78985




THE WORLD BANK/IFC ARCHIVES



    ORAL HISTORY PROGRAM



Transcript of interview with



     Richard H. Demuth




Oral History Research Office

    Columbia University

      August 10, 1961
                                                            Richard Demuth


Interview with Mr. Richard Demuth

By Robert Oliver                                          August 10, 1961



Interview # 1




Q:   Now, sir, will you give your name?



Demuth:   My name is Richard Demuth.    I joined the Bank in July, 1946,

in the very early days.    My training was as a lawyer.   I had been in

private practice and with the government before the war.     I went into

war service.    I first had international experience with the Allied

Control Council in Germany.    When I came back, I decided I wanted to

stay in the international field, and a good friend of mine, General

Swatland, of Cravath, Swaine and Moore, I discovered had recommended

my name through Mr. McCloy to Mr. Meyer, who had just become president

of the World Bank.     Mr. Meyer asked me to come down and see him, and

eventually offered me a job as his assistant.     Without knowing very

much about the organization, but intrigued by the job, I came down to

work for the Bank.



Q:   This law firm you mentioned is Cravath, Swaine—



Demuth:   And Moore.    That’s where Mr. McCloy was a partner, and

Chester McLain the first general counsel.     Meyer at first asked McCloy

to become general counsel of the Bank.     McCloy had been unable to


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                                                           Richard Demuth


accept it but recommended Swatland.    Swatland, having been unable to

accept, had recommended McLain.    McLain was coming in and they

suggested that I come in with McLain as part of his legal staff.



Q:   Was this firm later changed to Cravath, Swathmore and something?



Demuth:    It was then Cravath, Swaine, Moore, something like that.

It’s now Cravath and Moore. It’s, I guess, the largest law firm in New

York.

        Well, I came in as a general assistant to Mr. Meyer, when there

were practically no other members of the staff.    Floyd Harrison, who

was Mr. Meyer’s personal investment advisor, was down here helping

him.    There was practically nobody except in the administrative

services.    McLain came on board shortly afterward.   Luxford was

already here, and gradually over the course of the summer, a number of

people came who are still with the Bank—Rist, who was alternate to

whoever was director for France, came on as the head of the economics

department.    Crena de Iongh, who’d been the Dutch Alternate Executive

Director, came on as the treasurer.    Dave Sommers came on early in the

fall—gradually we built up a working staff.

        In those very early days, we had a full time board of directors.

They were terribly anxious to do something, and they sat around and

created committees and decided all different kinds of policy issues,

and the staff was kept terribly busy trying to write papers for these

board committees.    We never did have much time to really get to work,

because we were attending committee meetings.


                                   - 2 -
                                                         Richard Demuth


     Very early on, the issue which subsequently became of major

importance, the board-staff relationship, came to a head, not in a

very clear form, but in an important way, even as early as the summer

of ’46.   The US director at that time, Pete Collado, was a very

ambitious young man, and he was determined to run the Bank from the US

director’s seat, and he had 33 or 35 percent of the votes.   The US was

putting up most of the money, and he felt the US had the right to take

the lead in running the Bank.

     Collado had a lot of connections in the State Department, with

whom he was in constant contact, and I think one of Mr. Meyer’s

difficulties was that he found himself fighting with the major

supporter, the major stockholder of the Bank, the US, fighting with

Collado for the initiative in running the Bank, rather than being

supported by the US in what he was doing.   Although Mr. Meyer never

told me directly why he resigned, my own feeling is that he woke up

one morning and realized he wasn’t happy.   He’d had a number of very

important jobs in his life, accomplished a great deal, had taken this

job on at the urgent request of the President, and he found he wasn’t

enjoying himself.   The reason he wasn’t enjoying himself was that

instead of running his ship, he was having to battle with the

executive directors led by Collado all the time, and he just decided

that he’d had enough.

     He resigned with two weeks’ notice, not dependent on finding his

successor, but simply gave notice of resignation that he was leaving

two weeks later, the idea being that this would put a great deal of




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                                                         Richard Demuth


pressure on the directors to select his successor.   Where were we

going to find a successor that quickly?   The company sort of . . . .

                                 * * *



Q:   I wonder if you could say anything about some of the things that

were at issue between Mr. Meyer and the board?



Demuth:   Well, I don’t think there was any very specific issue.   It

was more the question of the approach the Bank should take.   Collado

in particular was very anxious that the Bank should invest a lot of

money and lend a lot of money very quickly.   I think the first

approach we had from an underdeveloped country was from Chile.     Chile

asked for 40 million dollars, for a completely undigested list of

projects.   Collado told Mr. Meyer that the Bank was darned well going

to make this loan by December of 1946 or he’d know the reason why.

Meyer pointed out that we knew nothing about Chile’s economy or

anything about the projects.   Collado said he knew Chile, he’d known

them for a long time, and they were good for 40 million dollars and

the Bank was darned well going to make the loan.   And it was this kind

of approach, whether the Bank was just going to be an institution to

hand out money to governments or whether it was going to be a real

investment banking institution on an international scale, that

underlay the issues.   I don’t recall now the specific points of policy

or whether there were in fact any specific points of policy on which

there were disagreements.   Oh, Collado also wanted the Bank to go out

and issue bonds on the market very quickly, and I don’t think he


                                 - 4 -
                                                           Richard Demuth


believed Mr. Meyer’s appreciation of the bond situation, that there

had to be a great deal of educational work done before the Bank could

sell any bonds.   It was that kind of general issue, as I recollect.



Q:   There was a newspaper report about October of ’46, I think, that

Mr. Beyen, the Dutch executive director, had made a speech somewhere

in Canada announcing that the World Bank, the International Bank of

course, was considering borrowing something like a billion and a half

dollars, selling bonds to that extent.     About a week later this was

repudiated by the management of the Bank.    Do you recall anything

about that?



Demuth:   I don’t have any recollection of that at all.   I don’t recall

that Beyen was any particular problem. In fact, Beyen was borrowed

from the Board then to become an interim first loan director, before

we had a loan director, so he was on both sides of the fence.    He was

acting as a staff man as well as an executive director.    I think our

major difficulties then were with the US and the UK directors, as I

recall.   But we were all terribly inexperienced.   I remember going to

my first loan working party on a French loan application.    Nobody knew

where to begin.   We were inexperienced.   We didn’t know what kinds of

questions to ask, what kind of investigation to make.     We hadn’t

developed the kind of project approach that we worked out later.      Our

European problems were very different from our development problems at

that time, of course, and the whole idea in fact of making national

and creditworthiness studies hadn’t yet been developed.    Just like any


                                 - 5 -
                                                            Richard Demuth


other new institution in a new field, at that time we were trying to

struggle along finding our way, and we had all these pressures to

operate very quickly and make a lot of loans very quickly.

        Well, Mr. Meyer resigned.   Mr. Smith, who was the vice president

at that time, was in terrible odor with the board.     They didn’t like

him at all, didn’t get along with him.      He had no appreciation of

this.    He wasn’t aware of the hostility with which the board viewed

this.    This, I think, was more a personality issue than anything else,

although Smith was not a man of any particular competence in this

field, or of imagination, which made it particularly difficult,

because Meyer just disregarded Smith as a member of the management,

and used to send things through me that should have been sent through

the vice president, which made my relationships with the department

heads very difficult.    So when Meyer resigned, Smith was nominally

head of the Bank, but he couldn’t get anywhere.     He thought the

directors were going to elect him president.     They had no notion

whatever of electing him president.     And so the Bank sat without a

president for some time.



Q:   Have you any knowledge about the attitude of the United States

government, the Advisory Council, at this time?     Were they prepared to

back Mr. Meyer, or were they listening to Mr. Collado?



Demuth:    I don’t think that Mr. Meyer ever brought this to an issue

where the National Advisory Council was called upon.     I may be wrong

about that, but my feeling is that Meyer just—these things hadn’t come


                                    - 6 -
                                                            Richard Demuth


to an issue at that point.    Meyer did talk to Will Clayton and a few

other people and complained about Collado, but there wasn’t any

specific issue that could be brought to a head.     I doubt that the US

government was aware of what was going to happen.     I think they were

taken quite by surprise by Meyer’s resignation.

      Well, then the question came up of finding a successor, and then

quite a game was played.    Every time the board decided to approach

anybody, this fact was leaked to the papers, and the papers would then

carry stories about how Mr. X was going to be approached and he was

going to turn it down because the job was an impossible job, because

there couldn’t possibly be harmony between the executive directors and

the staff of the Bank.    The whole issue that we talked about, between

the directors and Meyer, wasn’t as much of an issue in fact, or at

least hadn’t been brought to the surface in fact, to the extent that

it was brought out in the newspapers.      The newspapers contained

detailed accounts of the impossibility of running the job, and it

became quite apparent after a while that this was a deliberate

campaign to dissuade anybody from taking the presidency of the Bank.



Q:   Do you know whether Mr. Meyer himself talked this over with

prospective candidates, and in a sense helped to dissuade them by

pointing out how difficult the situation was?



      Demuth:   No.   I think Mr. Meyer—I think the job was first offered

to McCloy, and I think McCloy probably talked to Mr. Meyer and talked

to Mr. McLain, the general counsel, who, then on Smith’s death came to


                                   - 7 -
                                                           Richard Demuth


be the strong man and leader of the staff, and undoubtedly the

conditions which he asked the US to accept as a condition of his

accepting the post of president were worked out after consultations

with Meyer and McLain.   McCloy’s conditions were turned down, and

McCloy then turned down the job.

     It was then offered, I believe, to Graham Towers of Canada, and

to others, but the campaign to tear the Bank down by proving how

impossible the job was, dissuading anybody from taking it, was

conducted from within the board.    The British director, as an

unwitting accomplice of the American director, was the channel through

which this stuff was leaked, and the purpose of it being—this is my

interpretation, but I’m practically sure that this was what it was—the

desire being to have the situation get so bad that there would be no

alternative but to turn to the American director and ask him to be

temporary president, the idea then being that the Bank would make some

loans and would issue some bonds, and the US director, even though a

young man, would be asked to become permanent president.

     This campaign came within about a day of being successful.      The

US was told by Collado that the board of directors was agreeable to

electing him on a temporary basis, and that would create no problem

within the staff and the staff was prepared to back it.    In fact, it

was violently opposed by the staff.    McLain made it perfectly clear to

Collado that he would resign if this went through.   One or two others

of us made it clear that we would resign if it went through.      This had

never been relayed to the US government.   About a day before—exactly a

day before—a meeting of the Executive Directors was scheduled to be


                                   - 8 -
                                                          Richard Demuth


held to elect Collado as temporary president.   The US State Department

was made aware of the situation, and the night before the morning of

the meeting they directed Collado to ask for a delay of the meeting.

     Subsequently, the State Department called up McCloy and asked him

to reconsider, and told him they would accept his conditions, and

McCloy did accept.

     This obviously didn’t leave a very good taste in anybody’s mouth,

and caused McCloy to come down appearing as though he were trying to

dictate to the Bank and ride roughshod over the executive directors.

This issue clouded his whole administration of the Bank, because there

were raw feelings left as a result of this battle and Collado’s

subsequent resignation, and McCloy had to keep a pretty tight rein in

order to assure the management’s position.   The word “management� came

into the jargon of the Bank after McCloy came in.   This was McCloy’s

contribution to the Bank—establishment of the tradition that the

initiative in running the institution was to be left to the

management.   Although, I think, McCloy on the whole got good

cooperation from the board, it was always somewhat grudging

cooperation, but by the time he left the position of the management

had been so firmly established that Mr. Black, an easier, pleasant man

with the board, could loosen the reins without impairing the position

of the president.    So McCloy was wonderful for his era, and Black was

fine for his era.    In many ways, and I think Black would probably

agree, he reaped the benefits of what McCloy sowed, and in the nature

of things, things were easier for Black than they had been for McCloy.

(Let’s stop for a while)


                                  - 9 -
                                                          Richard Demuth


                                    * * *

Demuth:   I have skipped over rather hastily Mr. Meyer’s six months in

office, because I can’t really remember very distinctly when

particular policies of the Bank were established.    In any event,

during that period policy questions were being explored rather than

decisions being made, and a great deal of the time was devoted to just

setting up the Bank’s structure and getting some people to staff it.

