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NEWS RELEASE
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D. C.

FOR RELEASE AT k P. M.,
MONDAY, OCTOBER 19, 196*+:

20429

Telephone: 393-8400
Br. 221

PR-99-6k (10-15-6*0

American prosperity and security depend in large part upon continued
development of emerging nations through the activities of the World Eank
and its affiliates, Chairman Joseph W. Barr of the Federal Deposit Insurance
Corporation declared today.
Discussing the role of the World Bank and the International Development
Association, Mr. Barr said "the international credit structure represents one
of the few islands of order which make international cooperation possible
today."

Maintenance of the World Bank, and continued support by the

United States, must be continued, he said, "for our security and prosperity
are at stake."
Addressing an afternoon session of the annual convention of the Iowa
Bankers Association, at the Hotel Fort Des Moines, in Des Moines, Iowa,
he declared "a vital part of the new diplomacy involves preserving this
credit structure and expanding economic activity under it, for only by
doing so can we maintain working relationships with these turbulent lands
where the future holds so much uncertainty."
Mr. Barr added, "It would be sheer blindness to ignore in our foreign
relations one of the great strengths which the United States has as the
free world’s leader —

the strength which comes from our great wealth of

capital."




(more)

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Citing some of the development activities of the World Bank and IDA.,
Mr. Barr pointed to another advantage reaped by the United States, the
"increasing rate" of exports from the U. S. to developing nations, and the
continued development of profitable investments available overseas to
private investors.
He urged his banker audience to support this program of economic
development which, he said, "ranks with military power and political skill
as one of the three main branches of diplomacy."
He concluded, "it is this branch which is most concerned, perhaps, with
maintaining the balance of hope in the proposition that other lands, so
deeply affected by our ideas and achievements, will develop ways of life
which are at least consistent with our security and compatible with our
concepts of freedom."




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NEWS RELEASE
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D. C.

20429

FOR RELEASE AT k P. M.
MONDAY, OCTOBER 19, 19^ :




BANKING TECHNIQUES IN FOREIGN POLICY:
THE INTERNATIONAL DEVELOPMENT ASSOCIATION

Address of
JOSEPH W. BARR,, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D. C.

at the

ANNUAL CONVENTION

of the

IOWA BANKERS ASSOCIATION

Hotel Fort Des Moines
Des Moines, Iowa

Afternoon Session
Monday, October 19, 19^^

Telephone: 393-8400
Br. 221

Address of
Joseph W. Barr, Chairman, Federal Deposit Insurance Corporation
Before the Iowa Bankers Association
Hotel Fort Des Moines, Des Moines, Iowa
Monday P. M . , October 19, 1 9 ^

BANKING TECHNIQUES IN FOREIGN POLICY:

THE INTERNATIONAL DEVELOPMENT ASSOCIATION

It is now nearly twenty years after the end of World War II and we
Americans are still getting used to the fact that diplomacy in our time has
become such a radically different thing from the stereotype we were taught in
school.

Just consider the contrast for a minute.
Our two great ambassadors of the revolutionary period, Benjamin Franklin

and Thomas Jefferson, were brilliant defenders of this country's interests; they
used their assignments abroad to make friendships' and spread propaganda for America
with great skill and imagination.

It was part of Franklin's diplomacy to bring

together the great scientific minds of Europe and America to share the results
of their experiments and in the process the image of America grew in stature in
Europe.

It was part of Jefferson's diplomacy to discourse brilliantly on political

theory with the great thinkers of Europe, and in the process America grew as a
fascinating study for Europeans in search of a new beginning to their political
affairs.
But we can be sure that neither Jefferson nor Franklin ever dreamed what
diplomacy would be like in our time.

They never dreamed that a whole cross

section of America would be transplanted in Germany and Japan, to carry out a
military occupation, and that subsequently American soldiers and sailors would
be part of the diplomatic scene in nearly 100 countries around the world.




They

2

never dreamed that the political discourse between nations would grow into a
global propaganda war between freedom and communism, involving all the heavy
machinery of mass communications.

