... to get addi tj,.o~l ~w· • goods and services in return for those we are sending abroad, Ttiere are legislative restrictions on the abiltty of other countries to sell ~r pe:rfoX'lll services :in or for the United States. -We all l<:no"' about the tariff. It is not a, high as it used to be but it :ts still a deterrent. 'l'hera conttnue to be severe restri.c_t:i,oni:, ·on_ the tn>e of activi.t:i,es wh:i.ch can b~ ~arri~ ori. i-n the UniteC,. State$ - 6 - • by foreign banks and insurance companies. And you are all aware of the rest.rictiom which exist on the use of foreign shipping to carry American goods. Now it is true that particular groups within this country are helped by these restrictions and perhaps in the case of shipping there a~e cartain strategic ad,rantages to be derivec but they do not aid the United States economy as a whole. To the extent that they prevent the European countries from providing goo1s and seTvices to the United States in return for dollars, they prevent the United States from receiving a re- turn on the e:xcess of e:xports it sends abroad. In plain uords, these restrictions cause America to give away things for which, in the absence of restrictj_ons, it "Would b9 paid, for either the taxpayer must pay for that excess or the foreigners must be allowed to earn it. To put it another way, every dollar earned by foreign commerce is used sooner or later to buy something else in the United States. There is another field in which the United States might help to solve its oi,.m problem of having to give away its goods and that is to encourage other coun- tries to look elsewhere than to the United States for goods which can be procured elsewhere. A high volume of exports, far from being an ass,et, is a decided liability if, as at present, a large percentage of those exports is being financed by grants. It is therefore in the interest of the United States that other sources of supply be developed and the dependence of other countries on United States ex- ports be reduced. Translated into practical terms, that means that the United States should look with favor upon the efforts of other countries to limit their purchases in the United States to essential goods they cannot make themselves or procure from other sources. Call this disc:::-·imination against American goods if you will, but it is a way to avoid giving away goods. Certainly it would seem better that goods be purchased in countries where they can be paid for in currencies earned by the purchaser rather than in the United States where they can be paid for only in dollars which the purchaser has not been able to earn. The world is not yet at a stage of econom1c he~lth where it can afford the luxury of unrestricted multilateral trade. · If it is important to the United St!\tes to reduce the Marshall Plan.bill it is important that all efforts to use American foreign assistance as a vehicle to dump surplus American production be resisted. The purpose of the foreign aid is to help the recipient countries to get bac!c on their own feet, not to subsidize un- economic exports from the United States. To the extent that that purpose is dis- torted European recovery will be delayed and American taxpayers as a whole will be penalized for the benefit of particular producing groups. Finally, I believe that American private investment abroad should be st1.mu- lated by every possible means so that there will not be any undue protraction of the period of ne(~essary inter-governmental financing. This is desirable not only from the standpoint of alleviating the burden on the Americnn- taxpaJrer, impo:r·tant as that consideration is, but t;ilso because private investment is far healthier, economically and politically, than governmental loans and grants. Little could, in my judgment, be more productive of hostility towards the United States, or little could be more demoralizing than to have the other nations of the world over a long period of time regard the Vni ted States Go,rernment as their • principal source of foreign capital, Under such circu.~stances, those receiving . financial aid would not regard it as exoeptional but as a matter of right, while those who received nothing, or less tnan they thought they were entitled to, would consider the United States guilty of unfriendly discrimination. There wo~ld be no end to the calls made upon the United States t;1nd, shoulo the United State$ itself - 7 decide to halt the program, it "Would be confronted by ..1uteries from every side • • Th~t brings me to the International Bank, for the Bank, as I have had occasion to say many times, is essentially a bridge between inter-governmental lending and private investment. Although the Bank is an inter-governmental agency, it has a mandate to conduct its affairs on a non~-:political and objective basis, it operates for the most part with funds raised by it in the private investment market and its lending activities are and must.be carried on in a businesslike manner. The short-run objective of the Bank is to provide capital for the m0st urgent and productive reconstruction and qevelopment projects in its member countries~ The long-run, and what I regard as the more important objective of the Bank, is to blaze the trail for sound investments in far greater amounts by private capital. The Bank is not in the business of making political loans or relief loans or loans to cover current balance of :payment deficits. Our field of operation is rather the financing of specific productive projects in cases where reasonable prospects of repayment exist but where the risks involved, fo~ one reason or an- other, are too great for private capital to assume. We hope that the character of our loans will be such that, on the one hand, they will create in the borrowing countries an economic base and an economic climate conducive to the flow of foreign private capital and, on the other, that they will help to restore the confidence of investors which was so badly shaken by the careless international lending and borrowing of the 1920 1 s. During the ERP period, the B1:mk's activities in Europe will necessarily be dwarfed by ECA; all we can hope to do is to supplement the ERP program by financing certain of the longer-term projects for which ECA funds mar be insufficient. Our primary emphasis will necessarily be, therefore, on the financing of productive projects in the underdeveloped countries and colonial areas of the world~ There is ample scope here for all the imagination, ingenuity and vigor we can bring to bear. The s1,1ccess we achieve will be important not only for the underdeveloped areas themselves but also for Europe and for the United States. For to the extent that we can help to increase the productivity of Latin America, of Africa, of the Middle and Far F~st, the dependence of Europe and of other countries on American exports will be diminished and there will be a smaller United States export surplus for the American taxpayer to finance. All of these problems of international economic recovery which I have t,ouched upon are complicateg. and baffling. It is much easier to state the diffi- culties than to find the solution, much easier to give way to pessimism than to sustain the hope of success. Progress has been made and very real progress - the important thing is to maintain and accelerate it. The year 1949 will be another crucial year and at th~ end of it we shculd know whether affirmat;i.ve forces have really been generated on the basis of the very greatly increased productive capacities which now exist. The ·values which will have to be applied in the coming year will at least be as much moral as physical • •