ADDRESS BY MR. JOHN J. McCLOY, PRESIDENT OF THE BANK, IN PRESENTING THE THffiD ANNUAL REPORT OF THE BANK TO THE BOARD OF GOVERNORS AT THE SECOND SESSION, SEPTEMBER 29, 1948 It is of course a great pleasure to welcome world. Though the operations of the Bank the Governors to the situs of the Bank, to are world-wide and while at least the direct be able to present a new Annual Report, and operations of the European Recovery Pro- to renew our exchanges regarding the Bank gram are confined to a certain segment of and its affairs. I have but few thoughts to the world, the effect of that Program on the add to those which are included in the re- operations of the Bank, as well as on the ports already in your hands. economies of many countries, weighs very I should like to draw your attention to an large indeed. Its recognition of the fact that aspect of the Bank's operations which might outside aid alone will not eliminate persist- be overlooked if attention were not specifical- ent deficits lIDless matched by vigorous steps ly drawn to it. It is always wise to recall to solve the problems of inflation, production that the Bank and the Fund, even though and trade, greatly advances the objectives their deliberations may be of less significance of the Bank. By placing a more SUbstantial than those of the General Assembly and floor under the operations of the Bank in the Security Council, are yet a definite part of areas where its direct and indirect benefits the United Nations concept. I think, there- can be felt, it both enhances the likelihood fore, that it is worth recording that the of recovery in those areas and increases the Bank, and I am sure the same remarks can security of the Bank's investments. More- be made of the Fund, has been in active over, it has helped to solve a serious dilemma operation as an international agency for a with which the Bank was originally faced, considerable period of time with a commend- namely. whether to aid hard pressed econo- able and really hopeful display of tolerance mies by what could only be palliatives or to and good temper. refuse any help at all. The Directors and the Staff represent Many people have ventured to say what many and diverse political points of view was in the minds of the founding fathers at and there is at least as much vigorous dis- Bretton Woods and, as I was not there, per- agreement among the economists and bank- haps I can speak with greater freedom than ers in the Bank as one could confidently the many of you who were. At the time of suppose such a group would generate. But Bretton Woods, the extent and nature of the what I have had reason to state elsewhere economic convulsion which had come upon I think it is proper to repeat here, namely, the world was not apparent, nor could it be that in an institution where objectivity foreseen that the post-war world would be rather than purely representational atti- politically so sharply divided as seems now tudes is essential to sound progress, the to be the case. The concept seems to have Bank has had from its Directors and its Staff been that the maladjustments in the balance all that could be desired in this regard. If of international payments which might be such objectivity is maintained to the point expected to arise from the war would be where it becomes a tradition, greater conse- temporary and could be dealt with through quences may flow from it than can be meas- the operations of the International Monetary ured by the value of the projects the Bank Fund, while the Bank, operating in the re- finances. stored confidence of a united world, could The major event of last year has been the cope with the specific reconstruction and de- introduction of the European Recovery Pro- velopment needs that private capital, for the gram as a new and mighty contributing time being, might not be available in suffi- factor in the economic rehabilitation of the cient quantity to meet. [4] However, we now know that the world has cies may be able to proffer terms in connec- experienced an economic earthquake, whose tion with their lending quite different from rumblings began long before the war. The those which the Bank is able to afford. Yet immediate effects of the war and the emer- it should not be forgotten that the Bank is gency of the Western Hemisphere as such a able to render very substantial aid not only disparately great productive factor, has left within practical reach of prospective bor- a wider crevice in the world economy tha~ rowers who present really productive enter- all but a very few anticipated. As full realI- prises, but, by reason of its public guarantees, zation of the actual condition came about and on terms more favorable to the borrower the overpowering need of dollars to buy the than could possibly be obtained privately sheer necessities of life developed in the save in very rare instances. The Bank was European area, a number of supplemental created to meet a long term need which will forms of aid were patched up, until finally remain when the present emergency is over these culminated in the largest and best inte- -the need for a continuing organization to grated of them all-the European Recovery promote international investment on a scale Program. With these supplemental and par- sufficient to ensure a balanced development of the world's resources and living standards. allel forms of aid the Bank can now, as I see I would suggest that these are matters it, come much closer to playing the role orig- which the member countries should take into inally designed for it, namely, to finance account in considering their reconstruction within its resources the creation and mainte- and development programs. Today extraor- nance of the sort of productive and bankable dinary international assistance is required to enterprises or projects for which, for the meet extraordinary contingencies. But this time being at least, no sufficient amount of situation cannot be relied upon to continue private. capital is available. To be sure, as for more than a relatively few years and, in the Bank depends on private markets and my judgment, rightly so. In the long run, not on government contributions for the bulk it is no healthier for nations than for indi- of its funds, some alleviation of the continu- viduals to rely for their support on grants or ous series of political crises is required if it on loan financing on terms resembling grants. is to operate in full vigor. Sound international investment over the long As for our