Memorandum by the Assistant Secretary for Economic Affairs (Thorp)1 to the Under Secretary of State


Subject: Trieste Aid Program

The Problem

Trieste does not now have a viable economy; it needs economic assistance both for current relief and for rehabilitation. While a permanent solution of Trieste’s economic problems can probably only be found in a revival of trade with both eastern and western European states, the United States is committed to keeping Trieste on its economic feet in the immediate future.

Shipments of food and certain other essential civilian supplies to the portion of the Free Territory of Trieste which is under US–UK administration are now being financed out of the post-UNRRA relief appropriation (Public Law 81).2 Available funds will cover shipments through the first quarter of 1948, but fresh funds will be needed for at least part of the second quarter and for the next fiscal year.

No provision for financing supplies for Trieste beyond March 31 has been made in our current legislative program. The Department has informed the War Department that it will assume responsibility for doing so. It has also included an estimate of Trieste’s needs in the supplemental aid program estimates submitted to Senator Vandenberg and Representative Eaton.

The Free Territory of Trieste is to be named in the ERP legislation so that it will qualify for aid after acceptance as a participant in CEEC (either as a US–UK zone of occupation, like Western Germany, or after a Governor is appointed). Funds for Trieste supplies are not, however, included in the $6.8 billion for ERP. Even if they were, it would probably be inadvisable to suggest that CEEC accept Trieste without adequate discussion. Moreover, it is imperative that funds be obtained for Trieste by April 1, without waiting for the completion of action on ERP.

The Facts

A statement of the facts bearing on the problem is attached as Tab A.

[Page 554]


Discussion of the problem is attached as Tab B.3


It is recommended that authorization be sought for a separate supply program for Trieste. Financing for this program could come from funds ($57 millions) authorized under the Foreign Aid Act of 1947 (Public Law 389), but not yet appropriated. The amount required (estimated on an ERP level) has been tentatively estimated at 833 million for the 15 months beginning April 1, 1948, the estimated deficit of Trieste with the Western Hemisphere countries for the period in question (see Tab C for details). If Trieste is subsequently admitted to CEEC, the funds would be transferred to the ERP appropriation. This program would be submitted to the NAC and the Budget Bureau.
It is recommended that this authorization be sought in the form of a bill simply amending Public Law 3894 to cover Trieste, to extend the period during which aid might be provided, and to make possible the provision of funds for recovery purposes. The amendments required are indicated in Tab D.
It is also recommended that the following steps be taken to bring Trieste within the ERP (it is already being named in the ERP legislation).
The US–UK military authorities in Trieste should be instructed to request the CEEC countries to permit the participation of the US–UK zone of Trieste in the European Recovery Program and should prepare the necessary supporting data.
The concurrence of the British to such instructions should be obtained and the support of other CEEC countries should be elicited through diplomatic channels.