If I had to mention the one major contribution, the largest

contribution I think Meyer made to the Bank, it was the number of

people that were recruited during his time of office that rose to

senior positions and are still with the Bank.   It was really quite an

amazing recruitment job in a short period of time.

     Meyer’s selection as president of course was in part dictated by

his reputation as a very successful investment banker, and as a

successful head of the RFC, and one of his major preoccupations was

sounding out the private capital market on raising money for the Bank.

I accompanied him on his first trip to New York, when we had a meeting

of investment bankers in the Federal Reserve Bank up there, and he was

most cordially received.   The bankers were very ready to hear his

story.    They were however, thoroughly unenthusiastic about giving any

financial support for the Bank.   There was an amazing discrepancy

between the attitude of the bankers and the expectations of Bretton

Woods, where it was believed that the Bank could easily borrow up to

the total amount of its subscribed capital, reserves and surplus.

There were many reasons for the complete disinterest of the bankers in

buying our bonds.   In part it was due to legal limitations.   I think


                                  - 10 -
                                                           Richard Demuth


the legal limitations were quite severe, but even more, it was the

attitude of the market towards an institution that was completely

unknown, and that smacked of having to do with foreign lending, which

at that time was in very bad repute.   The Bank had a lot of members

whose credit was undoubtedly non-existent.    In general, it was thought

of as a do-good institution, as a wild idea, without any respectable

support.   Some people understood the value of its securities, but they

were few and far between.      When we finally did come to make an

issue, we had to undertake a tremendous campaign of education,

changing laws, particularly getting boards of directors and investment

committees to understand what the Bank was, because anything called

the World Bank or the International Bank in those days just smacked of

something that investment committees didn’t want to have anything to

do with.   So we organized a terrific sales group, Black and McCloy

did, when they set up the first issue.     Their presence and the support

that they got from their friends in the investment banking community

in New York, the underwriting group they finally were able to put

together, insured the success of the issue.    If it had been done with

any less careful preparation, I’m afraid it might have been a very

substantial flop.

     You want me to talk about Mr. McCloy’s term of office?     One

really can’t talk about McCloy without talking about the triumvirate

of McCloy, Garner and Black.   They worked as a remarkably good team,

Black out selling the Bank to the market, McCloy helping greatly in

that effort but also selling the Bank to the world, the public at

large, Garner the able chief of staff who really got the Bank into


                                  - 11 -
                                                           Richard Demuth


operation as an effective banking institution.    I don’t think one

could speak too highly of Garner’s contribution in those days, not

only in terms of tremendous work but tremendous toughness, his

insistence that we operate not as a public institution, accepting less

than the best standards, but as a business institution.    Our staff had

to be the best staff that could be gotten together, and we did not

compromise because of the political nature of our constitution and our

structure.

      I know this created conflicts with governments at times,

governments that were pushing people—for example, he refused to pay

any attention to the political pressures that were put on to employ

certain individuals.   While he was sometimes impatient with the

economists, with the “long hairs� in the Bank, his approach was a very

broad approach, and he was willing to stick his neck out to make

decisions.   All those policy issues that had been discussed for a long

time in committees were brought up to the management of the Bank for

decision, and they were quickly decided, sometimes rightly, mostly

rightly, sometimes wrongly, but at least they were decided and

enacted.



Q:   You are speaking of Mr. Garner in this?



Demuth:    Yes, Mr. Garner.   Mr. McCloy gave the Bank a broad vision and

incisive approach that was extremely salutary, and I think he probably

made the most, the boldest moves the Bank has ever made in terms of

its European reconstruction loans.    He realized that the Bank’s


                                   - 12 -
                                                          Richard Demuth


reputation was at a low ebb and action had to be taken, so he both

organized the marketing campaign I have mentioned and he decided to

proceed rapidly with a number of European loans.   Nobody at that time

had any assurance that our loans to Europe would be repaid, but there

was a desperate situation there, when Lend-Lease was cut off and the

Marshall Plan had not yet been conceived, and the European economy was

threatened with a stoppage of fuel and food imports, raw material

imports, and McCloy decided that action had to be taken, and we made

500 million dollars of European reconstruction loans, on faith to a

very large extent, without reasonable prospects of repayment that

could be documented, but in the knowledge that if Europe wasn’t held

together, the rest of the Bank’s job was not going to be very

effective.

     Then, you must remember, shortly after those loans were made, the

idea of the Marshall Plan was first mentioned by Dean Acheson in his

Louisiana speech, I think it was, and Marshall made his speech at

Harvard which was taken up by the Europeans.   The Bank spent a great

deal of time in the summer of 1947 in helping work out the Marshall

Plan, helping the United States and helping some of the Europeans work

out the presentation of the Marshall Plan.    McCloy testified for the

Marshall Plan, in full knowledge that this would put us out of

business in the main area in which we were attempting to do business,

but with thorough recognition that the job was so much beyond the

Bank’s resources that we shouldn’t take a narrow jurisdiction stand

and that the Marshall Plan was a necessity.    And I think his testimony

assistance and the Bank’s position were of considerable assistance in


                                - 13 -
                                                           Richard Demuth


getting the Marshall Plan through Congress.    Then we turned to the

problem of development.



Q:   Before you go into development, I wonder if you could say

something about the policy issues that had to be decided in the case

of the first loan in particular and the reconstruction loans in

general.



Demuth:    My memory isn’t good enough for that.   Among the problems I

remember was the question of how we were going to supervise the loans.

These were large loans that could be disbursed for a wide variety of

goods.    They were not the kind of project loans that the Bank was set

up to do.    We had to pretend they were project loans, or decide they

were all exceptions, exceptional situations.    But I don’t remember

with any definiteness, what the particular issues were.



Q:   What sorts of things were you doing in those days, the first days

of McCloy’s tenure?



Demuth:    Oh, I was working on all kinds of things—for example, the

question of board-management relations.    We finally got some kind of a

memorandum agreed to by the board as to how we would go about

processing loans, how we would take them to the board, what kinds of

initiative they would leave to the management.     Then there were all

kinds of recruitment problems still.    I did a lot of speech writing

for McCloy.    I did a lot of work on the Marshall Plan.   We had a large


                                  - 14 -
                                                         Richard Demuth


number of policy issues that came up to Garner, and I was acting as

his assistant, trying to get some of those policy issues resolved.    We

had organizational problems.   As a matter of fact, I was general

assistant to both Garner and McCloy at the time.



Q:   You had been a special assistant to Mr. Meyer.



Demuth:   Well, he had two assistants and I was one of them.   The other

was a Collado man who left more or less with Collado.   Before Garner

came in, I recommended to McCloy that my job be switched to being

assistant to the vice president rather than assistant to the

president, so that we wouldn’t have the same situation that we’d had

with Smith, where things were going through me to other people instead

of going through the vice president, and since McCloy had brought

Garner in and had confidence in him and was going to use him as chief

of staff, it seemed to me that the kind of job I was doing would be

more appropriately put on the level of assistant to the vice

president.   I had suggested that it be changed to that level, but I,

in fact, acted as assistant to both of them.



Q:   Was the name of the fellow, who was the other assistant, John

Ferguson?



Demuth:   Yes.



Q:   When did he leave?


                                 - 15 -
                                                           Richard Demuth


Demuth:   Almost immediately after McCloy came in.   He was of the

school that believed the US executive director ought to run the Bank,

and at the time of the interregnum, he was the staff man.     Who’d go to

the directors and keep them informed what was going on in the staff.

When Collado left and McCloy and Garner came in, Ferguson decided to

leave too.



Q:   Was the staff divided in camps, or was Ferguson alone?



Demuth:   Ferguson was almost alone.   I was in the unhappy position of

not being able to be invited to staff meetings in those days because

if I was invited, Ferguson had to be invited, and Ferguson would take

everything the staff said to Collado.     This was an unhappy situation.

      Well, the other job I had at that time, which brings up a whole

new subject, involved our relationship with the United Nations.      In

the very early days of the Bank, when it was under Mr. Meyer, the UN

people came down and approached us and said that they wanted to enter

into a liaison arrangement with us, a relationship agreement, and they

gave us copies of relationship agreements that they’d entered into

with some of the other specialized agencies, which made the other

agencies very definitely subordinate to them.    We said we didn’t know

enough about our business to enter into any kind of formal contract

with them, that we were quite willing to cooperate in a lot of fields

where we thought we could be mutually useful, but that entering into a

contractual relationship was something we wanted to defer for a year

or so until we knew more about our business and what our relationship


                                 - 16 -
                                                          Richard Demuth


should be.   In any case, we said that we couldn’t enter into the kind

of contract that the other agencies had entered into because it would

appear to the public that we were in effect an agency of the United

Nations, and if it seemed that we were an agency of a political

instrumentality, our market position would be impaired.

      This was reluctantly accepted for a while, and then on review at

the UN, their lawyers said that it was—the Charter required that the

United Nations enter into a contractual relationship, that this

required a written contract agreed to by both sides, and they raised

again with a good deal of insistence the need for a written document.

      Well, we said, all right, if they really wanted a written

document we’d submit a draft that we could accept but they wouldn’t

like it and we wouldn’t recommend that they accept it.    Their lawyers

said, “Let’s see what you can do,� so we wrote a draft agreement that

was in effect a declaration of independence, starting out with—“The

United Nations is an independent international agency with its own

governing body, and the International Bank is an independent

international agency with its own governing bodies, each responsible

for its own policies.�

      This was a document that if we had been the United Nations, we

wouldn’t have been glad to sign, and we didn’t urge them to do it at

all, but we said if they needed a contract, this was the only kind of

contract we could accept.



Q:   I suppose this is still in the files somewhere?




                                 - 17 -
                                                          Richard Demuth


Demuth:   Oh, yes.   This contained also a statement that the United

Nations would not make any—as a matter of policy - the United Nations

Economic and Social Council would not make any recommendations to the

Bank with respect to a particular loan or with respect to the terms of

financing, something like that.

      Well, this caused a lot of—the UN people wanted to go ahead with

it, the international organization people in the State Department were

very anxious that it go through, and there was a very strong, vigorous

negotiating session between a committee of the Economic and Social

Council and Mr. McCloy, which went on for a day at the United Nations,

in which our draft was reviewed, and we took out a few of our

declarations of independence but not very many.   The agreement, as it

presently exists, was agreed on and accepted by the Economic and

Social Council with a certain amount of bad grace.

      I don’t think anybody’s ever looked at it since.   It’s been

misconstrued.   There’s nothing in this agreement that prevents the

Economic and Social Council from making general policy recommendations

to us, but the ECOSOC has been so cowed that they feel that it

prevents them from making any recommendations on policy to us, which

it doesn’t at all.



Q:   I take it that what you were trying to make clear primarily was

that even if they did make recommendations, you weren’t obliged to

accept them.




                                  - 18 -
                                                          Richard Demuth


Demuth:   Well, we wanted to make it clear that the Economic and Social

Council would not attempt to dictate particular loans to us, that we

were making the loans on a businesslike basis and without regard to

political considerations, that we wouldn’t want a political body to be

standing over us and telling us what loans to make or on what terms to

make them, but if they wanted to make a policy recommendation, for

example that we should give thought to industry or to agriculture, or

if they wanted us to give more emphasis to Africa than to Latin

America, there was nothing in the agreement that would stop general

recommendations of that sort.    We wouldn’t necessarily adopt them but

we didn’t say that it was appropriate to make them.    We had agreed in

this agreement that we would submit a report to the Economic and

Social Council once a year, but unlike the other agencies we did not

agree to prepare a separate report for the purpose.    We told them that

we would send our annual report and that we would appear before the

Economic and Social Council and present it, and each year the

President does go up and present it to the Economic and Social Council

which gets publicity.   They make a few speeches back, and that’s the

relationship with the Council.   It’s extraordinary how differently the

governments react in their discussions, at the Annual Meetings, for

example, where the finance ministers are representatives and at the

Economic and Social Council where the representatives come from

foreign offices, and are more politically motivated.   This is one of

the difficulties in the relationship.

