Presidents, Bankers, the Neo-Cold War and the World Bank

 At first glance, the neo-Cold War between the US and its post WWII European Allies vs. Russia over the Ukraine, and the stonewalling of Greece by the Troika might appear to have little in common. Yet both are manifestations of a political-military-financial power play that began during the first Cold War. Behind the bravado of today’s sanctions and austerity measures lies the decision-making alliance that private bankers enjoy in conjunction with government and multinational entries like NATO and the World Bank.

It is President Obama’s foreign policy to back the Ukraine against Russia; in 1958, it was the Eisenhower Doctrine that protected Lebanon from a Soviet threat. For President Truman, the Marshall Plan arose partly to guard Greece (and other US allies) from Communism, but it also had lasting economic implications. The alignment of political leaders and key bankers was more personal back then, but the implications were similar to the present day. US military might protected its major trading partners, which in turn, did business with US banks. One power reinforced the other. Today, the ECB’s QE program funds swanky Frankfurt headquarters and prioritizes Germany's super-bank, Deutschebank and its bond investors above Greece’s future.

These actions, then and now, have roots in the American ideology of melding military, political and financial power that flourished in the haze of World War II.  It’s not fair to pin this triple-power stance on one man, or even one bank; yet one man and one bank signified that power in all of its dimensions, including the use of political enemy creation to achieve financial goals. That man was John McCloy, ‘Chairman of the Establishment’ as his biographer, Kai Bird, characterized him. The relationship between McCloy and Truman cemented a set of public-private practices that strengthened private US banks globally at the expense of weaker, potentially Soviet (now Russian) leaning countries.

John McCloy and the World Bank Twist

In 1947, President Truman selected then-partner at a Rockefeller law firm, John McCloy, to be the second president of the World Bank (or International Bank of Reconstruction and Development) that would provide financial aid to developing nations after WWII. McCloy demanded the ability to unilaterally restructure the nascent World Bank—absent Congressional debate –such that its bonds would be sold through Wall Street banks.

That linkage altered the future of global financial relationships, by  transforming the World Bank into a securities vending machine for private banks that would profit from distributing these bonds globally, while augmenting World Bank aid with private loans.

World Bank, IMF and other multinational entity decisions about aid vs. austerity or any other ‘reform’ requirements including opening border to private banks, would be controlled by the capital markets. Big private global banks arrange, underwrite and distribute World Bank bonds. Small banks in Greece did not. Financial assistance terms were established to follow a similar hierarchy.

During the Cold War, the World Bank provided funds for countries that leaned toward capitalism versus communism.  Political allies of the United States got better treatment (and still do). The Nations that private bankers coveted for speculative and lending purposes saw their debt loads increase substantially and their industries privatized.  Equally, the bankers decided which bonds they could sell to augment public aid funds, which meant they would have control over which countries the World Bank would support.  The World Bank did more to expand US banking globally than any treaty or entity that came before it.

The Marshall Plan and Eisenhower’s Rise

Another pillar of global reconstructive and foreign policy efforts, the Marshall Plan, would provide further a ide to “friendly” countries in the early years of the Cold War.  Truman unveiled the Marshall Plan in the spring of 1947. He presented it as a way to counter the threat of Communism, warning that Europe was disintegrating economically, and Truman feared Greece and Turkey would fall victim to Communist control. America’s new enemy was not Germany nor the Nazis but Communism and its associated countries.

Under the Marshall Plan, Congress approved $13 billion to aid Europe’s fight against Communism, and also to bolster prime trading partners for American industries and banks. As a result, more currencies became available for conversion into US dollars. The Marshall Plan wasn’t just about helping allies: but about spreading dollar domination.

Chase (now JPM Chase) Chairman, Winthrop Aldrich enthusiastically supported the Marshall Plan. To big banks, lending to developing nations and fighting Communism amounted to the same thing. Plus, the Marshall Plan effectively gave each major US bank its own European country to play in. From 1948 to 1952, Chase amassed the most deals in Europe, nearly $1 billion, followed by National City Bank (now Citigroup). 

