The Chairman

by Kai Bird

  Instead, in their negotiations with the Poles, McCloy and Garner now began to raise conditions that they knew to be unacceptable. They demanded that Poland first stabilize its currency according to guidelines issued by the International Monetary Fund.57 Instead of $45 million, the Bank’s loan committee suggested $25 million, and even that was to be contingent on the Poles’ agreeing to sell their coal to Western Europe and use the hard-currency proceeds to make payments on the Bank’s loan. Poland’s executive director at the Bank and its ambassador in Washington—both anticommunists—tried to persuade their government to accept these unusually tough terms. But, since they had originally sought $600 million, the $25 million the Bank offered now was hardly incentive enough for the Polish communists to agree to such concessions.58

  Simultaneously, a firm consensus developed within the Truman administration rejecting the notion that Western aid might help preserve the coalition government in Warsaw. As an intelligence report from the newly created CIA evaluated the situation a year later, “. . . any assistance from the West to Poland would only contribute to the ultimate enhancement of the Soviet Union’s war potential. . . [and] would have a demoralizing effect on anti-communist segments of the Polish population. . . .”59 So, finally, in mid-1948, Eugene Black told McCloy that he had been formally instructed by the Truman administration to vote against any loan for Poland. McCloy then suspended all further negotiations with the Poles, who protested in the United Nations that for some “sinister reason” the World Bank had killed the loan. Citing the rejection of a similar proposed loan to Czechoslovakia, the Poles charged that the United States was using the Bank to wage economic warfare against Eastern Europe. Moreover, they angrily pointed out that the Bank’s two major loans, to France and the Netherlands, were in amounts that in effect compensated these two colonial powers for their respective military expenditures in Vietnam and Indonesia.60

  McCloy retorted that he did not regard communist countries as prima facie bad risks for Bank loans. The Bank, he said, was seriously considering loans to Yugoslavia and Finland, both of which were then thought to be part of the Soviet bloc. But Averell Harriman had independently come to the same conclusion as the Poles. While visiting Paris in 1948, Harriman, who by then was the Marshall Plan’s special representative in Europe, cabled Acheson “pointing out that French spending in Vietnam was about as much as we were giving them in Paris.” Acheson sharply rebuked Harriman, telling him that Europe and not the Far East was his responsibility.61

  If the Bank under McCloy was showing signs of emerging as a viable financial institution, its loyalties were obviously to the Western world, and, more specifically, to the United States. This was not the intent of its Bretton Woods creators, who had assumed that the Soviet Union would play a major part in the Bank’s activities. At Bretton Woods, the Soviets themselves had demonstrated that they were willing to participate in the Bank as a full member. One indication of this had come just before the conference adjourned, when they agreed to raise their subscription to the Bank from $900 million to $1.2 billion. By the time the Bank opened its doors in 1946, however, Soviet-American relations had sharply deteriorated. Stalin had been angered by Truman’s abrupt cancellation of Lend-Lease, and dismayed that his repeated requests for $6 billion in postwar credits were ignored for months.62

  Still, some American officials had been perplexed when Stalin refused to join the World Bank and IMF. In February 1946, officials at the U.S. Treasury Department cabled the U.S. Embassy in Moscow and asked for an explanation of Stalin’s behavior. They got Kennan’s famous eight-thousand-word “Long Telegram,” probably the most debated piece of foreign-policy analysis ever written by a U.S. diplomat. Kennan argued that Soviet behavior could only be explained by the traditional Russian sense of paranoia and inferiority toward the West. The refusal to take their place in the Bretton Woods institutions, and their increasing hostility on other issues, was motivated by deeply rooted historical insecurities, not by their worn-out ideology.63 Stalin had simply decided to do what czars in the past had done when confronted by a rich and powerful neighbor in the West—withdraw into the isolation and self-sufficiency of the great Russian land mass.

  Kennan claims in retrospect that his policy prescription—containment—was misunderstood, that he believed the Soviet challenge was political in character, and that the Soviets did not intend to risk war with the West. But there is no disputing that Kennan’s analysis did contain the rationale for a host of U.S. economic and political initiatives which the Soviets quickly perceived as a policy of aggressive encirclement.

  Arguably, Soviet-American relations might have been very different if war reconstruction aid had been forthcoming in 1946–47. The economic motivations for the Soviets to tighten their control over Eastern Europe in order to extract reparations from East Germany, Poland, and Hungary would have been less compelling. Of course, all of Europe was in need of such war reconstruction aid, and if it had been funneled through the World Bank, as was originally intended at Bretton Woods, the course of the Cold War might have been different. But America did not decide to allocate the necessary funds until late in 1947, and then it was done within the political context of the Marshall Plan, a vehicle the Soviets perceived as inimical to their sphere of influence in Eastern Europe. During the ensuing Cold War, McCloy’s World Bank became neither a truly internationalist institution nor the crucial one in the scheme of European war reconstruction. That was left to the Marshall Plan, which succeeded brilliantly in its aim of integrating Western Europe into the West.

