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Notice Numbers appearing in square brackets (ex. [45]) within the transcript indicate the pagination in the original, hardcopy version of the oral history interview. RESTRICTIONS Opened June, 1979
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Oral History Interview with
June 20, 1974 by Richard D. McKinzie MCKINZIE: Mr. McDiarmid, I think a lot of historians, economists, and political scientists are interested in why people go into Government service. I wonder if you could talk to the point of how you came to go to work for the U.S. Government. You were born a Canadian citizen. MCDIARMID: Yes. I became an American in 1939. In early 1942 I had been teaching at Carnegie Tech, which is now Carnegie-Mellon University. I knew some people in the Government, and they were setting up a Joint War Production Committee between the United States and Canada. The idea was to use Canadian facilities for subcontracting because they were somewhat further along in some arms fields than U.S. manufacturers. This committee was set up for the purpose of coordinating war production activities between the United States and Canada. Through our contacts at the University of Toronto, I knew a chap, Frank Coe, who subsequently got into some troubles. He was Secretary of the joint war production committee. I had written something, and he had read it. He had also been at the University of Toronto, but after my time. He asked me if I would work for this joint war production committee, which I agreed to do. I think that was in February of 1942. I worked for them until I went into the Army in September of 1942. I went into the Army on a limited service basis, because I had some eye trouble. I got involved in the Pentagon and in the production of munitions. I was actually in the artillery division of the Ordnance Department. Then I was asked to teach at the Army Industrial College, which I did for two or three years. I had been trying to go overseas, but being on limited service there wasn't much opportunity. But in any case, in 1945 I was shipped out to the Philippines and was in the GHQ in Manila. When the war was over, I went up to Japan. I didn't have enough points to come home, and the opportunity arose to go to Japan. I had had no training in military government, but I went to Tokyo and got into SCAP, the headquarters of [General Douglas] MacArthur, Supreme Commander of the Allied Powers. Being an economist, I got into the economic and scientific section, and for a time I was executive officer of the Finance Division. I was chiefly responsible for the "supervision," as we called it, of the financial institutions of Japan. I got involved in a lot of things, none of which had much to do with the overall economic policies that the occupation was trying to get the Japanese to adopt. MCKINZIE: As an economist, you couldn't help but have some feelings about those kind of things. I'm wondering, what kind of people you worked with? There has been some criticism of General MacArthur that he didn't bring to bear, on those problems of financial and of economic reform, all of the talent that was available. He's been criticized for not using social scientists, but he has been defended on the grounds that the Army had people such as yourself who were eminently qualified social scientists. MCDIARMID: I think a good deal of that criticism is justified. I don't know as I'd blame MacArthur so much as the directive under which he was operating. It specifically said that it was not part of the function of the military government to restore the economy of Japan, in fact, just the opposite. We were there to enforce measures which were calculated to prevent the Japanese from becoming a military threat. Now, there was a certain amount of economic philosophy introduced into the policies that we were asking the Japanese to adopt. But all these had some sort of a military justification, such as land reform, which brought about a sweeping economic change in Japanese agriculture, and, I think, was one of the most, if not the most, successful of the economic policies which were carried out. But the object of that, basically, was to break up the large land holdings, with some thought that these large land owners had contributed to the war effort. The same applied to the antitrust activities, the anti-Zaibatsu program. That, of course, was a program to separate, first of all, the industrial and the financial power of the country. Each of these Zaibatsu families had a bank attached to it. These banks were separated from the industrial and commercial establishment, and then, of course, there was some attempt to fragment the industrial and commercial empires. MCKINZIE: That didn't really work very well, did it? MCDIARMID: No, it didn't work nearly as well as the land reform. It didn't work more successfully, because it was very much contrary to Japanese instincts. There was no constituency of support in Japan for the anti-Zaibatsu program. There was much more support for the land reform program. The land reform program in Japan had a number