They never dreamed that in one year

in

1963 to be exact -- the United States government would be officially represented
at 537 international conferences to discuss and debate everything from the laoest
developments in science to the problems of buying and selling coffee and cocoa.
They never dreamed that the traditional arts of economic reporting by consuls
abroad would grow in our time into a huge program of development diplomacy,
where technical ambassadors from the farms and factories of this country would
be working side-by-side with their counterparts in other lands, trying to help
them engineer an escape from the worst perils of national poverty.
Actually it is only in the last twenty years that the ancient arts of
diplomacy have been transformed.

They have been transformed by science and

technology which, while enriching our lives, have forced us to live in
uncomfortable intimacy with other nations —

science and technology which have

brought our communities to within a few minutes by missile from communities on
the other side of the world.
The ancient arts of diplomacy have been transformed by the very political
ideals which Jefferson and his contemporaries preached —
and national self-determination.

the ideals of liberty

If the ideal of individual liberty seems all

too often today to get lost in the slogans of modern nationalism -- or worse
still, perverted by the communists into its very opposite —

these ideals

nonetheless still provide the fertilizer of revolution throughout Asia, Africa,
and Latin America.




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And the arts of diplomacy have "been transformed by the very ideas of
progress which energized that great mind of Franklin's —

ideas which have

persuaded millions the world over that there is an alternative to a life of
poverty.

We have shown the world what society can do when men master the secrets

of nature;

we should not be surprised that millions now want to master those

secrets too, and are impatient to catch up with our material progress.
Nor should we be afraid to accept the impact of our heritage on the
world.

It is not surprising that we are constantly exposed to the immensely

complex business of diplomacy in our time.

For just as science and technology,

just as the pursuit of political ideals, have vastly complicated and enriched
our lives here at home, so they have complicated our relations with mankind
beyond our borders out of all comparison with the past.
Of all the new arts in diplomacy perhaps the one that fascinates me most
is the application of banking techniques to the problems of development
diplomacy -- as Mr. Eugene Black used to describe his business when he was
president of the World Bank.

The World Bank, first under Mr. Black's leadership

and now under the leadership of Mr. George Woods, has made two very important
contributions to the new arts of diplomacy.

It has been able to conduct its

business very largely by raising money in the private markets of the United
States and Europe; and it has refined a banking technique called the "project
approach," which is at once very similar to the down-to-earth kind of banking
you know, and at the same time peculiarly well suited to the very difficult and
delicate problems of dealing with the governments of new nations, all of which
are quite understandably seeking to get rich quick —

or at least to get less poor.

The financial success of the World Bank is a story in itself.




Never

- b before in history has an international organization, made up of

102 sovereign

governments, attempted to float its bonds in the private market.

The World Bank

has done this in the United States, Canada, the United Kingdom, Belgium, the
Netherlands, West Germany, Switzerland, Italy, and Austria.

It has offered its

bonds at the going market rate, and its offerings have been taken up eagerly.
World Bank bonds are held today by private investors and government institutions
in virtually every non-communist country of the world.

The Bank's outstanding

funded debt -- about 1+0 percent of it held in the United States and 60 percent
outside of the United States -- now amounts to $2.5 billion equivalent.
Of course, World Bank bonds would not have been a success in the private
markets if the World Bank didn't make a profit.
have been running at a rate of

It does; net earnings in fact

$100 million a year recently, resulting in

accumulated reserves in excess of

$850 million.

So strong is the Bank's

financial position that at their recent annual meeting, held this year in Tokyo,
the Bank's Governors voted to. transfer $50 million out of last year's net
earnings to its affiliate, the International Development Association.

The Bank

expects to make similar transfers on a regular basis in the future.
But profits are not a good measure of the World Eank's success in the
new diplomacy.

The World Bank's success, just like the success of your own

banks, should be measured in the broadest sense by the contribution made
through lending, not just by the security afforded to savers and investors.
This is even more true in the case of the World Bank, for its whole object is to
help its borrowers -- public utility enterprises, private industries, government
agencies -- to organize, finance, and administer sound development projects.




- 5 -

Here’s ■where the "project approach" comes in.
Just as you want to know what a borrower is going to do with the loan
he gets from your hank, so the World Bank asks a lot of questions before making
a loan.

But the banker-client relationship is a much more delicate and difficult

matter when the Bank is an international organization and the client is one
of 80 sovereign governments.

To put it simply, communication can be very

difficult when you try to be the neighborhood bank to the whole world.
Yet this is just where the Bank has proved its great worth.

