The Transformation of Diplomacy
How to Save the State Department
FOR the past five years this Government has advocated international economic coöperation to restore world trade and to free it from the restrictions that isolate countries and divide them into conflicting blocs. The responsibility for dealing with these problems does not rest in any one country. The problems are international and they can be dealt with only through international coöperation. We have not been content with securing agreement on abstract principles. International economic problems must be dealt with in concrete terms. We have proposed that the United Nations provide the means for continuing cooperation through the International Bank for Reconstruction and Development, the International Monetary Fund and an international trade organization.
This policy recognizes frankly that the breakdown in world economic relations in the 1930's was an important factor in prolonging and intensifying the great depression and that the economic warfare of the 1930's was part of a master plan for aggression by Germany and Japan. Conquest began by isolating the intended victim from the world economy through bilateral agreements which put the weaker nation at the mercy of the stronger. These practices must be outlawed by coöperative international action on world currency and trade practices.
Until industrial and agricultural production has revived in all countries, world trade cannot be restored to the high level necessary for a balanced world economy. The World Bank is intended to facilitate reconstruction and development, so that countries can again use their own resources for production. The Bank will help provide the supplementary capital necessary for sound and productive projects on terms fair to both the lender and the borrower. The capital of the Bank, to which 38 countries have now subscribed, will be used primarily as a surety fund. The loans made or guaranteed by the Bank will be financed almost entirely by private investors. But all countries will share in the risks of these loans in proportion to their subscriptions.
The urgency of reconstruction has been so great that it could not be delayed until the World Bank was in full operation. To take care of emergency reconstruction needs, the capital of the Export-Import Bank was increased, and its authority was extended by Congress to permit it to make loans for reconstruction in Europe and other devastated areas. After the World Bank is in full operation, the Export-Import Bank will continue to carry out its special function of offering our businessmen help in financing American exports and imports. In this, the Export-Import Bank will be a useful American supplement to the international institutions designed to facilitate the expansion of trade.
The expansion of world trade requires the elimination of the restrictive and discriminatory currency practices that grew up in the prewar decade. The United States, England and France tried unsuccessfully to accomplish this task through the Tripartite Accord of 1936; the problem is now much more difficult because of the extension of these devices during the war. The Monetary Fund, to which 39 countries have already adhered, will facilitate a full flow of trade by promoting stable and orderly exchange arrangements. The members of the Fund undertake to maintain fair currency standards under which trade can expand and grow. Countries that abide by these standards can obtain help from the Fund out of the resources subscribed by the members.
These financial measures for international economic coöperation must be supplemented by other measures to reduce the barriers to trade. The Bretton Woods Conference adopted a resolution which recommended that the participating governments seek "to reach agreement as soon as possible on ways and means whereby they may best reduce obstacles to international trade and in other ways promote mutually advantageous commercial relations." This government has been aware of the necessity of dealing with trade problems and has submitted to other governments proposals to relax trade barriers of all kinds, to eliminate discriminations and to establish an international trade organization that will maintain fair trade practices.
At the time the Anglo-American Financial Agreement was negotiated, the Government of the United Kingdom expressed its full support for the American proposals on trade. The first steps have already been taken to carry out these proposals. The Economic and Social Council of the United Nations has agreed to convene an international conference on trade and employment in the latter part of 1946. The British Commonwealth and eight important trading nations have accepted the invitation of the United States to meet in advance of the conference to consider reductions in trade barriers in accordance with the American proposals.
This whole program for international economic coöperation, now nearing completion, cannot be put into operation until Britain can meet her balance of payments problem. The war has seriously disrupted her international economic position. She will require help from abroad to secure for the next few years the imports she must have to maintain the living standard of her people and to enable her industries to function. If she could get help from the United States and Canada, she would be prepared to put into effect these fair currency and trade practices. The Financial Agreement with Britain will make it possible to put promptly into operation the United Nations program of international economic coöperation.
The World Fund and Bank are the result of careful planning that began in 1941. The agreements were formulated at the conference in Bretton Woods in 1944, and ratified in Washington on December 27, 1945. During these four years, there has been thorough public discussion of the Fund and Bank in the United States, Britain and Canada. This debate, in the best democratic tradition, has been very helpful. Its effect has been to achieve the support of an informed public for a comprehensive program of international economic coöperation.
While the Articles of Agreement of the Fund and the Bank came into effect at the close of 1945, these two institutions were still merely shadows. They had to be brought to life. The inaugural meeting of the Boards of Governors of the Fund and the Bank was called by the United States to convene in Savannah, Georgia, March 8, 1946, for the purpose of bringing these institutions into operation. The countries already members of the Fund or Bank were represented at the meeting and seven other countries sent observers. The Savannah meeting was extraordinarily successful in dealing with the questions on which the organization and operation of the World Fund and Bank depend.