of things going for it. One, the Japanese farmer is very productive and can get along well with a small holding. And the inflation that occurred during the occupation resulted in it being largely a confiscatory program. The amounts of money, which were paid to the landlords, was decided in 1946, but by the time these payments were made in 1948 they were worth practically nothing. A friend of mine who subsequently became president of the Asian Development Bank, Takeshi Watanabe, had in his family a quite substantial estate. He told me he got just enough to buy a case of beer out of this deal. So, the land reform program was a confiscatory program, as far as the landlords were concerned, and it was more successful from the standpoint of the tenants who acquired this land. The Zaibatsu program, however, was not successful. True, some of the chaps who were in charge of Mitsubishi, Mitsui, Mitsukawa, and so on, were displaced, but their places were taken by the people who had been working for them. Before the war the power was mainly in the hands of the industrialists and the commercial circles in Japan. After the war, it shifted to the financial institutions to a large extent. MCKINZIE: You said that in the Finance Division you didn't have much opportunity to have input to this kind of thing. MCDIARMID: No, I didn't. It was established in the basic directive that was given to MacArthur that he was to carry out these programs. We had a budget section, but I didn't have much to do with that; I was in the money and banking side. The budget section was supposed to have supervision over the Japanese budget. SCAP lacked an overall economic supervision until Dodge came in 1949. MCKINZIE: Which had a great deal to do with the inflation. MCDIARMID: Oh, it had an awful lot to do with the inflation. MCKINZIE: Mr. McDiarmid, SCAP is kind of legendary for its lack of contact with the Japanese. I was wondering if you ever had occasion to consult the Japanese about financial policy. These contacts were fairly rare, I take it, within the organization. MCDIARMID: We had constant contact with the Japanese. The contacts consisted mostly of lecturing them. I'm afraid this was mostly done by some generals who didn't really know what they were talking about. I was saying that we had a budget division there that was supposed to go over the budget, but, of course, there were conflicting interests, as there always are in government -- there certainly were in SCAP. There were people who were keen about various undertakings in the field of resources and health. These were expensive and tended to unbalance the budget. Then there was another group that was inclined to cut everything. I left Japan in July of 1946. We tried a monetary reform patterned after the German model in February of 1946. It was totally abortive, because it consisted of calling all the currency into the banks and then letting it out again. This didn't do any good, because what was generating the inflation was primarily the budget. Also the occupation was drawing heavily on the Government for funding occupation expenses. Of course, we were putting a good deal of aid into Japan, GARIOA [Government Aid and Relief in Occupied Areas], but that was being sold at very artificially low prices. One very shocking fact is that at that time Japan had practically no exports. Even by 1948, my guess would be, that she had less than a hundred million dollars of exports; she had over 400 million of imports. But looking at it from the standpoint of yen in the foreign trade fund, there was a huge deficit. The exporters were getting more yen than the importers were paying on foreign exchange account. The balance of payments was very much in the red. The yen account (it was all state trading) was also in the red, which it shouldn't have been. Of course, the yen counterpart of the imports, which were largely financed from U.S. aid, should have been an offset to the fiscal deficit which the Government was running. But under the exchange rates system the average import rate was less than a hundred yen to the dollar I'm speaking now about 1948 -- and the average export rate was over 400 yen to the dollar. When I got really involved in Japanese economics was not while I was in SCAP. We were doing little things like looking after a United Nations national's property; closing down the overseas banks, which had been involved in wartime activities; and, trying to round up any German property that was in Japan. Somebody had the crazy idea this would be good for reparations. MCKINZIE: I was going to ask you if you got involved in the reparations question. MCDIARMID: I didn't very much, except to do some crazy things like that. You asked me how I got into the Government again. I came back from Japan in the middle of 1946. I knew Eddie [Edwin] Reischauer, who subsequently became Ambassador to Japan, and he introduced me to Ed [Edwin W.] Martin. They asked me whether I wanted to work for a while for the State Department on Japanese affairs, and I did. That's how I got into the