Foreign Relations of the United States, 1952–1954, Western Europe and Canada, Volume VI, Part 2

751G.00/8–453

No. 609
Memorandum by the Ambassador in France (Dillon)¹

top secret

Paris, August 4, 1953.

• Subject: Discussions with Prime Minister Laniel concerning his economic and financial program.

During the past week I have had an opportunity to review with Prime Minister Laniel his thinking on the policies which he hopes to pursue in the economic and financial field. This memorandum contains a summary of our discussions.

In considering Laniel’s chances for carrying out the rather wide-sweeping program which he envisages, I think it is important to remember that he is not a politically ambitious man. He did not actively seek the job of Prime Minister and was chosen in the final phase of the longest Ministerial crisis since the end of the war primarily because of his general acceptability, based largely upon his fine record in the Resistance and his disassociation from past party feuds.

Now at this critical period in French public affairs Laniel finds himself vested with “special powers” of a much broader scope than most people realize. With these powers his Government can introduce far-reaching economic and financial reforms. Since these powers have been voted for a limited period of time only, this is an opportunity which will shortly pass. However, Laniel states he is determined to accept his unusual responsibility and not let that opportunity pass unutilized.

Laniel takes as the point of departure for his policies the thesis that France—for her own good as well as in the interests of her European associates and her NATO partners generally—must be freed from the position of dependence in which she has languished since the end of the war. This objective, he believes, cannot be accomplished unless and until a solution is found for France’s chronic economic and financial ills. And this means a significant reduction in the level of commitments—both domestic and external—which now overburden the French economy and keep it in a constant state of near collapse. The “special powers” in his view represent a unique chance for an attack upon this problem even though he recognizes that his freedom of action is circumscribed by the overriding necessity for France to make a major contribution to the defense of Europe and of Southeast Asia.

I would like to caution that while Laniel has impressed me with his determination to accomplish something concrete and significant, the Government has not yet reached any decisions on the use it will make of the “special powers.” The various possible courses of action are now under study by a series of committees working under the direction of Finance Minister Faure. Some initial measure will be announced in the early part of August. However, as is usually the case in France, the most useful reforms will probably be taken only a few days before the broadest of the “special powers” expire at the end of September. I would also emphasize that all decisions on the use of the “special powers” must receive the agreement of the full Cabinet. Consequently, we must recognize that however far Laniel himself may be prepared to go, he may in the end have to give ground to some of his colleagues or risk provoking another Ministerial crisis.

The first point in Laniel’s program is to maintain stability in prices and wages. The wheat price, which sets the tone for a number of key agricultural prices, has already been held at last year’s level. Now the Government, under Faure’s sponsorship, is engaged in one of its periodic campaigns to lower prices by such devices as “shock imports” and direct controls. This campaign is being carried out in anticipation of the usual seasonal tendency of prices to rise in the autumn. The idea behind it is to gain as much margin as possible in the cost-of-living index below the crucial figure of 149.1. At that point an automatic wage increase is set in motion under the escalator wage law.

The second and central point of Laniel’s program is to introduce a substantial measure of order into the public finances. He is determined to bring within manageable proportions the excessive budget deficit which has been the source of the continuous French inflation since the war. The problem for 1954 becomes even more serious, because certain expenditures, such as debt service, pensions, and investments underway, must unavoidably increase. Laniel’s aim—and in this he is firmly supported by Faure—is to carry out important reductions in both the civil and defense expenditures, affecting in the latter case Indo-China as well as the French Metropolitan budget. At this early stage, precise information on the 1954 budget is not available but the reduction goals Laniel mentioned to me—a 250 billion franc reduction in civil expenditures, a 100 billion franc reduction in defense expenditures for Metropolitan France, and a 50 billion franc reduction in the Indo-China budget—seem highly optimistic. Reductions of anything like the magnitude of 250 billion in civil expenditures are sure to encounter serious political opposition and plans will certainly have to be revised downward. Laniel stresses that to have any success he must insist on sizeable reduction in defense expenditures as well.

Laniel’s tactic is to present the 1954 budget to the French public as completely in balance. To accomplish this he proposes first to remove from the budget the credits for capital investment. These credits to finance the modernization programs of the nationalized enterprises and to provide development loans to private industry and agriculture would be made conditional on borrowing the necessary resources from the capital market. His aim would then be to curtail severely or, if possible, completely eliminate the residual budget deficit of 400 or 500 billion francs remaining after the elimination of these investment credits by the reductions in civil and military expenditures to which I have referred above.

From a strictly financial point of view the device of simply removing capital investment appropriations from the budget really does not alter the basic situation with respect to the investment projects in question. The money must still be found to cover them or the Government must reach a political decision to see them abandoned. However, we should not underestimate the psychological benefits of being able to make a fairly strong argument that the budget is at long last balanced, even if under one interpretation this is not strictly the case. It has been demonstrated time and again that the psychological element is an extremely important one in the French economic and financial picture, and this consideration has obviously weighed heavily in Laniel’s mind.