One important problem was to keep membership in the World Fund and Bank open to nine countries which had not yet ratified the Agreements. Australia and New Zealand, and some Latin American Republics, could not accept membership in December because their legislatures were not in session. Russia has apparently not yet decided whether she will participate fully with the other United Nations in the World Fund and Bank. All these countries, except Liberia and Haiti, showed their continued interest in the Fund and Bank by sending observers to the inaugural meeting. The Governors adopted a resolution which keeps membership open until December 31, 1946, on the original terms, to all countries that participated in the Bretton Woods Conference. This will give these countries ample opportunity to consider more fully their participation in the United Nations economic program.
It had always been thought that other countries will wish to join the Fund and Bank, and the Articles of Agreement provide that membership shall be open to them in accordance with prescribed terms. Under the by-laws adopted at Savannah, new countries can apply for membership by filing an application with the Fund and Bank setting forth all relevant facts. The Executive Directors will consult with the applicant; will recommend to the Board of Governors of each institution the quota and subscription and such other conditions as they believe the Governors may wish to prescribe; and the Governors will then pass on the application.
A number of countries indicated their interest in becoming members of the Fund and Bank during the inaugural meeting. At their request the United States Government placed before the Governors the applications of Lebanon, Italy, Syria and Turkey, which were referred to the Executive Directors for consideration and recommendation. Action on the ensuing recommendations will probably be taken by the Governors at their first annual meeting in September 1946.
The Governors also agreed on a quota of $68,000,000 for Denmark in the Fund and a similar subscription in the Bank. Because Denmark had no government independent of Axis control, she was represented at the Bretton Woods Conference by the Danish Minister in Washington acting in his personal capacity. The Danish Government has now ratified the Bretton Woods Agreements and is a full and original member.
The Articles of Agreement provide that the principal offices of the Fund and Bank will be in the United States. The Governors had to select the city in which the institutions would be located. The United States felt that, all things considered, the Fund and the Bank would derive the greatest advantages from being situated in Washington. It must be remembered that these are not ordinary institutions with ordinary stockholders. They are coöperative enterprises of governments and their chief business is with governments. Their location in Washington would have the great merit of making it easy for all the members to carry on their business with them, since all members have adequate representation in that city. But more than merely this convenience is at stake. The Fund and Bank are not business institutions in the ordinary sense. While they must be operated so as to conserve their assets and allow the most fruitful use of their facilities, they are not profit-making institutions. The business of the Fund and Bank involves matters of high economic policy. They should not become just two more financial institutions.
The Governors adopted a number of resolutions for interpreting the Fund and Bank Agreements by the Executive Directors. At the request of Britain, the Executive Directors of the Fund were asked whether steps to protect a country from persistent unemployment, arising from pressure on its balance of payments, are to be considered measures necessary to correct a fundamental disequilibrium. They were also asked whether the Fund may permit use of its resources for other than current monetary stabilization operations which afford temporary assistance in connection with seasonal, cyclical and emergency fluctuations in the current balance of payments. Further, they were asked whether the Fund has authority to permit the use of its resources for relief, reconstruction or armaments, or to meet a large or sustained outflow of capital. The Executive Directors of the Bank were asked whether it has authority to make long-term stabilization loans. The interpretations, except that requested by Britain, are called for in the Bretton Woods Agreements Act adopted by our Congress.
At Savannah there was some difference of opinion among the Governors as to whether the Executive Directors of the Fund and Bank would have to devote all of their time to the business of the Fund or whether they could be partly occupied with other duties. The Articles of Agreement provide that the Executive Directors shall function in continuous session at the principal office and shall meet as frequently as the business of the Fund and Bank requires. It is clear that this provision assumed that the Executive Directors would always be quickly available for business sessions. This question is closely related to the responsibility intended to be vested in the administrative officials of the Fund and Bank. If final authority is vested in the administrative officials, the Executive Directors become little more than an advisory body. In my opinion, this would be contrary to the manner in which it was intended to operate the Fund and Bank. It is questionable whether in practice it would be an effective way to manage two large international institutions. The Managing Director of the Fund and the President of the Bank must be capable men with great vision and a high sense of duty. The men chosen meet these high qualifications. Even so, it is unwise to lodge complete responsibility for management in one man. It is necessary and prudent to require that the policies of the administrative officials be made in consultation with the Executive Directors.