Government after the war. I was in charge of the financial section in Ed Martin's office, which was concerned with Japan. I went out to Japan in 1948 with what was called the Young mission. MCKINZIE: It preceded the Dodge mission. MCDIARMID: Yes, it preceded the Dodge mission. Ralph Young, from the Federal Reserve Board, was the head of it. There were about a half a dozen of us representing various agencies. We went out there and wrote a report on the financial situation. This report recommended that the budget be balanced, although it didn't say how. Its major recommendation was for a unitary exchange rate. We named a figure of 270 to 330 yen to the dollar. This would apply both to imports and exports and military pay, etc. This was resisted very strongly by the headquarters. I don't know whether you've seen some of the cables that General MacArthur sent in about this, but they were certainly very, very strongly opposed. He said that this action would cause the cost of living to go up, because imports would be priced into the economy at this rate and a financial squeeze would occur. There was a lot of money being used by what they called the Reconstruction Finance Corporation of Japan to reconstruct the Japanese economy, and this largely would have to be cut off to prevent the further expansion of the money supply. Those guys out there just saw red on this. The Japanese Government also thought it would cause them a great deal of anguish to introduce such a policy at that time. The State Department was more or less neutral on this subject. The Treasury and the Federal Reserve Board were strongly in favor of following through on the Young mission recommendations. The Pentagon was very much opposed. General [William H., Jr.] Draper, the Under Secretary of War at the time, was very sympathetic to the position that General MacArthur was taking against the recommendations of the Young mission. It came around to budget time, and a presentation had to be made to Congress to get more GARIOA aid for Japan. The Treasury and the Fed took the position that they wouldn't support a request to Congress for further appropriations for aid to Japan unless the recommendations of the Young mission were carried out, and we had this up in the National Advisory Council. As I say, General Draper and the chap who was Secretary of War (Kenneth Royall) at that time were very much opposed to this. We drafted a cable to SCAP to execute a nine point stabilization program. I was in the State Department, so I couldn't talk as strongly as the boys in the Fed and the Treasury, but I certainly agreed with their position. In any case, the cable went out to General MacArthur telling him that these Young mission recommendations had to be carried out. After he got the order from Washington, he said, "Well, if I have to do it, I'll do it, but you have to send me a top-level financial adviser." Joe [Joseph M.] Dodge was available. He had been with [Lucius D.] Clay in Germany, and he agreed to go to Japan. I understand President Truman asked him to do so. This was in early 1949, and the team that went out with Dodge was a new team. I was the only one that had been on both the Young mission and the Dodge mission. We went out, and Dodge had a number of conferences with [Hayato] Ikeda. Ikeda was the Finance Minister then. He subsequently became Prime Minister. Dodge took a rather tough line, though not a very sophisticated one. But he laid down the law about fiscal stability and an overall balanced budget. As far as the exchange rate was concerned, that was pretty much done unilaterally with little discussion with the Japanese. The only argument was whether it should be 330 or 360. I favored 330, in view of the budget situation. They would have to subsidize food quite heavily, and everybody recognized that. If they priced food into the economy at the official rate, it would have to be subsidized. So, the prime considerations in establishing the exchange rate were two: one, to get a rate that was relatively close to the effective export rates that were prevailing at the time; and, two, to get a rate that wouldn't too badly increase budget subsidies, because the other prong of this policy was a balanced budget. We in Tokyo argued with Washington. I took the line that it should be 330. The Washington chaps said it should be 360 because further inflation was likely, and they finally, of course, prevailed. So we ordered the Japanese to put in an exchange rate of 360 yen to the dollar, which lasted until a couple of years ago. It proved to be a very good rate for the Japanese. Subsequently, it somewhat undervalued the Japanese currency, so it gave them a very favorable export position. Then, the Korean war came along and that gave a great boost to Japanese exports. So their position improved quite rapidly, although it wasn't until 1955 that they got back to the level of exports that they had had in the prewar period. Well, that's part of the saga of what happened as far as the Japanese situation was concerned. MCKINZIE: Mr. McDiarmid, there is a historian named Gabriel Kolko. He's written a book called The Limits of Power. He's a neo-Marxist, and he writes about the Young and the Dodge missions. MCDIARMID: Oh, he does? I haven't seen that. MCKINZIE: If I could read just a little bit of it, he says:
