Foreign Relations of the United States, 1949, Western Europe, Volume IV

ECA Telegram Files, FRC Acc. No. 53A278, Paris Torep: Telegram

The Administrator for Economic Cooperation (Hoffman) to the United States Special Representative in Europe (Harriman), at Paris

secret

Washington, March 17, 1949—8 p. m.

u.s. urgent

Torep 3893. From Bissell.¹ As promised in Torep 3775² the following are our views about European exchange rates. We are strongly convinced that positive action should be taken in near future towards reaching realistic rates among participating countries and between participating countries and US.

1. Call your attention to cables 212 and 247 to SecState from Vienna and also Toeca 353 from Vienna.³ Agree in general that problem of devaluing Austrian schilling should be approached circumspectly, but circumspection must not be made an excuse for delay.

2. Greater expansion of exports of ERP countries to soft currency areas than to dollar area underscores fact that European currencies are seriously overvalued in relation to dollar. Such overvaluation provides incentives that work against basic ECA objectives. Imports from the dollar area are made cheap and European exports to soft currency areas tend to yield higher local currency prices than exports to dollar area. Although exports may in certain cases be directed properly by Government exhortation, the chief incentives where private trading exists are provided by the price mechanism. In the case of imports more realistic exchange rates would reduce the burden of administrative controls and would remove the necessity of discriminatory practices toward the U.S.

3. The political repercussions in the U.S.A. of trade discriminations against American business are becoming progressively more serious. Even though depreciation of European currencies would generally deter American exports to Europe, the effects would be less arbitrary.

4. Unrealistic exchange rates are also harmful in promoting misdirection of resources. With gross capital formation in Western Europe now running approximately 20 percent of gross national product, it is particularly important that price incentives be used to direct capital formation into industries best calculated to solve long-range dollar problem of Europe. A major part of decision on direction of investments remains in hands of private business in Europe and therefore tends to follow direction indicated by highest local currency price of products. Even in case of public investment misdirection may result from present overvaluation of European currencies. Administrative action seeking to prevent a misdirection of resources extremely difficult.

5. Since end of war Executive Branch of our Government has taken position that Europe should be allowed a breathing spell before adoption of realistic exchange rates. Expansion of European exports has been considered secondary to demands of large investment programs and improved consumption programs. Important to note however that production in Europe now restored to prewar level and in view of sharply declining schedule of ECA assistance we must prepare participating nations for greater efforts toward balancing their own dollar accounts.

6. While concurring in general that every consideration should be given to delicate problems of internal financial stability prior to exchange rate devaluation, delay on this score becoming less tenable. Most of participating nations, with important exception of France, dependent on dollar area for grain. For this reason many observers have argued against European currency devaluation in relation to dollar on ground that bread prices would be substantially increased, that the distribution of real incomes within the participating area would be distorted in a manner prejudicial to low income groups and therefore that it would be impossible to hold the wage line. To meet these arguments any exchange rate action should be developed in the context of necessary internal fiscal policies which are best calculated to prevent undesirable effects of exchange devaluation. Methods of compensating low income groups in part for the price they must pay are sufficiently obvious to make elaboration here unnecessary and in any case are separable from the problems raised in this cable. The recent decline in prices of agricultural products, of course, eases this problem. Pending appropriate fiscal adjustments, release of counterpart funds might cushion effect of the gap between dollar value and internal price of ECA-imported commodities. If absolutely required to remove last obstacle to attainment valid rate of exchange, we might even consider exceptionally use of counterpart to subsidize temporarily non-ECA imports.

7. Our efforts toward bringing about exchange rate adjustments have been delayed by doubts concerning internal stability in France. In view of the internal progress that has been made in France in recent weeks⁴ we now feel immediate consideration important. First direct step being taken by U.S. Government is concerned with Austrian schilling with which you are familiar. Our view, for which there is increasing support, is that sterling problem must be examined at once as the possible focal point for a broad revaluation of European currencies both in relation to one another and in relation to the U.S. dollar. It is realized that any discussion on this matter with British will be extremely difficult and delicate. As very strong objections may be encountered from British, discussions may take considerable time.⁵

8. Whenever it appears that exchange rate action is necessary and timely and after adequate bilateral exploration between the U.S. Government and the country concerned, the general procedure, as agreed with NAC, would be that participants who are members of the IMF would be asked to take up their exchange rate problems with the Fund. Since in each Bilateral Agreement the participating countries have agreed to establish and maintain valid exchange rates, we are keenly aware of our responsibility. Await your views.⁶ [Bissell.]

Hoffman

1. Richard M. Bissell, Jr., Assistant Deputy Administrator for Program of ECA.
2. Not printed; it transmitted ECA’s tentative views on the existing intra-European payments plan. (ECA Telegram Files, FRC Acc. No. 53A278. Parte Torep)
3. None printed.
4. For documentation relating to the political and economic situation in France, see pp. 626 ff.
5. For documentation relating to the United States concern over the British financial crisis, see pp. 781 ff.
6. In Repto 3391 from Paris, March 30, not printed, OSR indicated its general agreement with the positions stated in this telegram (ECA Telegram Files, FRC Acc. No. 53A278, Paris Repto). They were also endorsed by the meeting of ECA finance officers in Paris, April 4–6 (840.50/4–1949).