     Our relationship also became very difficult on a staff basis.

The UN at that time had some pretty ambitious characters who were


                                  - 19 -
                                                           Richard Demuth


trying to build the UN up into a top agency and wanted the Bank to be

a tool that they could use, but they never really had the ability or

stature that went with their pretensions.    The United Nations, for

example, wanted to undertake all the general survey missions.       They

wanted the Bank to supply experts to their missions, and we should

just do the financing in accordance with the recommendations made by

their missions, done by the UN.    We said, “Send out any kind of

missions you want, but we’re going to send them out too, if we’re

asked to by the governments, and we don’t feel we should participate

in anybody else’s missions because that would bind us, make us

participate in a mission we didn’t control and might put us in an

embarrassing position, if we couldn’t finance the program that was

recommended.�

        This was a subject of very bitter dispute between Mr. McCloy and

David Owen.    It ended up with our saying, “You just go on your own way

and we’ll go on our way,� and in the end the requests came to us

rather than to the UN and so we did this sort of business and they

didn’t.    But with David Owen then running the Economic Affairs

Department and David Weintraub as his ambitious second in command, it

was a very rough relationship, which still hasn’t been wholly smoothed

over.    It’s a very difficult relationship at best, because in the

hierarchy of things the UN is the top agency.    They’re the central

global body, and they feel they ought to be able to exercise authority

over all the other international agencies.    On the other hand, the

Bank has the money.    It has many more people of real stature on its

staff than the UN has.    The UN’s a little jealous of us, and on the


                                  - 20 -
                                                           Richard Demuth


other hand we’re very impatient with any kind of UN interference.

Also, our management has from the beginning been very loath to get

involved with the UN in any way for fear of contamination because for

the most part we didn’t have much respect for the people, and this

kind of attitude gets felt, so the job of keeping relationships happy

in that kind of a milieu is not an easy one.    I think it has become

considerably better, though now it’s beginning to get aggravated again

as the UN is once again engaged in a desire to become the top

development authority in the world and use the Bank as an

instrumentality, and the Bank itself wants to be the top development

agency.    This is where the conflict is beginning to make its

appearance in a few ways.



Q:   Has the development of a Special Fund in the UN complicated

matters?



Demuth:    No, I don’t think so.   The Special Fund, you know, was

created because the US wanted to buy time on SUNFED, and they thought

with this 100 million dollar a year fund—50 million dollars a year

originally—they could direct the persons—for a capital investment fund

for a few years.

      We felt that the Special Fund might have a very real role to

play, and Mr. Black has been very anxious that the Bank cooperate with

the Special Fund, and in fact we’ve cooperated with them quite

effectively.   We are one of the executing agencies—some of the other

agencies have many more projects, but I think we’ve probably got more


                                   - 21 -
                                                             Richard Demuth


completed and under way than most of the others, and on the whole I

think this has worked out very well.    We’ve been able to put things to

them which they’ve financed, and others we’ve carried out with the

help of their financing.   The difficulty is that Mr. Hoffman, Paul

Hoffman, has greater ambitions for the UN, and he wants the UN to get

more actively into development work and to serve as a world

development authority.   To do this he is now about to use his money to

try to build up UN field offices to serve as central coordination

points for all development efforts in the poor countries, and to that

extent there is some conflict, maybe.       But on the whole he has not

been active in supporting a UN capital fund, which was always the one

threat that has been hanging over us.       Once a UN capital fund has been

created, the confusion between that sort of fund and the Bank would

have been tremendous, and whether the creation of IDA, which was

designed in very large part to hold that development off, will succeed

in doing so, has yet to be seen.    But with IDA getting into many more

fields, and the Special Fund active in fields in which we’re

interested, our relationships necessarily become closer.



Q:   Are they closer?



Demuth:   Much closer, and I would say that for the last five or six

years they have been pretty good, quite good—that is, a fairly close

relationship, and both Mr. Black and Mr. Hammarskjold are very much

interested in the Near Eastern problems.      They have a mutuality of

interest there, so that ever since Mr. Hammarskjold came in and Dr.


                                   - 22 -
                                                          Richard Demuth


Seynes came in on the economic side, things have been considerably

better.



Q:   I’ve heard that the real beginning of good relations between the

UN and the Bank began with Suez and Mr. Black’s work there.



Demuth:   Well, that has certainly had a good deal to do with it.

That’s where Black and Hammarskjold really came together.    I think in

fact—well, that’s where the management of the Bank began to have some

respect for the UN.   Staff relationships have gotten considerably

better since that time.   I think with the advent of Dr. Seynes as the

top economic man at the UN - to a certain extent with the departure

from the Bank of Mr. Garner, who had no use for the UN - things have

gotten better.



Q:   How does the Bank decide how to coordinate with the Special Fund?



Demuth:   Well, we get all the Special Fund projects.   They send them

to us for examination and advice, and to get our views on what should

be done, and we’re in close touch with what they’re doing.



Q:   While we’re on the subject of coordination with other lending

agencies, could you say something about the Bank’s relations with ICA

and the Development Loan Fund and Export-Import Bank?




                                 - 23 -
                                                         Richard Demuth


Demuth:   Oh, the Export-Import Bank relationship has a whole history

in itself, but I can’t begin to remember all of it.   For a long time

our position was that the Export-Import Bank get out of our business,

that the United States shouldn’t do any international financing and

should leave this entirely to the International Bank, and for a while

it almost succeeded.   When the Eisenhower Administration came in, Mr.

Humphrey strongly supported this view as Secretary of Treasury, but it

never was adopted.   Of course the US program, instead of being out

back, has grown immensely.   We never had good relations with the Ex-Im

Bank, I think largely because of its competition.   People at the head

of the Ex-Im Bank always seemed to be good fellows before they went

over there and became devils as soon as they became president of the

Ex-Im Bank.   The advent of the DLF made things somewhat better,

because the need to coordinate became even more evident, obviously,

and there were three agencies, DLF under its statute not being allowed

to finance if the Ex-Im Bank or we were willing to finance.   It forced

some kind of coordination.   Our relationship with the DLF from the

beginning was better than with the Export-Import Bank.   I don’t know

quite what the reason for this was.   Maybe the fact that they were

giving soft loans and therefore strengthening the credit of our

borrowers.



Q:   In a sense their activities increased the creditworthiness of the

countries that the Bank was interested in but the activities of the

Ex-Im Bank decreased the creditworthiness.




                                 - 24 -
                                                          Richard Demuth


Demuth:   The first part would be fair to say.   I think the second

would have to be documented.   I would hope that the Ex-Im Bank’s loans

on the whole were for sound enough projects so that in fact they did

not weaken a country’s economy and thus decrease its creditworthiness.



Q:   In any case they were not development loans, isn’t that true?



Demuth:   Well, the only things we were worried about were the

development loans.



Q:   But if the foreign debt of a country is increased as the

consequence of an Ex-Im Bank loan, and the money has been used to

finance current consumption, for example, then in a sense the country

is less likely to qualify for a World Bank Loan.



Demuth:   Well, that’s right, but very few of the Ex-Im Bank loans were

for current consumption.   Now, what we were worried about and what we

are worried about in the USA program is that when we try to impose

conditions on our loans designed to improve the credit of the country,

if it can just run around to the State Department and the Export-

Import Bank and get a loan without these conditions—it weakens our

position.   The US frequently has to give loans for political reasons,

but we think they would be better made if certain conditions were

first fulfilled, and it’s that kind of thing rather than decreasing

the creditworthiness that concerns us.




                                 - 25 -
                                                           Richard Demuth


Q:   I understand that this was quite an issue with Brazil.   Was it an

issue before Brazil also?



Demuth:   Oh, yes.    There was a case where McCloy went on a campaign on

this during his tenure in office, which was long before the Brazilian

crisis came to a head, and it was very difficult from the beginning,

because there was just no rational basis on which you could decide

whether something should be financed by an Export-Import Bank loan or

a Bank loan.   We wanted some guidelines put down, and we were quite

willing to leave the political loans to the Export-Import Bank if they

didn’t undercut us on our normal loans.     But the US was quite

understandably reluctant to say, “We’ll only do extraordinary

political loans in the Export-Import Bank,� because this meant, if

they’d adopted that rule, that anything the Export-Import Bank did

would immediately be labeled as a political loan.    So they wanted to

do a wide variety of loans, including political loans in those.    And

they also felt, and I think quite justifiably, that it would be

unfortunate to give a monopoly role in international finance to any

one institution.     We were likely to do more, and more money was likely

to go out overall if there were two agencies operating than if there

were only one.   But this was a long hard fight, this relationship

between the two agencies.



Q:   Speaking of Mr. McCloy, somebody told me that when Mr. McCloy got

back to the Chase Bank after his period in Germany, he suddenly




                                   - 26 -
                                                           Richard Demuth


decided that the Ex-Im Bank was pretty good after all.    Did you hear

this?



Demuth:    Well, I think probably that what your informant had in mind

was that the Chase Bank set up the Chase International Investment

Company in which they tried to take over, with Export-Import Bank

backing, some of the export financing—this was export financing, not

development financing, that the Ex-Im Bank was doing.    Whether this

was a misconceived idea or whether there were some other reasons for

it, it never worked out, and I know before the end of that experiment

the Chase Bank was very browned off with the Export-Import Bank.



Q:    How about the relationship between the Bank and the Fund?



Demuth:    The International Monetary Fund.   They haven’t been good.

They’ve been good at the working level.    They’ve never been very good

at the higher levels.    In the early days of the Bank, the Monetary

Fund was a fairly inactive institution.    It was dominated by its board

of directors, and regarded as a very much more political institution

than we were.    Its management was not as strong as the Bank’s

management, and the Bank’s management didn’t have very much to do with

it.    The reason we’re in this building today rather than in a

beautiful building down on Constitution Avenue—what we were offered

was a magnificent plot of land, by the US government—was because the

Bank didn’t want to have a permanent building alongside, share a

permanent building with the Fund.    Now, all kinds of things that might


                                  - 27 -
                                                           Richard Demuth


have been expected to have been done jointly never could work out—

joint missions, for example.    I finally succeeded in borrowing one or

two Fund people for some of the Bank’s missions, but this took a

terrific amount of effort.    There has been a feeling of intense

competition between the top people at the Fund and those at the Bank.

I think personality conflicts rather than any issues of substance were

at the root of the trouble — the top management relationships were

bad.    I think the working relationships were good, and I think as the

Fund gets more active and acquires a more reputable place in the world

and more inspired leadership things will be considerably better.



Tape 2



Q:   I wonder if you’d say a little more about how the Bank was

organized under Mr. McCloy, particularly before 1952, under the

general reorganization.



Demuth:    Well, the two major departments of the Bank under Mr. McCloy

were the loan department and the economic department.

        The economic department had in it all the functions that are now

performed by the economic staff, general studies, a lot of these

studies, and all the creditworthiness studies now performed by the

area departments.    The loan department was the loan negotiating

department, and it had an engineering staff under General Wheeler

which in effect did what the whole technical operations department now

does.    They were the project analysts.


                                  - 28 -
                                                           Richard Demuth


Q:    That didn’t begin right away, did it?   Wasn’t it not til about ’49

that the Bank really had engineers on its permanent staff?



Demuth:   No, my recollection is that Spec Wheeler came over in ’47.

’48 at the latest but I think it was ’47.     It was a very small staff,

as we didn’t feel very many engineers were needed.     Then the

supervision of loans was done by the Treasurer’s Department.       There

were many problems involved in this organization, and people got

shoved around from country to country and there never was any

continuity in Bank staff working on a particular country.      In part

there was difficulty because the economist was working on a country

and reported to one man, and the loan officer who was trying to work

out a program for the country reported to another man, and they never

came together except at top management levels.     Then, of course, the

end use work was being done by a group that had nothing to do with the

original negotiation of the loan, or at least no responsibility for

it.

       Nonetheless, the organization was not inherently bad.      There were

normal bureaucratic jealousies between the two operating departments.