Then he goes on to say:
It goes on to say:
Then he goes on to say from there:
Now, that's a Marxist criticism of the Dodge plan. Is that worthy of comment? MCDIARMID: Well, I don't know... MCKINZIE: The brunt of it fell on the working class of Japan; they were the ones that suffered as a result of the Young-Dodge financial reform. MCDIARMID: To some extent that was probably true, the price of food did go up. I don't think his timing is right. Dodge went out there again the following year (1950). I mean, some of those things may have happened then; I wasn't on the 1950 expedition. I don't think it's quite fair to say that all the burden was on the working class. Certainly, the inflation was a heck of a burden on the laboring man. In the short run, he may be right about the freezing of some of these wages, but I'm not sure about his statement about the right to strike. I know MacArthur prevented some strikes from occurring in the public utilities and the railroads and so on. I never heard Joe Dodge say anything about the right to strike, but he was a tough-minded fellow on the financial side, and he may have contributed his ideas to the freezing of wages. Actually, what happened was when it became apparent that the Young plan had some merit, everybody jumped on the bandwagon. MacArthur became the great advocate of it, and everybody around the headquarters did also. When we were there in 1948, we were really very extremely unpopular, and everybody's hand was against us. In 1949 there had been a complete turnaround. Everybody was supporting this austerity program, including General MacArthur. If you read General [Courtney] Whitney on MacArthur, he gives MacArthur the entire credit for this whole stabilization program which is absolutely absurd if you just look at MacArthur's reaction in the 1948 proposals. MCKINZIE: You were in a unique position in a couple of ways. You were a part of the occupation structure in SCAP and then came back to the State Department. At what point did people begin to realize that the beneficial policy to the United States in Japan was not to destroy the economy and keep it a burden on GARIOA or somebody on the U.S. side, but rather to rebuild. [Dean G.] Acheson, at some point, said, "We waited too long to rebuild the workshops of Europe (Germany) and the Far East (Japan)." When did this idea that they were the workshop begin to dawn on people? Obviously, it didn't dawn in MacArthur's mind. MCDIARMID: It was a gradual process. George Kennan went out there, probably, in '47. He came back with the idea that reparations should be stopped and that the SCAP bureaucracy should be cut down. But on your point, I would think that that probably happened in '47 and '48. Draper was one of the first to begin to preach the need for economizing on U.S. expenditures in Japan. I don't think he did it out of any desire to rebuild the Japanese economy as to save the U.S. taxpayer. He took an extreme view. He didn't even want us to restore some of the Allied property which had been sequestered by the Japanese forces and taken to Japan. He even thought that would be a blow to the economy. I can remember spending a night over in the Pentagon arguing for the restitution of Allied property. But I think Draper is mainly responsible for the turnaround in the view. MCKINZIE: From an economizing position rather than as a component of an integrated world or regional economy? MCDIARMID: From the standpoint of economizing U.S. aid. It was also because of the cold war. That had a lot to do with it. MCKINZIE: Yes. In fact, that's what I'm trying to get at. Japan's new position in the cold war, and the financial policy as it related to that. MCDIARMID: That did have an important bearing on the change of attitude. Although, when we went out there in 1948, our mission was primarily motivated by the notion that the occupation was costing the American taxpayer too much and that we should recommend a program to reduce that. That's what we tried to do, although alongside that were the ideas that were beginning to be voiced at that time, that the initial directive was a mistake and that it was in the U.S. interest to see Japan recover. The two sort of went along together. MCKINZIE: Was there any thought in your mind that a reconstructed Japan would be a militant Japan -- by 1948, when you were on that mission? MCDIARMID: I think by that time that idea had pretty much evaporated. MCKINZIE: In your mind as well as everybody... MCDIARMID: Not in the minds of a number of the countries that were in the Far Eastern Commission here in Washington. They were still plugging -- the Australians and the New Zealanders and so on. They were still very much concerned about the revival of Japan as a military threat. But on the American side, I think MacArthur had probably convinced them back here that this was not