The United States felt it essential that the Executive Directors devote all of their time to the business of the Fund and Bank. The United Kingdom felt that the Executive Directors might well be responsible officials of the Treasury or the Central Bank of a member, available to come to the head office for a meeting from time to time when required, but not expected to devote all their time to the business of the Fund and the Bank. Whatever the merit of this argument as it affects appointed Directors, it clearly does not extend to the elected Directors. Seven of the 12 Executive Directors were elected by 35 countries that do not have a right of appointment. Each of these Directors represents on an average five countries. It is inconceivable that an elected Executive Director, representing two or more countries, should give only part of his time to his international duties. The countries that elect such a man have a right to expect that his complete devotion to their interests in the Fund and Bank will not be impaired by duties with his own government which leave him less than full time to represent them.
There will be plenty of work to occupy the Executive Directors during the first two years. The Fund must consider the question of initial exchange rates, multiple exchange rates, exchange controls and exchange restrictions. The Bank must consider the raising of funds from the market, the types of security to be issued, the terms of loans and similar problems. The next two years will be a critical period in which international monetary and financial problems will be of major importance. For these two years it is essential that the Executive Directors should always be available to give their time in full to the problems of the Fund and Bank. The solution worked out in the by-laws of the two institutions is a practical one. An Executive Director and his Alternate will devote all of the time and attention required to the business of the Fund or Bank, and one or the other will be continuously available at the principal office. In the end, the problem will have to be solved in the light of experience.
These institutions have great responsibilities and they are entrusted with tremendous resources. They will need able Directors, men of the highest competence who will devote their time and attention to the Fund and the Bank. Their salaries have to be somewhat comparable to those paid by banking institutions. The salary for a full-time Executive Director is $17,000 a year and for an Alternate $11,500 a year, both net of income tax. (The fixing of salaries in this form is necessary to assure equality of compensation to the international staff of the Fund and Bank, and is in accord with the practice of the United Nations.) These salaries seem good but not excessive compensation for the kind of men the Fund and Bank must attract. Where an Executive Director or Alternate serves only part-time, compensation will be in proportion to the time served. An Executive Director or Alternate serving both the Fund and Bank will be paid in equal parts by each.
The first Executive Directors of the Fund and Bank were elected at the inaugural meeting of the Board of Governors. It is a mark of the cooperative spirit of this meeting that there was almost complete unanimity in their selection. The men chosen comprise a very capable group with long experience in international finance. The wide geographic distribution assures ample representation to every important economic area of the world. The United States, Britain, China, France and India have appointed, and Canada, Netherlands and Belgium have elected, Directors of the two institutions. The Latin American Republics are represented by Mexico and Brazil on the Fund and by Cuba and Chile on the Bank. In addition, Czechoslovakia and Egypt have Directors on the Fund and Poland and Greece have Directors on the Bank.
A special problem has arisen regarding the five Executive Directors appointed by the countries with the largest quotas or subscriptions in the Fund and Bank. It was expected that these countries would be the United States, Britain, Russia, China and France. Because Russia has not yet joined the Fund and Bank, India has become the country entitled to appoint Directors. Obviously, if Russia accepts membership at some later time an arrangement will be necessary to assure representation to both Russia and India until the next election of Directors.
The Articles of Agreement of the Fund and Bank provide that when new members come into the Fund and Bank, additional Executive Directors may be elected to broaden the representation. At Savannah, the Governors adopted a resolution which provides that such additional Executive Directors will be elected to serve until September 1948 provided the countries not represented by the Directors have votes totaling 4,000, and the unrepresented countries include one or more who did not participate in the Bretton Woods Conference. In this way all countries will be assured of full representation on the Executive Directorate, until the next election of Executive Directors.
The greatest achievement of the inaugural meeting in Savannah was not in settling these difficult questions of organization. It was important that they be decided in a manner offering the greatest hope of efficient and successful operation. But far transcending these achievements was the spirit which pervaded the meeting.
The Savannah meeting showed that all countries are deeply conscious of the necessity of making the Fund and Bank work. Differences on matters of detail were ironed out by discussion, through the democratic process of give and take. The common determination to work together made the meeting an inspiration to all who have faith that international coöperation can and will succeed. The Fund and Bank will need capable and devoted officers and staffs and wise governors and directors. But above all their strength must come from the constant help and support of the people of all nations.
The World Fund and Bank cannot live as the creatures of any one nation. They will succeed in performing their important tasks only if they continue to be the basis for constructive cooperation among all nations. This will require understanding and forbearance. The people of all countries must insist that their representatives on the World Fund and Bank should not seek petty and temporary advantages. These institutions are too important to the world to be endangered by narrow and shortsighted policies; they must be operated for the benefit of all mankind.