Oh, I should add that somewhere about that time, in ’50 or ’51, I was

charged with the responsibility for technical assistance, and that was

then an operating responsibility, and I was in charge as a direct

operator rather than as a staff officer.



Q:    Was this in a department, or was this a separate technical

assistance department per se?


                                  - 29 -
                                                          Richard Demuth


Demuth:   Well, this was in my capacity as assistant to the vice

president.    I was also in charge of technical assistance.

Q:   Did you have staff working for you on technical assistance

problems?



Demuth:   One or two people.   This was in the early days of technical

assistance.    We had a discussion around 1950 as to whether the Bank

was appropriately organized, whether it should be reorganized. This

was shortly after Mr. Black came in.    It must have been before 1950.

We had a long discussion of the organization of the Bank, and at that

time we decided that there was no urgency about reorganization, that

the organization we had was as appropriate as any other and it was a

question of making it work.    But a few years later, we reviewed the

problem again.    A working party was set up under Mr. Iliff of which I

was a member, to consider how to improve the organization.    There was

a general feeling that if we had a group of economists and loan

officers working on the same country, they would come up with a more

consistent approach, and it would be an easier operation.     There was a

general feeling that project work should be separated out from the

rest, and that it should be done not just by engineers, but by

engineers, economists, and financial experts.    I think the major thing

that came out of that reorganization was the technical operations

department.    Then we created the economic staff to do the general

economic work.    The technical assistance work then became, on my

recommendation or certainly with my affirmative concurrence, a staff

service, because the difficulty we had with technical assistance was


                                  - 30 -
                                                             Richard Demuth


that the loan department regarded it as outside its jurisdiction.      It

was something that was Demuth’s specialty and the loan offices felt

that they had nothing to do with it.    I felt, on the other hand, that

the Bank shouldn’t build up a technical assistance staff, large staff,

to conduct separate relationships on technical assistance operations.

We were an important technical assistance agency largely because we

were a financial agency.   The two had to be integrated.     It was

therefore very important to make the people who were in charge of a

country program feel that technical assistance was part of their

responsibility.   So technical assistance was made an operating

responsibility of the area departments, with my office retaining a

responsibility for recruiting personnel and for generally advising the

area departments, thus bringing in the experience that we had in

various areas to bear on any new problems that might arise in an area

in which we hadn’t operated before.

     The one great danger in this reorganization was that the

economist would lose his independence, and that, if a loan officer

wanted to make a loan, he would more or less direct his economist to

come up with a report that indicated that a country had enough

creditworthiness to justify the loan.       We were quite anxious to avoid

the subservience of the economist and to maintain his independence.

We tried to do that in two ways.    One was by creating an economic

adviser in each department, who was supposed to be the man to whom the

economists in the department could come if they were being pushed

around, so that at management level within the department they would




                                   - 31 -
                                                          Richard Demuth


have a supporter. The economic adviser was also supposed to review the

work of the economist, to be sure that it was kept up to scratch.

     Then we also created the economic committee consisting of all the

economic advisers, who would review all the economic reports and make

sure that there was consistency in the reports among the areas.     I

don’t think we—we have really achieved the latter.   I think we are

acquiring quite different creditworthiness standards in fact in the

different areas.   But there are people working on it.   Perhaps this is

inevitable anyway.   You can’t have standard criteria in a vague field.

Probably you have different judgments with different economists

working on different countries anyway.

     The other essential coordinating factor in the organization is

the working party, which on the whole has worked pretty well.   It

works well in keeping everybody informed.   There’s one basic

difficulty with the working party, and that is that the loan officer

is the chairman.   This is inherent in the idea that the area

department coordinates everything.   In fact, the loan officer is

frequently a man of less stature than the technical man who is working

on the report or than the technical assistance person, if it’s a

technical assistance problem.   Particularly if the loan officer is a

young man without too much to do and the working party is the

instrument through which his own satisfactions come, because this is

where he’s boss, he only has a few countries and he wants to

concentrate on them—he can waste an awful lot of time at working party

meetings which could well be spent otherwise.   And it makes the

technical operations people in particular feel as though they’re


                                 - 32 -
                                                           Richard Demuth


subservient to the loan officers, and this is a difficult kind of

relationship.   The technical operations people, who often have

considerable professional competence, don’t like always to be second

to the loan officer in a subservient position.



Q:   Does this imply that the loan officer, being an area department

person, is rather more likely to push for a given loan than the

technical operations person in a working party?



Demuth:   Probably yes, and that’s probably sound.   I think the best

loan officers are the people who are trying to push loans, although

not trying to push them over sound technical objections.    But I think

you need some kind of a balance, because your technical people are

always looking for flaws and should be, and you need to compensate for

that with someone whose primary interest is to get loans through, and

I think that’s an appropriate role for the loan officer.    But the

relationship is not an easy one and never will be an easy one, however

we may be organized.   We’ve had trouble with it and I think we’ll

continue to have trouble with it, but I think that’s inherent in an

organization where you try to put together as many different talents

as you do in this organization.



Q:   I’ve heard that in the early days before the reorganization of ’52

that there was some conflict as to whether the economists even in the

loan committee should be primarily in charge of a given study, and

also that the economists were rather more ambitious about trying to


                                  - 33 -
                                                           Richard Demuth


push loans and had rather broad standards of creditworthiness, more

than was true of the loan committee.



Demuth:   The second part of this doesn’t ring true at all.   I would

not have thought the economists were trying to push loans.    I do think

that the economists took a broader view of the situation.     They saw a

country needed capital and they were anxious for the Bank to make

capital available and had perhaps more impatience than they should

have had with the loan department which took the project approach, and

because the—until the project had been worked out, there wasn’t any

capital to be made available.   I think they were impatient with the

project approach and wanted to see the Bank take more of a balance of

payments or program approach, and in that sense I think they probably

were anxious to push ahead.

     On the other hand, I suppose, since there were two coordinate

departments, sometimes the economist was considerably senior to the

loan officer.   I suppose there probably were conflicts as to who

should be in charge of a mission.   In fact, I think in those days

sometimes the economists were in charge of the mission.

     The present organization has a different difficulty which is not

easy to work out.   Because the area departments are basically

administrative loan-making departments, the directors have to be

operating types.    They have to be administrators.   And that means that

the Bank hierarchy gets filled up with people who come up through the

operational channels rather than through the economist channels.     The

staff members who stay in economic positions feel that they can’t get


                                  - 34 -
                                                           Richard Demuth


ahead very far, about as far as they can go is to become an economic

adviser or head of the economic staff or of EDI perhaps.    They have

little chance, as economists, to become a department head or assistant

department head.   And that leads a lot of economists to feel that the

economists aren’t appreciated at the Bank and that one has to be an

operator in order to get ahead.   And this is one of the reasons, I

think, that we decided to create this new Development Advisory

Service, as a separate unit of the Bank, so that we could get away

from this administrative structure.   In the Development Advisory

Service we have a whole group of senior level economists who are

recognized simply by their inclusion in the service to be senior level

people, without regard to whether they’re called a department head

assistant or department head.   It’s like the foreign service.   There

are class 1 and class 2 officers, without regard to an hierarchical

arrangement.

      But this problem of keeping top level economists happy at the

Bank in that situation is difficult in the present organization.



Q:   Well, some people who were in the economics department have in

fact become senior operating officers in the Bank.



Demuth:   Oh, there are a number of economists who have gotten ahead in

the Bank by becoming operators, including one of the vice presidents,

but this is by becoming operators, rather than by staying economists.

      I think the difficulty is that the tendency is all for the

economists who are ambitious and want to get ahead hierarchically,


                                  - 35 -
                                                              Richard Demuth


they say, “Well, we can’t do this thing as economists.        We have to

become operators.�

        Now, I think frequently economic training is the best training

one can have to become an operator in the Bank.        But there are some

economists who want to remain economists and work in that capacity.

They’re very much needed in the Bank.        Yet if they want to stay

economists, as thinking analysts, their chance for advancement is much

less.    That’s what I meant.

        Now, you asked me what my own job is.     My own office in the Bank

has always been a hodgepodge of things that just didn’t fit anywhere

else.    In the very early days, it was largely just greasing the

wheels.    For a time I was the interpreter of the economics department

to Mr. Garner, or vice versa, so that there would be some

communications between the two.     I’ve always had a certain number of

special policy problems thrown at me; through historical accident I’ve

been responsible for our liaison with the UN and other international

agencies.    I have this technical assistance program.      And I’ve had the

job of really creating and getting under way most of the new programs

the Bank has gone into.    For example, I was responsible for getting

the Economic Development Institutes started.        The idea for an

International Finance Corporation was worked out between Mr. Garner’s

office and my office.    I did all the preliminary work on getting IFC

started, and spent the first year of IFC helping Mr. Garner to get it

going, similarly with the IDA, I helped work out that charter and get

it through the Board, and I chaired the committee which formulated

first policies of the IDA.      I also helped work out the concept of the


                                    - 36 -
                                                          Richard Demuth


Development Advisory Service which has just been started and various

other new approaches to technical assistance.    I also coordinated the

Bank’s work on and was the channel of communication for all the

Special Fund projects that we have.

      Beyond that, I was responsible for a long time for the

entrepreneurial work in connection with the development banks, and to

a degree responsible for developing the Bank policy on the

establishment of such banks.   This was a rather vague assignment,

because the area departments were all interested in this.     The

technical operations department was administering our development bank

loans.    I was the fellow that was supposed to be solving new ones,

working out our policy on development banks, which was rather an

administrative monstrosity.    IFC is also concerned with this, and I

think I’ll be relieved of this responsibility in the future.



Q:   I’d like to hear you say something about development banks but

before you do there’s one quick question.   You say that in the early

days you were liaison, interpreter or something like that between Mr.

Garner and the economics staff.   I don’t quite understand.



Demuth:   Well, this is really a personality question more than

anything else.   Leonard Rist, head of the economic staff, and his

deputy Paul Rosenstein-Rodan, on the one hand, and Mr. Garner, on the

other, just didn’t understand each other’s language, and they also got

on each other’s nerves.   Nevertheless the economics department had a

great deal to add to Bank policy making and the policy being made,


                                  - 37 -
                                                          Richard Demuth


made a great deal more sense than it sounded to the economists.    So I

was to a certain extent the spokesman for policies being advocated by

the economics staff, explaining it in terms that Garner would

understand and then translating Garner’s policy decisions into terms

that the economists would go along with, rather than the way they

might misunderstand him.



Q:   I wonder if in this connection you and others were responsible for

the Fifth Annual Report which contains perhaps one of the earliest

systematic statements of what the Bank’s lending policy was?



Demuth:   Well, I was responsible for that.   I just felt that it was

time to establish the policy and explain it to the world.     I guess I

forgot to say, through the Fifth, my job was to write the annual

report, and at the time of the Fifth Annual Report I thought it was

time we had a systematic statement.   We also wanted to make policy.

That report made some policy, not all but some of it was made in that.



Q:   Would you say something about the evolution of policy?



Demuth:   Oh, I think I’d rather talk about development banks.   Well,

development banks—this is an almost necessary mechanism for industrial

financing, and when we talk about development banks, in this case,

we’re talking about industrial investment institutions.   It’s just

impossible for any global institution to assist the great many

industries in a country.   You just can’t go through the investigation.


                                 - 38 -
                                                         Richard Demuth


You don’t know the promoters and the people involved.   Beyond that, we

had a charter limitation that required a government guarantee, and it

was very difficult for most industrialists to get or even accept a

government guarantee.   So financing development banks was a way in

which we could get money into the private sector, the investment

sector, and we felt that it was terribly important to get some kind of

investment banking tradition established.   Garner, I think, was the

originator of the idea.   There’d been a number of development banks,

but most of them before we got into operation, at least in the

underdeveloped countries, were government run.   Garner’s feeling was

that we should establish these under private commercial control, so as

to get them away from political control that had them invest their

money according to political considerations, and in order to establish

some kind of a real investment banking tradition in the country.

