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

840.50 Recovery/8–2448

Memorandum by the Chief of the Division of Commercial Policy (Willoughby)¹

secret

[Washington,] August 24, 1948.

Memorandum for the Files

Participants:	Mr. Lester B. Pearson, Under Secretary of External Affairs;
	Mr. Clifford Clark, Deputy Minister of Finance;
	Mr. C. M. Drury, Coordinator of ERP Activities for Canada;
	Mr. John D. Deutsch, Director of Economic Relations, Canadian Department of Finance;
	Mr. A. D. Skelton, Director General of Economic Research Branch of the Department of Reconstruction and Supply;
	Mr. J. Robert Beatty, Chief of Research Division, Bank of Canada; and others
	Mr. Arthur Smithies, Mr. Robert Strange, ECA;
	Mr. Charles D. Glendinning, Treasury Department;
	Mr. Homer S. Fox, Commercial Attaché, American Embassy, Ottawa;
	Mr. Woodbury Willoughby, CP

Mr. Pearson opened the meeting and left early. Mr. Clark and Mr. Drury presided the remainder of the time. Most of the talking on the Canadian side was done by Mr. Skelton and Mr. Deutsch. The latter appeared to be the most influential in determining the Canadian position.

Mr. Smithies was the principal spokesman for the U.S. group.

There was no agenda and, at the suggestion of the Chairman, Mr. Smithies explained that the U.S. group wished to exchange views in regard to conversations to be held in the latter part of September as to Canada’s participation in the ERP program in the coming year. He explained that the ECA was obligated to seek maximum participation by other countries and that it would have difficulty in obtaining from Congress adequate funds for offshore purchases unless such participation were forthcoming. Reference was made to the improved position of Canadian reserves and it was pointed out that the U.S. could not use ERP funds to finance the building up of large reserves or the importation of non-essentials into Canada through relaxation of import controls. Mr. Smithies pointed out that in determining the allocation of offshore purchases among supplying countries the ECA would necessarily take into account the amount of contribution they make to ERP. The attached memorandum on Canadian Relations with ECA, prepared August 13 by Mr. Smithies and agreed to by State Department representatives prior to our departure for Ottawa, explains in detail the position taken by the U.S. group.

The Canadians reiterated statements made in previous discussions of the subject, that is, that Canada has already done her share toward aiding Europe, and probably more than her share. Emphasis was placed on the fact that her reserves had been drained to a dangerous point as a result of Canada’s program of a billion dollars offshore purchases. (This use of the term “offshore purchases” was not made clear.) It was stated that, nevertheless, Canada wishes to continue in the future to do all she can to promote European recovery.

As had been indicated to us previously, the Canadians were unwilling to discuss the amount of contribution that Canada might make in the coming year. They will review the situation in the light of definitive crop estimates before talking to us in September. They observed that there were several non-recurring items, including one of 30 million and the 150 million dollar loan by U.S. insurance companies, which contributed to the increase in reserves. They also said that imports were reduced because merchants were using up stocks accumulated in 1947 in anticipation of import restrictions. The view was expressed that the 50 million dollars Canadian aid made in 1948 may prove more than warranted.

The Canadians still agree that their over-all surplus on current account represents their ability to contribute. They admit that there is “some relationship” between U.S. offshore purchases and Canada’s ability to contribute to ERP, but are strongly opposed to any attempt to develop a “formula”.

[Here follows material relating to Canadian internal affairs.]

In summing up the U.S. views, at the end of the meetings, it was stated that we are not trying to tell the Canadians how much they can contribute. ECA funds are inadequate and we want Canada to contribute as much as she can. We know that the Canadian Government wants to do so. We want to do what we can to lessen uncertainties and make it possible for the Canadian Government to make the maximum contribution. ECA has in mind the possibility of guaranteeing in advance a minimum of offshore purchases which will be made in Canada. Before the September meeting it will explore this possibility and try to clarify other problems such as the “surplus commodity” provisions of the Act.

General Comments and Conclusions

Canadian officials evidently had been forwarned that the ECA would try to extract a commitment from Canada to contribute to ERP in accordance with some formula which would lead to a figure far higher than they thought reasonable. I understand that Mr. Smithies had suggested that Canada might match U.S. offshore purchases in Canada dollar for dollar. At the beginning of our visit the Canadians were, accordingly, on the defensive and somewhat negative.

It became clear that any effort to seek agreement during our visit, even on general principles as to how to arrive at a reasonable relationship between U.S. offshore purchases and Canadian aid, would be fruitless and merely arouse antagonism. For this reason we decided to conclude on the note that we desire to do anything practicable we can to facilitate the maximum commitment from Canada when they are in a position to appraise their capacity for aid in the coming year.

