Memorandum by the Chief of the Division of Financial and Monetary Affairs (Collado)83

Subject: Aid to the U.S.S.R. in the Acquisition of Industrial Equipment

This memorandum is designed to provide background for the Secretary’s meeting with Secretary Morgenthau on Wednesday at 3:30.
The relevant papers include:
Secretary Morgenthau’s letter to the President of January 1 indicating that the Treasury has a comprehensive plan of financial [Page 957]aid for Soviet reconstruction, which has been referred to State for a reply.
Ambassador Gromyko’s note of January 4 indicating Soviet willingness to sign the Fourth Protocol subject to certain conditions.
The President’s memorandum of January 5 urging all possible effort to continue Lend-Lease deliveries to the Soviets, and the prompt negotiation of a Fifth Protocol.
Ambassador Harriman’s telegram of January 4 transmitting Molotov’s aide-mémoire requesting immediate and post war credits of $6 billion at 2¼ percent interest, amortization beginning in the ninth and ending in the thirtieth year, with 20 percent off government contract prices on items ordered before the close of the war.
Ambassador Harriman’s telegram of January 6 recommending that we tell the Soviets that discussion of true post war credits must be separated from consideration of wartime program, that no long-term industrial goods can be put into production until the 3–C agreement is concluded, and that we have presented our final terms on the 3–C agreement.
Mr. Crowley’s letter of January 13, suggesting a reply to Gromyko and Molotov which would in general follow Harriman’s recommendations.
While we have not been informed officially of the Treasury’s proposals, I understand that they will be substantially as follows:
Separate 3–C from true post-war credits.
Follow Harriman’s recommendations with respect to 3–C but offer no interest, a schedule of deferred payments over say 30 years, and make no concessions on contract prices.
Seek legislation (either specific or as part of expansion of the Export-Import Bank—I am not sure which the Treasury will finally recommend) to permit extension of a $6 billion (or even at $10 billion) credit at low (say 2 percent) rate of interest, and amortizable over 30 or 40 years. Justify the low rate of interest by an option to purchase in the U.S.S.R. for 30 or 40 years, and at reasonable world prices, petroleum, minerals, and other raw materials as a U.S. conservation measure.
A meeting took place Tuesday between Mr. Acheson,84 Mr. Clayton, and others from the Department and Generals York, Wesson, and Spalding (who has left for Moscow) and Messrs. Cox and Davidson85 to discuss the Fourth Protocol and related 3–C issues. It was tentatively decided:
To proceed with the Fourth Protocol—Generals York and Wesson will draft a reply to Gromyko’s note.
Subject to general clearance and White House approval, to instruct Harriman as he has recommended—standing on our previous terms. (There was a majority agreement on the question of terms, [Page 958]but I strongly urge that we adopt the Treasury’s proposal unless there are overwhelming reasons arising out of the negotiating history. The Treasury terms would provide an excellent basis for a 3–C agreement with the British covering food and other materials in the pipeline, and a useful basis for the French and other nations. They would also provide a means of getting out of the present impasse with the Soviets.)
To authorize Harriman, at his discretion, to offer the Soviets an interim agreement whereby orders could be placed for the long-term industrial equipment against cash on delivery. This agreement to be superseded by an eventual 3–C agreement. (This is similar to the interim French arrangements.86) The purpose of this is to forestall Soviet criticism—of dubious validity, it is true—at the Big-3 meeting that war production is being delayed. General Wesson and Mr. Cox are going to try to draft on points (b) and (c).
With respect to 3–C, the only problem for discussion with Secretary Morgenthau will be the matters of terms discussed above.
The Treasury will probably devote most attention to the matter of post-war credits and its proposal which I believe will be as outlined above. It is recommended that the Department take no position until it has had a chance to study the Treasury’s formal proposal. The following are some tentative comments on various aspects of the matter:
Authority—We have generally felt that the Congress would rather grant general lending authority to the Export-Import Bank or other agency than to legislate specific credits. The China loan of 194287 was so special as not to constitute a precedent. We also question the desirability from point of view of relations with other nations of requesting specific legislation for one.
Terms—We have felt that there would have to be some very distinguishing characteristic to an arrangement to make possible the extension of especially favorable terms. Our experience has been that when we reduced Export-Import Bank interest rate for one nation we were submitted to irresistible pressure to reduce them for all other nations. The Treasury staff admits the force of this argument (so does the Export-Import Bank but not the FEA proper) but feels the option purchase arrangement would constitute the distinguishing feature.
The whole problem of rates of interest is very complicated. The Export-Import Bank has been lending at 4 percent, a rate roughly equivalent to the best private market rate for best foreign risks—that is, the Netherlands. While some have advocated a lower rate of interest—since the United States can borrow at long-term at 2⅜ percent—most have felt that the effect of such a rate on private lending [Page 959]would be harmful, and that commercial banking support for the Export-Import Bank would be jeopardized.
