Foreign Relations of the United States: Diplomatic Papers, 1945, Europe, Volume IV

865.24/7–2745: Telegram

The Ambassador in Italy (Kirk) to the Secretary of State

Rome, July 25, 1945—noon.
[Received July 27—8 p.m.]

2097. Reference Department’s instruction No. 460, June 30, 1945⁹⁸ regarding Surplus Property disposal in Italy. Discussions have taken place between the Embassy, the Treasury representative and Office Army–Navy Liquidation Commission in Italy regarding disposition of United States Army and Navy surplus property in Italy. Acting Field Commissioner of Office Army–Navy Liquidation Commission in Mediterranean Theater of Operations United States Army summarized provisions of Field Commissioner’s Guide No. 1,⁹⁹ from Office Army–Navy Liquidation Commission laying great emphasis on objective of obtaining dollars maximum extent possible. With respect to the provisions in first list of priorities regarding acceptance of local currency or other obligations the Acting Field Commissioner considers preferable arrangement for disposal of surplus property to Italians on a two-fold basis; cash dollars for items appearing for example in Italian import B list which would otherwise be currently procured in the United States; for other surplus items payment would be made in dollar credits to be repaid on the basis of an agreement to be negotiated as soon as possible between the two Governments. Under such an arrangement Italian Government would be enabled to bid for and buy all surpluses offered.

However the Embassy wishes to call the Dept’s attention again to the serious administrative problems which would arise from attempting to match current procurement for B program or other essential Italian imports with the disposition of surplus property. Adept must realize that the Army strongly desires that disposition of surplus property should be expeditious; an objective which would be compromised if time were to be lost comparing surplus property items with procurement planned specifically to meet Italian requirements. In addition the shifting of the bulk of Italian requirements from semi-manufactured and manufactured products to raw materials may greatly limit the possibilities of such substitution even apart from the administrative burdens involved. Finally the delays involved in such matching might place the Italians at a considerable disadvantage as compared with other bidders unfettered by such restrictions.

Embassy also raised question of effect of priorities established in guide No. 1 on types and quantities of surplus material which would be available to the Italian Government. In this connection reference was made to the sale of almost 3,000 mules belonging to the United States Tenth Mountain Division to United Nations Relief and Rehabilitation Administration for export to Yugoslavia and Greece from Italy a country most of which has been stripped of draft animals by the Nazi Army in its retreat northward. Acting Field Commissioner of Office Army–Navy Liquidation Commission did not believe that the cream of surplus property in Italy would be skimmed off for export to other areas.

Embassy considers that dollars credits are probably the best method of disposing of surplus property expeditiously. Of course if United Nations Relief and Rehabilitation Administration program for Italy is expanded then some part of disposal of surplus property in Italy could take place through United Nations Relief and Rehabilitation Administration which would have the effect of lessening the contribution in new supplies which would be furnished Italy under such an expanded program.

Office Army–Navy Liquidation Commission would like to establish the credit arrangements as soon as possible which they consider are authorized by the Surplus Property Act but in accordance with their directives request the approval and guidance of the State and Treasury Departments. The terms of such a credit arrangement would of course be of outstanding importance and must be linked to Italy’s capacity to pay. Should the Adept and the Treasury approve the use of dollar credits for this purpose instructions regarding the Dept’s views on terms of payment would be appreciated.

Office Army–Navy Liquidation Commission considers that approval of the two agencies with respect to initial credits up to about 25 or 30 million dollars would probably cover the bulk of surplus property for which cash dollars are not available to Italy for payment barring any significant changes in redeployment program of the army which Office Army–Navy Liquidation Commission considers possible. While such an initial credit appears reasonable to the Embassy and the Treasury representative consideration might also be given to a smaller initial credit with the understanding that it would be increased when necessary. In this way credit extension could be more nearly fitted to the amounts of surplus property offered for sale.

In its instructions to Rome in this connection Adept and Treasury may wish to consider the following in connection with proposed dollar credit arrangements:

(a) A financial agreement in detail should be concluded as soon as possible with the Italian Govt.

(b) An initial credit would be made available to the Italian Govt. Fifteen million dollars is suggested for this purpose.

(c) When this amount is exhausted an additional amount would be made available to the Italian Govt. The additional credit extended would be based approximately upon the amount of surplus property which the Acting Chief Commissioner estimates will be available during the next quarterly period. The agreement probably should refer to the possibility of additional credits being granted should the circumstances warrant.

