by Kai Bird
While the British and other non-Americans groused about how they were being ignored or worse, McCloy, Black, and Garner set about organizing the Bank along commercial lines. As a token of his good wishes, Nelson Rockefeller had loaned them his house, a handsome structure on Georgetown’s Foxhall Road, together with its well-stocked larder and bevy of servants. For three months, the men shared the mansion while their wives remained in New York. This arrangement allowed them the privacy they needed to concentrate on the work at hand. “We were often up until one or two in the morning,” recalled Black. “My job was to create a market for securities; Garner’s job was to set up a loan apparatus. McCloy was quite insistent that things be run on a conservative basis, with the proper loan conditions.”20
Wall Street greeted McCloy’s coup d’état at the Bank with mixed emotions. American Banker, a mouthpiece of the investment-banking community, applauded Collado’s removal as a sign that the Bank would now be “guided by the philosophy that it must minimize political consideration and maximize economic factors in making its loans. . . .”21 The New York Times editorialized that McCloy’s ascension was “a symbol of new hope.”22 But there was still talk around Wall Street that perhaps the Bank’s as yet unissued securities should be taken off New York State’s “legal list” of bonds eligible for purchase by the savings-and-loan industry. And a number of other state legislatures were still refusing to allow pension funds and insurance companies to invest their monies in World Bank bonds.23 Memories were long on Wall Street, and many brokers could still remember the 1930s, when 34 percent of all loans to foreign governments were in default. Only the Finns had repaid their World War I debts in full.24 So the idea of further lending to foreign governments was not very attractive to most private investors.
In an effort to turn the situation around, McCloy, Black, and Garner spent much of April on the road, giving speeches at bankers’ conventions and lobbying various state legislatures. McCloy told an audience of the Chartered Life Underwriters at New York City’s Town Hall that the Bank “would operate in a goldfish bowl,” that its securities would be listed on the New York Stock Exchange and comply with all the SEC’s reporting regulations. Political loans of any kind, he told these potential investors, were “definitely excluded.” Despite these assurances, many were still skeptical. After listening to one such presentation by McCloy, Gene Black overheard a member of the audience mutter, “I wouldn’t touch those bonds with a ten-foot pole.”25
In May 1947, McCloy told 350 members of the elite Bond Club in Manhattan that the mere fact that the World Bank intended to sell its bonds on the open market would help to ensure that it remained free of political pressures. If investors learned otherwise, he said, “The word would spread. It would be killing the goose that lays the golden egg.”26 In one way or another, of course, politics permeated the Bank’s activities. McCloy had joined the Bank the same month that the British withdrew their troops from the civil war raging in Greece, an action that had precipitated the Truman Doctrine. The world faced a stark choice, Harry Truman said, between two ways of life, communist and democratic. As Truman himself summarized it in his memoirs, this was a “turning point” in U.S. foreign policy. From now on, “whenever aggression, direct or indirect, threatened the peace, the security of the United States was involved.”27
Not everyone in the foreign-policy establishment was comfortable with such an open-ended commitment to intervene against the spread of communist governments anywhere. After seeing an early draft of the speech, George Kennan, then director of policy planning at the State Department, voiced his strong objections to Dean Acheson and others in the State Department.28 Like McCloy, Kennan believed that Russia’s resources were already so severely taxed that the Soviets had no intention of expanding outside the sphere of influence Yalta and Potsdam had accorded them in Eastern Europe. “I personally,” he wrote in the autumn of 1946, “have no fear about our being able to contain the Russians for the foreseeable future, if we handle ourselves reasonably well.”29 Kennan’s influence, however, was already beginning to wane, even as he stood at the apex of his foreign-service career.
In this context, the World Bank’s lending policies could not help having great political ramifications. By April 1947, Chile, Poland, France, and several other nations had already submitted loan applications. Early that month, McCloy decided that the first loan would go to the French. At a moment when the Cold War was beginning to move into high gear, there were compelling political reasons to shore up the French government. The Communist Party of France had won for itself a minor position in the coalition government, and Washington feared that it might increase its mandate in the next elections. “The Communists were at the throat of the French,” Kennan recalled a year later. “A pall of fear, of bewilderment, of discouragement, hung over the continent and paralyzed all constructive activity.”30 The French wanted $500 million, not for specific projects—a road, a power plant, or an irrigation system—but in “general-purpose” funds to finance imports of food, fuel, and industrial machinery. This was exactly the kind of loan that ordinary commercial bankers would avoid, the kind of loan that had gone into default in the 1930s. But it was what the French needed to revive their economy. And so, though he had not initially been prepared to endorse such lending, McCloy was quickly convinced by the Bank’s senior economists that Europe’s war-torn economies needed such balance-of-payments assistance.31
The terms would be tough: The Bank would lend only half of the requested $500 million, Bank officers would monitor end use of the funds, and the French government would have to pledge that the repayment of the Bank’s loans would have absolute priority over any other foreign debt. Furthermore, the Bank would closely supervise the French economy to ensure that the government took steps to balance its budget, increase taxes, and cut consumption of certain luxury imports.32 The French protested that such conditions infringed on their sovereignty.33 But when McCloy refused to budge, they reluctantly agreed to his terms. Simultaneously, the State Department bluntly informed the French that they would have to “correct the present situation” by removing any communist representatives in the Cabinet. The Communist Party was pushed out of the coalition government in early May 1947, and within hours, as if to underscore the linkage, McCloy announced that the loan would go through.34 Even then, he warned that the French would not receive the loan until the Bank successfully floated $250 million worth of bonds on the New York market.
