840.50 Recovery/7–1047: Telegram
The Secretary of State to the Consulate at Geneva
urgent
768. Personal from Lovett for Clayton and Ambassador only. I have read with great interest the discussions you and Douglas have had with Bevin, Cripps, Dalton etc. and the Brit aide-mémoire summarizing them.1 These documents are very helpful in giving us an insight into your thinking and into the problems which the Secretary’s suggestion raises. In general I can say that our thinking has been running along parallel lines, though you have developed some points further than we have taken them. There are a number of points on which I should like to comment.
It seems to me that yours is the right answer on the relation of the special Brit dollar problem to the question of European recovery. A correct solution to the European production and distribution difficulties will go a long way to help the Brit out of their troubles. The European program, however, should not attempt to solve the world dollar shortage. For one thing, I doubt that this country can stand the pressure on its exports at the rate of the first quarter of this year. As you know, the pinch is being felt in oil; lately we have been made aware of worries in coking coal, steel and agriculture. Canadian and Latin American purchases here are exerting very heavy pressure on domestic supplies. If in the name of European recovery we help Brit to pay Canada, Argentina etc. all the dollars the latter require, we are going to find ourselves solving a world long-run problem via a short-run European problem and we will run into Congressional difficulties. We can make provision in European recovery aid for the transfer of some dollars from Europe to points outside the US. The Brit commitment to convert annually agreed amounts of blocked sterling into dollars should be taken into account for example, as well as the minimum amounts of dollars Europe will require to finance purchases from non-US areas. In addition, we should try to get away from tied purchases, if Congress will permit, and procure commodities needed by Europe under minimum aid programs outside the US, if this does not interfere with supply arrangements on which Europe is already counting. Finally, I know that Dept is considering whether we should take over the burden of the minimum support of the US–UK combined zones of Germany, insofar as dollars are concerned. Beyond this, however, I think we have to be careful not to go, or we will find ourselves [Page 325] trying to solve the dollar problems of the whole world. This we cannot do.
Your distinction between short-term needs for consumption and long-term needs for reconstruction is a correct one, but I am somewhat uneasy about drawing too hard and fast a line. For general reconstruction needs, you are of course completely right. For bottleneck items, such as fertilizer, mining machinery, facilities needed to aid Europe in repairing rolling stock, I am not sure that we should not hold the question open a little longer. As you point out, the distinction between consumption goods and capital goods leads to geographic differences. Eastern Europe doesn’t need coal and food so much as fertilizer, transport equipment, mining machinery etc. If we insist too rigorously from the beginning that all capital goods have to be obtained on a loan basis, while consumption goods may be financed through grants, we lose a little flexibility which may later stand us in good stead. I suggest only that this question be held open a bit longer on capital goods needed to produce consumption goods in a bottleneck field. I have not yet talked to McCloy2 on this subject but hope to do so shortly.
We are all here in agreement with you on the point that a customs union is a desirable long-run objective but that to attempt to work it out now would bog Europe down in details and distract from the main effort. I leave to you how the integration which Bevin seems to want in such matters as farm implements and musical instruments can be squared with our ITO endeavors. Undoubtedly if rapid recovery is to be achieved we shall have to interpret various escape clauses in ITO liberally.
I agree with Douglas on the importance of steps to straighten out financial chaos, but think that the Brit are probably right in thinking that we should not press too hard on this from this end. Nevertheless fiscal stability should be pressed by someone. In addition to the budgetary aspects of the problem, there are of course exchange-rate questions (France and Germany) questions of external and internal prices (which must be solved shortly if trade—in other than critical bottleneck items which will presumably be allocated—is to flow in normal channels) and the restoration of internal monetary stability, including confidence in currencies. The last of course largely a budgetary question except that in some countries like Germany and Austria, budgets are balanced but outstanding currency and deposits are far too large in relation to prices.
I have not thought through the problem you raise in suggesting that while we should get individual and overall commitments from Europe [Page 326] regarding their recovery, our aid should be arranged through a series of bilateral agreements with separate countries. I appreciate your worries about an UNRRA type distribution of aid. On the other hand, I don’t see how a European coal program, based upon certain goals for production in deficit and exporting countries and certain minimum requirements for aid from the United States, can have the latter fixed by a series of European country agreements with us in view of the necessity for flexibility in allocations. As you know better than I, allocations cannot be made effectively much more than 3 to 6 months ahead (and in food there is frequent necessity to divert individual ships). If US coal is allocated by a European organization, and if our aid is linked in whole or part to commodities, how would the bilateral agreements work. I am not yet sure that we want to discard the commodity approach, the administrative aspects of which may be possible of solution in ways that would avoid the UNRRA difficulties, without having examined the question further. If we allocate dollars, rather than commodities, for example, we are in danger of returning to the piece-meal approach we are so anxious to avoid.
Finally, I am inclined to think that the commodity approach should not be pursued by Europe to the exclusion of trade and administrative problems. Some device must be found to rid Europe of the stultifying effects of bilateral trade, and steps must be taken within the separate economies (partly monetary but some administrative) to correct black markets, compensation deals, hoarding, diversion of resources to repair or expansion in low priority industries, etc. You cover these points indirectly when you asked Bevin for an account of why recovery in Europe had not progressed farther in the two years since the war, given the substantial quantities of US aid. But this account of the past, I think, should not be focussed exclusively on commodities, and it should produce an effort to handle the European economic problems more effectively, both inter-Europewise and internally in separate countries. This raises issues larger than food, coal, fibers, etc.
A word on timing. If Europe gives us a plan by September 1, the best we can do under present prospects is to have hearings this fall and try to get approval shortly after January 1, 1948. This is optimistic. Before this day, I am told, there may be financial crises in Italy and France. You know more about this than I. Do we have to envisage taking some piecemeal steps for France and Italy before January 1?
I do not like these emergency treatments because they are piecemeal and our whole approach is based on an overall solution. Yet I see no alternative. What are your views?
I am sending a copy of this to Douglas in London as Dept’s 2952.
Marshall