The Bretton Woods Bank is to lend only when private lending “at reasonable rates” is not available. Moreover, most of its operations will require access to private market funds in which cases it must add a commission of 1 percent to the market rate—a total of at least 4 percent.
The problem is whether we can and should attempt to get Congressional authorization for special terms to the U.S.S.R. and perhaps a few other countries. We will have to consider this further in view of widespread differences of opinion both within and outside the Government.
Amount—The Soviet request for $6 billion is all that they can service at their terms with their current gold production. We believe that their gold production will thus determine the amount of borrowing that they will undertake. At more costly terms they would borrow less, and vice-versa.
The Treasury will suggest that the United States should extend the entire credit—for political reasons. Ambassador Harriman has stated that a smaller amount—say a billion—might suffice as a starter at least. The answer probably lies in the amount of specific or blanket authorization which the Congress will enact. If we choose a lower amount, the Soviets can be referred for the remainder to the Bretton Woods Bank—where the interest rate seems certain to be about 4 per cent which they will probably reject.
Commodity option—The first reaction of the commodity experts of the Department to this idea is not enthusiastic. The Treasury has a memorandum from Interior stressing weak points in our raw materials resources—petroleum, zinc, bauxite, etc.—and indicating a strong conservation interest in husbanding these and purchasing abroad. On the other hand the directly affected interests—petroleum and mining—are apt to be opposed, and in addition the British and others are apt to view the arrangements with concern.
The commodity option would probably not be as strong an argument with the Congress as the Treasury believes, and at the same time it does not appear to provide a fully distinctive basis for offering special terms to the U.S.S.R. To some degree, many other countries could offer us similar arrangements.
Finally, it is questionable whether the proposed arrangement is consistent with the Atlantic Charter,88 our attitude towards the British on bulk purchases, and our general foreign economic policy. Coupled with especially low credit terms which might be said to constitute a form of export subsidy, it might be said to embody certain elements of “Schachtism.”89
United States interests in a credit to the U.S.S.R.—
It is our general policy to extend credits for sound economic development.
Our export industries will be aided, but this argument is not nearly as important as the Soviet aide-mémoire suggests.
We are desirous of improving overall diplomatic relations with the U.S.S.R. This involves, among other things, Soviet participation in the Dumbarton Oaks program;91 Soviet participation in economic collaboration such as the Bretton Woods proposals; Soviet participation in the United Maritime Authority; the establishment of a proper role for the United States in the Allied Control Commissions in Rumania, Bulgaria, Hungary, and eventually Germany; establishing a proper role for the United States in general economic relations with and the reconstruction and development of Poland, Czechoslovakia, and the Balkan nations; and establishing a proper basis in Iran.
There must be considered several questions which have been outstanding for a very long time. These include the Kerensky obligations to the United States Government,92 and the claims of private American citizens who have had properties in the U.S.S.R. In 1934 the First Export-Import Bank refused to extend credits to Russia because of failure to obtain settlement on some of these matters.93 In view of the much larger amounts of credit now suggested our bargaining position might be better. In general it has been the Department’s experience that specific balancing of claims against credits has not been a successful diplomatic technique. In our dealings with the Russians it might be more successful than in the case of most nations.
  1. Addressed to the Assistant Secretary of State (Clayton) and to the Secretary of State.
  2. Dean Acheson, Assistant Secretary of State.
  3. Oscar Cox, Deputy Administrator, and Alfred E. Davidson, General Counsel, Foreign Economic Administration.
  4. Signed at Washington, February 28. 1945, between the United States and the Provisional Government of the French Republic, Department of State Executive Agreement Series No. 455, or 59 Stat. (pt. 2) 1304, 1307.
  5. Loan agreement signed at Washington, March 21, 1942; for text, see Department of State Bulletin, March 28, 1942, p. 263, or United States Relations With China, p. 510. See also bracketed note, Foreign Relations, 1942, China, p. 490.
  6. Joint statement by President Roosevelt and British Prime Minister Churchill, August 14, 1941, Foreign Relations, 1941, vol. i, p. 367.
  7. Hjalmar Schacht, President of the German Reichsbank, 1933–39; Minister of Economics, 1934–37; Minister without Portfolio, 1937–43.
  8. See Foreign Relations, 1944, vol. i, pp. 713 ff.
  9. See memorandum initialed by President Roosevelt and the Soviet Commissar for Foreign Affairs (Litvinov), November 15, 1933, Foreign Relations, The Soviet Union, 1933–1939, p. 26.
  10. For negotiations to implement the agreements of November 1933 in regard to claims, credits, and other matters between the United States and the Soviet Union in 1934 and 1935, see ibid., pp. 63191.