For the next several months, McCloy and Black worked on little else but the first bond offering, now scheduled for July 15,1947. They decided to offer two bonds, one issue of $100 million, ten-year bonds paying 2.25 percent, and a second issue of $150 million, twenty-five-year bonds paying 3 percent. Normally, such a bond offering would be marketed by one or two of the major investment houses on Wall Street. But because the Bank’s securities were still an unknown commodity, these firms would have charged a hefty fee for underwriting the sale. So, instead, McCloy and Black decided to market the securities through hundreds of independent brokers across the country. Letters were sent out to 2,650 dealers, promising them a guaranteed commission twice the rate paid for the sale of similar corporate bonds. Over seventeen hundred dealers agreed to participate in the sale, and on the appointed day McCloy, Black, and Garner stationed themselves on the floor of the New York Stock Exchange and waited anxiously for the first bids. At 10:02 A.M., two minutes after the opening of the market, McCloy formally accepted the first bid for $100,000 worth of the twenty-five-year bonds at three points above the offering price. After two hours of spirited bidding, it was announced that both bonds had been heavily oversubscribed. At a luncheon for McCloy immediately afterward, the president of the New York Stock Exchange, Emil Schram, called it a “historic moment.”35 Newsweek printed a photo of a beaming McCloy, clearly relieved that his gamble had paid off.36
Of course, the investors, largely banks and insurance companies, were assuming very little risk on bonds that paid a higher-than-
average interest.37 As Sylvia Porter, financial editor of the New York Post, observed, it had been “the sort of bond sale investment men must dream of as they ride the Banker’s Special and think their thoughts of heaven.”38 But because the market fears the unknown, McCloy felt he had to make the Bank’s first offering particularly attractive. Even so, Standard & Poor’s, the market’s best-known rating service, gave the Bank’s securities a rating of A, the minimum grade necessary for a bond to be eligible for purchase by an institutional investor.39
McCloy felt that his conservative strategy of slowly building confidence in the Bank had been vindicated. But there were many who believed such a course was undermining the fundamental purpose of the Bank. The executive directors, and many of the Bank’s staff economists, believed these first two issues were far too small for the task at hand. Even assuming scaled-back lending levels, the British Labour government still hoped that the Bank might quickly begin lending on the order of $1 billion annually. In fact, under McCloy’s tenure the Bank would never loan even half that amount.40 That summer, the British were particularly resentful. “It seems to me extraordinary,” wrote one British official, “that these bodies [the IMF and the Bank] should be doing so miserably little. . . . After all, great hopes were raised by Bretton Woods and we ourselves have made big international concessions as a contribution to enable the Bank and the Fund to get a good start. How can we accept all these burdensome obligations and see nothing done in return?”41
Not only the British, but the French too were unhappy with the Bank’s unambitious stance on war reconstruction. That spring, French Foreign Minister Georges Bidault had bitterly complained to Secretary of State George C. Marshall that the Bank had cut their request in half. France was pressed to the wall, he said, and needed substantial economic assistance in order to “avoid a civil war” with the communists. Bidault was well aware that an appeal on such political grounds might evoke a response from Washington. Only the previous year, Marshall’s predecessor, Jimmy Byrnes, had justified a $050-million bilateral credit to the French by arguing that it would help to “combat this Russian influence.” Marshall told Bidault that he was aware of the “delicate political situation in France” and would have a personal chat with McCloy to see what could be done.42
McCloy, of course, explained how the Bank’s lending operations were constrained by its ability to sell its securities on the New York and Canadian financial markets. When he talked to Marshall that spring, the Bank had not even sold its first bond. He said that it would be a long time, perhaps years, before the Bank would be in a position to lend billions of dollars. If European recovery required massive new loans, then the American taxpayer would have to finance a bilateral program. Will Clayton, George Kennan, Dean Acheson, and many others influenced Marshall’s attitude on this question, but since he was president of the institution specifically created to deal with war reconstruction, McCloy’s views weighed heavily. Over the next few weeks, a consensus emerged within the Truman administration that some kind of bilateral European Recovery Program (ERP) should be proposed to Congress. Marshall unveiled the new idea at a Harvard commencement address on June 5, 1947.