Eisenhower, NATO & Bankers

In 1952, General Dwight D. Eisenhower was commander of the North Atlantic Treaty Organization (NATO), the new military alliance established between the United States, Canada, and leading Western European powers to deter Soviet expansion, and promote European political integration. NATO blended military, political, and economic power behind the mantra, “an armed attack against one or more of [the allied countries] shall be considered an attack against them all.”.  In practice, what held for military support, held for opening borders to dollar based trade and private banking business, too.

In the spring of 1952 Aldrich traveled to Europe with an entourage of power brokers to persuade Eisenhower to run for president on the Republican ticket. Upon election victory, Ike’s banker sphere of appointees included his secretary of war, Thomas Gates, who would later chair the Morgan Guaranty Bank (now JPM Chase), Aldrich who became Ike’s ambassador to Great Britain, and John McCloy, who would spend the Eisenhower years as chairman of the Chase National Bank (now JPM Chase) assuming Aldrich’s role.

Beside the Marshall Plan, the Truman and Eisenhower doctrines extended US military and economic support to nations that adopted US ideology and that were military allies. Overseas offices of major US banks subsequently swelled to accommodate all the private loan demand that accompanied government support.  

In 1956, W. Randolph Burgess, former National City Bank Vice President, left his Treasury Department post to become the US ambassador to NATO. By that time, the luster of NATO was fading. By 1963, Burgess noted that “the shine of postwar NATO was getting a little dull.” Stronger European countries felt less threatened by Soviet aggression and this made them less pliable to US policies. In addition, their European  banks began spreading their wings globally again. The financial end of the cold war was preceding the diplomatic end by decades.

The International Bank Race

US bankers sought to compete with strengthening European banks by opening more offices overseas and by fighting to eliminate New Deal regulatory restrictions so they could grow domestically and use their size as a broader lending springboard.

Fast forward sixty years later to today , and those seeds of political-military-financial partnerships against the threat of the Soviet Union (now Russia) have sprouted to support US banks and dollar, and US monetary and fiscal policy supremacy the world over.

Much has happened in between; mass deregulation of international banking, technological advancements in trading, and the use of the World Bank (and the IMF and various central banks) to subsidize bank led speculation by submitting weak countries to austerity measures or ‘bailouts’, thereby prioritizing payments to bondholder clients of mega-banks over economic stability. The Big Six banks in the US, a subset of the 30 G-SIBs (global systemically important banks) enjoy a magnitude of government, central bank and multinational entity support that would have been unimaginable back then.

Whether it’s a $17 billion bailout package for the Ukraine. or a $270 billion one for Greece, or Obama doing a 180 on Cuba to keep Russia out, the costs of power alignments are greater than ever for the smaller, weaker countries. Their economic coffers have been pried open by the Western super-powers still calling the political, military and financial shots and again using threats of Russian ‘aggression’ to camouflage expansionary intents.

Under Obama, the US is resurrecting the Cold War and invigorating NATO by promoting the threat notion, just as Truman and Eisenhower did.  Financial supremacy and currency dominance remain central to this strategy. But this time, there’s a more dangerous difference – a level of financial opposition that could become military opposition if sufficiently provoked. The counter-movement from a currency and financial perspective is comparatively small. But it’s growing.  The global position of super-powers and super-banks remains at play in this newly sanctioned financial Cold War.  

For more on historical foundations for present decisions, read: All the Presidents’ Bankers: The Hidden Alliances that Drive American Power (out now in paperback). Also, please watch my interview with Max Keiser. 

All the Presidents' Bankers Excerpt: World Bank, IMF, Globalizing Wall Street

(This excerpt first appeared on Zerohedge courtesy of Nation Books. A fascinating, relevant piece of Cold War, Financial Globalization history.)

The World Bank and the IMF: Expanding Wall Street’s Reach Worldwide

Just after the United States entered World War II, two simultaneous initiatives unfolded that would dictate elements of financing after the war, through the joint initiatives of foreign policy measures and private banking whims. Plans were already being formulated to navigate the postwar peace, especially its international power implications for finance and politics, in the background. American political leaders and scholars began considering the concept of “one world” from an economic perspective, void of divisions and imbalances. Or so the theory went.