Although the Canadians did not say so in open meeting, it was made abundantly clear in private conversations that the extent of Canadian aid will not be measured by ability to aid but will be determined by political expediency. It must be borne in mind that while we have a serious political problem in presenting the ECA appropriation bill the Canadians have one which may be even greater in that the Liberal Party, which has suffered important set-backs, faces an election and must have the support of Quebec—a province strongly opposed to “internationalism”, aid to Britain and controls of any kind.

At best, negotiations with the Canadians in September are going to be difficult if we are to get a large contribution. They should be conducted by one of the top ECA officials, preferably one who is trusted by the Canadians. Ty Wood seems much the best available.

The State Department should follow closely and participate in the preparation for, and conduct of, the negotiations. Canadian aid cannot be divorced from other aspects of our relations with Canada—military, commercial and otherwise. Political factors may be the determining ones. For example, it would be contrary to our interests to urge any action which would jeopardize the success of the Liberal Party next year. Any other party or combination of parties would follow policies less favorable to the United States.

[Enclosure]

August 13, 1948.

Canadian Relations With ECA

General Approach

From the outset of ECA it has been understood that discussions would take place on possible Canadian participation in ERP and on the relation of aid extended by Canada to Europe to offshore purchases made in Canada by ECA.

ECA is following the general policy that the purpose of offshore purchases is to increase or maintain the flow of goods to Europe and that any benefits to the countries in which the purchases are made are incidental. However urgent the need for dollars in any non-ERP country, we do not feel that we can make purchases in that country unless they can be justified in terms of European recovery. Thus, if goods will move to Europe without dollars, they should not be made the subject of offshore purchases.

In the case of Canada, we embarked on offshore purchases without any express consideration whether dollars were required to make the goods move. We hope to pursue precisely the opposite policy in the case of the Sterling Area countries and Argentina. There have been practical reasons for those differences, but now consistency demands that we open discussions with Canada. Furthermore, ECA has a specific mandate to encourage other Western Hemisphere countries to extend aid to Europe.

Since Canada insists on payment in dollars for exports sold for cash, it follows that there must be an intimate relation between offshore purchases and Canadian aid. We are therefore compelled to discuss Canadian aid in order to carry out our offshore purchase policy.

Specific Canadian Problem

The Canadian problem has three related aspects:

A. Offshore purchases are necessary to provide the Canadian economy with essential imports. We can consider the provision of enough dollars for this purpose as in line with the ERP policy since certain level of dollar imports is necessary for Canada to remain an effective supplier of Europe. The present Canadian import controls can be regarded as establishing a minimum level of imports. Offshore purchases in excess of the amount required to pay for the imports permitted under the controls result in an increase of Canadian reserves. Such an increase above a minimum level cannot be regarded as in line with ECA policy.

B. The Canadian balance of payments with countries whose currencies are not convertible into dollars must be financed either by offshore purchases or by Canadian aid, to those countries. At the present time, Canada has stopped the British line of credit and is at present extending no aid to European countries.

C. In line with our mandate to encourage other countries to give aid, it can be argued that Canada should contribute to European recovery amounts comparable to those contributed by the United States. For instance it might be agreed that aid extended by each country should amount to the same proportion of national income. However, any such comparison is a complicated matter. The United States might legitimately argue that ERP is part of a security program and that to achieve comparability, we should consider defense expenditures and ERP expenditures as a combined total.

Our negotiations with Canada should seek to take into account all these aspects of the problem. While any attempt to formalize is apt to be misleading, the following approach seems the most reasonable:

1. Determine the offshore purchases required to satisfy minimum import needs and allow for no increase in reserves.

2. Determine Canadian aid by deducting this amount from the amount required to finance Canada’s favorable balance with inconvertible currency areas.

3. Reconsider this result on grounds of equity.

On the basis of the figures we have for the Canadian balance of payments, it seems that the simple rule of equality between Canadian aid and offshore purchases might yield a satisfactory result.

The question of import restrictions will undoubtedly come up for discussion now or later on. Notwithstanding what was said above, it can be argued that by the end of the ERP period, we should plan for Canadian imports to be restored to normal. But, for the present, we have to insist on a tight Canadian import policy. For the present a possible position for us to take is that any increase in Canadian imports from the United States should be met by an increase of exports to the United States. Such an increase of exports must not be a diversion of exports from Europe. We might discuss the question of restrictions on Canadian lumber exports.

The question of Canadian reserves will also receive attention. Since the inception of ERP, Canadian reserves have increased rapidly. It will be exceedingly difficult to justify our Canadian policy if it does result in any further increase.

Our discussions in Ottawa next week are purely exploratory. We want to explain to the Canadians our general point of view but neither side has instructions that will permit it to make any kind of commitment.

1. This memorandum covers conversations held by United States and Canadian officials in Ottawa on August 16 and 17, 1948, regarding Canadian participation in the European Recovery Program.