Attachments: Tabs A, B, C, D.5

Tab A

Funds for Trieste Supply Program

The Facts

The aid being furnished to Trieste at the present time involves shipments at an annual rate in the neighborhood of $12,000,000. The [Page 555] exact rate is not entirely clear because of differences in the area covered and increases in the ration scale during the present fiscal year.
The amount of assistance being furnished under the present program will theoretically cover consumption requirements until about the end of June. However, if funds are not made available for use during the second quarter, the pipeline would run dry and stocks in the area would be entirely exhausted at that time.
There remains unallocated from the Foreign Relief Appropriation about $1,000,000, to which may be added another $1,000,000 which the Department hopes to recover from the Army. These sums might be used to meet the needs of Trieste in the second quarter. However, there are other demands on these sums, particularly for coal for Austria. Furthermore, even if the whole sum should be available, it would be inadequate to meet Trieste’s needs for the second quarter, which are estimated at about $4.8 million.
Tab C contains an estimate prepared in the Department of Trieste’s requirements and balance-of-payments deficit for the 15 months period beginning April 1, 1948. These requirements have been based on an ERP standard. Briefly, they show a deficit in the balance-of-payments of $40.9 million. This total represents a deficit with the Western Hemisphere of $33 million, a deficit with CEEC countries of $8.5 million, and a surplus with countries not participants in CEEC of $0.6 million. The major part of the deficit with CEEC countries is with Italy. Total requirements of food, medical supplies, fibers and fuel amount to $40.6 million, of which $22.6 million is from Western Hemisphere sources.
The estimates contained in Tab C are somewhat tentative. In particular, it should be noted that a small Anglo-American mission is now examining the requirements for recovery. The needs shown for raw materials and equipment for reconstruction will have to be reviewed in the light of the report of this mission, which will not be available for some weeks.
Trieste’s financial problems were examined early in 1947 by a Four Power Commission established by the Council of Foreign Ministers. The Commission drew up a tentative estimate of the balance of payments of the Free Territory for the fiscal year beginning July 1, 1947, on the assumption that the Italian Peace Treaty would have entered into force prior to that date. The estimate showed a slight surplus in the balance of payments for the year as a whole, but the British, French, and American members reported that there would probably be a deficit of $5,000,000 in the first quarter of the year. At the Moscow meeting of the CFM, the Council agreed to recommend to the United Nations that the sum of $5,000,000 be advanced by UN [Page 556] to the Governor of the Free Territory of Trieste if requested. Provision for such an advance was made in the UN budget for 1948.
The assumptions made in the report of the Trieste Commission of Enquiry were at the time clearly optimistic. Moreover, there were various points on which the Commission frankly admitted that its estimates were little better than guess work and would depend much on the attitude of other countries. In practice, the situation of Trieste has not developed in the manner foreshadowed in the Commission’s report. The economy of the area is depressed, there is a large volume of unemployment, and the area continues to maintain a precarious existence only by reason of subsidies furnished by the United States and to some extent by Italy. With the end of UNRRA, port activity has slumped. Industrial production is understood to be about 40% of capacity. Employment is being maintained through a work relief program. Fundamentally, the solution to the economic problems of the area depends upon the restoration of active trade with countries in both the eastern and western orbits. However, the economic position of the city would be considerably improved if a greater volume of raw materials could be obtained for its industry and a certain amount of money invested in reconstruction.
Provision of dollar funds to cover Trieste’s estimated $33 million deficit with the Western Hemisphere countries would not provide for the $8.5 deficit with CEEC countries. It is hoped that coverage of this deficit, which is largely with Italy, can be worked out in negotiations with the Italian Government.
The Peace Treaty with Italy provides that, pending the establishment of a separate currency for the Free Territory of Trieste (FTT), the lira will continue to be legal tender, and Italy is to meet the lira and foreign exchange needs of the area on a basis no less favorable than that accorded its own nationals.6 The provision of lira currency for the area is now under negotiation between the Allied Military Government and the Italian Government. Largely because of the low level of economic activity in the area, Military Government is confronted with substantial expenditures for work relief and has a large budgetary deficit. The Italian Government does not admit that it is obligated to meet this deficit under the Treaty. The outcome of these negotiations will have considerable bearing upon the extent to which it will be possible to obtain supplies from Italy by the expenditure of lire during the period immediately ahead.
Until such time as the Security Council appoints a Governor for FTT, governmental authority will continue to be exercised by the US–UK military authorities and Yugoslav military authorities in their [Page 557] respective zones. It seems unlikely that agreement on a Governor will be reached in the immediate future.
The $5,000,000 which the General Assembly of the UN has authorized to be advanced to the FTT Government to meet the balance of payments deficit will not be available until the Governor is appointed. In view of the present situation in Trieste, these funds will be clearly inadequate to cover the deficit for more than a short period of time.7
  1. On January 19, 1948 Thorp was also made Coordinator for the European Recovery Program.
  2. Approved May 31, 1947, 61 Stat. 125.
  3. Tab B, not printed.
  4. Approved December 17, 1947, “Interim Aid to bridge the gap between the end of the United States Foreign Relief Program authorized under Public Law 84, and the beginning of a general long-range program”.
  5. Tabs C and D, not printed.
  6. Article 11 of Annex VII of the Treaty of Peace with Italy.
  7. See the letter of the Secretary of State to the President pro tern of the Senate, released to the press March 3, enclosing a draft bill to amend the foreign aid act of 1947 to provide assistance to the Free Territory of Trieste (Department of State Bulletin, March 14, 1948, p. 348).