Foreign Relations of the United States, 1947, The British Commonwealth; Europe, Volume III

840.50 Recovery/8–3147: Telegram

The Ambassador in France (Caffery) to the Secretary of State

top secret

Paris, August 31, 1947—1 p. m.

3543. For the Secretary and Lovett from Clayton. With reference to your 3201 August 26 and Caffery’s 3489 August 28,¹ Ambassadors Caffery and Douglas and I spent Friday and Saturday morning with Kennan and Bonesteel in a comprehensive review of the Paris Conference. This mutual exchange of ideas was most helpful and enabled us to agree on a common position which we stated orally to the Conference’s Executive Committee yesterday afternoon.

Following is a brief digest of discussions in a three hour meeting with the Committee:

1. Introductory remarks:

We have now had an opportunity to acquaint ourselves with the general work of this Conference and to review the reports of its committees. We believe that these reports represent a valuable contribution and provide a basis upon which its work might be carried forward.

Nevertheless, the conclusions of the Conference as reported to us are, in our opinion, disappointing and might, if formally advanced, prejudice the success of the entire Marshall program.

2. Objective:

The objective of the European recovery program, as we see it, is to provide for the speediest possible reactivation of the European economic machine and for its restoration to a self-supporting basis, while at the same time meeting the essential consumption requirements of the people. It is our belief that once determined steps toward this end are taken and tangible results achieved, the latent resources of Europe will begin to make their contribution to recovery. Common European effort, initially assisted by special American aid, should give rise to a further liberation of trade and to the emergence of fresh supplies of capital and technology, both from within Europe and from outside sources.

3. General comment:

The Conference’s preliminary estimate of dollars 29.2 billion of required outside aid would appear in the US as much too large. The size of the estimated deficit and the fact that it remains same at the end of the period reflect the unsatisfactory nature of the methods by which it was calculated and the assumptions on which it was based. The most important standards by which the program will be judged in the US are the purposes which it is intended to serve and the basis on which it has been prepared. Congress and the American public will have to be convinced that there is an urgent need for this program, that its fundamental objectives are sound and can be accomplished within a specified period of time; that it represents a considered and critically analyzed statement of requirements; that the program has been prepared with a view to reducing to a minimum the outside aid required; and that at the end of the period the European economy will be restored to a balanced condition in order that its long run expansion will be assured.

4. Conditions:

It is believed that the probability of widespread acceptance of this program by the American public will be enhanced if it meets the following main essentials:

a. It must provide for the achievement within the four year period of a workable European economy independent of special, outside aid.

b. It must provide for continuous and progressive reduction in the special outside aid required by the participating countries to the point where it will become eliminated by the end of the period.

c. The participating countries must from time to time during the period of the program show convincing evidence that they; have made substantial progress toward the scheduled goals of production of items essential to European recovery especially food and coal.

d. Long run development projects should not be allowed to interfere with the reactivation of the most efficient existing productive facilities. The latter must have first priority. The financing of long term projects must be obtained from sources outside this program.

e. The participating countries must mutually undertake the necessary internal financial and monetary measures to stabilize their currencies, establish and maintain proper rates of exchange, and generally restore confidence in their monetary systems.

f. The participating countries must take concerted steps to facilitate the greatest practicable interchange of goods and services among themselves, adopting definite measures directed toward the progressive reduction and eventual elimination of barriers to trade within the area, in accordance with the principles of the ITO Charter.

g. The participating countries must regard the conditions mentioned above as a common European responsibility and must therefore provide for a multilateral organization which from time to time will review and take stock of the progress achieved by participating governments under the program.

We made it clear that we are not attempting to dictate to the Conference, and that no commitment by US was involved, but that we were merely stating our view of essentials for winning approval of American people.

Two of the committee members, Sir Oliver Franks and Alphand, discussed at length essentials a and b. Franks said that he was doubtful whether the European economy would in fact have reached a point by the end of 1951 where it could sustain itself without special external assistance. It seems to him that by the end of the period the deficit should have been reduced to moderate proportions but that complete viability, as far as the United Kingdom was concerned, and probably for the entire area, could be expected only on three assumptions:

1. Complete convertibility of currencies so that export receipts from one part of the world could be transferred to other areas to meet dollar needs.

2. Ability to find markets for export surpluses.

3. A readjustment in the terms of trade which would correct in large part the present disparity, as compared with the war, between prices of imported foods and raw materials and prices of exports. In reply to my comment that historically the pendulum of price relationships following wars tends to swing in the other direction and then to reach a normal balance, Sir Oliver said that his investigations indicated a prolonged shortage of cereals, livestock, iron ore, lead, and possibly zinc and he was not convinced that the correction in relative prices would occur by 1952. In completing his comments on this general question, Sir Oliver said, “It is not yet clear as to how zero can be reached by 1952. We can get to a low figure. If zero, we will have gone from area of reasonable assumptions to paper construction.”

Alphand said that his list of assumptions necessary to viability are as follows:

1. That targets of production would be reached.

2. That exports to dollar areas would reach their goal.

3. That some important trade with eastern Europe be established.

4. That there be effective internal financial stabilization which in the case of France could bring out hidden resources in commodities, gold, and foreign exchange.