This idea—the Marshall Plan—was the something more that was needed to get Europe’s basic economy moving. Acknowledging that the world’s needs surpassed the Bank’s capabilities,43 McCloy lobbied vigorously for the congressional appropriations that would make the Marshall Plan a reality. He warned it would be a waste of taxpayers’ money if too little aid was given; anything less than the $6.8 billion the Truman administration was requesting would amount to a relief program, not a program aimed at full economic recovery.44 But Congress would not act quickly on the controversial measure, to the consternation of Undersecretary of State Robert Lovett, who felt the world was edging toward war. “At no time in my recollection,” Lovett wrote that summer, “have I ever seen a world situation which was moving so rapidly toward real trouble.” McCloy was not nearly so pessimistic as Lovett. He thought that the British pound crisis was exaggerated, and that Europe in the long run had all the resources and manpower to become once again a major economic power.45 He even refused to have the Bank fund food aid as a temporary measure until Marshall Plan aid arrived. “Europe itself must make the major contribution to the solution of all these problems. . . . Outside assistance is vital, but it represents a small percentage of the total effort.” The Bank, he flatly stated, was “not in the stop-gap business.”46
And, despite the political confrontation with the communists in France, or perhaps even because of it, he was unwilling to approve that country’s request for the additional $250 million. Such a loan, he thought, could not be justified to the Bank’s Wall Street investors. Truman and Lovett bowed to the logic of this argument, and reconciled themselves to the fact that the World Bank was no substitute, even in the interim, for massive bilateral aid. At the end of September 1947, Truman told a group of congressmen in the Cabinet Room, “We’ll either have to provide a program of interim aid relief until the Marshall program gets going, or the governments of France and Italy will fall, Austria too, and for all practical purposes Europe will be Communist.” Such presidential rhetoric persuaded a special session of Congress to appropriate almost $600 million in interim aid for France, Italy, and Austria.47 By this time, the World Bank had issued three more loans: $195 million to the Netherlands, $40 million for Denmark, and a small $12-million loan for Luxembourg. Together with the $250-million French loan, these four loans were the first and the last of the loans McCloy would make to Europe. In the years to come, the Marshall Plan would make the Bank’s operations in Europe redundant.48
Later, when it became apparent that the administration would successfully fight back efforts by Senator Robert Taft and other conservative Republicans to cut Marshall Plan aid by one-third, some newspaper columnists speculated that McCloy would soon leave the Bank to head the European Recovery Program.49 McCloy himself was tempted, if only because he knew that, in comparison with the Marshall Plan, the Bank “was a row boat next to the Queen Elizabeth.”50 But, having spent less than a year with the Bank, he could not easily be considered a candidate; Paul Hoffman, president of the Studebaker Corporation, got the job instead.
By restricting the Bank’s involvement in European reconstruction, McCloy could claim that, insofar as the Marshall Plan was motivated by political considerations, he was keeping the Bank’s lending operations free of politics. And as Hoffman’s boys over at the ERP began pumping $13 billion worth of American goods and services into Western Europe, he took every opportunity to distinguish their activities from his own, even to the point of criticizing the liberal terms of Marshall Plan aid. “If the [Marshall] Plan merely turns into another grant of dollars . . .,” he wrote John Foster Dulles at his Sullivan & Cromwell law office in November 1947, “it will have done more harm than good.”51
Notwithstanding such disclaimers, politics repeatedly intervened to influence Bank policy. By the end of 1947, it seemed to the British and most of the other executive directors that the Bank under McCloy had become a U.S. “monopoly.”52 This was demonstrated most graphically by McCloy’s handling of a loan application from the communist-dominated coalition government of Poland. In one of the first loan applications to the Bank, in 1946, the Poles had requested $600 million to buy coalmining equipment from the West. In the spring of 1947, the Poles had renewed their request, scaling it down to a more reasonable $128.5-million loan. But McCloy had decided to give priority to the French loan, and that spring The New York Times reported that, though the Polish loan was considered “a sound investment,” it had so far been blocked by the U.S. government, “which fears the political effect of such a credit to Poland’s Communist-led government.”53
In June 1947, McCloy sent a Bank team to Poland to evaluate the coal project. The resulting staff report was favorable, and that autumn McCloy visited Poland. He came away strongly impressed with the potential the Polish coal industry had for supplying Western Europ
e with a much-needed energy source. But on his way back, he stopped off in London and saw Churchill, who said he was opposed to the whole notion of lending Western capital to Eastern Europe. A revived Germany, he said, not Poland, was the key to European stability. McCloy responded that many Europeans, particularly in the East, found the prospect of a revived Germany profoundly unsettling. Besides, a loan to Poland might save the country “from complete subjugation” by the Soviets. So, when he got back to Washington, he formally opened negotiations for a loan of some $50 million. At the same time, he realized that the Bank could not make the loan without the support of the Truman administration.54
Within a couple of weeks, it became clear that Truman’s State Department would oppose the loan.55 McCloy did not announce a negative decision, but he began to back off from the proposal. Because it would be awkward to admit that the loan had been rejected on political grounds, he privately made it known to the British and other interested parties that he now thought his Wall Street investors would not approve. This annoyed the British, who favored the loan, arguing that it would “help to prevent increased dependence on the part of Poland on the USSR. . . .” One British diplomat, after talking to McCloy, commented, “For what it is worth, my impression of McCloy’s remarks . . . is that he tends to use the New York market as a convenient scapegoat for avoiding difficult decisions. I should have thought that if he really wanted to, he could make a small loan to Poland out of the $250,000,000 which he raised recently in New York.”56