The World

Bank is in a way more conservative than you are; by and large, it will only
lend money for specific projects -- projects which it has scouted thoroughly to
he sure that the plans are soundly engineered, that the internal financial
structure makes sense and that management looks competent.
15 years the Bank has loaned
different projects in

Over the past

$8 billion of its own funds to hundreds of

80 countries and territories.

Local governments and

private investors have invested perhaps twice that sum in the same projects.
The World Bank does not open lines of credit in favor of governments
or government enterprises.

It does not make loans simply on the "full faith

and credit" of borrowing governments.

Recently, it has departed from its

"project approach" to make a loan in India to guarantee the supply of certain
key imports to private industry as a whole.

But the important fact is that

the Bank only disburses its money against specific orders for materials,
equipment or services, the end use of which it has thoroughly studied and
explored beforehand.
The conditions laid down by the World Bank are, as I say, quite like




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the conditions which you lay down very often in your own lending.
specific, reasonable, even orthodox.

They are

They may entail new methods of internal

financial controls in public utility operations; they may entail a reform
in the administration of an import licensing program; they may include a
reorganization of a highway maintenance shop; they may insist on the establish­
ment of an autonomous public authority, such as a port authority; they may require
the borrower to hire technical services from abroad, for a number of years.
But ordinary as these conditions must sound to you, they are the very stuff
of the World Bank’s success.

These conditions have led to innovations and

reforms in the borrowing countries; even more than the ability of borrowing
governments to service World Bank loans, it is these innovations and reforms
which promise economic progress in the future in Asia, Africa and Latin
America.
The World Eank has made out of ordinary banking techniques a new diplomatic
art.

Economic progress is made up of a host of rather special requirements which

are often lumped together in the phrase "efficient production."

It is not just

capital, though that’s important; it’s not just government policies, though they
are important; the real common denominators of economic progress are hard work
and efficient production.

It is these common denominators which the World Bank

is working to encourage throughout Asia, Africa and Latin America.
It would be reassuring to be able to say that the World Bank has found
the answer to what we call in Washington "the annual problem of foreign aid."
I think it does provide part of the answer, but unfortunately the nations of
Africa, Asia and Latin America are much too poor to service unlimited quantities
of World Bank loans, even if the World Bank could raise unlimited quantities of




- 7 -

capital in the private market.

In this country it is hard to find a good

prospect —

a good man or a good idea -- which cannot qualify for a bank loan

somewhere.

In the world at large there are a great many good prospects which

cannot be financed on conventional terms simply because the nation cannot
afford the foreign exchange even if the individual or the idea is a good prospect.
In i960 the United States Government borrowed an idea from Senator Mike
Monroney of Oklahoma in an effort to expand the usefulness of the World Bank by
allowing it to finance more of the good prospects it had found in Asia, Africa
and Latin America without burdening its borrower with too much foreign debt.

The

idea became the International Development Association --Ida, as we call her.
Member governments of the World Bank have agreed since i960 to invest $1.5 billion
in IDA in the form of non-interest bearing notes or contributions.

The United

States has put up about Uo percent and Western Europe most of the rest.

The

effect of IDA has been to enable the World Bank to make its money go further;
the financial effect has been to reduce the Bank's effective interest rate in
its borrowing countries by mixing with regular bank loans IDA "credits" which
normally run for

50 years with a nominal service charge in place of interest.

IDA is a unique international organization; in reality it doesn't exist
apart from the World Bank.

IDA's directors are the same as the Bank’s directors,

with a few unimportant exceptions;

IDA's staff is the Bank's staff;

IDA money

is used, with few exceptions, for the same kinds of projects which are financed
by the Bank,

IDA, if you will, is a unique way of reconciling the capital

requirements of the developing countries with the need to preserve and expand
a stable international credit structure.
Let me illustrate the kinds of projects which are made possible by the




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existence of IDA.
In 1950 the World Bank undertook to finance a series of improvements in
the road system of Ethiopia.

The projects were part of a farm-to-market road

program essential to Ethiopia’s economic prospects, for that country earns its
way in the world only as it sells its agricultural products, particularly coffee,
on the world market.

The Bank made loans of $5 million in 1950 and $15 million

in 1957 which, in conjunction with the United States bi-lateral aid program in
Ethiopia, resulted in the establishment of a government highway authority which
now maintains some
In

3?200 miles of all-weather roads.