(d) Repayments of dollar credits should be amortized over a period of years sufficiently long to prevent default as to principal or interest as a result of lack of means of payment. Period of time would depend on ultimate size of credit on one hand and Italy’s basic balance of payments position on the other. Initially the period could be fixed at 15 or 20 years. However, provision should be made for periodic review in the light of developments in Italy’s international economic and financial position with the objective of revising upwards or downwards the amortization period. For this purpose a review every 3 years might be suitable.

(e) No payments on interest or principal should be required for an initial period of 3 years. Whether interest would be charged during this period should be determined by Adept and Treasury. Requirement of payments during first 3-year period would probably simply result in US dollars made available to Italy to finance reconstruction and rehabilitation being used to repay credits. It would appear preferable therefore to openly state no such payment will be required rather than to finance such payments ourselves.

(f) Whether or not interest payments should be required on the dollar credits extended is a matter for the Adept and Treasury to decide. Some interest payment might be desirable and it is suggested that one to one and one-half percent be considered for this purpose.

(g) The agreement would of course be based on dollar obligations avoiding thereby the problem of exchange rate fluctuations.

(h) Italian Govt might undertake to purchase for cash dollars any items which are offered as surplus property which are similar to or identical with items for which funds have been otherwise made available. Thus new Italian procurement concurrent with disposal of particular surplus property would be met by cash purchases of substitutable surplus property items. However, as indicated above the Embassy does not consider such procedure feasible and would prefer to have surplus property disposal handled separately from other procurement.

(i) US might reserve right to accept due payments in form other than dollars. This clause should be unilateral. However Italian Govt should be given the possibility of offering foreign exchange other than dollars in payment of principal and interest should the U.S. Govt approve.

(j) Such dollar credits might be convertible into lire for extraordinary US Govt expenditure in Italy from time to time and for such purposes as may be mutually agreed upon by the two Govts. It would be understood that such conversion should not tend to undermine the economy of Italy by increasing the difficulties of acquiring essential supplies abroad.

(k) Italian Govt should undertake not to export surplus property items sold for dollar credits. This would avoid the possibility of resale for other currencies. Such property should be used exclusively for the purpose of reconstruction and rehabilitation in Italy.

(l) Italian Govt should undertake to give US citizens national treatment in the disposition of surplus property in Italy.

(m) Either Govt should be permitted on 30 days’ notice to open conversations with the other Govt with respect to the terms, operation conditions, etc., of the agreement.

(n) In the event the Italian Govt considers it cannot meet payments when due the US Govt should reserve the right to request a full statement of the reasons therefor including all the necessary supporting statistical, economic and financial data.

(o) It is of outstanding importance that the terms of the agreement be [consistent?] both with the Bretton Woods multilateral system of payments as well as the Trade Agreements Act as amended.¹ The proposals above are believed consistent in this sense with a multilateral system of trade and payments as advocated by the United States Government.

The Embassy has been informed by the Acting Chief Commissioner that it is urgent that the manner in which the sales of surplus property is to be financed be settled as soon as possible. Considerable amounts of surplus property are currently becoming available with no arrangement in effect for permitting the Italian Government to bid for such property directly. Other bidders are presently in a preferred position. In the interim period, the Embassy will authorize the Acting Chief Commissioner on August 2 unless instructions to the contrary are received to grant limited dollar credits to the Italian Government to enable it to bid for surplus property subject to the understanding on the part of the Italian Government that repayment provisions will form part of a financial agreement on surplus property to be negotiated in the near future.

Deputy Commissioner for surplus property in Europe, Conrad Matthiessen, OANLC (Office Army–Navy Liquidation Commission) has visited Embassy and left copy of letter dated July 11, 1945, addressed to American Ambassador to Holland² outlining principles to be followed in disposition of surplus property. Embassy has been requested to adapt this letter to fit Italy. Proposals of Embassy above appear to be consistent with provisions of above letter. It is assumed that letter in question supersedes proposed aide-mémoire⁴ on subject. See urtel 782, May 8, 7 p.m.⁵

Repeated Treasury for Tasca.

Kirk

98. Not printed; it transmitted enclosures, copies of which are not found in Department files.
99. Guide No. I, dated June 16, 1945, not printed.
1. Act approved June 12, 1934, 48 Stat. 943; amended June 7, 1943, 57 Stat. 125; amended July 5, 1945, 59 Stat. 410.
2. Stanley K. Hornbeck.
4. Not printed.
5. Not printed; it stated that proposed aide-mémoire was still under consideration (865.24/5–845).