  By early 1948, McCloy could see that, if the Bank was to have any impact, it would have to be among underdeveloped countries in Asia, Latin America, and Africa. That year, he made two month-long trips to Latin America, and in a speech in Bogotá, Colombia, he declared that the “American republics constitute an area of special interest for the Bank at this time.” To the distress of many Latins, however, he then emphasized that the Bank’s lending in Latin America was intended to “blaze the trail for private international investments.” This was not what his audience wanted to hear. He refused to budge when challenged by a Mexican economist who rose from the floor and, to great applause, suggested such investments should be made by governments, not private investors.64 The billions in Marshall Plan aid then being appropriated by the U.S. Congress might look like substantial sums. But, McCloy argued, in the long run the World Bank might be able to stimulate a much larger flow of private capital for development purposes. Such aid, he said, would be much more effective than “any program which is dependent upon political appropriations and the legislative conditions of the moment.”65 It was the same argument, turned around, that he had used to persuade private investors back on Wall Street to buy Bank bonds. But it sounded less than convincing to a Latin audience in Colombia. In fact, McCloy was dead wrong. It would be two decades before private commercial bankers began lending substantial amounts to the developing world, and many of those loans were to default over time. Direct foreign investments are still inconsequential compared with official bilateral and international aid flows. Loans and grants made by the World Bank itself greatly surpass private foreign investment in most of the poorest developing countries.66 Such low levels of both official and private capital flows did little to contain the turbulent political forces sweeping the developing world.

  Despite the bleak economic conditions McCloy saw all over the continent, only Chile received two World Bank loans, totaling $16 million, that spring, and even this small amount was lent only after he forced the Chileans to reach a settlement with their foreign bondholders on some $170 million worth of defaulted debt. McCloy thought it essential to set a precedent that the Bank would not loan to any country unless all previous defaulted debts had been rescheduled or paid up. This infuriated many Latins, who grumbled that the Bank had become a mere bill-collector for Wall Street. But McCloy had his way, and the principle has been applied to all subsequent lenders.

  Over the next year, McCloy ap
proved loans for several other Latin countries. He made another trip south that autumn, and then, in early 1949, toured Central America. In Nicaragua, the country’s dictator, Anastasio Somoza, took him to a baseball game where the third baseman made numerous errors. Afterward, McCloy was entertained at a dinner during which several Nicaraguan officials made windy speeches pleading for Bank lending. When it was finally his turn to speak, McCloy broke the icy atmosphere by turning to Somoza and saying, “What Nicaragua needs most is a good third baseman.” Still, upon his return, he told Bob Garner that he had observed that those countries ruled by dictators were in “better condition.”67

  By this time, the Bank was considering loans in twenty countries throughout the world. But total Bank lending since McCloy had taken charge was still less than $500 million. Though the Bank’s reputation on Wall Street had never been more sound, it was still not doing the job of a development bank. In the wake of violent riots that broke out in Colombia in 1948, the Truman administration began to feel pressured to mount some kind of “Marshall Plan” for Latin America. Critics in the press and Congress suggested that the World Bank was incapable of providing large new levels of development aid. Congress debated whether or not to expand the government-funded Export-Import Bank, an institution established to stimulate U.S. exports. McCloy now regarded the “Eximbank” as a rival. By the end of 1947, it had extended some $1.1 billion in credit to Latin America alone, and in 1948 Congress appropriated the Eximbank another $500 million for such lending. Moreover, the Eximbank could make these loans at 3.5 percent, and Marshall Plan loans carried an even lower rate, 2.5 percent. McCloy knew of some countries that had abruptly suspended loan negotiations with the World Bank when they thought it possible to obtain the same funding at lower interest rates. If this continued, he warned, the Bank would have to “curtail, or perhaps even to suspend, its operations.”68

  Early in 1949, McCloy decided to take his worries to the president. He wrote Truman an eighteen-page memorandum defending the Bank and sharply criticizing both the Marshall Plan and the Eximbank. Any further U.S. war reconstruction or development loans, he argued, should be made through the World Bank, and not on a bilateral basis. He stressed that he was not opposed to further U.S. aid flows: “I urge only that such additional assistance be in the form of grants rather than in the form of illusory loans. . . .” Because the World Bank was an international institution, he argued, it was in a better position to “resist political pressures and to allocate its resources on a sound economic basis.” To the extent that loans were made by the Bank, the United States would be “relieved of both the burden and the odium of being creditor to the world. . . . The pressures now being exerted for ‘Marshall Plans’ for Latin America and for the Far East bear witness to this.” He recognized that the United States had “important political objectives” in Latin America, but he did not believe that throwing more money at Latin America could advance these objectives, and it might “only serve to stir animosities.”