     This is a very difficult field, because no development bank in an

underdeveloped country, is likely to be successful without some kind

of subsidy.   The cost of investing money and investigating projects,

also of engaging in promotional activities is so heavy that if you

have to take private money and pay your overhead costs, then you can’t

get a return that is sufficient to satisfy the investors.   This is

particularly true in most underdeveloped countries where the market is

small and you have to give a great deal of technical assistance, where

you probably have to wait a long time for returns on some of your

money, and where the alternative opportunities are many and higher

returns can be realized through loans and other investments.   So the

development bank is just not going to be able to attract private money


                                 - 39 -
                                                         Richard Demuth


unless it has enough subsidy money to make it a—to give it some

leverage.   Even then it’s not attractive as a pure investment matter.

Most of the local stockholders in these development banks are people

who are public-spirited or who are interested in the industrialization

of the country for other reasons, and expect to benefit as

industrialists and bankers, rather than from their development bank

shares as a pure investment.   So institutionally the banks are of a

very mixed character.   They are in private ownership, but basically

some government support is necessary to make them go, and the private

ownership is frequently motivated by other than investment

considerations.

     Nonetheless, despite the unorthodox character of these

institutions, their record on the whole has been pretty good.     They

have been able for the most part to stay out of political lending;

because they have to account to their stockholders for profit, they

have to make dividends, they’ve been following much more businesslike

practices than most of the government banks.   And gradually, all of

these banks have had great difficulty, but gradually they’re—the early

ones are coming out of the woods and making a very substantial

contribution.   The difficulty with our position is that we will assist

only the privately-owned development bank, and the number of economies

in which this kind of development bank is either feasible or

appropriate is very limited.   We’ve done the obvious things, like

India and Pakistan and Turkey.   Latin America is probably the only big

untapped place that has room for this kind of institution, and there

there are already some public institutions in this work, which makes


                                 - 40 -
                                                          Richard Demuth


it harder to promote private ones.    So everybody recognizes that

development banks are a good thing, but since our ideology prevents us

from helping a government owned one, we’ve operated within a much more

limited sphere than we might otherwise have.

     There’s a current of opinion that we’ve been rather rigid in only

helping privately owned ones.   I think Mr. Black recognizes that

privately owned development banks are not appropriate in many places,

but since there are a lot of other financing institutions around, he’d

rather have somebody else finance the government-owned development

banks because he feels that they’re not likely to be very successful.

     In at least one instance, I saw the value of this.    We’ve been

trying to promote a private bank in Colombia.   We haven’t been

successful in this for various reasons.   In Colombia a private bank

would be a fine thing, a very good thing, but, if we had been willing

to follow the policy of promoting a government bank, we wouldn’t have

had a chance in the world of getting a private bank there because the

government wouldn’t have had any conceivable interest in its creation

and would much rather have us support their government institution,

which hasn’t been very effective.    Our only chance there, and we may

sometime succeed in getting it, was because we said we wouldn’t

support a government institution and if they wanted this money that we

were anxious to put into their industry, it would have to be through a

private bank.   Maybe the rigidity of these rules, although it may

offend in some places, has been justified in a number of other places.

Rather than taking the easy road, we’ve taken the harder but perhaps

better road.


                                 - 41 -
                                                         Richard Demuth


Interview with Mr. Richard Demuth

By Robert Oliver                                       August 16, 1961



Interview # 2




Q:   Now, if you’d say a word about the background of the International

Finance Corporation, in the light of the Bank’s interest in private

enterprise as such.



Demuth:   Well, the same considerations that caused our interest in

development banks were responsible for our initiative in connection

with IFC, namely, we thought it was important to develop the private

sector of the economy.   We were prevented from doing it to a large

extent because of the requirement of obtaining a guarantee and because

we didn’t have available any equity money, and many of the private

industrial projects that we saw needed venture capital rather than

fixed loan capital.

      So way back—I don’t know what the dates are, my memory for dates

is pretty bad anyway—way back, before IFC started, we gave a good deal

of consideration to the possibility of creating an arm of the Bank,

but with separate funds, that could do something about this.

      This was way back in McCloy’s day, as a matter of fact.   I recall

that when Truman made his Point Four speech in ’48, the State

Department was caught completely unawares.   They had no idea he was

going to do this, and they had no idea of how they were going to draw


                                 - 42 -
                                                           Richard Demuth


up the development program that was announced in his Point Four.

There hadn’t been any thinking about the concepts—nothing.    At that

time Willard Thorp was Assistant Secretary of State for Economic

Affairs, and McCloy was asked to go over and see him.     I went over

with McCloy.    We tried to sell him the concept of IFC as part of the

content of the Point Four program.    So the thinking was way back as

early as that.

      What we were thinking about was a fund that could be made

available to private enterprises, without government guarantees, and

in the form of equity as well as in the form of obligations.

      We drafted some memoranda on this.   Dave Gordon and I did most of

the work on it.    Bob Garner was the most enthusiastic on the

management side.    Again, this was a subject which had the staff

divided down the middle.    Most of the people were very worried about

it.   They thought the IFC was a very dangerous experiment for the Bank

to go into.    Even Dave Sommers was very negative.   But McCloy and

Garner were interested, and as I say we proposed this to Willard Thorp

and took it up very actively.

      Eventually we made this proposal.    Well, what happened was, that

Nelson Rockefeller was named head of an advisory council to the

President to write a report that eventually was called Partners in

Progress.   He had Stacy May doing most of the work on that one, and

they were looking around for ideas to put in the report, something

concrete and new.   They came down and talked to us and we sold them on

the IFC idea, and this first saw the light of day in Rockefeller’s

report, Partners in Progress.


                                  - 43 -
                                                         Richard Demuth


     It was then picked up in the United Nations somehow, in the

Economic and Social Council, and we devised the strategy of having

this debated in the United Nations, to begin to bring pressure on

governments to take some action about it.   So, we stimulated it and

accepted a request from the Economic and Social Council to make a

report on the whole subject.   For several years in a row we made

reports to the Economic and Social Council on this proposal.     And this

gradually generated more interest and more and more pressure.

     The underdeveloped countries on the whole were very favorable to

the IFC idea.   The opposition came from the United States, which

regarded it as pretty socialistic, the idea that money would be

provided by a public institution for private enterprise, particularly

in the form of equity investment.   This was regarded as public

ownership of private property and that was socialism.   The NAC voted

against it.

     Gradually the pressures built up, however.   There were two

subjects on which the various United Nations bodies continued to harp.

One was Sunfed, the international capital development fund which was

to make grants and long term low-interest loans on that basis.     The

other was the International Finance Corporation idea.   And Latin

American countries in particular, who didn’t see that they were going

to get very much out of grants or long term low interest loans, were

particularly enthusiastic about the International Finance Corporation.

The pressure continued to build, and finally the US felt it had to

give way on some front if it was to buy time on the creation of the

International Capital development fund.   The US also had to go down to


                                 - 44 -
                                                            Richard Demuth


a meeting in Brazil of the Latin American countries and had to say

something, give them something to relieve the pressures.

      This came right after an annual meeting of the Bank in which a

great many speeches had been made in favor of the International

Finance Corporation.    So they began to reconsider their position on

that, and they had some meetings with the management of the Bank.



Q:   Could you say who “they� is?



Demuth:   Humphrey was the Secretary of the treasury at that time, and

Garner and Black were the Bank representatives, with Sommers and

myself participating.    Two things happened to make it more acceptable

for the United States.    One, Black cut down the proposal size from 450

million dollars to 100 million dollars.      He said, “I don’t want 450

million dollars.   I want to try this out on a pilot basis, let’s make

it 100 million dollars,� and this made it a great deal more acceptable

to Humphrey.   Burgess, Randy Burgess was the other man in the US that

was in on these discussions.

      And the second thing was a suggestion I think made by Dave

Sommers that we should cut out the equity idea, and get venture

capital through things like profit participation options and

convertible debentures instead of direct equity ownership and that

last proposal, which I fought, finally put the thing over.     But I

think the pressures were such that it would have gone over even

without it.




                                    - 45 -
                                                          Richard Demuth


     Both of these concessions, as a matter of fact, have had an

unfortunate effect on IFC.   I don’t know that they necessarily follow,

but historically they did have this effect.    As for cutting the size

down from 450 to 100 million dollars, that probably would have been a

wise thing, if the 100 million fund had been operated as though it

were the first part of a 500 million dollar fund.    Instead, it was

administered as though it were the only resources IFC would ever get,

and so it led to a great dispersion of funds among very small

industries.   Every time a 10 million dollar project came along, this

was thought of in terms of “this is 10 percent of our total

resources,� which made it appear quite different than if it had been a

500 million dollar fund, and in my opinion the result of that was to

drive away or turn away the very business for which IFC was primarily

designed, namely, the large enterprises that needed mobilization of

foreign capital.   Foreign capital is often reluctant to put that much

money in underdeveloped countries without some kind of umbrella which

the IFC was designed to provide.    So for many years I have seen it

suffer under this handicap of operating with 100 million dollars

instead of a 500 million dollar fund.

     And the second obstacle created all kind of problems which are

now being removed through amendment of the charter.    I don’t know that

they were inherent either but they led to unorthodox types of

financing which confused people.    They probably induced confused

thinking on the part of IFC’s management too, which consistently tried

to get both a creditor’s position and a venture capital position.      The

result was that the terms proposed were considered excessive by some


                                   - 46 -
                                                         Richard Demuth


of the people that they were doing business with.   If they had been

making direct investment they wouldn’t have thought of trying to get a

creditor’s position for the same money for which they were getting an

equity position.   So I think the novelty of it, the fact that it

didn’t fit in with existing patterns, caused confusion to the

borrowers, and I think it caused confused thinking on the part of IFC,

because in order to provide real venture capital IFC would have had to

do something that really would have looked pretty silly to orthodox

financial circles, something like taking perpetual bonds without any

fixed interest with income dependent on dividends and fully

convertible.   Well, this sort of thing is unorthodox, and the thinking

was, well, let’s think about this sort of thing but let’s make it 50

years instead of perpetual, or better still let’s make it 20 years,

let’s have some fixed interest as well as participation in profits,

and so on.   And when you began to add all these things together, you

got a package that wasn’t anywhere near as attractive to people as a

straight loan and equity investment would be.

     But in any event the US finally changed its mind about the

creation of IFC, and once it changed its mind the proposal moved

rapidly, because then the US took the initiative in pushing it.     It

was decided to ask the executive directors to draw up a charter, and

then the whole thing went into a drafting session with the executive

directors which worked out pretty well.   I think subject to the

limitation, of no equity investment, it turned out to be a pretty good

charter and it’s probably as good as one could expect.   I think that’s

about all.


                                 - 47 -
                                                           Richard Demuth


Q:   It strikes me as very ironic that Mr. Garner, one of the leading

advocates of private enterprise in the Bank, should be in favor of a

plan that the US government or some people in it like Mr. Humphrey

would think of as being socialistic.



Demuth:    Well, there were two great ironies.   One was, the charge of

socialism against a Garner-advocated plan.   Nobody’s less socialistic

than he.   And secondly, the vital and almost essential role that the

United Nations played in getting this adopted.    Mr. Garner is one of

the people around here who has least respect for the United Nations

and has always been derogatory about it, and if it had not been for

the discussions in the United Nations, the public opinion pressures

that were created by the UN, IFC would not have been here today.     In

fact, for a long time the UN emphasized that IFC was its own

brainchild and creature.

                                  * * *



Demuth:    I think when I last talked to you in connection with the very

early days of the Bank and Mr. Meyer’s regime and Mr. McCloy’s regime,

because what dominates my memory is the interregnum between the two

and the personality difficulties.   I may have understated or under-

emphasized the amount of actual policy work that went on during the

first six months of the Bank’s existence when Mr. Meyer was president.

As I think I stated, there were all kinds of committees of the board

reviewing policy questions, and some of the Bank’s policies that are

so established that one doesn’t think of them as issues of policy


                                  - 48 -
                                                            Richard Demuth


anymore were in fact debated and established at that time, or at least

the groundwork was done so that they were established immediately

afterwards.

