Digitized Records of the �°Ĳʿ��'s First Loan

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Digitized Records of the �°Ĳʿ��'s First Loan

2017 is the 70th anniversary of the signing of the �°Ĳʿ��’s first loan – a Reconstruction Loan to France in 1947. To mark the occasion, the �°Ĳʿ�� Group Archives has publicly released records relating to the loan and made digitized versions of the records available through the �°Ĳʿ��’s database. The digitized records, which consist of correspondence and memoranda relating to the negotiation, administration, and repayment of the 1947 loan, evidence the work involved in the execution of this seminal event in Bank history.

Initial Challenges

�°Ĳʿ�� officially opened for business on June 25, 1946. As with any new organization, there were initial difficulties.

�°Ĳʿ��'s first President, Eugene Meyer, resigned abruptly in December 1946, without a clear successor. The Bank’s Vice President, Harold Smith, died suddenly on January 23, 1947. Although a few applications had been received, the Bank had thus far made no loans. However, the election on February 23, 1947, of John J. McCloy as the Bank’s second President marked the start of true operations in the �°Ĳʿ��. The Bank soon embarked on the preparation and execution of an important series of reconstruction loans to Western Europe countries, the first of which was to France.

The Loan Application

The French loan application for $500 million arrived as a simple letter attached to an outline of the government’s reconstruction program, the Monnet Plan. The overall requirements included $106 million for equipment, $180 million for coal and petroleum products, and $214 million for raw materials. The equipment included ships, freight cars, trucks, radio and electrical equipment, and coal mining equipment. The list of raw materials included fertilizers, copper, tin, synthetic rubber, animal fats and chemicals.

The timing of the French loan was ideal for the Bank to establish its credibility as a lender. It was just before the Bank’s first bond issue. France was expected to make good use of the dollars and was an acceptable credit risk. It was also understood within the Bank that this loan would not set a precedent. The loan was not “for the purpose of specific projects of reconstruction or development,” as specified in the Bank’s Articles of Agreement, but was covered under the “special circumstances” provision. For many years to come, program loans such as this French reconstruction loan would remain a minority as the Bank concentrated on project lending.

Appraisal

In his , Richard H. Demuth, at that time Assistant to the �°Ĳʿ��'s Vice President, recalled the challenge of appriasing what would become the Bank's first loan:

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 creditworthiness studies hadn't yet been developed. Just like any other new institution in a new field, at that time we were trying to struggle along finding our way.

Loan Negotiations

In his autobiography, This Is the Way It Was, then Bank Vice President Robert L. Garner recalled that the loan negotiations were not without their difficulties:

It was difficult for [French chief negotiator Wilfrid Baumgartner] to accept our policy to require specific certification as to the precise use to which every dollar of our loan would be applied and the provision of the negative pledge clause. There was no precedent for such requirements and he considered that they were a derogation of the dignity of his country. The requirement for specific designation of the use of all the proceeds meant that every contract for purchase of equipment and materials must be submitted and approved by the staff of the Bank against certified bills of the suppliers. [...] We agreed to station a staff member in Paris to facilitate the necessary approvals and the system which we set up has been followed by the Bank.

Signing the Loan

France had originally applied for a loan of $500 million. The Bank agreed to half that amount, with the possibility of a second tranche. The relative amounts for each category in the overall requirements remained the same. The loan was signed on May 9, 1947. With this loan the Bank committed more than one third of its loanable funds held on June 1,1947. In real terms it is still the Bank's largest single loan, with a 1997 value of $2.6 billion.

The Bank’s assessed the circumstances surrounding the loan to France:

The importance of France in the economic position of Europe made it particularly fitting that France should be the first country in whose reconstruction the Bank should play an active part. France is vital to Western Europe because of her size and her productive capacity and the problem of her recovery cannot be divorced from the recovery of Western Europe as a whole.

The Bank is fully aware of the uncertainties and difficulties facing France. Leaders of the French Government themselves have stated that they realize that unless France's budgetary difficulties are overcome, the ensuing fiscal instability will endanger the entire reconstruction program. Some of the factors impeding recovery are beyond the control of France. But to the extent that France has been able to speed her own recovery considerable success has been achieved. Her external debt record has been excellent. The Bank believes that its loan will hasten the process of reconstruction, that it will result in raising the level of France's productivity, and that the risks involved are of the type which the Bank was designed to accept.

Recovery in Western Europe

Further reconstruction loans to the Netherlands, Denmark and Luxembourg followed. Including the loan to France, the Bank loaned almost $500 million to postwar reconstruction efforts.

Although the Bank's efforts were later upstaged by the Marshall Plan, they played an important part in the economic recovery of Western Europe.

As part of the Bank’s fifteenth anniversary in 1961, Richard Demuth looked back on the accomplishments of the �°Ĳʿ�� in the pages of the Bank’s internal staff newsletter, . He describes both the risk involved in the Bank’s first loan and the ultimate reward:

In the winter of 1947 the prospects that Western Europe would achieve economic viability were bleak indeed. The financial requirements were immense and the countries of Western Europe had practically no foreign exchange reserves to help meet them. Indeed, the threat loomed large that the Western European economies would come to a standstill for want of dollars to keep essential food, fuel and raw material imports flowing in. The Bank's reconstruction loans were an emergency measure to meet this situation. It took a bit of stretching for the management to conclude that repayment prospects were reasonable; the economic report on France, for example, laid its stress, not on financial resources or specific export prospects, but on the French "collective will to recover." The Bank's gamble paid off handsomely, however, for it won time necessary for the European Recovery Program (the Marshall Plan) to be formulated and put into effect (with considerable help from the Bank's staff), with results that are now familiar history.

Sources:

“The Bank’s First Loan: $250 Million to France.” . May 1987.

Demuth, Richard H. “A Look Backward.” . June 1961.

Demuth, Richard H. . �°Ĳʿ�� Group Archives Oral Histories, August 10, 1961.

Doggart, Caroline, "From Reconstruction to Development in Europe and Japan" in Lateef, K. Sarwar, ed., . Washington, D.C.: �°Ĳʿ��, August 1995.

Garner, Robert L. This Is the Way It Was. Chevy Chase, Maryland: Chevy Chase Printing, 1972.

International Bank for Reconstruction and Development. . Washington, D.C., 1947.

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