The original plans to create a set of multinational entities that would finance one-world reconstruction and development (and ostensibly balance the world’s various economies) were conceived by two academics: John Maynard Keynes, an adviser for the British Treasury, and Harry Dexter White, an economist in the Division of Monetary Research of the US Treasury under Treasury Secretary Henry Morgenthau.

By the spring of 1942, White had drafted plans for a “stabilization fund” and a “Bank for Reconstruction and Development.” His concept for the fund became the seed for the International Monetary Fund. The other idea became the World Bank. But before those entities would come to life through the Bretton Woods conferences, many arguments about their makeup would take place, and millions of lives would be lost.

Keynes, White, and Power Transfer to the United States

By early 1944, nearly two-thirds of the European GNP had been devoted to war; millions of people had been slaughtered. But six months after the complete liberation of Leningrad, it was the international financial aspects of the coming peace that exercised the imagination of the policy elites. In July 1944, 730 delegates representing the forty-four Allied nations convened at the Mount Washington Hotel in Bretton Woods, New Hampshire. Amid picturesque mountains, hiking trails, and oppressive heat, they sat to determine the postwar economic system.

For three weeks, they debated the charter for the International Monetary Fund and discussed how the International Bank for Reconstruction and Development, or the “World Bank,” would operate.

White and Keynes had competed for influence over this final result for the past two years. To a large extent, the personal vehemence of each man aside, they did so as an extension of the jockeying for position between the United States and Britain as the incoming and outgoing financial superpowers. At first, virtually every American banker and politician opposed the main aspects of Keynes’s plans, particularly his idea about creating a new global currency—the unitas—that would supersede gold and the dollar.

Many subsequent histories of the Bretton Woods Conference consider the final doctrines for the IMF and World Bank as representing a clear compromise between White and Keynes. But they leaned far more toward White’s model and vision.

From the bankers’ standpoint, White’s model was more tolerable because it preserved the supremacy of the dollar. Former President James A. Garfield once said, “He who controls the money supply of a nation controls the nation.” But in the negotiations surrounding those Bretton Woods meetings, the mantra was more “Those who control the banks backed by the currency that dominates the world control world finance.”

While final drafts snaked through Congress after the July 1944 meetings, one key US banker maintained his public opposition to Bretton Woods. Even after it became clear that the multinational entities would be dollar-based, Chase chairman Winthrop Aldrich remained opposed to the idea. Mostly, he feared the slightest amount of competition from any uncontrollable source. Though Aldrich favored removing trade barriers, which would provide the US banks a wider field for cross-border financing, he didn’t want some supranational entity getting in the way of private lending to facilitate that trade.

In his “Proposed Currency Plan” of September 16, 1944, Aldrich slammed the accords, which he saw as a distinct challenge to the power of private banks. “The IMF,” he said, “would become a mechanism for instability rather than stability since it would encourage exchange-rate alterations.”

Like most bankers, Aldrich was fine with the World Bank taking responsibility for exchange-stabilization lending. That element would aid bankers; a supranational entity providing monies to struggling countries would bolster them sufficiently to be able to borrow more through private banks. But bankers didn’t want a fund constructed as a competing lending mechanism that could possibly take business away from them, operating in the guise of economic security.

Aldrich warned, “We shall have the shadow of stability without the substance. . . . Perhaps the most dangerous aspect of the Bretton Woods proposals is that they serve as an obstacle to the immediate consideration and solution of these basic problems.”

Aldrich’s public outcry was unsettling to President Roosevelt and Treasury Secretary Robert Morgenthau, who knew that it was politically important to get all the main bankers’ support. Not only did they hold a solid proportion of US Treasury debt; they had become the distribution mechanisms of that debt to more and more citizens and countries. There couldn’t be an IMF without the support of private lenders, and if the US was going to be in command of such an entity from a global perspective, US bankers had to be on board. Concession to the bankers wasn’t a matter of empty appeasement but of economic supremacy.

The American Bankers Association, on which Aldrich was a board member, also wanted to restrict the IMF’s powers. Burgess, who served as chairman of the American Bankers Association and National City Bank vice chairman, was unwilling to back the Bretton Woods proposals unless White made more concessions to reinforce the supremacy of the US banks and the dollar. He would play hardball and get Morgenthau involved if he had to.