  If necessary, he argued, the Bank could easily handle a lending program of $500 million annually, and even more if the U.S. government decided to enlarge its capital contributions: “Accordingly, it is difficult to see any economic justification for the United States now engaging in a new and enlarged program of international development financing.”69

  Much of this was sound advice. His perception of how much the developing world could absorb in foreign aid may have been overly pessimistic. But he was certainly right to argue that if the United States—for humanitarian or even outright political reasons—wished to increase its capital flows to the developing world, then it made good sense to do so through an international institution like the World Bank. But in 1949 such arguments carried little political weight. Truman didn’t even bother to respond in writing to McCloy’s memo, and instead, just passed it on to Dean Acheson in the State Department.

  Two weeks later, at his inaugural in January, the president unveiled a massive new lending program that came to be known as “Point Four.” Designed to provide bilateral loans and grants to developing nations in Asia, Africa, the Middle East, and Latin America, Point Four was everything McCloy had just recommended against. Ironically, for a few days, authorship of the president’s proposals was attributed to McCloy. In fact, McCloy and the Bank’s vice-president, Bob Garner, were aghast. Garner wrote in his private diary that Truman’s speech was “another indication of impulsive bungling.” McCloy’s misgivings soon made their way into press. Four days after Truman’s speech, the New York Post’s columnist Marquis Childs reported, “McCloy has made no secret of his concern for the status of the World Bank.”70 With Marshall Plan aid for Europe and Point Four aid for the developing world, what was the Bank’s role to be?

  The problem, of course, was that the U.S. Congress, impressed by Truman’s Cold War admonishments, was willing to fund bilateral aid programs, but unwilling to appropriate the same funds to be administered through an international bank. McCloy resigned himself to this reality, telling The New York Times that the Bank would simply have to take a back seat to Point Four aid in the developing world.71 Privately, he complained to Bernard Baruch, “I must say I think the fear of Communism and its encroachments does have such a deep-seated base that Congress and the people are going to respond for some time to the thought that dollars can help destroy the menace. What rather appalls me is the number of people today in the Government who are disposed to rationalize every foreign problem in terms of further United States aid. . . .”72 It seemed to Baruch, Harriman, and his other friends in Washington that McCloy was showing signs of frustration with his position at the Bank. Rumors that spring began to circulate that he might tender his resignation, even though he had served only two years of a five-year term.

  McCloy had a number of reasons to leave the Bank. For one thing, relations with his executive directors were worsening. More than once he expressed the opinion that men of greater stature could be recruited to the board if it met once every three months instead of each week. Many of these directors found themselves subjected to considerable criticism from their domestic constituencies. Why had Bank lending been so frugal? They in turn began to vent their frustration with McCloy, who rarely consulted with them. He admitted, “I’d go to a meeting and tell them that the Bank’s mission had departed for Guatemala. Then I’d go to the next meeting and tell them the mission had arrived in Guatemala.” As the Bank’s secretary put it, in understated form, “. . . he might have been guilty of letting the board go by default once or twice.” Once, when the directors lined up for a group photo with McCloy, one official joked, “Why don’t the members pose with their rubber stamps in their hands?”73

  McCloy frequently ruffled feathers by cutting across formal lines of responsibility. He enjoyed showing up unannounced at a program officers’ meeting and questioning all the people attending about their work. But the information he gathered in this manner was often anecdotal. As the Bank staff grew to several hundred professionals, he left the day-to-day management of the building to Bob Garner, even though the two men did not get along. Garner was a difficult personality, temperamental and extremely protective of his own authority. “It was obvious to me,” Garner wrote in his memoirs, “that McCloy and I were not on the same wave length. . . .”74 Garner was a stickler for details and orderly procedures, administrative qualities that McCloy simply did not care to develop. Gradually, McCloy began to spend more and more of his time on non-Bank activities.

  Shortly after returning from his first tour of Latin America in the spring of 1948, McCloy was recruited by a government task force to study the growing intelligence bureaucracy. J. Edgar Hoover had lost his crusade to prevent the creation of a civilian Central Intelligence Agency when President Truman signed the National Security Act of 1947. Soon the CIA became the most rapidly expanding agency in the government. Insiders boasted to one another that it would be “bigger than State by’ 48.”75 And, indeed, by the summer of 1948 it had a larger presence in Washi
ngton than the State Department, while the reports of its agents stationed overseas already carried greater cachet with the White House than did analysis written by foreign-service officers. Increasingly, the Agency operated on its own, as a virtually autonomous arm of the foreign-policy bureaucracy, almost a government within a government. All this happened pretty much out of the limelight of public attention. In 1948, however, McCloy participated in a classified study of the CIA, which gave him the opportunity to become intimately knowledgeable about the broad reach of U.S. intelligence activities around the globe.

  Worried by a burgeoning postwar federal bureaucracy, President Truman appointed ex-President Herbert Hoover in the spring of 1948 to chair a commission to study means of streamlining the government. The Commission on Organization of the Executive Branch of the Government set up shop on K Street in downtown Washington. On defense and intelligence matters, Hoover decided to appoint his old friend Ferdinand Eberstadt as chairman of a task force to study the national-security establishment. It was a logical choice for Hoover, since he trusted the judgment of this hard-boiled, conservative investment banker. But the selection rankled James Rowe, Jr., one of the few liberal Democrats appointed to the Commission.