the right approach. So we were taking the view at that time that the recovery of Japan combined with the idea of saving the U.S. taxpayer (which, I think, was still the foremost idea), was an important consideration. MCKINZIE: That idea was in both the minds of Mr. Young and Mr. Dodge when they led the missions out there? MCDIARMID: Yes. MCKINZIE: What did you do after the Dodge mission? MCDIARMID: After 1949 I was not much involved in Japanese affairs until the peace treaty. I worked a bit on that with John Foster Dulles. I had become chief of the International Finance Division of the State Department, and I got involved in Marshall plan business and in a number of other things, such as the devaluation of sterling and the other exchange rates in 1949, and in IMF [International Monetary Fund] activities. None of these were of any earthshaking significance as far as I was concerned. I was in on the discussions that led up to the European Payments Union, but rather on the periphery of that because really that was centered in the ECA under Paul Hoffman and Dick Bissell. MCKINZIE: But in those two things you just mentioned, the whole ECA program and particularly the EPU, weren't there some political objectives to be gained, namely, the objective of European integration? MCDIARMID: I suppose that was in the Marshall plan pretty much from the beginning. Acheson and Marshall left it up to the Europeans. Ernie [Ernest] Bevin called together the European countries, and they formed the OEEC [Organization for European Economic Cooperation]. That was certainly the start towards European integration, and then the [Robert] Schuman plan came along. MCKINZIE: But EPU did something that I've heard people argue, that existing financial institutions could have done. Its purpose for existence really was political rather than functional. Is that MCDIARMID: I didn't have that impression. I always thought it was just a mechanism, established to make the aid program operate better. Of course, it had the effect of stimulating European trade through the drawing rights arrangement. I don't know what existing institutions could have done that. I think that some people thought that the IMF was sort of being shoved aside. Of course, during the Marshall plan years European countries could not draw on the IMF; it was out of the picture. The IMF was a pretty static operation, and it didn't have any real role to play until after the end of the Marshall plan period in 1952. MCKINZIE: In the early years of the Marshall plan, you were concerned heavily, I gather, with Far Eastern Affairs? MCDIARMID: I was in on German affairs also. I got involved to some extent in German problems that came up in the State Department. MCKINZIE: You weren't involved with that whole business of the famous plates and dealing with that mess? MCDIARMID: Yes, I was. We had a committee. Burke Knapp and Frank Southard went over to the negotiations. Frank Southard was the leading character on the committee. We had a lot of meetings and tried to devise some unified currency for Berlin. Or are you thinking of something earlier? MCKINZIE: I'm thinking of that early business of giving the Russians a set of currency plates. MCDIARMID: Oh, yes, I thought you were thinking of the Berlin blockade, and the currency problem that led up to that, but you're talking about turning the plates, for printing the currency by the Russians. I got in on that too from the Japanese side, because we did the same thing in Japan. There was no turning over of plates, but up until July 1st of 1946 you could remit yen, at the ridiculous rate of 15 to 1, back to the States. Of course, the boys just sold cigarettes to the Japanese at fantastic prices and sent the money home. We ran up troop pay deficits in Japan and Korea of 90 million dollars; it was small compared to the German one, which, I think, was 300 million. MCKINZIE: Was that a Treasury policy that allowed that to happen? MCDIARMID: I don't think there was any policy connected with it. If it was anybody's policy, it was the military, who thought it would be very hard on the morale of the troops not to be allowed to remit their money home, and I think that was the main thing. Of course, in Germany, the plate business was a phony. There would have been troop pay remittances of a large amount, even if the Russians hadn't had the plates. But they had the plates. They could print the currency, and they could buy their watches or cigarettes from the guys that could get them in the American PXs. Giving the Russians the plates may have increased the troop pay deficit a bit. The reason they called it the troop pay deficit was that the remittances exceeded the troop pay account, so there was really no money to make good this deficit. When the proposal came out to introduce the military payment certificate, we were asked to comment on that. We favored it. I had no idea, at that time, the amount that was involved. I got in on it, I suppose, at the cover-up stage, after the military payments certificate was adopted and that, of course, cut off the flow, because