865.5018/9–1747: Telegram
The Ambassador in Italy (Dunn) to the Secretary of State
2772. ReEmbtel 2633, September 5 and 2651 and 2652 September 61. In submitting my recommendations to ship wheat to Italy at the expense of other commodities under the relief program, we made a choice that was forced upon us, and in which we were guided by humanitarian as well as political arguments of special importance to Italy. Aside from the preponderance of cereals in the Italian diet (normally two-thirds of the caloric intake), we would be poor managers indeed of relief program if Russia, by timing rather than generosity, were afforded the opportunity to make good the Italian deficit at a critical political moment, say March.
The choice of wheat is almost entirely at the sacrifice of coal, the commodities under USFRP already having been virtually eliminated. Whether we supply all of the wheat and none of coal, or half of wheat and half of the coal, there remains a wide gap which Italy must fill with foreign exchange. The gravity of this decision to Italian economy is clear.
Italian economy normally used about one million tons of foreign coal a month. However, Italian industry operates on a narrow margin as regards both fuel and raw materials; the proportion of coal allocated to public services here is considerably greater than is the case in countries with heavy industries. Therefore, proportional cuts of coal receipts affect Italian production to a greater degree than production of most of its neighbors.
[Page 974]The Italian Government has been counting among its exchange resources some 20,000,000 of sterling, most of which would have been used for US coal purchases. The suspension of convertibility leaves the Italian Government in a critical exchange position—according to statements of Governor of Bank of Italy4 and Minister of Foreign Trade,5 the net dollar position is between 13,000,000 and 15,000,000. While by scraping the bottom of barrel, Italian Government may possibly find some small sums of additional dollars, it is very undesirable for it to consume the last of the meager resources, and placing the government before end of year in a most vulnerable political position. (The Embassy is making a careful inquiry into such additional US tapped [additional untapped?] sources of dollars as may exist—for instance, suspension of 50% exchange retention legislation—and hope to be able to report at end of the week.)
It can be frankly said, therefore, that Italy is on verge of a dollar crisis, which if allowed to break, will inevitably so restrict production, transportation and employment as to cause an inflation, with attendant political upheaval, so far unmatched in Italy. If it does not break in a few weeks, it cannot be held off for long.
While the Marshall plan is still a light of hope on the dismal road Italy walks, it is a dim and distant one for the weary traveller.
I appreciate from the messages we have been receiving and particularly from the Under Secretary’s statement of September 3 and yours of September 12, that our government is anticipating the measures to take in order to meet the gathering forces of despair in western Europe. However, as the situation in Italy is giving signs of starting to move rapidly, I have felt constrained to risk the error of repetition by presenting the above picture. By the same token I submit for what it may add to the Department’s material, some of the possible emergency devices which might be considered.
- 1.
- An advance of dollars against Italy’s sterling as collateral.
- 2.
- A stabilization loan similar to the recent one to Mexico, if the Italian case fits the requirements.
- 3.
- Expediting the opening of credits under the Export-Import Bank 100,000,000 dollar credit, of which only some 30,000,000 have been formally committed and none used.
- 4.
- Making a public commitment now, with a view to negotiation of an agreement as soon as possible, of a new Export-Import Bank loan of at least $100,000,000 available for purchases of raw materials without conditions as to the export trade it could develop, the present formula of “political stability”, etc. (While such an operation would depend upon a change of bank’s policy, I imagine that, in the absence of other US loan funds for foreign countries the interim use of the [Page 975] Export-Import Bank for the critical period in Europe is under general examination.)
- 5.
- Exploring the possibility of an International Monetary Fund and Bank operation in favor Italy. Despite the long term nature of the bank’s loans public commitments to an Italian loan should have a splendid psychological effect at once.
Patently, these are all emergency measures to meet a new, and the worst, emergency; the definitive solution to Europe’s ills must be built of constructive planning at Paris which will sell itself on its merit to the American people and Congress. The suspension of contro-vertibility has rapidly accelerated economic deterioration. There was a time not long ago when I believed Italy would pull through, at least until the first of the year. Such is no longer the probability. In a short time, perhaps a very short time, it will be question no longer whether this government or even a broadened one can survive; it will be a question when Communists find it suits their purpose to seize initiative, which is passing to them, to assume the Government by legal means.
The present or a similar type of government is one which we should support with substantial assistance now if we really want to avoid Italy going Communistic. Without assistance this government will fall and the only alternatives are either a coalition including the Communists or a government of Communists and non-Socialists [Nenni Socialists?]. Either of course would mean the end of democracy in Italy.
Sent Department, repeated Paris 365.
Repeated Paris for Clayton.