        I’m thinking of such things as the decision that we would charge

the same interest rate to every borrower irrespective of its

particular creditworthiness, and the decision not to take security for

loans in the normal cases except where we are financing private

enterprise.    In the case of private enterprise financing, there are

various factors which may make security advisable.      But generally no

security for a public authority.



Q:   The negative pledge clause?



Demuth:    The negative pledge clause was also very much debated at that

time.    The whole form of contract was beginning to be worked out at

that time -- the issue of whether we would operate through loans or

through guarantees, because at Bretton Woods, as I understand it,

there was a strong feeling that the Bank would be primarily a

guarantee operation.    The whole question of looking intensely into

projects, rather than simply making money available in the form of a

loan or line of credit holding off all financing until the project is

ready to receive it.    The notion that we really would follow

disbursements to make sure that we only financed those things for

which payments had actually been made.      So that I think I may have

given the wrong impression, that there wasn’t a great deal of work

being done.    We take these things for granted now because they are so


                                   - 49 -
                                                           Richard Demuth


well established, but at the very beginning we had to think all of

these things through.



Q:   Well, there was no sharp division claimed between Mr. Meyer’s

period and Mr. McCloy’s period.



Demuth:   Well, there was a sharp division between Mr. Meyer’s period,

when all these things were being debated in committees of the

directors, with the staff so occupied attending these meetings that it

was very hard to get decisions made, and the period when McCloy and

Garner came in.   The initiative was then taken over by management and

decisions were made very much more rapidly than they had been before.

But certainly the McCloy-Garner team utilized all the groundwork that

had been done during the Meyer regime.     A great many of the personnel,

Dave Sommers and to a certain degree I myself, were all involved in

the same process right through.



Q:   Would you say a bit more about the discussions as to whether or

not the Bank would give lines of credit loans or whether they’d

finance specific projects?   I take it this has been sort of a running

discussion almost throughout its history.



Demuth:   Well, there are a lot of aspects to this.   In the early days

there was some feeling that, if we just knew the general purposes for

which a country needed money we ought to make a loan to the government

and let them spend the money within certain categories.    This was to a


                                  - 50 -
                                                           Richard Demuth


large extent Collado’s view.   He pounded the table and said, “You have

to make 40 million dollars available to Chile within the next few

months.   I know them, they’re good people, they need money.�

     Well, that disappeared very quickly, and it was generally

recognized at a very early stage that we had to be satisfied with the

soundness of the program for which the money was needed.

     Then there was the question of definition, of “what is a

project?�   Should a project be considered primarily a factory or a

power plant or a distribution system, or could you make a project out

of a specified expenditure?    In other words, suppose there was an

import program for a lot of spare parts and other miscellaneous

imports needed for the economy of a country, for private industry as

well as governmental efforts—could you take that kind of a program and

call that a project?

     The way we evolved, this is not a project now, not considered a

project, although if you read the Fifth Annual Report you will see

that we say there that the whole specific project approach was

designed simply to insure that we knew what our money was being used

for and that it would be used for high priority purposes, and that

definition would include loans for a program.

     I think the general feeling here in the Bank has been that while

countries that were well managed would use the proceeds of a program

loan effectively and that for them, a program loan would be just as

good as a project loan.   For other countries, less well managed, we’d

never be able to tell whether the imports were well used or not, and




                                  - 51 -
                                                         Richard Demuth


therefore it was better to look at a specific project in the terms

which we use now.

     Then there were all kinds of debates as to how far we ought to go

with projects.   We’ve gradually gone deeper and deeper into getting

into the details of projects.   Some of us think that sometimes we go

into too much detail.   But this is something that’s a matter of degree

and it’s hard to pose this as a policy issue.

     Another issue that was discussed in the early days—the question

of whether you should say to a country, “We’ll make you a line credit

of say, 20 million dollars to be utilized for projects that you work

up, and when you work them up we’ll examine them and if we’re

satisfied with them then we’ll let you draw on this line of credit

against them�—this is the device which the Export-Import Bank used

very extensively and still uses, and DLF has used, and it’s got the

great advantage that if the borrowing country has an immediate

political need for money, you can assure the country that they’re

going to get money if they get sound projects and stimulate project

preparation.   And you give them great assurance in their planning.    It

has the added advantage for institutions like the Export-Import Bank

that they make double capital out of it.   They make capital out of the

time they grant the line of credit, and then they again make capital

in publicity terms at the time they approve the drawing on the line of

credit.

     The basic difficulty, and the reason why we didn’t adopt it, is

that it puts terrific pressure on the lending institution to approve

projects, because once it grants the line of credit, then if it never


                                 - 52 -
                                                          Richard Demuth


finds a project that is satisfactory, the pressures build up and the

government will say, “Maybe you didn’t mean this line of credit, you

give the line of credit but you haven’t approved a single loan on it.�

      We thought we would be in a better position to make sure that the

country did the things necessary to absorb the money effectively if we

didn’t extend the credit until the project was ready to receive the

money.    Now, we’ve had a different policy of course in connection with

development banks, where we’re simply putting a development bank in a

position to make commitments which they have to work out afterwards.

      But I think on the whole our policy in this respect has been

sound, although it puts us sometimes under criticism that we don’t

function as generously as some of the other institutions.



Q:   I think you left the impression that Mr. Collado was inclined to

want to give lines of credit or more general balance of payment loans.

Is that correct?   Or was it the board of directors, for example?



Demuth:   The Chileans had come up with a loan request and mentioned a

number of projects, but none of these projects had been worked out to

the point where they were ready for financing.   Our first development

loan was in fact to Chile.   I think about two years later, and I think

it was for one of the projects included in the original request.     I

suspect some of the projects that were in that 40 million dollar loan

request have never gone through yet.   So I suppose some of them were

good and some of them weren’t.   You’d actually have to go back to the

records to see on that.


                                  - 53 -
                                                           Richard Demuth


Q:   I wonder if you’d like to say a bit more about the whole technical

assistance operation.



Demuth:   Yes.   That’s a big subject.   We started in this technical

assistance field as the result of a realization that although we were

being very careful to see that our money was used effectively for

priority projects, all the care that we were using in connection with

our own money wasn’t going to have very much effect on the development

of the country if they were using the resources released by our loan

and all the other resources for silly projects, wasting the money.

Basically we weren’t a bank just in terms of wanting to lend money and

get repaid with interest, but we were interested in the effects of our

operations on the development of the country, and that development was

going to be very much more affected by what the country did with the

90 percent of the resources that came from domestic sources or other

financing agencies than by what it did with just the small percent,

the small fraction, that came from us.

      In part this was also due to the fact that in order to determine

the priorities of projects presented for Bank financing, we had to

look at the whole program of a country to determine whether a power

project or another project had priority.    So we had to look at what

they were doing in the whole field of industry and agriculture, so

that our people were gradually getting a good deal of knowledge about

the economies of some of our countries.    And we realized that very few

of those countries had effective programs of any sort.




                                  - 54 -
                                                           Richard Demuth


        So we felt that—we had a number of discussions internally before

we ever took any outside action—that if we could effectively help

these countries program the use of their own resources, using bank

loans as both a carrot and a stick, we might be doing very much more

than just finding a few projects to finance ourselves.

        There was a good deal of opposition to this approach within the

Bank.    People were saying, “Well, if we help the countries draw up a

program, then we will be committed to finance a portion of that

program.    Do we want to take this commitment?�

        And to their credit, the management of the Bank said, “Yes, there

is a moral commitment, and we recognize it and we want it.     We’re

anxious to make loans for sound programs.    We think we can make more

loans where a country has a good program and uses its own money

effectively.    We can accomplish more of the Bank’s objectives.   So

we’re not worried about the moral commitment.�



Q:   Is this a particular period or time in the Bank’s history?



Demuth:    Well, this was I think around 1950, ’51, because—



Q:   Shortly after Mr. Black became president?



Demuth:    I don’t know if Black or McCloy was president at this time.



Q:   Black became president in ’49.




                                  - 55 -
                                                             Richard Demuth


Demuth:    It must have been after Black became president.    Well, we did

a lot of talking about this and there are internal Bank documents on

this subject, as to what we should do.     At that point Mr. Garner got

very interested in Colombia, got very close to some of the leaders of

the government in Colombia, and we had more or less decided that we

were going to make Colombia somewhat of a showcase, show what we could

do in one country in Latin America, and this might have a stimulating

effect on other Latin American countries around.

        Somewhere along this time, the Colombians came in, or some of the

Colombians came in—I think it was Emilio Toro, who was then the

Colombian director at the Bank—and said, “We’re having a hard time

making decisions on our investment program because we’re divided into

five separate regions, and we’ve got more regional loyalties than we

have national loyalties.    Everybody thinks first of his region and

second of Colombia as a nation.    So all our decisions are made on the

basis of balancing all of the regional and political influences

against other regional and political influences, and nobody’s looking

at the problem on a national basis—won’t you send a commission down

here and recommend a development program to us?�

        To what extent this was an original idea of Toro’s or initiated

by Toro and to what extent it was implanted in Toro by Garner, I don’t

know.    I think he had a good deal to do with stimulating the request,

because it was something we were anxious to try out.



Q:   Toro was what?




                                  - 56 -
                                                            Richard Demuth


Demuth:    He was the Colombian executive director of the Bank and an

important influence in the Colombian government at that time.

        At any rate, we did get the request, we agreed to accede to it,

and then we went about trying to organize a mission.      We spent months

getting the first head of the mission.      We got Lauchlin Currie.

That’s a story in itself but I won’t go into it at this time.



Q:   Was he already in Colombia?



Demuth:    No, he was at that time a business consultant in New York, an

economic consultant in New York.    And we got about a 14 or 15 man

mission that went down to Colombia and spent three or four months

there and came back and spent a year writing a report.      And that

report has since been extremely influential in helping shape the

development program of Colombia.

        After the report was written, we were faced with the problem of

how to translate a report for a—into a Colombia program.      We suggested

to the Colombians that they set up a non-partisan citizens’ committee

to review the report, and to make recommendations to the government as

to the action the government should take on the report.      They did.

They set up the Economic Development Committee.      This was the first

time in years the two parties had worked with one another.      And they

sat for months, with help and encouragement from the chief economists

on the mission, considered various aspects of the report, made their

own reports to government, and a great deal of action followed from

that.    At the same time we published the report here and I think they


                                   - 57 -
                                                         Richard Demuth


published it in Spanish.   And we had a good enough view of this report

that we decided the technique should be extended to other countries.

      Then I think Turkey asked for this kind of mission, and we sent

the wrong kind of mission to Turkey—personalities who’d made their way

in the business world but had no idea what economic development

consisted of.   That mission was headed by a man who’d come up through

Sears Roebuck, who went out to Turkey on a preliminary visit and came

back and recommended a mission—a mission composition on which there

was no economist.   Well, unfortunately we still employed him to run

this job, and the mission was a terrible mess and we finally had to

pick up the pieces and write the report ourselves.   We wasted—



Q:   --why did the Bank decide to go outside of its own staff to do

these reports in the first place?



Demuth:   Necessity, because it takes—oh, it’s a year’s report writing

job at a minimum, and although we always put some people from our

staff on the mission, we couldn’t even put all the economists on, to

say nothing of all the specialists.   Some of the specialists required

were in fields where we had no experts on the staff, and even where we

did, our people were very busy operationally and we felt that

particularly in the specialist group, we could effectively go outside.

And this is a pattern that’s developed really over the years.     We

always put on these missions with a few exceptions – it’s our policy

always to put on these missions from the staff either the mission

chief or the chief economist or both and usually one other economist.


                                 - 58 -
                                                           Richard Demuth


This way you get the experience we’ve had in this field translated

from one mission to another.   Then we usually get one or two

economists from outside, and then some of the specialists from

outside.   Sometimes we have a transport man from the Bank or a power

man or an industry man, but usually the Bank’s staff is so busy we

have to go outside.   And this is a field where you can, because on

these specialists’ jobs it’s only a four to six months assignment and

people are very anxious to get them.   We’ve been able to get some very

high caliber people that way that we couldn’t ever have hoped to

attract to the permanent staff of the Bank.