the GI's couldn't remit the military payment certificates and they couldn't remit the local currency any longer. Then I came back to Washington, and the issue came up of how was this deficit to be explained to Congress. Who was going to bell the cat? I got roped into writing some testimonies for guys that were going up to the Hill to explain to Congress how this all happened. I don't think Congress really understood it. I thought the way the troop pay deficit had been covered up didn't reflect any great glory on the United States -- some of the sources of funds that were used. MCKINZIE: GARIOA funds finally paid for it, didn't they? MCDIARMID: Not a substantial amount. The one thing that was done was that Japan was supplying Korea with coal -- I think it was coal -- and the aid funds for Korea were tapped to pay for this coal. The Japanese, of course, were paid far the coal in yen they supplied the occupation and the dollars were put into the troop pay account. But the slimiest thing, I think, was the fact that they also used the prisoner of war account. The prisoners of war got paid in dollars, theoretically. Money went into that account. When the prisoners of war went back to Germany, they were paid off in marks, and that left dollars in the prisoner of war account and that was used to pay off part of the troop pay deficit -- to cover part of it. They dug up various funds around the Pentagon (I guess you can always dig up some funds around the Pentagon) and that went into the troop pay account. What they wanted to avoid naturally was having to go up to Congress and ask for an appropriation for this, because then the whole thing would have had to have been brought into the open. But they were able to avoid that by these various strategems. MCKINZIE: Which was only possible because they were in control of the economies of the country, essentially. MCDIARMID: Yes, that's right. MCKINZIE: In our initial discussion, you mentioned the committee that did, sometime after the Berlin blockade, try to negotiate a currency arrangement for Berlin city. MCDIARMID: Yes, that's right, to try to have a unified currency for Berlin. I don't remember the details of it, but it was that dispute over currency that touched off the Berlin blockade, so it became a matter of urgency to get some solution to this so that the Russians would lift the blockade. We had a committee working back here in Washington trying to devise some solution. No solution actually was ever devised; they just split the city. At that time they had, theoretically, at least, quadripartite control in Berlin. The Russians had their sector, and the feeling was that if you had separate currencies, you would never get a unified city. So the chaps that were working on it around here were trying to devise some system of having an independent currency and an independent bank of emission in Berlin that the Russians would agree to, and we would have a separate currency for Berlin -- separate from that of East Germany and West Germany. But it never came off, because we could never get an agreement. Jacob Malik, now the Russian chap in the United Nations, was negotiating on the Russian side. Burke Knapp was negotiating on the American side. This went on for quite some time and finally, of course, the blockade was lifted. But the currency problem was never solved. MCKINZIE: Having been involved with these very technical aspects of the Marshall plan, you obviously were familiar with its operation. As an economist you must have had some feelings about the entire U.S. aid effort in those early days. I have the distinct impression that there were a couple of philosophies about development in 1947 and 1950. One was the Marshall plan idea -- the massive infusion of capital. Then, tagging behind, were the Service "infrastructures" -- the Point IV idea. There have been some people who were involved who, now, many years later, have said that that was a rather raging argument within the Government. Did that seem to be? MCDIARMID: Well, there was an argument as to whether we needed a Marshall plan for the underdeveloped countries. I was out of this business. In 1951 I went to the Philippines. I was assistant director of the aid mission there, and I didn't have anything to do with what was going on here. But I think there was a difference of opinion. There certainly was a difference of opinion as to whether we should have a Marshall plan type of operation for the underdeveloped countries. Of course, by that time the administration had changed. There was some commitment that Hoffman made to Congress that the Marshall plan, as far as he was concerned, was only a four-year operation, and it wouldn't go on longer. Those who thought massive amounts of aid would be required for economic development got a very cold shoulder around Washington in those days, particularly after the Eisenhower administration came in, but even before. MCKINZIE: As for a country like the Philippines, with which you had some great familiarity, people who were head of Point IV would say, "The Philippines can only