Though White refused to bow to Burgess’s requests, Congress incorporated them into the final documents. To make the bankers happy, a compromise was fashioned that restricted the IMF funds to loans offsetting short-term exchange rate fluctuations, such as when one country has a sharp and sudden shift in the value of its currency relative to another. That loophole left plenty of room for banks to supply aggressive financing to developing nations over the loosely defined longer-term. It also meant that all nations receiving short- term assistance from the IMF would likely be on the hook for more expensive debt at the hands of the bankers in tandem, or later. But in the scheme of White’s plan, this alteration was more cosmetic than substantial.

The Bretton Woods Agreement

Congress approved the Bretton Woods agreement on July 20, 1945. Twenty- seven other countries joined as well. The Soviet Union did not. It was a portent of how rapidly the world was falling into the Cold War and how rapidly the United States was forging its own foreign alliances in the postwar economy.

By the time the Bretton Woods delegates reconvened to settle the final details of the agreement at Savannah, Georgia, in March 1946, Churchill had already coined the term “the Iron Curtain” to describe the line between Communist Soviet Union and the West in his famous “Sinews of Peace” speech at Westminster College.

In addition to the growing Cold War mentality, or perhaps because of it, expectations that White would lead the IMF were squashed when the FBI alerted President Truman that White and other senior civil servants had passed secret intelligence to the Soviet Union. It’s doubtful that Truman believed the allegations; though he took White out of the bidding for the head position, White remained an executive director.

The incident served as a precedent for how the top positions at the World Bank and the IMF would be allocated along political-geographical lines. The post was offered instead to Belgian economist Camille Gutt, establishing the protocol whereby the IMF would be headed by a Western European and the World Bank by an American.

But while politics dictated the initial leadership choices, private bankers’ behavior would soon overshadow the functions of both bodies. Despite their “international” monikers, the World Bank and the IMF disproportionately served the interests of the Western European nations that were most important to the United States from the get-go. The bankers could exert their influence over both entities to expand their own enterprises.

Later, another element that reinforced this dynamic was added. Thanks to a minor technicality introduced by Truman’s Treasury secretary, John Snyder, “aid monies” to “friendly” (or large and friendly) countries would be considered “grants,” which would not show up as national debt, thereby providing the illusion of better economic health. Money granted for military operations or the friendly countries would not show up as debt either. This presented a foreign business opportunity whereby banks could provide loans at better terms to larger countries and make more money off higher interest loans to developing ones because of the disparity in their perceived debt loads.

In addition, as Martin Mayer observed in his classic book The Bankers, “the growing and unregulated Eurodollar market would become a cauldron of out-of-control debt and heady profits for US banks.” Through this market, many of the major midcentury postwar loans would be made.

Making the World Bank Work for Wall Street

Congress had established the National Advisory Council to be the “coordinating agency for United States international financial policy” and as a mechanism to direct that policy through the international financial organizations. In particular, the council dealt with the settlement of lend-lease and other wartime arrangements, including the terms of foreign loans, details of assistance programs, and the evolving policies of the IMF and World Bank. As chairman of the National Advisory Council, U.S Treasury secretary John Snyder carried a vast amount of influence over those entities, as many major decisions were discussed privately at the council meetings and decided upon there.

There was one ambitious lawyer who understood the significance of Snyder’s role. That was John McCloy, an outspoken Republican whose career would traverse many public service and private roles (including the chairmanship of Chase in the 1950s), and who had just served as assistant secretary of war under FDR’s war secretary, Henry Stimson. McCloy and Snyder would form an alliance that would alter the way the World Bank operated, and the influence that private bankers would have over it.

It was Snyder who made the final decision to appoint McCloy as head of the World Bank. McCloy, a stocky Irishman with steely eyes, had been raised by his mother in Philadelphia. He went on to become the most influential banker of the mid-twentieth century. He had been a partner at Cravath, Henderson, and de Gersdorff, a powerful Wall Street law firm, for a decade before he was tapped to enter FDR’s advisory circle.

After the war, McCloy returned to his old law firm, but his public service didn’t translate into the career trajectory that he had hoped for. Letting his impatience be known, he received many offers elsewhere, including an ambassadorship to Moscow; the presidency of his alma mater, Amherst College; and the presidency of Standard Oil. At that point, none other than Nelson Rockefeller swooped in with an enticing proposition that would allow McCloy to stay in New York and get paid well—as a partner at the family’s law firm, Milbank, Tweed, Hope, and Hadley.

