840.50 Recovery/1–2249: Telegram

The Ambassador in France ( Caffery ) to the Secretary of State

top secret

us urgent

276. Attention Secretary, Gross2 and Nitze.3 Reference Deptel 127 January 144 and conversations with Nitze. Our comments based on contributions of $100 to $125 million military aid to France matched by additional effort from French of order of 30 billion francs are set forth below. We have assumed that an important part of military aid would be in raw materials and processing equipment to manufacture military items or would be in free dollars to purchase such raw materials and equipment. We have also assumed that French military budget for 1949 will be voted by Assembly in March at 350 billion francs. This figure is already 30 billion francs higher than government’s first recommendation to Assembly. It includes military investment and installations but not military pensions, estimated at over an additional 60 billion francs. Finally, we have of course assumed that military program would extend over a period of years.

Before discussing details of methods whereby France could best cooperate in a program of reciprocal military aid, it may be useful to set forth certain general observations regarding the present situation here which should be taken into account in any realistic approach to the problem.

We wish to make it clear at the outset that we are in entire accord with the concept of “self-help and mutual aid” not only because we [Page 627] appreciate that no other approach would stand a chance of obtaining the approval of the American Congress and people, but also because no other approach would be so well-calculated to impress upon the people of France and other western European nations the cooperative nature of this vast undertaking and the need of all to bear a share of the burden in our common defense. Furthermore, it may be possible for US and French Government to use participation in military program, particularly its economic aspects, as incentive to achieve ERP objectives. It should be made clear to French Government that United States and western European nations must be able to rely on France to full extent as full contributor of steel, equipment, machines, chemicals, textiles, etc., which implies that reasonable degree of social and economic stability must be achieved. French groups who might hesitate to lead country in making necessary sacrifices would perhaps be more willing to do so if the alternative were a shift of economic potential to Germany or other western European countries.

In France, two closely related obstacles to progress are, first, basic distrust of currency engendered by assumption of continued price inflation and political, economic and social instability, and second, fear of international conflict. Second obstacle is unquestionably important, but the US commitment implicit in military aid to France and western Europe, as well as the growing military strength of the US and the Atlantic community, should tend progressively to alleviate this fear.

As for first obstacle, French Government and Parliament are now engaged in carrying out ERP commitments designed inter alia to aid them in bringing price inflation under control. Program to this end should be adopted by March 31. Until inflation is brought under control, France cannot fulfill her political, economic or military role in western Europe and Soviet Union will continue to hope that communism can maintain or increase its ability to prevent France from developing her full potentialities as a key barrier to the expansion of Soviet power. Our immediate objective should be to bring about economic conditions which will improve moral authority of government and permit all Frenchmen to identify their future well-being with. French recovery program and cooperation with the west.

We believe that France has an unusual opportunity in 1949 to lay firm basis for progress to economic recovery. Parliament and French people are more alive to consequence of continued inflation. Communist strength was successfully challenged in recent strike wave. Agricultural and industrial supply situation promises continued improvement. Tempo of price increases was slowed down and government through its recent measures is staking its position on stopping increases; non-Communist labor unions again seem willing to restrain demand for [Page 628] money wage increases given prospects of price stability. Large industry seems to have accepted government’s program to hold prices, though middlemen and small industry are still grumbling. Agricultural groups are becoming nervous about drop in food prices.

Government has laid groundwork for adequate financial and fiscal measures. Fiscal reform should permit improvement in tax collections. Government claims in fact to have been conservative in estimates of additional revenue, particularly from direct taxation. Assembly has approved a budget for 1949 which envisages real non-inflationary resources for nearly all government expenditures. Government has accepted commitment to ask Parliament for additional real revenue or additional economies if necessary to carry out broad program for covering all expenditures from non-inflationary sources. Bank of France has framework of credit restrictions to halt undesirable expansion of bank credit in private sector. Some ERP counterpart should be available over and above that which French Government hopes to utilize for investment in order to create deflationary impact to offset in part such inflationary pressures as will remain.