absorb so much aid, so fast." Did you feel, when you went there in 1951, that the Philippines were getting all the aid that they could absorb effectively? The first head of the Point IV program said he would rather spend part of the money and turn the rest of it back, if it couldn't be spent effectively. Now, of course, he didn't get very much money either. MCDIARMID: No. MCKINZIE: I'm trying to get some view of your economic philosophy towards development -- as to the stage the Philippines found themselves in in '51. MCDIARMID: It was largely a question of limited capacity to plan projects. The Philippines was a unique case, because the Point IV aid for the Philippines was only a small part of the aid the Philippines was getting from the United States. There was a huge amount of money put into the Philippines to pay war losses, both to individuals and to the State. The Philippines at that time was running a very heavy trade deficit, and we were putting in our funds much in excess of Philippine exports to pay war damages, to rebuild the infrastructure, to rebuild the roads. I think something like 200 million dollars was spent to rebuild Philippine roads and bridges. So, as I say, the Philippines was not a typical case. The Point IV program there, I think, was something in the order of 25 million, and part of that was commodities to generate pesos to really support the budget. I don't think that the Philippines could have used much more than they were getting. But, of course, this whole business of economic development was slow to catch on, particularly, as far as getting appropriations out of the Congress was concerned. When I came back here and worked for a little while for Harold Stassen in 1955, we were still selling aid to Congress on the grounds that it was defense support. I remember suggesting one time, that we give up this rather farcical point of view and go up and try to get money for economic development, because that was what it was being used for. And of course, I was shouted down, "No, you've got to tie it to the defense program. You can never get any money for development." Well, I'm just theorizing about this, but I think it was John Foster Dulles who realized that aid could be used as a useful political weapon and that you didn't have to necessarily tie it so closely to a defense program. This resulted in the establishment of the Development Loan Fund, an agency set up in Washington. It lasted for a while, and when Kennedy came in it was abolished. That was set up under Dulles, and that was the first real institutional recognition that you needed a development aid program as distinct from a defense support program. MCKINZIE: I have the distinct feeling that the Point IV program and U.S. aid in general had an underlying political purpose that was to stop the spread of Communist ideology. When you went to the Philippines in 1951, was this a conscious thing, that this was the purpose of your work? MCDIARMID: It wasn't as far as I was concerned, but we knew that this was the reason that we were getting the money. Of course, in the Philippines, at that time, you had a lot of insurrectionist activities going on. The Huks were a very great threat in the early fifties in the Philippines, but I don't think the aid program was very much tied to the suppression of the Huk movement. When [Ramon] Magsaysay came in as President in 1953 he began to use economic means to deal with the Huk problem. Up until that time, it had been dealt with entirely on a military basis, with the Army. Maybe some people felt that they were fighting communism with foreign aid; I didn't have any such idea. MCKINZIE: What part did you play in the negotiations to bring about devaluation of the British pound in 1949? MCDIARMZD: I was not close to the center of power, obviously, at that time. I was just a division chief in the State Department, and those negotiations were carried on at the Cabinet level. The British did send a delegation over here in the late summer of 1949, just before the annual meeting of the Bank and the Fund, with the view to getting some increase in American aid, because they didn't want to devalue the pound. The answer they got in Washington was negative, so far as increasing aid was concerned, and they immediately announced, "If we can't get any more aid, the only thing we can do is devalue." They devalued the pound by about 30 percent. There followed a practically world-wide devaluation of currencies against the dollar in September of 1949, and this all followed from the British discussions, and the position the U.S. took at that time. My own feeling, in hindsight, was that the devaluations of most of the European currencies at that time were too steep. This may have contributed to the reverse situation much later on of when we had a dollar glut rather than a dollar scarcity -- although there was a ten-year interval between the two. MCKINZIE: The United States, as I understand it, ever since the end of the Second World War, had wanted to destroy the sterling bloc because it stood in the way of that sort of