Far more than the IMF, the World Bank's direction and policies have been established by the personality of the executive director. The director's authority came largely as the result of a power struggle in the bank's early years between the first president, Eugene Meyer, a seventy-year-old investment banker selected by the Truman administration, and the bank's management and executive board. This dispute over power sharing led to Meyer's resignation after only six months. The high-profile "wise man" John J. McCloy was brought in to succeed him and to place the tottering bank on a better footing. McCloy's first act was to get the bank's executive board to relinquish its activist position and allow the president to dictate the organization's policies and directions. Though McCloy only stayed two and a half years, he began the tradition of powerful American World Bank presidents who drove the multilateral organization's agenda.
The World Bank's original mission was to provide reconstruction loans to war-torn Europe and Japan. These loans were intended for basic infrastructure projects such as roads, bridges, electrical plants, and the like. But the bank's lending policies were very conservative at first, and the recipients both demanded more funds and resisted the conditions attached to financing. The European Recovery Program, or Marshall Plan, soon eclipsed the World Bank. This U.S.-financed program provided far more money and attached fewer strings. During its first four years the World Bank provided only $500 million to western Europe, a figure dwarfed by the Marshall Plan and even by private American investment.
The World Bank's conservative lending policies continued under the long-term leadership of Eugene Black (1949–1962). While Black, a former president of Chase Manhattan Bank, enjoyed a solid reputation in the financial world, he was wary of moving too quickly away from the bank's original mandate. But by the late 1950s and 1960s the World Bank decided to escape its international irrelevance by reinventing itself. Western Europe and Japan were well on their way to a robust economic recovery that the World Bank had little to do with. The key event was the creation of the International Development Association in 1960. The IDA was established to make subsidized loans to poor countries that were credit risks and could not afford private commercial loans.
In order to borrow from the IDA a country must meet four criteria. It must be very poor (less than $800 per capita GNP in 2001). It must have sufficient political and economic stability to warrant financing over the long term. The country must have extremely difficult balance-of-payments problems, with little opportunity to earn the needed foreign exchange. Finally, its national policies must reflect a real commitment to development. These goals and policies reflected a new passion within the U.S. academic and foreign policy community for using foreign aid to promote "modernization" in the so-called Third World.
The IDA did not start out well. In fact a whole series of regional institutions were developed in order to fill the perceived void created by the World Bank's stingy loan practices. In 1958 the European Development Bank was created, largely for the benefit of francophone Africa. The European Investment Bank was established to finance infrastructure projects within the European Economic Community. In 1958 the Inter-American Development Bank was set up in Washington, D.C., to spur growth in Latin America. The African Development Bank was created in 1964, and the very successful Asian Development Bank began operations in 1966. If imitation is the sincerest form of flattery, then the World Bank was successful indeed. But the proliferation of regional banks also signaled the failure of the Bretton Woods institution to fully embrace the enormous global development challenges that arose in the 1960s.
The World Bank began its real transformation under the controversial leadership of Robert S. McNamara (1968–1981). McNamara took over the bank after his resignation (or firing—he was never sure which) as President Lyndon B. Johnson's secretary of defense in 1968. McNamara became the father of a much-contested lending concept called "sustainable development." He dramatically increased the bank's lending portfolio, and by the time he left in 1981, lending had increased more than tenfold, from almost $900 million to $12 billion. McNamara succeeded in finally making the World Bank relevant to the global economy, particularly in the underdeveloped world. But he also left a legacy of continuing controversy that has fueled passionate anti–World Bank rhetoric from both the extreme left and right.
By the time McNamara had decided to leave the bank, there had been a sharp shift in orthodoxy within both the economics profession and policymaking community toward development aid. The election of Margaret Thatcher in England and Ronald Reagan in the United States signaled a move away from Keynesian demand management toward a more laissez-faire philosophy. This was bound to affect the bank. In fact, just as the last years of Jimmy Carter's presidency witnessed a defense buildup and a spate of economic deregulation that foreshadowed the Reagan years, so too did the final period of the McNamara presidency bring a sea shift in World Bank policies. By the end of the 1970s there was a growing dissatisfaction with the results and perceived lack of accountability in World Bank lending. This led the bank to institute its own "structural adjustment" policies in the hope of encouraging macroeconomic reform among countries receiving funding.
McNamara's successor, A. W. Claussen (1981–1986), faced mounting challenges: hostility from the new U.S. administration, a poorly performing portfolio, and increasing fears of a full-blown debt crisis in the developing world. Over time, Claussen replaced McNamara's more progressive staff members with neoclassical economists like Anne Krueger. Claussen maintained a far more low-key style that served the bank well during this period of transition. Claussen's successors Barber Conable (1986–1991) and Lewis Preston (1991–1995) did not fare as well. The World Bank was forced to suspend its lending to its largest (and in many ways most successful) client, the People's Republic of China, after the June 1989 Tiananmen Square massacre. This set a precedent of sorts for the bank, as it had scrupulously tried to stay out of "borrower politics." The Preston presidency faced growing questions about the bank's effectiveness, detailed below, which continued to plague Preston's successor, James Wolfensohn, who took over after Preston's untimely death in 1995.