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

800.48 FAA/12–3147: Telegram

The Secretary of State to the Embassy in Italy

secret

Washington, February 4, 1948—6 p. m.

304. For Tasca from State and Treas. Following is thinking re use local currency counterpart PL 389¹ (urtel 4226 Dec 31)² but does not cover PL 84³ which concerned with use for relief and work relief.

1.

a. Interim aid agreement (Deptel 2732 Dec 30)⁴ provides flexibility in utilization local currency counterpart USFAP. While preferred uses to which such counterpart should be put stated explicitly Sec I para 2a of Annex, para 2b provides flexibility within framework of general intent of this Section.

b. Aware of efforts of Ital Gov in recent months to arrest inflationary process resulting in some deflation by late 1947. Local currency counterpart of USFAP should most appropriately be used to encourage and facilitate financial and economic stabilization measures preliminary to and dovetailing with larger program of individual and cooperative action pledged by CEEC countries. Although no commitment now possible regarding ERP it is felt to be in interest of countries concerned to act as soon as possible during interim period to implement above objective. Interim aid funds should be used to encourage and facilitate such implementation.

2. Following may be used as general guide in evaluating specific uses of USFAP funds:

a. Local currency equivalent should be disposed of in accordance with procedures which have been formulated by participating govs in agreement with US.

b. Such procedures should utilize local currency equivalent to best minimize inflationary pressures as part of a general program of monetary, fiscal and other measures designed to reduce budgetary deficit so far as possible and promote maximum output of essential goods and services.

c. Following uses considered appropriate:

(i) Sterilization to assist in measures of financial reform and currency stabilization;

(ii) non-inflationary retirement of national debt;

(iii) local currency costs incident to exploration for and development of additional production of raw materials in probable long term short supply in US; and

(iv) local currency costs of mutually agreed projects contributing to European economic recovery.

3.

a. We note from urtel 219 Jan 16⁵ that Ital Gov has approached Emb with proposal to use lira fund for vocational training program and Alpine hydro-electric development also mentioned urtel 4226. Before commenting re specific uses local currency counterpart of USFAP, request that you discuss with Ital authorities whole problem of how local currency counterpart might best be integrated with such stabilization and recovery program as Ital Gov may have in mind. Seemingly only indication of general Ital thinking on use of lira counterpart available here contained Emb despatch 1448 August 8,⁶ 1947 stating intention is to apply it to extraordinary budget for reconstruction. We are prepared to consider use of lira fund to cover approved projects already included in Ital budget.

b. In connection with such specific projects as Itals propose you should procure detailed info re magnitude of expenditures contemplated and estimate of anticipated contribution toward Italian recovery; also obtain statement of relationship of such expenditures to projects already provided for in Ital budget. Projects covered by USFAP funds should preferably be short term and productive in nature although genuinely feasible long term projects upon which significant short-term progress can be made not precluded. Also limited expenditure for humanitarian projects might receive consideration. Seriously doubt whether use local currency counterpart USFAP directly for security purposes (para 3 urtel 4226) appropriate or feasible.

c. Size of amts released for expenditure considered important from point of view of overall effect on Ital economy. Decision regarding overall amts of funds to be released will be made here altho Emb might be authorized to release nominal amts to Ital Gov for approved purposes.

4. Agreement as to use of local currency arrived at cooperatively with Ital Gov will offset possible communist attacks against US “interference.”.… Recognize that Ital political situation must play large part in determination of uses made of USFAP funds but feel that impetus to financial and economic stability through appropriate use these funds will aid greatly in achieving our general objectives. [State and Treasury.]

Marshall

1. Public Law 389, 80th Congress, approved December 17, 1947 (61 Stat. 934). See Foreign Relations, 1947, vol. iii, editorial note, p. 484.
2. In this telegram, not printed, Dunn explained that the local currency counter value of relief to be sent to Italy would total over 600 billion lire; that control of the lira fund would mean control of the Italian economy. He urged that the U.S. exert control despite the possible outcry against interference, and suggested several possible ERP programs. (800.48 FAA/12–3147)
3. Public Law 84, 80th Congress, approved May 31, 1947 (61 Stat. 125).
4. Not printed, but see footnote 3, p. 755.
5. See footnote 2, p. 873.
6. Not printed.