Foreign Relations of the United States, 1948, Western Europe, Volume III

London Embassy Files: Lot 59 F59: File 850 Marshall Plan

Memorandum by Mr. W. L. Hebbard of the Economic Cooperation Administration Mission in the United Kingdom to the Ambassador in the United Kingdom (Douglas)

secret

[London,] May 10, 1948.

Subject: OEEC Plan for Financing European Trade

It appears from information received at the Embassy that the technical group set up at the recent Brussels Conference will propose a plan for financing intra-European trade which represents a modified version of the “Ansiaux-Playfair Plan.” Presumably the modified plan is being presented to E.C.A. representatives in Paris this week. This memorandum describes and assesses the modified plan.

I. Basic Elements of the Plan

The following hypothetical example is set forth as an aid to analyzing the significance, to the United Kingdom, of the somewhat complex provisions of the plan.

1. Assume that the United Kingdom receives $1,300 million under E.C.A. $340 million being credits and $960 million being gifts. The United Kingdom places £240 million (the sterling equivalent of $960 million) in a Special Account at the Bank of England. E.C.A. agreement is needed to pay out of this account.

2. With E.C.A. approval, the United Kingdom agrees that £40 million—one sixth—of the sum in its Special Account will be available for financing European Trade.

3. In spite of endeavors to reduce its sterling area deficit, France runs low on sterling. It requests the United Kingdom, under the plan, to transfer sterling to France’s account at the Bank of England. For simplicity, assume the whole £40 million is transferred.

4. In return, France undertakes two steps. The first is to obtain the French franc equivalent of £40 million, and deposit this sum in the French Special Account in Paris. Technically this might require an initial borrowing by the French Government, but the whole operation would be self-cancelling, because the Government would recoup the francs by selling sterling to French importers over the following months. The effect of this is to change the distribution, but not the total dollar value, of OEEC Special Accounts under E.C.A. supervision.

5. The second step taken by France is to draw £40 million, in sterling from the I.M.F. This has two effects.

(a) France can finance a deficit of £80 million—half by the United Kingdom contribution and half by the I.M.F. drawing.

(b) More important, however, is that the Funds holdings of sterling decrease when France buys sterling for francs. Since United Kingdom drawing of dollars is limited by the amount of sterling the Fund may hold, the French drawing of sterling increases the United Kingdom ability to draw dollars.

6. In actual practice, the £40 million would not all be transferred by the United Kingdom to France in a lump. Periodic drawings would take place. When France’s drawings reached 25 percent of the sum in the French Special Account, the United Kingdom and France would discuss ways to reduce France’s sterling deficit. The limit on Frances drawings would be 5 percent more, or 30 percent.

7. On its part, France would agree to make available for financing European trade, not only the initial one-sixth of its grants-in-aid, but also the franc equivalent of its aid from the United Kingdom. Thus, the United Kingdom “loan” to France would be reversible, if in the future the sterling area began to incur a deficit with the franc area.

II. Analysis

The key point of the plan is the compensatory drawing on the I.M.F. by a deficit country. The British state that the Belgians would not readily accept the plan without this provision. Insofar as they are creditors inside Europe, the British will, probably, adopt the same attitude. But this key provision is unsatisfactory, both technically and in terms of the problem to be solved.

A. Obstacles to I.M.F. Drawings: A Paris cable points out that:

Italy and France cannot draw on the Fund;
Sweden, Switzerland and Portugal are not members; and
United Kingdom, Netherlands and Belgium have exhausted their present borrowing rights.

These eight countries account for nine-tenths of the aid allocations outside of Germany. With respect to the great bulk of European trade, therefore, the Brussels plan depends either on a relaxation of the I.M.F. restrictions upon drawing foreign currencies, or upon ad hoc arrangements of quid pro quos to substitute for the I.M.F. drawings. If, however, the plan reduces itself to nothing more than a proposal for future ad hoc arrangements, it would seem unreasonable to dignify it by calling it a concrete “plan.”

B. Evasion of Basic Problem: A more fundamental weakness is that this provision reflects a failure to deal directly with the basic problem.

The basic problem we have to deal with divides itself into two parts. The first is the imbalance of trade between Europe and the Western Hemisphere. By the E.C.A. we have agreed that this larger problem will be solved, largely on a gift basis. The second part of the problem—which is important but somewhat more restricted—lies in the imbalance of trade among the various participants. Our attitude has been—and the formulation of E.C.A. reflects this attitude—that this problem must be solved by the participants.

The problem cannot be avoided. We have worked for many months in Washington trying to devise ways to rechannel dollars and to revise allocations, in an attempt to avoid it. But it is impossible to escape the fundamental economic fact that unless the level of trade is reduced to dangerous levels, some countries in Europe are going to incur deficits with others. Economically it is unavoidable that some European countries must be creditors and others must be debtors on intra-European account. The issue which faces the E.C.A. in Paris this week is whether goods can be made to flow in the right direction inside Europe on any other basis than that of immediate and explicit gain for the net exporting countries.

If the plan outlined above is the one which is proposed by the European countries, an answer to this question is in the negative. The provision for I.M.F. borrowing is an attempt to throw this extra credit problem back onto the dollar, through the I.M.F. Belgium, for example, wants to receive dollars to the full extent of its local currency made available to France. It is understandable that Belgium should want, in effect, to export to France against dollars, but these are not times in which the ideal solution can be planned for. It is simply not possible, yet, to finance the whole of world trade with dollars, and it is inescapable that this requires genuine financing in non-dollar currencies.

A related objection is that the scheme, in order to work, would require a distortion of our present method of determining the amount of E.C.A. assistance needed. In essence we calculate appropriations by the formula:

Dollar needs—dollar receipts=ECA assistance.

If drawings on the I.M.F. are to be permitted, they should enter into the equation under dollar receipts. If they do not, we are essentially saying that Belgium can demand dollars for exports to France without counting those dollars as “available.” But if they do enter into the equation, Belgium’s E.C.A. appropriation should be cut, and Belgium would be no better off than if there had been no quid pro quo to its assistance to France. Since this latter is obviously not what is sought, the plan boils down to an attempt to obtain current dollars which will remain outside the purview of the E.C.A.

III. Conclusion: It must be concluded that the Brussels technicians have not faced up to the problem realistically. While their desire to obtain free dollars or to combat inflation is understandable, it is to be regretted that they seem to find it impossible to adjust themselves to the present framework of U.S. assistance, which while admittedly not ideal, is nevertheless a generous and adequate basis on which to build a genuine plan for self-help. As pointed out above it solves the problem of the imbalance between the East and West largely on a gift basis. It is impossible, however, for it to solve a similar problem of the imbalances in intra-European trade. Whether the European countries do their financing on a credit or a gift basis is at the moment immaterial; what is inescapable is that they must solve them outside the scope of dollar assistance.

W. L. H[ebbard]