867N.5151/8–1148
Memorandum by the Acting Secretary of State to President Truman
Mr. Epstein, the Representative in Washington of the Provisional Government of Israel, is pressing for a decision on his Government’s application for a loan of $100 million, now pending before the Export-Import Bank, for economic development in connection with the resettlement of immigrants.
Although Israel will probably need substantial financial assistance if it is to maintain economic stability during a period of large-scale immigration, there are difficulties in the way of extending a loan at this time. The United Nations Mediator, Count Bernadotte, is now engaged in difficult and delicate negotiations, in which he is seeking the terms of a settlement which might be acceptable both to the Provisional Government of Israel and to the Arab Governments. The Government and people of Israel have a vital interest in the success of these negotiations. The immediate effect of a large United States loan to Israel both on the Arabs and on the Jews might be such as materially to prejudice Count Bernadotte’s mediation efforts. In any event, it would be necessary to consult with Count Bernadotte beforehand in order to ensure that serious consequences would not follow for which this Government would be blamed.
Information from Palestine shows clearly that the present truce in Palestine is being subjected to great pressures by all parties concerned. Our principal concern is to find a basis of agreement before the truce itself breaks down. The Arabs are restive under the truce because they believe that the Jewish military position is being steadily strengthened despite the conditions of the truce, a belief which is given greater currency by the public statements of high officials of Israel itself. The Department of State believes that we must take into [Page 1301] account that the Arab Governments would undoubtedly charge that economic aid to Israel by the United States would materially upset the balance of military advantage in favor of Israel and would thus alter the basis of the existing truce which was ordered by the Security Council on July 15, 1948.
From the economic aspect, the Department is informed by Mr. Epstein that the basis for repayment of the $100 million loan would largely be contributions from private sources to the Provisional Government of Israel, which in turn would make available these contributions for the service of the loan. The soundness of the loan must be assessed in connection with the fact that the State of Israel is, in effect, in a state of war and that a resumption of hostilities would render promises to pay almost meaningless. Accordingly, from the strictly banking aspect, the loan presents great difficulties to the Export-Import Bank.
The Export-Import Bank has had numerous discussions with the representatives of Israel, and Mr. Martin notified Mr. Epstein on July 26 that “… reports reaching me do not appear to warrant at this time active consideration by the Export-Import Bank of the credit application.… [”]1
Although the Department of State does not believe that a flat $100 million loan should be made to the State of Israel at this time, it is suggested that Mr. Epstein be informed by us that the Export-Import Bank will be prepared to consider specific projects for which a loan might properly be granted and for which assurance of repayment and service could be provided on sound banking principles.
I thought it advisable to seek your approval of this recommended position since Mr. Epstein and Dr. Weizmann have previously discussed the loan application with you.