Q:   Was there also a consideration of the sort that you were talking

about before, that the Bank did not want to get too closely involved

in the missions because this would imply that the Bank was going to

finance the program the survey developed?



Demuth:    Well, this is kind of a fuzzy area.   Our legal posture is

that these reports are the reports of the missions, in fact they’re

the reports of the mission chief who’s responsible for the report, and

all the Bank does is approve the report in the sense of certifying

that it’s a piece of work done by a serious and competent group that

should be given very careful consideration by the government.    The

Bank doesn’t approve the individual recommendations.    Nonetheless we

recognize that in the country those are regarded as International Bank

reports.   We reserve our legal position, but it doesn’t really affect

our moral responsibility, and we know this, and because of this we


                                  - 59 -
                                                          Richard Demuth


very carefully review those reports, and we have in many instances

pressed for substantial revisions in the reports simply because we

didn’t think that they were reports that we wanted to live with.

We’ve had many hot discussions and many very very difficult sessions,

where we had to get reports rewritten because they weren’t something

that we were going to stand back of.   On the whole, however, I think

the end results of these reports, in almost every instance—there was

one case that we weren’t very proud of and some others that weren’t

quite as good, but for the most part these reports have been something

that we were quite ready to stand behind.   And surprisingly enough,

they have never really embarrassed us as one would have expected with

the very substantial number of recommendations that go into these

reports and the large number of countries, that we would have been

embarrassed and subjected to substantial criticism for erroneous or

incompetent reports and recommendations.    This has happened in

individual cases but nothing of any serious nature at all, and to the

contrary, the reports have had a much larger influence than I

expected.   I’m always pretty cautious about this because it’s terribly

hard to tell what the effect of a report is.   You never know how much

would have been done if there’d been no report.   You never know how

much actually is attributable to the report, or the training, which

some local official has obtained through his contacts with the

missions.   I’ve been pretty cautious in assessing the value of these

things.   I remember once I gave a lecture at EDI about this and was

being very cautious, and I got very strongly attacked by three members

of the EDI who came from countries to which we had sent missions, and


                                 - 60 -
                                                          Richard Demuth


each of them said that I was badly understating the effect of those

missions, that the organized development effort in his country had

really started from the time the Bank’s missions went in.   Which was

very encouraging to hear.

       The one thing I think it would be wrong to conceive of these

missions as thinking up of brand new development programs, or come up

with bright new ideas that have never been thought of before.

Basically what they do in most instances, is to give support to the

people in a country who are trying to do the right thing but

frequently don’t have enough power or political influence to do that,

and having the Bank report to rely on, they can do what they wanted to

do anyway.   The missions also provide a longer-term perspective, of a

kind that a day to day operating official of a government can’t easily

get.   The missions go out and stand away from the day to day problems

and take a longer view than the government would normally take.



Q:   I suppose the fact that the Bank is in charge of the report, so to

speak, if not legally committed to its conclusions makes the report

much more useful from the standpoint of the borrowing country than if

the report had been done say by a center of international studies at

MIT or any given outside organization.



Demuth:   Well, I think, Number 1, the Bank has a reputation that most

of the other organizations don’t have, so that when the finance

minister or the prime minister gets up and says, “We must do this

because the Bank says we must,� this has a great deal more political


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importance than if they say, “We must do this because Max Millikan

says we must.�   So that’s Number 1.

     Number 2, they help to get financing, which is extremely

important.    Number 3, and this to me is very important, the program

usually must include not only use of domestic resources but use of

resources that can be reasonably expected from the outside.   That

means you have to make an estimate as to what people expect to get

from our Bank, the Export-Import Bank and whatnot.   It has to be a

pretty realistic assessment of what outside resources are likely to be

obtainable.   And when other bodies send out missions, they’re not

responsible for financing, and they’re liable to take the needs and

say, “Here’s what needs to be done, this is a reasonable objective,

this is the amount of money that will be required,� without thinking

too deeply about, can that money be repaid?   Is it likely to be

forthcoming in a form that doesn’t have to be repaid?   And so forth.

So you find in most cases in reports written by UN groups or FAO

groups or others that used to be in this business at one time, an

unrealistically high program is presented, which never can find the

finance, and which has the result that when it isn’t carried out it

causes disillusionment and discontent, worse than if the report hadn’t

been done.

     I think our reports on the whole have been inclined to be more

realistic, without being too bankerish in the sense of trying to cut

it down to a minimum.   We try to give alternative programs, depending

on the amount of money the country will find available.




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Q:   Did the Bank coordinate its missions in any way with these of

other organizations like FAO?



Demuth:   Oh, yes, we’d always go to FAO for example in picking out

agricultural exports.    We’d have them briefed by FAO on the way out,

and debriefed by FAO on the way back, and we’d send the pertinent

parts of the report to them in draft form for comment.    Similarly with

WHO and UNESCO.   In these countries like Libya where the UN has had a

big program, our whole report is submitted to them for review.   The

mission retains the right to reject the comments of the other agencies

and in some cases there are fundamental disagreements on some points

that never do get resolved.   These are the exceptions.   We work very

closely with the other agencies and they have told me that they find

it very useful to have these reports.

      One of the most interesting things about these general survey

missions has been the fact that several colonial powers have asked the

Bank to send missions to their colonies.    This has been particularly

the case with the U.K.   Not that the UK couldn’t organize a mission

that was just as good as any we could organize, but if they did it and

sent it out, the local government was likely to think the report of

the mission was made for the benefit of the UK rather than for the

benefit of the colony.   So the U.K. decided that they would like to

have these developing country missions come from the Bank, even though

that meant that the colonial office in the UK lost control of what the

report said.   The missions had a great deal more acceptability coming

from an independent institution.    And the UK colonial office has in


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                                                          Richard Demuth


fact been our biggest client for this type of mission.    I think it’s

been a very useful relationship.



Q:   What did the Bank itself do with these survey mission reports?

How does it use them?



Demuth:   Well, I think we use them as background material.   I think in

the early days the operating people were inclined to slough off these

reports if they didn’t like them and this is one of the changes we

were seeking to accomplish by putting technical assistance

responsibility in the area departments so that these reports would be

made by missions for which they, rather than some other department of

the Bank were responsible.

      The views of the operating departments vary considerably.   I

think some of the reports are used very religiously as guides for

their own actions, others they’re likely to be skeptical about.   But I

think on the whole they’re quite useful, and I think they’re being

more useful.



Q:   Has the Bank ever considered using these survey missions as a sort

of a starting point for continuous advisory service to a number of

governments for helping them plan development programs?



Demuth:   Well, this is the idea from the beginning, that the survey

mission would be the first step, and we would then maintain a

continuing relationship with the government, helping them to translate


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                                                           Richard Demuth


the mission report into a national development program, and then

helping them to carry it out.   It’s never worked quite this way, but

taking that Colombian survey mission, in the beginning, we first sent

the mission down, then we sent people down to help them consider the

mission report and decide what was to be done and eventually we sent

some advisers down to work with what was then their planning office

and start implementation.



Q:   Were these advisers people from the Bank’s staff?



Demuth:   Yes.   It turned out that some of them left the Bank and got

plush jobs with the Colombian government, to our annoyance.    But I

mention this as the archetype of what we ideally wanted to do in our

relationships.   The difficulty, of course, in all of these exercises

was the lack of people.   It’s terribly hard to find the very high

level people that are necessary for this sort of job, who are willing

to live abroad for a long period of time.   The people who were best

were the people that the Bank wanted to keep in its operation, and the

demand for this sort of thing was tremendous.   All during the last ten

years, the realization of the need for programs, the desire for

programs has been growing, and development economists have been more

and more in demand, so that we just didn’t have the people to carry

out the kind of relationship that we would like to have.

      A number of us have been wrestling with this problem for years.

We’ve suggested that the Bank should have additional people available

for this kind of work, and we advocated what we called the fat man


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                                                          Richard Demuth


policy.   The fat man policy was that we should have some fat on our

bones to be available to be stripped off and made available to the

countries for advisory services.    And it was agreed some time back

that it would be very proper that the area departments should have one

or two “fat men.�   But what happened was what almost inevitably would

happen.   The people that were any good were very quickly absorbed in

operational work, and there never was additional personnel.   That

overstates the fact.   Every once in a while we manage to pry somebody

loose to take a technical assistance requirement; we’ve had a resident

mission in Pakistan and a number of resident missions in South

America, and now Nigeria—but we never were really able to build up the

kind of extra people we needed for this sort of work.   And there were

a number of reasons for that.    One of them, I think, was the fact that

department heads were quite naturally reluctant to take on people when

they didn’t see exactly what job they’d fit into.   Secondly, this

requires a pretty high level type of person, and to get that kind of

person into an organization already established is likely to disrupt

morale.   Because they have to be brought in at a higher level than

many of the existing staff.   Because we have a necessarily pyramidal

organization it would disrupt the hierarchy to get these people in at

high level kinds of positions.   And I think there was also probably

opposition by some of the operational heads who were very much more

interested in making loans than in looking at development in a broad

way and considering their responsibility for development, as a

developmental, a broad developmental responsibility in which financing

was a major tool, rather than just a financing responsibility.   It


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                                                         Richard Demuth


varied considerably and does still vary from department to department,

depending on the personality of the department head.

     At the same time that we were unsuccessfully trying to add to the

economic talent available for this sort of work, the demand grew and

grew, because not only were there more and more countries, as new

countries became independent and needed economic talent, but some

countries that had done a lot of planning in the past began to get

into high gear in their development efforts and needed more people to

be sure they were doing the right things, and there was generally much

greater awareness of the importance of some kind of programming, as

evidenced by the US Foreign Aid Bill, for example, where now the great

emphasis is on the kinds of things that we’ve been preaching for a

long time.

     Well, up til now, our technical assistance program has been

concentrated, simply because of the lack of personnel, and we didn’t

want to overstep our bounds and get in the way of other organizations.

We’ve been concentrating on short term experts, short term missions,

survey missions, and similar kinds of advisers going out for short

periods of time.   We’ve always known that this wasn’t the whole answer

or even a major part of the answer, but it’s become apparent that

there’s a tremendous gap in people who are available to do resident

advisory jobs, that the ICA personnel is very spotty for the most

part, not terribly good for this sort of thing.   The UN has never been

able to acquire them.   In a few instances some good people have gone

out under contracts, like Ford Foundation contracts, to Pakistan and




                                 - 67 -
                                                         Richard Demuth


Iran, but there just is a tremendous need for more people available on

a full time basis, particularly for long term resident assignments.

     When we tried to find these people outside the Bank, we ran into

the problem that nobody wants to leave his occupation and career for

two years with no assurance of re-employment, with everything in the

process of going ahead rapidly throughout this part of the world and

not knowing what’s going to happen to them when they come back, and if

we really wanted to get the kind of people we wanted we had to offer a

career service.

     Well, we decided first to take these people on in area

departments, the fat man policy and so forth, but that didn’t work

out, and this summer finally we have decided to establish, partly as

an administrative technique, a new foreign service which we are

calling the Development Advisory Service, which is largely an

administrative gimmick designed to enable us to get in high level

people without their worrying what their position is vis-à-vis the

economic adviser and the area department director, etc., and with

their positions and salaries and so forth depending on their

professional qualifications, not on their particular positions in the

administrative hierarchy.

     This was decided on after consideration of very much more drastic

approaches—that we should sponsor an institution that would be

independent of the Bank, and although the Bank should run it in the

sense of naming its head and lending it the authority of its prestige,

it should be entirely independent of Bank policies and should go out

without the supervision of the Bank.   We felt that we couldn’t do this


                                - 68 -
                                                           Richard Demuth


because we couldn’t give the Bank name without being sure that the

people were going to follow the general lines of Bank policy, and it

could really disrupt things, to have advisers go out from an

institution that we sponsored while we at the same time keep on with

our normal activities of giving advice and reviewing the plans.

      We didn’t have enough people available for any of that to happen.