Kennan said that this was a vital question and that if the possibilities of a balanced position by 1952 were actually remote it would call for a reconsideration of the problem and a frank discussion of the matter with our own people. Bonesteel inquired whether Frank’s pessimism was fused [based?] on the inadequacy of the time period or on a fundamental disequilibrium. Sir Oliver replied that the big question marks were terms of trade and marketability.

The Scandinavian representative (Coel Bjoernsen of Norway) said that it must be assumed that after 1951 Europe would be a capital importing country in the broad sense. Bonesteel replied that this was recognized and that what we had in mind was an end to the need for direct assistance from the US Government.

In commenting on the foregoing observations we pointed out that an inflow of foreign capital from the International Bank and other sources was a reasonable assumption if western Europe could make itself a going concern and get out of its red-ink status. We emphasized that a prime condition of any plan is that it should accomplish its purpose of placing Europe in a balanced position by the end of the contemplated period, saying that any other approach would be disastrous in terms of public reaction in the US. It seems evident that Sir Oliver’s expectation that deficits will persist is based on a higher standard of living than Europe’s productivity will support. It will also be noted that, while Franks was talking in terms of developments outside the immediate control of the European group, most of Alphand’s conditions relate to objectives the attainment of which primarily depends on the Europeans themselves.

In discussing Point c (production of items essential to European recovery), we emphasized that it seemed to us that reasonable goals would be prewar fuel output by France and Italy and British coal production at level which would again result in annual shipment to continent of 25–30 million tons. We also recognized joint US–UK responsibility towards the European group for high level Ruhr output.

Alphand emphasized that while most European countries were projecting programs equal to or in excess of prewar coal production, the figures submitted by bizonal authorities gave a target below prewar output. Ambassador Douglas said it was his understanding that destruction to the mines was greater in the case of the Ruhr. Hirschfeld² confirmed this and said, furthermore as a result it is now necessary to open five new mines a year whereas under the Hitler regime it was necessary to open only one.

The balance of the discussion centered on Point g, regarding the need for a joint organization. We explained that it seemed implicit in the program itself and from the other conditions outlined that some continuing organization would be needed for the period of the program and that we felt there should be a joint responsibility by all members of the group as to standard of performance. Thus there should be periodic and critical reviews of the programs by the participating governments. It would be our intention to recognize this mutuality of interest and responsibility and to tie in with the multilateral undertakings any bilateral agreements which we might negotiate with the individual participants. The conditions specified in the bilateral agreements would thus include those undertaken by the members towards each other. Four of the members of the Executive Committee, speaking in personal capacities, agreed that the program would require this kind of continuing organization.

The Scandinavian representative stated that on behalf of Sweden and Norway he wished to make full reservations on this point. He then commented that those countries believed that there were already organizations such as the European Economic Commission and proposed international trade organization which had been formed to fulfill many of the economic functions envisaged in this new project. He inquired whether we had in mind a large organization with a large secretariat.

We said that the need for the organization arose from the essentials of the program: That its activities would be limited to that sphere; that we saw no need for a large bureaucratic setup; and that other international organizations were not in a position to perform this work, which was essentially a matter of implementing the joint responsibilities of the participating countries in this particular enterprise.

We told the committee that a survey of the preliminary work indicated that the individual national requirements and production goals set forth in the committee reports do not reflect a concerted effort to direct European production, trade, and manpower, in the most efficient and economic manner, taking account of existing productive installations. For example, in determining the requirements of coal for steel production, account should be taken of the relative efficiencies of available plants, and other related matters. The report on steel avoided this problem by assuming that all existing steel capacity in the 16 participating countries would be operated at its maximum, beginning in 1948, and that there would be sufficient coal and transportation for this purpose. Since realistic estimates of coal and coke supplies indicate that the committee’s optimistic expectations will not be fulfilled, attention must be given to an initial selective utilization of productive capacity, without regard to national boundaries.

Alphand remarked that the French Government had definite views on the question of utilization of productive steel capacity. Franks said that it was substantially correct that the basic approach to the Conference report had not been based on the establishment of standards or on the critical analysis of individual country programs. This was because:

(a) The terms of reference for the Conference made it clear that there would be no diminution of sovereignty and

(b) Lack of time prevented investigation of end use of required materials.

Nevertheless there had been scrutiny of the country reports and in two cases, pit-props and agricultural machinery, adjustments had been made. There were also one or two examples where country reports had undergone scrutiny because their stated requirements were out of line with their prewar consumption.

In closing we referred to the conversations which Ambassador Caffery had had during the week with individual members of the Committee regarding the necessity of coming up with a workable program even though it meant a major extension of the time period originally projected for the conference work. Sir Oliver replied that they had taken due note of this suggestion and had given up any idea of completing the report by September 1.

It is our understanding that Kennan will take up with you two matters of major importance:

(a) Our possible discussion directly at a high level of the objectives and conditions outlined above with the governments of certain countries and

(b) The question of full participation in the program by western Germany.

I am leaving today for a few days stay at St. Moritz, Palace Hotel, returning to Paris on September 6 or 7 where I shall stay until departing for London the evening of September 10.

Sent Department, repeated Geneva 162, London 690, Rome 223.

[Clayton]
Caffery

1. Neither printed.
2. M.H.M. Hirschfeld, Netherlands representative on the Committee of Cooperation at the CEEC.