Cordell Hullian idea of an integrated economic world -- the whole preferential system of British trade stood in the way of the "economic vision" of the postwar world that at least a lot of people had when the war ended. Did that same kind of unsympathetic idea toward the British tend to pervade this period? MCDIARMID: It certainly did, particularly in the U.S. Treasury Department. They were the high priests of orthodoxy. The British wouldn't need to discriminate against the dollar in the sterling area if they tightened their belts enough. If you take a look at the Anglo-American financial agreement that [John Maynard] Keynes negotiated in 1946, it's a most unrealistic document, because it contemplated that sterling would be made convertible very soon. It had this dollar account provision under which any sterling earned by the United States would be convertible. Of course, the proceeds of that loan went down the drain almost overnight. I think the loan was made in May, and it was exhausted by September, because there was so much sterling around which the British had paid out during the war. Everybody (India, Egypt, etc.) had sterling balances, and as soon as sterling became convertible those flowed into dollar accounts. That loan, which was supposed to solve all the problems just wasn't a drop in the bucket. Then it was thought that the World Bank would be able to help out. We did make some loans to Western European countries. We made a loan to France -- that was the first big loan we made, for something like 250 million dollars, and this was supposed to help reconstruction. The whole thing was looked at through the wrong end of a telescope. The cost of reconstruction in Western Europe was grossly underestimated. I'm wandering away from the question that you asked, but there was a gross underestimation of the burden of reconstruction. I suppose this was related to the attitude that was taken towards the sterling area; why couldn't these blighters make their currency convertible? They couldn't because there was too much of it around. They needed to import too heavily to reconstruct their economy. Instead of being a four billion dollar job, it turned out to be a 16 or 20 billion dollar job. There was a lot of impatience with the British. MCKINZIE: But you said that the U.S. Treasury Department was the voice of U.S. orthodoxy? MCDIARMID: They sure were. MCKINZIE: So you would lay the terms of the British loan on them as much as anyone else? MCDIARMID: Oh, yes. I think so. I don't know why the British accepted that bargain, but I guess they had no alternative. Keynes defended it in the House of Lords. I don't know whether he underestimated the extent of the problem or not. They did put a provision in that Anglo-American loan agreement. What do they call those provisions where payment stops if certain events occur? They run a certain trade deficit, and the payments are suspended (moratorium). MCKINZIE: An escape clause of some kind. MCDIARMID: Yes, an escape clause, but there was another term that escapes me now. They had that sort of a clause in that agreement. But, you know, it should have been obvious, but it wasn't obvious that it was going to be a long time before sterling would be convertible, and that the same applied to other European currencies. MCKINZIE: In negotiations preceding the devaluation, how much influence did American advice have with these people? If the U.S. position on a subject was for it, did that simple fact really carry as much weight as some of the critics of the United States contended? MCDIARMID: Oh, yes, I think the American view did carry a lot of weight but ways were found to circumvent it sometimes. To just give you one example (this isn't a very important thing), we had this counterpart device in the Marshall plan. The purpose of that was to curb inflation. The idea was that the counterpart of American aid would be frozen, and this would curb inflation. Then there were also other agreements, such as a ceiling put on advances by the Bank of France to the Government. I remember one episode where the Bank of France said, "Please release some counterpart for public expenditures, so we won't have to change the rules about advances by the Bank of France." And we did; we agreed to release counterpart. So, they found ways of getting around this rather austere policy which the United States wanted these countries to adopt, just as they found ways of getting around the Dodge line in Japan. We set up a counterpart fund in Japan after the European model, and that was supposed to be a means of curbing inflation, but it was used for public fiscal purposes before very long. But the U.S. did have a lot of influence, sure. MCKINZIE: Well, thank you. [Top of the Page | Notices and Restrictions | Interview Transcript | List of Subjects Discussed]
Acheson, Dean, 23, 28 Bank of France, 50-51 Carnegie-Mellon University, 1 Development Loan Fund, U.S., 42 European Cooperation Administration, 28 GARIOA, 10, 15, 23 Hoffman, Paul G., 39 Ikeda, Hayato, 17 Japan:
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