An independent outfit going out meant that the Bank would have to

review everything that was done and perhaps come to a different

conclusion.   So although we saw some advantages in the suggestion, we

thought the disadvantages were greater, and we set this thing up as an

integral part of the Bank.



Q:   These will be full time people?



Demuth:   These will be full time people that will be available for a

variety of things—resident assignments abroad, being chief or chief

economist on a survey mission, short-term assignments abroad, and then

in between assignments abroad doing operational work, teaching, doing

research, working at the Economic Development Institute.    What we want

to do is give a satisfying career in the whole field of development

with perhaps two thirds of the total time spent in resident

assignments abroad.   Now, whether we’ll be able to get the people to

do this sort of work is the great question.   We have presented it to

the board.    We have presented it as an experiment.   But we’re sure the

demand is there.   If we can get the kind of people we need, I’m sure

they will be immediately absorbed, and this thing will grow into a


                                  - 69 -
                                                          Richard Demuth


very large operation.   But it won’t grow rapidly because it’s going to

be so hard to get the people.   What we eventually want to do is to

build this up in such a way that it becomes the capstone in the career

of a Bank economist.    From the most part we’ll recruit people from the

operational staff of the Bank, after they’ve been trained in the

operational side of the Bank, who gravitate towards development.    In

the beginning I hope, as I said, in the course of developing the

advisory service, some of the senior Bank people will be transferred

to it.



Q:   Is this a brand new departure for the Bank?



Demuth:   Yes, the organization questions haven’t been fully settled.

The only thing that’s been settled now is, it’s an administrative

service within the Bank, headed by somebody with the rank of a

department head.   Exactly how it will be set up, I don’t know.   There

was considerable thought given to setting it up more elaborately as a

development center, including the Economic Development Institute, the

technical assistance program, advisory service, all within a center.

We decided not to do this initially.   Whether it will eventually come

to it or get to something like it through other mechanisms hasn’t yet

been decided.



Q:   Maybe you’d care to say something about the Economic Development

Institute as such, in its relationship to technical assistance.




                                  - 70 -
                                                           Richard Demuth


Demuth:   The Economic Development Institute idea was first stimulated

by Paul Rosenstein-Rodan when he was on the Bank staff, although I

think he had in mind something that was considerably more advanced in

theory.   Eventually for my sins I was put in charge of trying to work

something out of the idea, developing it.    Mr. Black was enthusiastic

about it, as something to do—nobody’d ever gotten down to seeing what

we could effectively do.   And my staff and I did some scouting around

in the United States, talking to a lot of people.    There was a lot of

academic doctrine, theology, that was very foreign to us—the question

of whether we would give a degree or not give a degree.    We had in

mind at one time asking Harvard to do this for us, but to do it in

Washington where we could make our people available, and they refused

to do that.   They said the whole idea of a university was to be

concentrated on a campus, not outside.     We talked to MIT, the same

way, and they didn’t want to do it.   Finally we discovered we were

getting over our heads.    We were getting involved with educational

matters we didn’t know very much about.    We decided to ask Alec

Cairncross to spend a summer here and work out a program, and Alec

agreed to do that.   He came over and spent a summer and wrote a

report.   What he very much had in mind was the Merrill Center in

Southhampton—the idea of a group living together and working together

for a year, six months, and great mind-stretching exercises between

the people.   We generally approved what Alec proposed, and then we

talked Alec into agreeing to head the thing for the first 18 months.

     Then came the problem of trying to find a Merrill Center in the

midst of Washington, or close enough to Washington that staff could be


                                  - 71 -
                                                           Richard Demuth


made available, not so far out that people would feel isolated, and

this proved just about impossible.    Eventually we got a great big old

mansion through Mr. Meyer, that he owned, his own home.    We then went

through the problem of decorating it, and found that we didn’t really

know very much about how to run boarding schools, but we got the place

decorated and we got our first group in, and we ran into all kinds of

trouble.    A Pakistani came in—I think it was a Pakistani—and said he’d

never shared a bathroom even with his wife, and why should he share it

with his Indian colleague across the hall?    An Indian wanted tea

served in bed.    He’d always had tea served in bed, why shouldn’t he

have it?    They were a miserable and unhappy bunch because they weren’t

getting the kinds of facilities they were used to, and they were

thrown on top of one another.    So the first year was a very difficult

year.

        Alec was very interested in the intellectual aspects of the year

and very impatient with these administrative housekeeping details.

The net result was that they had an exciting time intellectually and a

miserable time in their personal relationships, and we had to do a lot

of rethinking about that.

        Alec really gave the Institute a very distinctive character,

through his own personality, and the persons who were part of his

first faculty were among the best people at the Bank.    They worked up

a pretty good curriculum.    My goal then was merely one of making

contact with the Bank and I worked with them to a certain extent on

revising their curriculum.    Alec left the middle of the second year,

and Mike Hoffman came on.    Mike considered his job quite differently


                                  - 72 -
                                                            Richard Demuth


from Alec.    He considered his job to be more that of the executive

director, getting other people in to do the substance, not trying to

do as much of it himself as Alec did.      At the same time, he was a much

neater administrator.    The calibre of the participants has been very

good.    This was our great worry at the beginning, could we get people

who were good enough to warrant the expenditure of money?      On the

whole the calibre has been very good.      I think the discussions have

remained lively.

        I’ve been disappointed in two aspects.   One is that we don’t in

the Bank get as much of the benefit of these discussions and

criticisms of the Bank’s policies or suggestions of new Bank policies

as we should.    There’s no a two way interchange there.    The Bank

people go teach at the EDI, but there’s never been the mechanism

through which the value of what goes on in the discussions at EDI

comes back to the Bank.    And perhaps related to this, I’ve been

disappointed that EDI hasn’t published more.      I had hoped that as a

result of these discussions, preparations of lectures and preparations

of teaching materials, we’d be able to get out some teaching material

on economic development that would be useful, and get more people

knowing more about development which would redound to the benefit of

the Bank, and that we’d get more books published of the kind that Bill

Diamond wrote on development banks, which was stimulated there.        We’ve

had a few, Bill Diamond’s book, and the Tinbergen pamphlet was really

done on Rist’s initiative for the EDI.      Now Al Waterston is working on

something, organization for development planning.      But there hasn’t




                                  - 73 -
                                                          Richard Demuth


been as much thinking and writing on the Bank as I really think there

can be and should be and maybe in the future will be.



Q:   I’ve heard that initially there was hope that the EDI could make

considerable use of the experience of the Bank itself in the

development field, but one of the difficulties was that loan

negotiations and working party reports and so on in the Bank couldn’t

be made fully available, for reasons of the confidential nature of the

material involved.



Demuth:   Well, that puzzled me, because one of the early decisions

that was made was that we were going to treat the EDI participants as

Bank staff members and we would make available confidential material,

with agreement by them not to reveal it.   I was under the impression

that they utilized Bank materials very freely in teaching courses.

I’m surprised at this—if it’s true, something ought to be done about

it—I didn’t realize it was so.   I also think—we’re not talking history

now, but of the future—but I do think EDI should and probably will

experiment.    I think we need a great many more training courses.   For

example, I think we need a course, a training course for development

bank people.   I think we ought to have a training course in project

appraisal for programming people.   This may require different kinds of

facilities, different kinds of staff, but there seems to me no reason

why you can’t or shouldn’t take advantage of our experience in the

Bank to have short as well as long courses on specific subjects as

well as on the whole broad spectrum of the problem.


                                  - 74 -
                                                          Richard Demuth


Q:   I think you said, didn’t you, that you’re hoping to have some sort

of a coordination between this new advisory service and EDI?



Demuth:   Well, I think there has to be.   I think the members of the

advisory service should be available from time to time for teaching.

It seems to me that a great deal that’s being done at the EDI would be

of value to these people in the advisory service.    What Waterston is

doing, I mentioned, on organization and development of programming,

certainly ought to be useful to most of these advisors.   So I would

think there has to be a pretty close relationship.   Training is just

one aspect.



Q:   There’s about five minutes left on this tape.   I wonder if you’d

like to use it to talk about development banks, or is there something

else that you’d rather deal with?



Demuth:   Well, development banks—that’s another big subject.   I guess

Garner again was the one most responsible for getting us into this

field.    It started out when he perceived the necessity for

establishing some kind of an effective long term industrial financing

mechanism in Turkey, wanted to get it out of state control, and

proposed the establishment of some kind of a private investment

institution that the banks would own, and gradually get investors in.

      This is a very difficult field, because we’re aware all the time—

our bank policy has been that we will support only privately owned

development banks, but we know that privately owned development banks


                                  - 75 -
                                                          Richard Demuth


in most underdeveloped countries can’t exist without some kind of

subsidy, and the only place that subsidy could come from is

government.   So we set up private banks with government support and

government subsidy, and then try to make—try to get every assurance

that the government won’t have anything to do with the operation of

the banks.    This is a pretty difficult road to follow, because it

takes a far-seeing government to say, “We’ll give half of the

resources or guarantee loans and so forth for these institutions, but

we will have nothing to say about them,� when they are prime agencies,

prime instruments, for pushing a major sector of the economy.

     On the other hand, many governments have recognized that

government-owned instrumentalities are apt to get their resources

frozen through making political loans, and this is an ineffective way

of carrying out development.

     All of these institutions are sort of anomalous.    They’re

privately owned, with a certain amount of public funds, a certain

amount of public influence.    But on the whole I think the record has

been pretty good.   The two biggest banks, the Indian and Pakistani

banks, Mr. George Woods of the First Boston Corporation set up as a

consultant to us; both of them have had tremendous troubles, troubles

in part caused by the necessity of having a foreign manager, as there

was no local investment banking experience, but a foreign manager

brings problems with him, no matter how good he is—in some cases

foreign managers have not been as tactful or as good as they should

have been.    The board sometimes necessarily represented the

industrialists of a country, because they were the people with the


                                  - 76 -
                                                          Richard Demuth


money, but where they had an interest in either promoting or

preventing projects going forward—and practically everything that came

up in India for a while, there was somebody, usually a number of

people on the board, that had an interest either in promoting or in

stopping it.

      The fact is that in most of these institutions, the motive of the

private people that come in isn’t an investment motive, because these

institutions have such a large overhead that you can’t develop an

institution that—they can’t be very profitable, and investors of any

sense don’t go in to make money.    They go in either out of patriotic

motives or because they see that the institution would be good for

their own banks, industries or whatnot.



Q:   What is the role of the World Bank in getting these started?



Demuth:   Well, we have been a motivating force, in Turkey, India, in

Pakistan, they saw the Indian one and they said they wanted one like

it, and then we promoted it.   In Iran, the actual lead there was taken

at the request of the government by Lazard Freres and Chase

International.   We participated in the discussions, and were an almost

necessary intermediary between the government and Lazard Freres and

Chase.    In Ceylon the bank was set up at the suggestion of a survey

mission, and again as the result of a bank mission that went out there

and promoted it.   Similarly, we provided either technical assistance

or actually suggested the idea in Thailand and Taiwan, where they have

a very good little development corporation.   The history of that was


                                   - 77 -
                                                           Richard Demuth


that they sent a bankers’ mission over here, and we talked to them

about some of the things we’d done in development banks elsewhere, and

they went back and recommended that a development bank be set up.       We

sent out a mission.   They actually beat the gun, because they set up

their development corporation before our mission reported.    There’ve

been various ways we’ve given encouragement, advice and assistance.

Sometimes we’ve put people out for a period as advisers.    Bill Diamond

was out in India for a year.



Q:   Do you make loans to these?



Demuth:   Yes, we’ve made—most of the development banks, we’ve used as

an intermediary through which we can make loans to private

enterprises.   We can’t make direct loans to anything but big private

enterprises, because they’re the only ones in a position to get

government guarantees or which can afford to accept a government

guarantee.   But in terms of processing the medium and smaller sized

industry, industrial projects, the development bank knows the people,

is in a position to process their loans, and they don’t have to have a

government guarantee for their sub-lendings of our loan.    There’s a

pretty full discussion of all this in the two books that we put out on

development banks, so I’m not sure it makes much sense for me to go

into it more fully here.




                                   - 78 -