1983 the highway program faced being cut back for lack of essential

imported materials.

Ethiopia’s balance of payments was under strain and the

country had already contracted a sizeable amount of foreign debt.

Ethiopia

was not a good risk for the Bank, yet the highway program was already "paying
off" in increased exports and increased economic activity in Ethiopia.
Bank decided to draw on IDA funds.

Here the

A $13*5 million credit, maturing in 50 years

with a nominal service charge in lieu of interest, was extended to complete
roads already under construction, to build
the asphalting of

135 miles of new roads and to permit

500 miles of existing road.

Ethiopia has a good prospect which could not be banked in an ordinary
way.

Yet if the prospect were ignored, workers would have had to be laid off

the job; the economic returns promised from Ethiopia’s farm-to-market road
system would be lessened or postponed; some work already in progress would have
been brought to a halt.

It was a natural case to call on IDA funds.

Or take the case of the Industrial Development Bank of Turkey.

This

private bank was established in 1950 with the help of a World Bank loan and a




- 9 -

loan from the Turkish government.

The object was to provide a new source of

financing for some of the hundreds of new private industries which have grown
up in Turkey since World War II.

The World Bank could not afford to deal with

these industries separately; most were simply too small.

So, as it has done in

many countries, the World Bank helped establish the Industrial Development Bank
of Turkey as a way of providing help indirectly for small business in Turkey.
The Development Bank has proved a success, even as the Turkish government
has fought a series of losing battles trying to balance its external payments.
In

1962 the Turkish Development Bank faced a serious shortage of foreign exchange.

Here again the World Bank stepped in, drawing on IDA funds.

A $5 million credit

was extended to the government of Turkey on condition that it be re-lent at a
5"2 percent annual rate to the Development Bank, which in turn re-lent the money
to its clients at 8 percent with maturities appropriate to the individual projects
concerned.

In this way many good private enterprise prospects in Turkey were

served with foreign exchange credit, at the going Turkish rate, to buy essential
imports in a manner which did not further impair the balance of payments of
Turkey.

On the contrary, this investment should strengthen Turkey’s payments

position insofar as private enterprise in Turkey continues its record of profitable
growth and returns to the government, through the Development Bank, 5'i' percent
interest on money which the Turkish government hired for a nominal service
charge.
From these examples you can see that IDA does support the international
credit structure, and I would be less than candid with you if I didn't say that
I think support of this kind is going to be needed for some time into the future.
I would hate to think of the production —




of the economic progress -- which

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would never have occurred had we not given extraordinary and unusual support to
the international credit structure, first and foremost through our bi-lateral
aid program and latterly through IDA.

I would hate to think what a shambles our

foreign relations would become if governments were forced to default on their
foreign debt because loan had been piled upon loan without consideration for the
international credit structure.
The international credit structure represents one of the few islands of
order which make international cooperation possible today.

It is not just that

its continued orderliness is necessary for the future work of the World Bank;
its continued orderliness is necessary if our exports are to continue to flow at
an increasing rate to the countries of Asia, Africa, and Latin America, and if
our private investors are to continue to make profitable investments there.

A

vital part of the new diplomacy involves preserving this credit structure and
expanding economic activity under it, for only by doing so can we maintain
working relationships with these turbulent lands where the future holds so much
uncertainty.
And I submit that we must continue this support —

in partnership, let

it be said, with our European allies -- for our security and prosperity are at
stake,

I don't have to point out to you, as bankers, that it would be sheer

blindness to ignore in our foreign relations one of the great strengths which
the United States has as the free world's leader —
from our great wealth of capital.

the strength which comes

To conduct diplomacy without making use of

our capital would be as silly as to conduct warfare without using the Navy or
the Air Force.
Just as we mobilize the talent of our nation in wartime, so we must




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mobilize our talents for the new diplomacy on which the peace of the world and
our continued prosperity depend.

The part that banking techniques have come to

play in this new diplomacy is so important that you should make yourselves
heard in the debates and discussions about how these techniques are employed.
For economic development today ranks with military power and political skill as
one of the three main branches of diplomacy.

And it is the branch which is most

concerned, perhaps, with maintaining the balance of hope in the proposition that
other lands, so deeply affected by our ideas and achievements, will develop ways
of life which are at least consistent. with our security and compatible with our
concepts of freedom.




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