relations with the Economic pull must, I suggest, be based on the willing Cooperation Administration and other agen- assets of the saving public rather than on cies of similar character, I feel one should the power of the tax collector. The Bank face the fact that it will always be difficult, was designed to induce and encourage pri- and perhaps impossible, to lay down any vate investment and it can greatly assist in hard and fast rules limiting or delimiting bringing this about, but the process must be the respective fields of activity between our- a gradual one. We cannot safely wait until selves and such agencies. If we are to have all extraordinary types of aid have ceased in flexible institutions best able to accomplish order to start the process. the fundamental objectives, no one of them This brings me to another thought. The should be too rigid in its approach but some Bank is more than a lending agency. It is a general areas should in my judgment be de- great and worthy international cooperative fined or else much confusion and considerable effort to promote orderly economic develop- loss of potential aid will result. Contact ment and improved living standards in the with the officials of the Economic Coopera- world. Many nations have pledged their tion Administration and the Export-Import credit to accomplish this. I would urge the Bank is never difficult to effect and I am con- members to find the means to take affirma- fident that we can rely on every effort being tive steps to preserve this spirit of coopera- rnade to eliminate the causes of any confu- tion. A number have done so, but there are fljfm or waste. fields in which more cooperation could be It is altogether probable that other agen- achieved. [5] We have already communicated to the Bank is keenly aware of the reasons, nJany Governors the desirability of having legisla- compelling, which have prevented the fl'r:e tion enacted or regulations adopted, where use of these facilities to date. Till now fE'W needed, to qualify the Bank's bonds for in- countries have been in a position to exrJort vestment in their respective countries. Our substantial amounts of goods on credit, yet report also stresses the efforts being made to some real opportunities do exist, opportt;ni_ secure funds from other markets than those ties which could be availed of through the of the United States. These efforts will con- medium of the Bank. tinue and we enlist your help. Few, I believe, It would therefore be most helpful if the appreciate the effect which the availability members would re-examine their position of such funds, if only in modest amounts, has and currently apprise the Bank of the extt-nt upon the United States market and the pub- to which and in a proper case the conditions lic opinion which, in the last analysis, sup- under which they would be willing to have ports the market. Where, for example, a part or all of their local currency subscrip_ foreign enterprises are required by local laws tions to the capital of the Bank used by it to hold a certain reserve of local government for lending purposes. or other types of bonds as a condition of Similarly, I would ask our prospective bor- doing business in a particular country, it rowers, and they may be in some cases the could be most beneficial to the general ac- same as those whose capital subscriptions ceptance of the Bank's securities if at least may be needed by the Bank, to investigate a certain percentage of those reserves might fully the sources of material supply in the be held in International Bank bonds. hope of finding substitutes for their dollar Another field of cooperation can be found financing needs. The contribution of the in making available for investment in the Bank to a balanced internationaltrade would Bank's bonds a portion of the outstanding be much enhanced if steps along these lines and acknowledged external reserves of mem- were taken. ber countries and their citizens. This in- I come back to the concept of the Bank as volves no loss in dollar reserves but it does an international cooperative institution and mobilize for reconstruction and development I suggest that in considering these matters purposes moneys which would otherwise not they should be approached with that concept be so employed. I know of no better security in mind and not solely upon the basis of a than the Bank's bonds and the gesture of nice balance of convenience or too close a confidence and constructive cooperation calculation of the immediate as distinguished which such action entails can therefore cer- from other quite valuable long-range benefits. tainly be made without any added risk. Considerable comment has been provoked Closely allied to this entire subject is the by the fact that our operations to date show availability of the so-called 18 per cent. of a modest profit. We have been able to show the capital subscription of the Bank. This, such a profit in spite of the fact that we have as you all know, is that portion of the sub- been rather severe in charging certain items scription of each member paid in the local to current operations. The significance of currency of that member and which, with this profit should not be over-estimated. One the consent of the member, is available for must admit that it is due much less to wise Bank lending, It was a fundamental concept and economic management than to the fact inherent in the capital structure of the Bank that thus far we have been able to draw on that up to 20 per cent. of the capital sub- our capital funds for our lending operations. scription was to be made available through The amount of our dollar capital amounted the medium of the Bank for the Bank's lend- to roughly $735,000,000, and we have thus ing purposes. I believe the time has come far committed $519,000,000. With all our when more serious consideration should be borrowers meeting their interest and com- given to the use of this asset if only modest mitment charges, we could certainly have amounts are made available initially. The been charged with extravagance if we did [6] not show a profit. But considering the con- tion and development of our member coun- stant need to build up reasonable reserves tries. If the Report seems to stress the and considering the fact that when we have number of things which have to be accom- used our capital funds which are available plished before recovery is effected, and if for lending we shall be dependent upon the some of the facts seem rather cold and hard, amounts