The job brought McCloy the status he sought. He began a new stage of his private career at Milbank, Tweed on January 1, 1946. The firm’s most import- ant client was Chase, the Rockefeller’s family bank. But McCloy would soon return to Washington.

Truman had appointed Eugene Meyer, the seventy-year-old veteran banker and publisher of the Washington Post, to be the first head of the World Bank. But after just six months, Meyer abruptly announced his resignation on December 4, 1946. Officially, he explained he had only intended to be there for the kick-off. But privately, he admitted that his disagreements with the other directors’ more liberal views about lending had made things untenable for him. His position remained vacant for three months.

When Snyder first approached McCloy for the role in January 1947, he rejected it. But Snyder was adamant. After inviting McCloy to Washington for several meetings and traveling to New York to discuss how to accommodate his stipulations about the job—conditions that included more control over the direction of the World Bank and the right to appoint two of his friends— Snyder agreed to his terms.

Not only did Snyder approve of McCloy’s colleagues, but he also approved McCloy’s condition that World Bank bonds would be sold through Wall Street banks. This seemingly minor acquiescence would forever transform the World Bank into a securities vending machine for private banks that would profit from distributing these bonds globally and augment World Bank loans with their private ones. McCloy had effectively privatized the World Bank. The bankers would decide which bonds they could sell, which meant they would have control over which countries the World Bank would support, and for what amounts.

With that deal made, McCloy officially became president of the World Bank on March 17, 1947. His Wall Street supporters, who wanted the World Bank to lean away from the liberal views of the New Dealers, were a powerful lot. They included Harold Stanley of Morgan Stanley; Baxter Johnson of Chemical Bank; W. Randolph Burgess, vice chairman of National City Bank; and George Whitney, president of J. P. Morgan. McCloy delivered for all of them.

A compelling but overlooked aspect of McCloy’s appointment reflected the postwar elitism of the body itself. The bank’s lending program was based on a supply of funds from the countries enjoying surpluses, particularly those holding dollars. It so happened that “the only countries [with] dollars to spare [were] the United States and Canada.” As a result, all loans made would largely stem from money raised by selling the World Bank’s securities in the United States.

This gave the United States the ultimate power by providing the most initial capital, and thus obtaining control over the future direction of World Bank financial initiatives—all directives for which would, in turn, be predicated on how bankers could distribute the bonds backing those loans to investors. The World Bank would do more to expand US banking globally than any other treaty, agreement, or entity that came before it.

To solidify private banking control, McCloy continued to emphasize that “a large part of the Bank capital be raised by the sale of securities to the investment public.” McCloy’s like-minded colleagues at the World Bank—vice president Robert Garner, vice president of General Foods and former treasurer of Guaranty Trust; and Chase vice president Eugene Black, who replaced the “liberal” US director Emilio Collado—concurred with the plan that would make the World Bank an extension of Wall Street. McCloy stressed Garner and Black’s wide experience in the “distribution of securities.” In other words, they were skilled in the art of the sale, which meant getting private investors to back the whole enterprise.

The World Bank triumvirate was supported by other powerful men as well. After expressing his delight over their appointments to Snyder on March 1, 1947, Nelson Rockefeller offered the three American directors his Georgetown mansion, plus drinks, food, and servants, for a three-month period while they hammered out strategies. No wives were allowed. Neither were the other directors. This was to be an exclusive rendezvous.

It is important to note here that the original plan as agreed upon at Bretton Woods did not include handing the management and organization of the World Bank over to Wall Street. But the new World Bankers seemed almost contemptuous of the more idealistic aspects of the original intent behind Bretton Woods, that quaint old notion of balancing economic benefits across nations for the betterment of the world. Armed with a flourish of media fanfare from the main newspapers, they set about constructing a bond-manufacturing machine.

With the Cold War hanging heavily in the political atmosphere, the World Bank also became a political mechanism to thwart Communism, with funding provided only to non-Communist countries. Politics drove loan decisions: Western allies got the most money and on the best terms.