Many unknowns overhang these encouraging aspects of present situation. Budgetary and fiscal implications for US objectives in France of an additional military effort are among most serious, particularly in crucial months of first half 1949. General commitments on budget and fiscal program given by French Government in connection with counterpart negotiations represent even now a bare minimum consistent with measures situation requires. Even without higher military budget additional economies or taxation may needed. Nearly all of program remains to be carried out. First hurdle is voluntary domestic loan of 100 billion francs which has just been launched. Government has undertaken to ask for taxes or forced loan if voluntary loan fails, but failure could result in sharp fall in government prestige. There may still be an inflationary gap in treasury financing in 1949 of upwards of 75 billion francs, most of it outside budget. Non-inflationary revenue for these expenditures are not yet assured. Assembly is scheduled to debate fiscal reform, military budget, reconstruction and investment, and special treasury accounts in coming weeks. While commitments have been accepted by government on all these aspects and general approval given by Assembly, any one of these debates could place government in serious straits.

Queuille5 administration must carry out commitments in difficult political circumstances. Cantonal elections scheduled for end of March. Continuous pressure will exist to postpone difficult measures [Page 629] until results are in. Recent price decree was undoubtedly to gain time in hope improved supply and credit situation would permit money wage increase to be avoided. Labor unions receive support for money wage adjustment from various sections of industry and agriculture who benefit from inflation. In this atmosphere new Cabinet crises could arise. New failure of present coalition could also lead to dissolution of Parliament in attempt to seek parliamentary body with a new mandate. Situation remains touch and go and it would be extremely difficult for the government to persuade average Frenchman to accept substantially increased taxes at present time even if this were to enhance France’s security.

In view of these considerations, we feel that any additional military efforts should be carried out to greatest possible extent without diverting government from its present vital tasks on which so much depends, and only after US has fairly specific proposal. Any negotiations or discussions should make it clear that French are expected to carry out their military contribution while maintaining ERP commitments. This would mean additional taxation or additional economies.

From technical viewpoint, certain but limited number of possibilities exist to make room for additional military effort without doing so through continued inflation. Tax collections (not necessarily increase in rates) on certain groups should in any case be vigorously applied. Operating deficits of nationalized enterprises might be reduced by a program to achieve operating economies or by selected price increases. It could be argued that some economies could be made in social security burden, reconstruction, and investment in favor of increased military budget. Certain administrative economies may also be possible within the military budget itself. All such possibilities are of course severely limited by what is feasible without setting in train more serious political problems, and it should be borne in mind that even present level of military budget has been subject to heavy attacks. In this connection heavy military expenditures are represented with propaganda effectiveness by Communists as a corollary to ERP assistance.

Increase in military effort would of course have an impact on import requirements, export targets, investment goals, and perhaps even consumption demands and goals. Impact could be minimized by careful review of type of military assistance France is to receive and of nature of French contribution. We assume that some way will be devised to integrate program within recovery program. Examples of ways in which impact of military effort might be reduced are following:

Plan French contribution from those industries which are now operating at less than capacity, e.g. textiles, radio and communications [Page 630] equipment, automobile plants, and aircraft components (see Embtel 2776).
Requiring private firms which might acquire new equipment or machinery to seek financing in capital share market.
Making certain that government does not use increased production as excuse for undesirable expansion of bank credit.
Make certain that franc counterpart of any private participation in program has full deflationary impact.
Requiring producers who may receive raw materials, for example, textile manufacturers, to pass along any reduction in unit costs to consumers.

In sum, it seems clear that whether or not France can carry an additional burden of order of 15 billion francs for second six months of 1949 depends upon success of government economic and financial program. It appears that it will be at least three or four months before degree of success or failure can be gauged.

It is our view that any approach to French should be so timed as to give government’s program opportunity to develop and so as not to prejudice prospects of bringing price inflation under control. If program is relatively successful, we believe that an additional military effort by France herein envisaged should be feasible in second half 1949.

Bruce7 collaborated draft this message before his departure and I am confident foregoing reflects his considered opinion as well as my own.

Section Two follows in Embtel 277.

  1. Ernest A. Gross, Legal Adviser for the Department of State, serving temporarily as Coordinator for Foreign Assistance Programs.
  2. Paul H. Nitze, Deputy to the Assistant Secretary of State for Economic Affairs. For Mr. Nitze’s subsequent report on his conversations in London and Paris in mid-January, see p. 54.
  3. Not printed; it referred to various problems of French plant capacity, manpower, raw materials, and finance (840.50 Recovery/1–1449).
  4. Henri Queuille, since September 1948 the President of the Council of Ministers of the French Republic.
  5. Not printed; it presented statistics on surplus capacity in various branches of French industry (840.50 Recovery/1–2249).
  6. David K. E. Bruce, Chief of the Mission to France, Economic Cooperation Administration.