The World Fund and Bank have important tasks to perform. To each has been entrusted a particular field of endeavor. The Fund has been charged with establishing stable and orderly exchange arrangements and helping countries maintain fair currency standards. The Bank has been charged with helping countries to secure capital for worth-while projects of reconstruction and development. Each institution, by performing its functions well, will facilitate the success of the other. It is, therefore, of the utmost importance that they work together in harmony.
It is well to point out that the Bretton Woods Agreements Act authorizing American participation in these two institutions took cognizance of this problem. The Act made special provision for coördination of the work in so far as that could be done in the American legislation. This Act is a model of careful drafting in this respect. Without encroaching on the rights of the Fund and Bank as international institutions, it requires the American Governor and Executive Directors of the Fund and Bank to do all in their power to assure close cooperation between them.
The United States appointed a single Governor to the Fund and Bank; and of the 38 countries that are members of both the Fund and Bank, 31 have followed the precedent of the United States and named a single Governor. The Governors of the two institutions further emphasized the importance of close coöperation between them by selecting the American Governor to be Chairman of the Boards of both institutions, and by selecting the Governors for the United Kingdom, China, France and India to be Vice-Chairmen of both Boards. The By-laws of both the Fund and Bank provide that a representative of the other institution may be invited to participate, without vote, in meetings of the Board of Governors and the Executive Directors.
The manner in which the Fund and Bank have been working together gives great promise of the harmony which our legislation hoped to promote. The inaugural meeting was a joint one: all of the business of the Fund and Bank was placed before the same group of men and any action on either the Fund or Bank was considered on the basis of the interests of both. It is my hope that the success of this joint meeting will be a precedent when the Governors of the two institutions meet again in September.
Any discussion of the operation of the World Fund and the Bank must take note of the special position and responsibility of the United States. The two institutions are located in this country. We are the largest subscriber to them. The American Governor is Chairman of the Boards of Governors of the two institutions. Some of the high officials of the Fund and Bank are Americans. Ours is a position of tremendous power and is, therefore, also a position of special responsibility. The faith that other nations have shown in the United States must not be abused for selfish ends. I know that our people want us to do all in our power to make the World Fund and Bank truly international institutions.
The United States is the greatest single economic force in the entire world. If the world economy is to function, we must import and we must invest. We can maintain the high level of balanced international trade and productive foreign investment that is required for our own well-being and for the prosperity of the world only if we have a high level of production and employment. For it is our level of income that governs our imports and foreign investment; and these are important determinants of world economic activity. The greatest contribution that the United States can make to the peace and prosperity of the world is to keep America strong and prosperous and the advocate of justice in the council of the nations.
Because of the importance of our policies in the successful operation of the Fund and Bank, Congress established the National Advisory Council on International Monetary and Financial Problems to coördinate the work of the American Governor and the American Executive Directors on the two institutions, and the policies of all agencies of this government engaged in foreign financial and monetary transactions. The Council consists of the Secretary of the Treasury, the Secretary of State, the Secretary of Commerce, the chairman of the Board of Governors of the Federal Reserve System, and the chairman of the Board of Trustees of the Export-Import Bank. Its structure will facilitate the highest degree of coöperation between the Government of the United States and the Fund and Bank. The Secretary of the Treasury is ex-officio chairman of the National Advisory Council. He is also the Governor for the United States on the Boards of the World Fund and Bank, and chairman of the Boards of Governors of the two institutions.
The National Advisory Council will have ultimate responsibility in formulating the policy of the United States on international financial matters. Obviously, it is important that the American representatives in the Fund and Bank should work closely with the National Advisory Council so that the United States will not find itself acting at cross purposes with these two institutions. Our own policies must in every possible way be made to facilitate the attainment of the objectives for which the Fund and Bank were established -- objectives which we have in common with the United Nations. The National Advisory Council is aware of the importance of its work. The policies it has been carrying out are a complete fulfillment of the concept of international economic coöperation.
In the end, the success of the Fund and Bank will not depend on the Articles of Agreement, the by-laws, or the Bretton Woods Agreements Act. It will depend on the men who run them. They must be managed by human beings. We cannot expect them to be completely free from the ordinary errors to which the human mind is subject. But we must ask and insist that the men who manage the Fund and Bank should be men of vision, imbued with the high ideals which the two institutions represent. All officials and members of the staffs of the Fund and Bank must always be aware of the international character of their duties. They are in truth among the trustees of mankind for a world free from war and want. They must keep that sacred trust.