Memorandum by the Chief of the Division of Eastern European Affairs (Durbrow) to the Assistant Secretary of State (Clayton)
Subject: Fourth Soviet Protocol and Postwar Trade Proposal with the Soviet Union.
Reference is made to Moscow’s telegrams nos. 29 and 61, January 4 and 6, respectively (copies attached for convenient reference). There is also attached a copy in translation of a note which has been received from the Soviet Embassy74 indicating that, with certain qualifications the Soviet Government is prepared to sign the Fourth Soviet Protocol. Copies of these documents have been made available to Major General Wesson,75 Division for Soviet Supply, FEA, and Major General York,76 President’s Soviet Protocol Committee, who have been asked to study the question and to make their recommendations as soon as possible. Both General Wesson and General York have indicated that they hope it will be possible to have a meeting with State Department officials not later than Monday or Tuesday of next week (January 15 or 16). I promised to let them know as soon as it might be possible to fix a definite time for the meeting.
The essence of the problem may be summarized as follows:
1. The Soviet proposals for post-war credits constitute an attempt to make applicable to all post-war trade and credits with the Soviet Union the terms and low rate of interest offered as a special exception under the so-called 3 (c) amendment to the Master Lend-Lease Agreement. Since the industrial equipment offered under the 3(c) agreement could be justified as contributing to the Soviet war effort in the event it should be erected before the termination of hostilities against the common enemy, we were able to make this offer by using lend-lease facilities and lend-lease funds. For this reason only we were able to offer exceptionally low interest rates which are undoubtedly lower than those which the Export-Import Bank could offer on a straight [Page 950]post-war credit or that private banking concerns or the proposed international bank would be in a position to make available. Moreover, there are legal restrictions at the present time to granting straight post-war credits (the Johnson Act, etc.).
For the above reasons it will not be possible for us at this time to accept the full Soviet credit proposal. The most we can do in this connection is to reiterate our offer under the proposed 3 (c) agreement. Before making this offer again, it might be necessary to reexamine some of the industrial equipment which we proposed to furnish through lend-lease on a long-term credit basis in order to make sure that we can still justify putting into production certain of this equipment which will take a long time to produce. With this thought in mind, we should, in reiterating the 3 (c) proposals, emphasize most emphatically to the Soviet authorities that not only is this the only legal means by which we can now start production on industrial goods which have both a war-time and peace-time use but that if the 3 (c) agreement is not signed in the very near future it might be necessary for us to reconsider our offers on the larger items of industrial equipment which we might not now be able to justify as coming within the terms of lend-lease. Moreover, in view of the interest rate problem referred to above, it might be well in reiterating the 3 (c) offer to make it clear that for various specific reasons it might not be possible to offer straight post-war credits at such advantageous rates of interest.
2. The Soviet Embassy’s note, agreeing, with some qualifications, to the signing of the Fourth Protocol, raises the question as to whether we are willing to sign the Fourth Protocol without obtaining the advantages of the proposals contained in schedule I of the suggested 3 (c) agreement. The question involved is whether we would be prepared to waive the advantages of a Soviet obligation to take and pay for specified items in the 3 (c) agreement which would be in the pipeline after the termination of hostilities. In other words, these proposals under schedule I may be classified as an orderly liquidation of lend-lease. By signing the Protocol without the 3 (c) agreement we might be subject to criticism if hostilities against Germany should end within the next few months and we had not made some previous provision for the liquidation of straight lend-lease material in the pipeline. If the war against Germany should last until the beginning of the Fifth Protocol year or if the Soviet Union should enter the war against Japan, there would be no reason why we should insist on tying the signature of the Fourth Protocol with the 3 (c) agreement.
If you concur that it would be advisable to have a meeting in the near future with the Lend-Lease Protocol officials and officers of the Department, I will gladly make the necessary arrangements.