The postwar blueprint and the limited role of aid

Although it led to the creation of the first multilateral development bank, the postwar blueprint adopted in Bretton Woods and San Francisco failed to include a development aid agenda because it was simply not on the horizon of its main architects. The UK and the Soviet Union were in dire straits and in need of aid themselves. The UK had emerged from the war with its eastern empire in distress and a mountain of debt not only to the US but also to many of its colonies and dominions: the ill-fated “sterling balances”. Its immediate goal was to receive more financial support from the US, not to supply finance to British colonies or anybody else. For its part, the USSR under Stalin, having lost the original idealism of the Bolsheviks, had adopted a cynical and provincial “Great Power” approach to world affairs, focussing on its immediate interests and influence zone rather than on “world domination” – as US officials began incorrectly to conclude. The only power in a position to give aid, thus, was the US. While there was massive destruction almost everywhere else in the world, the US economy emerged from WWII twice as big as it was before the war, producing more than half of the world’s manufactured goods. It was thus the only real donor in the short run and the only potential one in the foreseeable future.

But launching a development aid agenda was not an immediate US priority for three reasons:

• It did not have a tradition of giving aid to other countries;

• When it did give aid, it was usually for tangible objectives and not for the general aim of development; and

• Its vision of a new world order did not include systematic aid from one state to another.

As we have seen, before WWI, loans from one state to another were relatively rare. It was generally the private sector that financed governments. In the extraordinary context of WWI, however, the US government, which had become the only strong creditor nation, did offer war loans (not aid) to its allies. This created a kind of “moral hazard” that was far from evident at the time. By supplying loans to the countries that they wanted to win the war, even before joining it, the US was in a sense paying other countries to win it for them. After the war they expected, in a way, to be repaid twice: first with the product (the war effort itself) and then with the money (Keynes, 1931). When it turned out that the US allies could not pay and defaulted, the US Congress drew the wrong lesson: it passed legislation to ensure that the

“bad experience” of handing out unredeemable public loans to other states would not be repeated – a particularly ill-advised move given that Hitler was already in power and that the possibility of another world confrontation was mounting by the day (Clarke, 2008, p. 7).

This legislation tied Roosevelt’s hands once WWII broke out. When the UK could no longer pay upfront for its US war imports as required by law, Roosevelt came out with a clever lend-lease scheme to gain the support of both Congress and public opinion (Truman, 1955). Lend-lease presented the US war contribution not as money but as goods (e.g., weapons), which the US would lease to its friends in need, just as (in Roosevelt’s metaphor) a neighbour would lend us a hose to extinguish a domestic fire. The trick was to avoid the word “aid”, which would be hard to sell. After all, the neighbour that lends a hose expects to get it back after it has been used. The general public seems to have believed this claim: in a national Gallup poll taken in February 1942, when the US had already joined the war, 84 per cent of responses expected lend-lease programmes to be repaid once the conflict was over (Clarke, 2008, p. 18). When Japan surrendered in August 1945, the lend-lease war programme, which had benefited not only the UK but also the USSR and other allies, came to a close. In the end, as US officials had known all along, the programme was almost pure aid, and a very significant one, as it played an important role in assuring allied victory, as Stalin himself (privately) recognised (Khrouchtchev, 1971, p. 271). But until the very end, the pretence of a reimbursement was maintained: with the help of a US loan and a “generous discount”, the UK agreed to pay for the equipment that it had received “on lease” and that had survived the war (Roosevelt’s mythical hose). However, what they paid was a token amount: 1/30th of the value of the goods received under lend-lease. At the end of WWII, thus, the US had still not fully embraced the concept of aid from one nation to another.

Once WWII ended, the US emerged once again as the only serious creditor nation in the world and was assailed on all sides by requests for financial support. In his memoirs, President Truman gives a good sense of the demands that the US was receiving, even before Germany capitulated. By the end of his first week in office, on Thursday 19 April 1945, President Truman had received the President of the Philippines, Sergio Osmeña, and the Foreign Minister of China, T.V Soong, both asking for “financial support”. The next day the Secretary of the Treasury, Henry Morgenthau, reported to him specific requests from the UK, France, China, India, Mexico and Cuba (Truman, 1955, pp. 65-68). To be fair, the US greeted most of these

demands with an open and generous mind. Its economy was strong and could cope. It clearly helped, moreover, that the Bretton Woods arrangements had made the dollar as good as gold. In keeping with tradition, however, the US government continued to support outright aid only to support humanitarian causes. In 1945 and 1946 it provided important amounts to reconstruct Europe, to relieve displaced persons and refugees through the UN Relief and Rehabilitation Administration (UNRRA) and to help avoid famine in many places in the world from Europe to India. But when the requests were not for strict humanitarian purposes, it opted for loans rather than outright aid.

As Truman later reflected, “Loans to some countries (..) were so essential to their survival that I felt it necessary to make them even at some risk that they would not be fully repaid” (Truman, 1955, p. 98).

Except in extraordinary circumstances, the US was not willing to soften its stance, as became all too clear when the UK government found itself in desperate need of funds after the abrupt end of lend-lease. In the autumn of 1945, negotiations began in Washington for a new US loan to the UK.

Lord Keynes, the head of the British negotiating team, argued strongly in favour of generous conditions, representing the UK as the US’ only true and devoted “brother in arms” (Skidelsky, 2005, pp. 793-824). But the US ruled out aid. Keynes then pushed for an interest-free loan of $5 billion. In the end, however, he only managed to obtain a $3.75 billion loan at a 2 per cent interest rate to be repaid in 50 years and with two tough conditions attached:

(1) the UK would have to work with the US to forge a liberal world trade regime (which would mean the end of its imperial privileges) and (2) the UK would have to make sterling convertible in the short term. The whole affair was not only humiliating but also outright disastrous for Britain. Fulfilling the terms of the deal, the UK released sterling, precipitating a massive attack on the pound by the markets. After only two weeks, the UK government was forced to introduce controls again. By then, however, most of the loan’s worth had evaporated. The whole episode showed that in 1945-1946 the US was still reluctant to hand out aid in peacetime except for strict humanitarian causes. In all other cases, it continued to play hardball.

Systematic aid from one state to another, thus, was not part of the blueprint of the new postwar order designed largely by the US and to a lesser extent by the UK. As the war came to an end, there was a clear need for grants and loans. But they were considered transitional measures, intended to reconstruct infrastructure and housing, repatriate prisoners, reallocate displaced populations, feed the hungry, etc. Once national economies were

back on their feet, the new international framework of embedded liberalism would once again allow the engines of the private sector – the free trade of goods and services and the free movement of capital – to spread wealth and welfare around the globe. In Truman’s words: “Our objective is to enable the peace-loving nations of the world to become self-supportive in a world of expanding freedom and rising standard of living” (Geselbracht, 2015, p. 213). In this blueprint, support for underdeveloped countries came in only two forms: the backing that “advanced countries” were supposed to give to their colonies or trusteeships and the hard loans that the World Bank was meant to supply to independent underdeveloped countries.