840.50 Recovery/8–247: Telegram

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

3084. For Lovett from Caffery. Reference is made to my telegram 3064, August 1,1 reporting the statement made by the French to Under Secretary Clayton that, in the event assistance from the United States under the European economic plan now being formulated could not become effective until March next, the exigencies of the situation would require France to curtail severely imports in the interim period and that a situation would certainly develop which would operate against any financial stabilization and which might result in serious political and social problems.

In view of the urgency of this matter, I submit the following comments:

My Agricultural Attaché has today given me a memorandum pointing out that the prospective food shortage in France arising from the winter freeze has been greatly intensified by drought conditions prevailing this spring and summer. I quote from this memorandum:

“The situation has seriously deteriorated since May. In many important agricultural regions there has been continuing drought since the freezes of last winter. The unprecedented heat wave in July has worsened the wheat prospects, and crops generally are now being affected. The wheat crop and other small grains may be said to be past redemption, but unless general rains are obtained in adequate quantities in the near future, reduced yields may be expected for crops generally. As pointed out to the Department in a recent telegram (Embassy’s telegram 2988 of July 271) this would mean a reduced availability of domestic food and feed and consequently an aggravated food situation with the beginning of winter. In these conditions it may be expected that the French Government may find it extremely difficult to keep the bread ration at present low levels during this coming winter and spring.

“In short, France is faced with a situation of domestic food shortages during the coming season unless there is a material and timely improvement in weather conditions. The situation may be as difficult as that of the 1945–46 season following the widespread drought of 1945 when approximately 4,000,000 metric tons of direct consumption foods, oilseeds, vegetable oils, and wine were imported during the year beginning 1 July 1945. Of these imports 2,236,000 tons were cereals, including rice. The French are already requesting imports [Page 727] of 2.5 million tons of wheat for the 1947–48 season. If the drought continues, imports of other food items may easily have to achieve levels comparable to those of the 1945–46 season. The implications in terms of the effects of such a situation on French finances, on the economy generally, and on the politics of the country are evident.”

In my despatch No. 9327, July 302 I have forwarded information regarding France’s prospective international financial position for the balance of 1947 and the first quarter of 1948, which may be summarized as follows:

1. Sterling area:

French cash position has increased from sterling equivalent of $51.2 million at end of 1946 to $191 million on June 30, with a possible additional increase of $30 million for second half of 1947. Actual cash position at end of year would be amount indicated above less any amounts of sterling made convertible.

Although trades statistics for franc zone as a whole are not yet available for first six months, it appears that trade of French overseas territories with sterling area was favorable enough to off-set any deficit of Metropolitan France with the same area. Increase in sterling holdings this year has arisen from

Transfer $60 million in gold under 1946 agreement,
Liquidation $72 million in French-owned sterling securities [garbled]
Financing moderate amount of French imports, principally wool, through British banking credits.

The Finance Ministry here is of the opinion that with its cash position and prospective exports, it should be able to finance transactions with the sterling area throughout 1948 without recourse to gold or dollars, unless British financial exigencies require United Kingdom to drastically reduce imports of non-essential items from France.

2. Payment agreement countries (principally neighboring European countries):

France was in a net debtor position equivalent to $197.7 million at end of 1946 and $198.3 million on June 30, 1947. No material change in this item is anticipated for balance of 1947, and no net recourse to gold or dollars should be necessary.

3. Dollar area:

The July 15 forecast of 1947 current payments with this area: for expenditures $1,819 million: receipts $343 million: deficit $1,476 million. This represents increase in anticipated deficit over April [Page 728] forecast of $186 million due to shrinkage in export estimates and increased need for wheat imports.

The French assumption in approaching this problem is that it is necessary to maintain a minimum gold reserve of $450 million, plus cash balance in exchange stabilization fund of $30 million. On this basis all except $212 million of $1,476 million prospective deficit is accounted for by such items as:

Gold and foreign exchange $335 million
Liquidation of private assets $150 million
Restitution of German-looted gold $90 million
Second Export-Import Bank credit $400 million
International Bank credit $250 million
Other credits $130 million

The anticipated uncovered deficit of $212 million should be adjusted upward by $30 million to account for difference between estimate of receipts of German-looted gold and probable receipts this year, and reduced by $75 million for Monetary Fund advances made to date and by $60 million for the minimum amount of sterling which the French feel the British will permit to be converted into dollars.

These adjustments would bring prospective uncovered deficit balance of this year to an amount slightly in excess of $100 million,3 but Finance Ministry estimates have been prepared on assumption of only one million tons wheat imports second half 1947. Such a program would probably in view of agricultural situation described above, require ultimate downward adjustment of bread ration to 200 grams. For the social, humanitarian and political reasons which I have outlined to you in previous telegrams, I would view such a development with concern.

The National Cereals Board, taking into account crop situation and need for 300 gram ration in five winter months, has estimated bread grains imports made second half 1947 at 1,630,000 tons. This approach would require an additional $70 million, increasing 1947 uncovered deficit to neighborhood $117 million.4 With reference to the first quarter of 1948 it appears that deficit with dollar area may, in view of continued need for heavy imports of wheat and coal, run at rate of $100 million monthly, which might be reduced to neighborhood $80 million if franc devaluation should take place early enough to stimulate exports to the western hemisphere.

My staff has reviewed the foregoing statistics in relation to France’s provisions import program for second half 1947, and finds that the latter was reduced from 1.3 billion originally requested by interested ministries, to a sum slightly in excess of $1 billion. Furthermore, a [Page 729] prospective savings of $100 million in dollar expenditures was achieved by transferring all possible procurement to sterling and payment agreement areas. The facts available indicate that the prospective deficit through March 1948 of $350–470 million represents a range below which things cannot go without severe underconsumption of food in urban areas and disruption of industrial production.

Mr. Clayton informs me that he will discuss this matter immediately upon his arrival in the Department, but in the interim I would greatly appreciate it if the Department could study the foregoing in the light of the basic situation here with a view to exploring all possibilities. These would appear to include the following:

Further reduction in gold reserve of Bank of France, taking into consideration the psychological impact in terms of a further decline in public confidence in French currency.
Possibility of suggesting that the British increase the amount of French-held sterling to be made convertible in the event that French dollar problem is of more immediate urgency than is the case with Great Britain.
Possibility of requesting IARA, with aid of American occupational authorities, to arrange immediately a German gold distribution based on 80 or 90 per cent of claim, rather than projected percentage.
In spite of the disinclination of both the French and Monetary Fund people to utilize short term funds to finance a long term deficit, the emergency may be so great as to make advisable a consideration of possible additional advances by the Fund.
Consideration of possible additional credits by the Export-Import Bank or International Bank. It appears that credits from these agencies, to be effective in meeting the commodity import program, would have to be granted on a general purpose basis.

I am fully cognizant of the difficulties inherent in the possible alternatives mentioned above and I suggest their consideration only because of the magnitude of the French financial problem and because of its urgency and implications vis-à-vis the objectives of American foreign policy in this area.

  1. Not printed.
  2. Not printed.
  3. Not printed.
  4. Marginal note: “See despatch $107–117 million.”
  5. Marginal note: “See despatch $177–187 million.”