The third major point in Laniel’s program is the revision of French external financial policy. He has not yet spoken to me of his plans, but his advisors tell me that Laniel believes a new rate for the franc would increase substantially France’s earnings of foreign exchange, and that the new rate could be held if the rest of his program is vigorously implemented. The Government is now giving active consideration to the possibility of devaluing around the middle of this month, but the decision is not yet definite. Laniel is inclined to consider an immediate operation both necessary and desirable, but Faure is still hesitating. First of all, Faure fears that a rate adjustment will induce price increases in steel and other key commodities, thus leading to a new price-wage spiral, and second, he tends to prefer carrying out a devaluation only when it is possible to announce a definite budget for 1954. This would mean waiting until there is a definite arrangement on American assistance as well. Agreement on a budget for 1954 will take some time and, if the operation must be postponed until then, any hope of a devaluation by this Government might have to be abandoned.

The Bank of France now definitely favors an immediate exchange rate adjustment. Governor Baumgartner has said he would be prepared to support the operation by a tighter credit policy and even by an increase in the rediscount rate. The latter step would increase the cost of government financing and might be possible only as a temporary step.

If a decision to devalue is taken, present plans are that the rate would be allowed to move only about 15 percent—that is, to 400 francs or just over for one dollar—and then be allowed to fluctuate within a range of some 10 to 15 points. Exchange controls would be maintained so that the flexibility in the system would be artificial. The hope apparently is to create an impression in the public mind that the official rate for the franc is a real one and also to bring about a noticeable improvement in the rate at the appropriate time in order to convince the public that the operation has been a success.

Laniel also favors a return to trade liberalization. The Finance Ministry is considering lifting quotas on textiles, shoes, kitchen utensils and certain other consumer items. Supporting such a program will also create political difficulties for Laniel. There is little to do in freeing financial transaction. Tourists might be given larger allowances and the limit on exports of banknotes by departing travelers might be increased.

The Indo-Chinese piaster will presumably move with the franc. The adjustment foreseen is not large enough to raise much of an outcry in Saigon and, under the present financial relations between France and Indo-China, any fluctuation of the franc against the piaster doesn’t make much sense. At a later time, if the Associated States obtain enough financial independence, they can appreciate the piaster if they wish to do so.

One of the first problems Laniel’s program presents for us in any aid negotiations with the French is the U.S. position on the level of military expenditures for the French NATO build-up itself. Some of the French insist that economies can be made without its being necessary to revise the goals; others that cuts of the magnitude of 100 billion francs will mean a reduction in forces. Pleven is certain to oppose these cuts strongly and has already been pressing within the French Government to open negotiations with the United States in the hope we will take a position supporting his view.

The far more serious problem is Indo-China. I believe my telegrams contain all the details now available on Laniel’s plans for a more active military campaign. I would, however, like to stress that Laniel does not wish to present the problem of financing as merely another request for additional assistance from the United States to support French operations in Indo-China. He believes that the international developments of the past two months have created an entirely new situation, requiring the United States and France (and perhaps the United Kingdom) to make a really searching re-examination of the problem of Indo-China. His views are still somewhat vague, because there are still substantial disagreements on the Indo-China policy within the French Cabinet. However, I might summarize them as follows:

(1) The relaxation of international tensions and the Armistice in Korea leave France the only country engaged in active military operations.

(2) France is now giving the Associated States real independence. I understand that Laniel tends more and more to the views of Reynaud and Faure, who are prepared to give the Associated States the choice of whether or not to remain in the French Union and even to have France propose that the United States give assistance directly to the Associated States, if that will facilitate the presentation of the Indo-China problem in the United States. However, Laniel has not discussed this aspect of the question with me, probably because of the sharp difference of opinion between Reynaud and Bidault.

(3) The war in Indo-China then becomes even more clearly a fight against Communism in the common interest. In Laniel’s view, France, in these new circumstances, is entitled to expect a greater sharing of the responsibility for, and the burden of, helping the Associated States.

(4) Moreover, Laniel states he cannot lead France out of her constant financial difficulties and her posture of continuous dependence unless he can reduce the defense expenditures of France. His whole program in his view hinges on that.

Laniel, you might say, wishes to give “part of the baby to the United States” but he is prepared to accept all the logical consequences of that wish in granting the Associated States an independent status.

Such details of Laniel’s program as are available and the views attributed to him in this memorandum should be held in secrecy. He has not yet taken many of his Cabinet colleagues into his confidence, and the divulging of this information could prove of considerable embarrassment to him.

1. This memorandum was sent to Acting Secretary of State Smith as an enclosure to a letter from Dillon dated Aug. 4. In his letter, Dillon explained that this memorandum was intended to elaborate upon and supplement the information sent to the Department of State in recent telegrams concerning the initiation of a more aggressive military campaign in Indochina; Dillon wanted to relate Laniel’s thinking on the Indochina problem to the broader framework of the economic and financial program which Laniel hoped to undertake.

   According to a memorandum by Walter K. Scott of Aug. 14, this memorandum by Dillon was read by Dulles and Smith and single copies were sent to Secretary of the Treasury Humphrey, Secretary of Defense Wilson, and Stassen of the Foreign Operations Administration. (EUR files, lot 59 D 233, EUR subject file)