860F.51/2–2646: Telegram

The Ambassador in Czechoslovakia ( Steinhardt ) to the Secretary of State

secret
us urgent

299. I desire to express my appreciation for the comprehensive outline of the present status of the Zecho loan negotiations set forth in Dept’s 82, February 7 which unfortunately was delayed 10 days in transmission.

In my opinion the failure of the Zecho Govt to follow up its original application for a 300 million dollar Eximbank loan by taking the initiative in pressing for all or part of a reconstruction loan or in seeking to close the 25 million dollar cotton credit, has been occasioned by the following:

(a)
Disagreement within the Govt as between those members who favor an orientation exclusively to the east and those who favor continued financial and commercial relations with the west.
(b)
Uncertainty as to the attitude of the Soviet Govt toward a large loan from the US to Zecho which would inevitably carry conditions with it and which would reestablish Zecho purchasing power in the US and result in greatly expanded trade between the two countries.
(c)
Uncertainty as to the scope of Zecho-Soviet economic and commercial relations in the immediate future and the demands the Soviet Govt may make of Zecho.
(d)
Hesitation by the moderates in the Govt to incur large dollar obligations before the spending proclivities of the Communists have been curbed, as is anticipated after the elections in May.
(e)
The unwillingness of Masaryk to subject himself to criticism by the Communists should he fail to obtain substantially the entire 300 million dollars, which he knows is not possible at this time.

As a basis for opening the negotiations I concur in the Dept’s proposal that a note should be addressed to the Zecho Govt which should request a detailed statement by the Czechs of all of their postwar trade agreements, particularly the engagements assumed by Laušman in Moscow. I also agree that commitments should be sought from the Czechs to abstain from long range policies which would conflict with [Page 186] the expansion of world trade and employment, and to compensate American owners of nationalized property in dollars. As no substantial amount of dollar exchange is available to the Czechs, compensation to American owners of nationalized property, other than in Czech crowns, could only be paid (1) out of the proceeds of a dollar loan (2) over a long period of years as a result of a favorable balance of trade which is as yet uncertain, or (3) by the physical acquisition of exportable merchandise. For the Dept’s information, while it has not as yet been possible to arrive at any satisfactory estimate of the total American claims for nationalized property, I doubt that the total amount will exceed 30 million dollars. I see little to be gained by including a provision for the establishment of a mixed US-Zecho commission to determine the basis and nature of compensation, as an expert assigned to the Embassy would serve substantially the same purpose as an unwieldy mixed commission, the functioning of which inevitably would involve delay. I should be disposed to regard the agreement in principle of the Czecho Govt to make payment for American nationalized property as a sufficient guarantee provided the means of payment is assured the Czecho Govt. There will, of course, be the inevitable disputes as to the value of individual properties but once the means of payment has been assured, the valuations should not present insurmountable difficulties and should not require the services of a special commission.

After the foregoing basis for negotiations has been laid, the following principal factors seem to me to be pertinent in considering the amount and nature of any loan. There is a negligible amount of gold and dollar-sterling exchange available to the Czechs. The Germans stripped the banks of their foreign exchange and liquid assets and flooded the country with paper money. On the other hand, approximately 80 percent of this paper money has been immobilized by the new currency law and the national debt is moderate, not exceeding roughly one billion dollars at the present rate of exchange. The physical damage in the country as a whole was relatively light and in this connection I have been convinced for some time that the Czechs have made a highly successful effort to exaggerate the extent of the damage. The purpose of this exaggeration has been to reduce Soviet demands and to gain a greater measure of assistance from UNRRA as well as loans and credits from the US, British, Canada and other countries. There is also the factor that the US is making a gift—as distinguished from loans—of over 200 million dollars to Czecho through UNRRA, the American Red Cross, American Relief for Czecho, etc. As I pointed out in one of my previous telegrams, these gifts are the equivalent of nearly 7 years normal peacetime imports [Page 187] from the US or a handsome profit on over one billion dollars of exports.

I have been given to understand that in some circles in the US it is being argued that “American loans to foreign countries tend to deter the spread of Communism”. To my mind this argument fails to take into consideration the fact that the Communists are already so strongly entrenched within the Govts of many European countries that large American loans to such countries are more likely to help than to harm the Communist cause. It is my considered judgment that a large American loan to any foreign Govt in which the Communist Party is strongly represented will be availed of by them indirectly to entrench their position and extend their grip.

While I favor the cotton credit as a more or less routine commercial transaction which is as much in our interest i.e. disposing of surplus cotton as it is in the interest of Czecho to resume the manufacture of textiles on a large scale, I do not favor a large loan for reconstruction purposes at this time and certainly not unless and until the elections in May evidence the desire of the people of Czecho to rid themselves of the very real threat that now exists of virtually complete Communist domination, nor until tangible evidence exists that American properties which have been nationalized will be paid for in dollars or exportable merchandise as distinguished from the vague promises of Lausman who has already intimated that because the British have a Labor Govt they will be expected to accept Czech crowns on reduced values for their properties.

In connection with that I have said above, I am not unmindful of the disastrous experience of the American public after the first World War in making excessive loans to foreign Govts. I had hoped that this experience would constitute a warning to many individuals in the US to abandon the practice of measuring the requirements and capacity to repay of other countries by American standards. I can find no need at this time for a reconstruction loan to Czecho of more than 30 million dollars. This is an amount sufficient for the Govt’s present needs, which not even a Communist-dominated Govt after the elections, in my opinion, would find it worth defaulting on. If later in the year or next year it is deemed necessary or desirable to loan an additional 20 million dollars, it seems to me that there is no present necessity for mortgaging our future decision. Obviously the present Czech Govt will seek as large a loan as it can obtain. This does not appeal to me as a valid reason for surrendering our judgment as to the present needs of the country.

I have discussed the substance of Depts 119, February 19 with Masaryk who fully understands the situation and who has authorized [Page 188] Mladek to “make soundings” in Washington on the loan situation and report to him. Masaryk does not seem over anxious to press for a large dollar loan at this time and assured me he would not think of proceeding to Washington for that purpose without first discussing the matter further with me.

Steinhardt