Memorandum by the Director of the Office of Financial and Development Policy (Ness)1


In a memorandum dated April 1, 1947, Mr. Thorp asked Mr. Matlock to prepare legislation, in view of the Congressional opposition [Page 673] to continuing deliveries to the U.S.S.R., which would allow us to complete shipments of lend-lease pipeline material to other countries. He suggested that such proposed legislation be drafted in general terms, rather than having it specifically exclude Russia.

The possibility of drafting legislation of this type, without mentioning Russia, has been fully explored, in consultation with Mr. Matlock and other members of the Staff of LP and Mr. Oardozo of Le/E, and we have determined that there is no practical way of doing this. The Russian Pipeline Agreement and the articles remaining to be shipped thereunder are in almost exactly the same situation as those of the other countries. It would be feasible, and might be politically advisable, to add a proviso to the legislation proposed on March 25, along these lines:

Provided, however, That whenever the Secretary of State determines that a government is in default under any undertaking with respect to articles transferred pursuant to the authority of the said Act of March 11, 1941, the funds made available herein shall not be available for any expense incident to the transfer of any articles covered by agreements entered into pursuant to Section 3(c) of the said Act until the Secretary of State shall determine that such government is no longer in default.”

In addition to the problem of drafting legislation that would exclude shipments to Russia alone, I feel that the Department should continue to maintain its stand that such shipments should be continued, unless the Secretary should determine that the interest of the United States would not be served thereby. If the Department in any way recedes from this position, it would be placed in the position of having to share responsibility for the potentially serious consequences of failing to carry out the Agreement of October 15, 1945.

One of the potential consequences of failing to complete the shipments is the possibility that the Russians may point to our default under the Agreement and refuse to make any payment for the $233 millions worth of material already delivered. Although they might be in a weak legal position to maintain that nothing is due under the Agreement as a result of our default, they might well seize upon our default as an excuse for such refusal, possibly for the political or bargaining effects as well as for other reasons. In any event, they would be fully justified legally in refusing to pay anything for those articles heretofore delivered, such as some of the oil refineries, for which components remain undelivered. This is specifically covered by the Agreement.

Another consequence of default on our part is connected with the patent royalties for the oil refineries and processes. Just before the December 31 dead line the Russians agreed to send a mission to this [Page 674] country to negotiate patent royalty agreements with the companies holding patents on the refineries and processes. If such agreements are not concluded satisfactorily, the United States Government may have to pay over $10 million to the patent holders with no chance of recovering that sum from the Russians. As a result of the stoppage of pipeline shipments after December 31, 1946, the Russians held up departure of the special mission, and advised the oil companies and the Department that the mission would not come to the United States until the problem of the pipeline deliveries had been satisfactorily solved.

Perhaps the most important consideration is that our default under the Pipeline Agreement seriously jeopardizes the chances of having the Russians agree to start final lend-lease settlement negotiations. These negotiations would cover the $11 billion of wartime lend-lease, as well as the pipeline material. It also jeopardizes our chances of reaching a satisfactory settlement of the problem of the lend-lease merchant vessels still in the possession of the Russians, which have been of such concern to other Congressional committees. Not only would our difficulties in connection with the lend-lease settlement be increased, but our default under one important agreement with the Russians would give them a continuing opportunity to use that default for political purposes for a longtime.

  1. This memorandum was directed to the Under Secretary of State for Economic Affairs William L. Clayton, and to the Assistant Secretary of State for Economic Affairs Willard L. Thorp.