we can borrow for our lending op- it is nonetheless important that they should erations, we can well foresee that our margin be known and faced. It is a false courage of profit in relation to the volume of loans which is engendered from ignorance. On the outstanding will narrow. Indeed the time other hand, we have also tried to -do justice may come when we shall have to give careful to the progress which has already been made attention to the synchronizing of our borrow- in repairing the devastations and disruptions ing and our lending. Moreover, a reserve of of war and economic upheaval. earnings can be most usefully employed in As for the Bank's operations themselves, many ways to further the objectives of the there are several small but significant fea- Bank. For example, it can enable us to do tures from which I think you can derive more in the way of investigating and assist- considerable satisfaction. ing, particularly the under-developed coun- Our ability to interest private capital di- tries, in the selection of sound projects. We rectly in the financing operations of the Bank do not now charge the expense of our mis- has been evidenced by the first positive step sions to the various countries and the accu- that we have taken in that direction. In July mulated cost of these is substantial. Further- the Bank sold to ten United States banks, more, a reserve of earnings had the beneficial with its guarantee, $8,100,000 of the shorter effect of making us less dependent upon the maturities of a total of $12,000,000 of notes vicissitudes of the bond market. of four Dutch shipping companies. These I would like now to say a word about our notes were received for loans guaranteed by provisions and practices for following up the the Kingdom of The Netherlands for the utilization of the proceeds of our loans. I purchase of six merchant vessels. think there is no feature of our organization The Bank also sold to the Bank for Inter~ which prompts more interest, at least among national Settlements an issue of Swiss franc investors, than does this one. It is a fact bonds of an aggregate principal amount of that support for the Bank's borrowing opera- 17 million Swiss francs, the proceeds of tions rests not solely on a lmowledge of the which were used in the loan to The Nether- security behind the Bank's bonds but to a lands. very important degree it is developed by a The work of the Bank in the development sense of confidence that the money invested field has made real progress. We have is actually being applied to constructive authorized the granting of our first credits work. There is a widespread supportable for development purposes and several other ~onviction that in the past the proceeds of development loans are in an advanced stage mternationalloans have often been used im- of negotiation. Applications from Latin properly or wastefully. That has frequently American countries particularly have great- resulted in defaults and ill-will, and a sense ly increased over the same period last year ?f frustration has developed in the entire and the character of the applications and the International financing field. If the Bank's discussions have narrowed down, I believe, to officials in their visits to borrowing countries more constructive and realistic proposals as seem persistent and meticulous in the work our conversations have progressed. 111e va- i~at the! do. in this connection, I urge you riety of the projects presented to us from t bear In mmd the importance of this fea- all over the world is impressive and from the u~ to the suc~essful operation of the Bank. amount of proposed transactions which are e have trIed to present to you in the now before us, and which we have been told f~nnual Report an objective analysis of the Qctsa'th ey reI ate to the task of reconstruc- !'j will be put before us, the Bank should be very busy in the coming year. [7] It is not only, however, in terms of loans confidence of both investors and borrowers made that our progress is measured. A really that their legitimate interests will be pro­ enormous amount of work has gone into the tected and promoted in all our operations. study of techniques and problems related to It may perhaps fairly be said that those development projects as well as the more who conceived the Bretton Woods Agree­ effective use of guarantees on the part of ments saw a more distant future more clear­ the Bank, the creation and development of ly than they did the immediate one. But the local capital markets, the mobilization for present emergency, like all emergencies, will use in Bank loans of capital outside the pass and in ten years' time we may be grate­ ful to those who looked so far ahead and United States, and constant liaison and dis­ created institutions such as the Bank and cussion with other agencies involved in the Fund which we, immersed in our daily con­ same general work as the Bank. The knowl­ cerns, might not have found either the time edge of the Bank's activities is far wider or the energy to conceive and establish. than it has ever been before and its contacts Imperfect though they are, they are impor­ with both investors and prospective borrow­ tant instruments for international economic ers have been broadened and developed. This aid and collaboration, and even though inade­ work will one day come to fruition. quately equipped to deflect a condition whose The Bank is aware of the long-term nature dire extent was not foreseen, these institu­ of the task entrusted to it and it is preparing tions do possess great powers and greater itself to play an increasingly active part in potentialities. the solution of world economic problems. I In short, I would not hesitate, in spite of think I can say it is the intention of the Bank the somewhat foreboding character of our to maintain the international character of Annual Report, to strike an optimistic note the institution by keeping in close touch with to you on behalf of the Directors and Staff member governments and seeking their views of the Bank. I would certainly feel justified on its problems, to maintain a competent in­ in doing so were the world not plagued with ternational staff and to acquaint itself thor­ the continuance of this knife-edged political oughly with the problems of its members situation which in so many ways hampers and offer objective and competent advice and the full effect of what we do and much that help. We shall strive to continue to win the we can be reasonably expected to do. [ 8]