Foreign Relations of the United States, 1948, The Near East, South Asia, and Africa, Volume V, Part 1

890F.51A/10–1348

Memorandum by Mr. Paul H. Nitze, Deputy to the Assistant Secretary of State for Economic Affairs (Thorp) to the Under Secretary of State (Lovett)

Restricted

[Washington,] October 13, 1948.

Subject: Monetary Advisors for Saudi Arabia

Reference is made to a letter dated October 1, 1948 on the above subject from Mr. Robert I. Brougham, Financial Vice President of the Arabian American Oil Company¹ (Tab A) also to a similar letter on the subject addressed to Mr. Snyder² of which you have a copy (Tab B). Briefly, the oil company has proposed that Mr. George Eddy, Chief of the Gold, Silver and Stabilization Fund Branch of the Office of International Finance, Treasury Department, go out to Saudi Arabia on or about October 28 in company with Mr. Brougham and other officials of the oil company and as an unofficial observer, to participate in discussions on monetary problems in that country with the Saudi Arab Government.

It is understood that on the basis of this request and after discussion of the matter with Mr. Snyder you have indicated to Mr. Philip Kidd of the Washington office of Aramco that there would be no objection on the part of the Treasury and State Departments to the company’s proposal.

Discussions have been taking place concerning Saudi Arabia’s monetary problems for a number of months between officers of NEA and OFD, officers of the Treasury Department, and representatives of Aramco. These discussions have brought to light the following pertinent facts:

(1) Although the United States Government has received no written request from Saudi Arabia for a financial advisory mission, the Saudi Arabian Government has indicated on a number of occasions to officers of the Legation at Jidda and to representatives of Aramco that it would welcome technical advice from the United States Government. Last spring the Treasury Representative at Cairo visited Saudi Arabia for this purpose, and the Saudi Finance Minister later expressed the desire that Mr. Polk return to bring him the views of the Treasury and State Departments.³

(2) The Saudi Arab Government has also approached the British Government for monetary advice and assistance, suggesting the possibility of linking the Saudi currency with sterling. The British Government feels that the Saudis may be trying to get the U.S. and the British to compete for the privilege of furnishing backing for any new currency and possibly loans to support it. The U.K. Treasury Delegation here has informed FN that the British do not want to be drawn into this kind of action and will await clarification of the U.S. position.

(3) In the absence of proffered advice and assistance from either the British or the United States Government, the Saudi Arab Government appears to have turned for advice to the manager of the branch at Jidda of the Banque de L’Indo-Chine. This bank has drafted a set of monetary decrees providing for the issuance of a paper currency and establishing the bank as fiscal agent of the Government and bank of issuance.

There is no assurance that recommendations that might be made by a U.S. technical mission within the framework of U.S. monetary policy would be acceptable to the Saudi Arab Government, or if acceptable would be effectively implemented by that Government. The Saudi Arab Government has at best only a vague notion of the requirements of modern monetary policy but undoubtedly is seriously determined to take maximum advantage of its present gold position which is supported by the payment of oil royalties in British gold sovereigns. Although the British gold sovereign is worth only $8.24 at the official U.S. Treasury price for gold, Saudi Arabia has been disposing of its current accruals of gold sovereigns through the Banque de L’Indo-Chine at $12–14 per sovereign. Recent efforts to maintain this advantage have involved the establishment of unrealistic exchange rates between the Saudi Arab silver riyal, the U.S. dollar, and the gold sovereign.

The United States’ economic and strategic interests in Saudi Arabia are considerable. While Aramco has been somewhat disadvantaged by the recent monetary decrees in Saudi Arabia, its real interest, according to company representatives, lies in the progressive development on the part of the Saudi Arab Government of an intelligent understanding of its monetary requirements and problems and of a gradual reform of its complicated monetary arrangements in the direction of a single national currency with a fixed foreign exchange rate in terms of gold and the U.S. dollar and with adequate controls over the internal supply of money and the disposition of foreign exchange resources.

It is my understanding that Aramco’s proposal, which was made in the above mentioned letters, was motivated by a desire on the part of Aramco to make technical advice quickly available to the Saudi Arab Government and by the misunderstanding that the State and Treasury Departments either are not prepared to act or could not act promptly enough. It is evident from discussions between officers of the Department and representatives of the oil company that in fact the oil company would prefer an independent U.S. technical mission.⁴ In order to meet the problem that has arisen, however, I am suggesting the following alternative which has been discussed with representatives of the Treasury Department.

Mr. Eddy should go to Saudi Arabia for a period of two to three weeks, as a representative of the Treasury Department, for the purpose of having informal discussions with Saudi Arab officials concerning their monetary and financial problems. Mr. Eddy should probably be accompanied by one or more representatives of other agencies including a representative of the State Department (OFD). Such representatives, it would be clearly understood, would be in a position if the opportunity arose, to give such technical advice and to make such recommendations concerning Saudi Arabia’s monetary problems as, in the light of their previous study, experience and technical competence seem appropriate to them, possibly on an ad referendum basis. Such representatives would not participate in any discussions or negotiations between the oil company and the Saudi Arab Government. It would be made plain to the Saudi Arab Government that the United States Government would have no responsibility for the success or failure of any policies adopted by the Saudi Arab Government on the basis of such recommendations nor any responsibility for assisting the Saudi Arab Government in implementing such recommendations.

It is believed that it would be preferable for the representatives to proceed to Saudi Arabia via commercial air transportation rather than by transportation furnished by Aramco.⁵

1. Not printed.
2. John W. Snyder, Secretary of the Treasury; the letter sent to him not found attached.
3. Telegram 432, July 24, 11 a. m., from Jidda, not printed.
4. At this point in the memorandum as originally drafted appeared the sentence: “I, therefore, suggest that you advise Mr. Brougham that after due consideration and further discussion with the Treasury Department, it has been decided that it would be preferable for Mr. Eddy not to accompany Aramco officials to Saudi Arabia in any sort of unofficial or consulting capacity.” This sentence has been deleted.
5. The State and Treasury Departments, on October 19, requested Jidda to assure the Minister of Finance of “continuing US interest and preparedness give technical advice” on Saudi Arabian monetary problems and proposed sending Mr. Eddy and Raymond Mikesell of the Office of Financial and Development Policy to Saudi Arabia to give informal comments to the Government, in conversations to be arranged by the American Legation (telegram 397, 890F.515/9–1648). Messrs. Eddy and Mikesell departed New York by plane on October 25 (letter of October 27 from Mr. Lovett to Mr. Brougham, 890F.5151/10–148).