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

840.50 Recovery/9–1549

Memorandum of Conversation, Prepared in the Department of State¹

secret

[Washington,] September 15, 1949.

Subject: United States–French Conversations Economic Problems

	France	United States
Participants:	M. Schuman	Mr. Acheson
	M. Petsche	Mr. Snyder
	M. Bonnet2	Mr. Hoffman
	M. Alphand3	Mr. Harriman
	M. Guindey4	Mr. Tomlinson

The Secretary of State opened the meeting by welcoming Foreign Minister Schuman, Finance Minister Petsche and the French representatives to Washington. He indicated that he had certain matters that he wished to discuss with Foreign Minister Schuman but before doing so he thought it would be useful to advise the representatives of the French Government of the results of the recent talks between the U.S., the UK and Canada. The Secretary asked the Secretary of the Treasury who had acted as chairman of these talks to review them briefly. Secretary Snyder summarized briefly the main points dealt with in the communiqué issued at the end of the talks by the three countries concerned.⁵ At the end of the summary he stated that with the exception of the arrangements for wheat and sterling balances, it was the view of the U.S. that all of the arrangements envisaged would benefit not only the UK but France and the other free nations of the world as well. Secretary Snyder referred in particular to the provisions relating to encouragement of United States investments, shipping, tariffs, and customs procedures. He pointed out that the OEEC had advocated bilateral discussions relating to oil.

Secretary Snyder added that no separate organization was envisaged for continuing the talks. On the contrary they had been and would be carried out entirely within the framework of the international organizations that had been established to deal with economic and financial questions.

Mr. Hoffman added that one of the first purposes of the talks had been to establish conditions under which the United Kingdom could be a real partner in OEEC.⁶ He was of the view that the results of the talks would help considerably.

Secretary Acheson said that he agreed entirely with the remarks of Secretary Snyder and Mr. Hoffman. The British had been having certain difficulties which led to their being a drag on OEEC and its program. These difficulties in a large part could only be removed by United States participation in action to deal with the difficulties—that had been the aim of the talks. They should be of benefit not only to the countries participating in OEEC but of general benefit to the world. Secretary Acheson indicated that the United States and Canada were also prepared to interpret the discrimination clauses in the U.S.-UK financial agreement and the Canada-UK financial agreement in such a way that the UK would be permitted freer action in its commitments as a member of OEEC. The talks had been conducted in this spirit and the continuing conversations would be conducted in the same spirit.

M. Schuman thanked Messrs. Acheson, Snyder and Hoffman for their statements. He was not surprised to see the American representatives give to the French representatives this information. Such statements are in conformity with our traditions and the close solidarity of our policies. He recalled that several weeks ago during the course of conversations with Mr. Bevin⁷ and Sir Stafford Cripps⁸ he had given full agreement to the idea of private conversations between the United States and the United Kingdom. The French Government was today glad to know the result of these conversations.

M. Petsche noted that the assurances furnished by the American representatives were of a nature to appease certain fears of seeing formed a sort of private Anglo-Saxon organization in addition to the existing European institutions. He wished to make two remarks of a technical nature: on the one hand, France also is interested in bilateral negotiations with the United States regarding petroleum with a view to reducing her dollar payments by means of purchases from other sources, notably in the Middle East.

On the other hand, France has particular interests which can be different from those of the United Kingdom in both stockpiling and the lowering of tariffs.

Secretary Acheson replied that the extent to which the United States could step up its total purchases for stockpiling was not at all clear. The entire program was now tied up in legislation but the United States administration was doing its best. For example, the United States faced a legal requirement that a certain proportion of synthetic rubber be used in manufacture of rubber products. Accordingly, the United States had indicated a desire to do more in the talks but had not been able to say what it could do. The Secretary stressed that the United States had not entered into any agreements in the talks.

M. Petsche had the duty to present to the American representatives the present state of negotiations entered into on French initiative between France, Italy, Belgium and recently Holland with a view to liberating commerce and exchange between these four countries. These negotiations have been followed informally by the representatives in Paris of ECA who have shown themselves to be quite anxious to see them concluded.

The four ministers of finance and their experts met in Washington. Difficulties have arisen. The Italians notably have presented objections which seem legitimate: in the measure where the actual cross-rate of the pound and the dollar would be respected the projected agreement would have as a consequence the further increase of an undesirable accumulation of pound sterling by the Italian treasury. It thus appears that the putting into effect of the agreement would necessitate the breaking of the cross-rate. M. Petsche wondered whether in the present atmosphere and in view of the results of the United States-United Kingdom-Canadian conversations a step of this nature taken before the Monetary Fund would be in conformity with United States policy. Moreover, the French Government as well as the governments of the other three countries wished to keep the British Government informed and to do nothing which could change the relations of Continental Europe with the United Kingdom.

Secretary Snyder replied that the interested countries should consult the Managing Director of the International Monetary Fund as to the appropriate time for this question to be brought before the Fund. Mr. Gutt could make a decision in keeping with the Fund’s agenda. The Secretary went on to say that the United States considered the proposal an important and a helpful step.

Mr. Hoffman said he would like to make two additional comments for the guidance of the French representatives. First, he wished to underline the necessity of convincing the American Congress and the American people that the European countries were making substantive progress toward European unity if the Marshall Plan were to continue. During the recent congressional hearings this had been the important question. He had tried to show that something was being done but he was afraid that he had been very unimpressive because he had so little evidence to present. At the end of the hearings Congress accepted his statement that there was a trend in this direction. But he needed evidence before the next congressional presentation—dramatic and substantial evidence. Second, he wished to state that the attitude of Congress reflected an intuition of the American people that Europe could not be self-supporting until it had made great progress towards unity and until there was a wide, free, competitive market to lower costs, to increase efficiency, and to raise the standard of living. Mr. Hoffman urged the representatives of the French Government to recognize this urgency from the viewpoint of a continuing American contribution.

Mr. Hoffman suggested that the French representatives might also wish to discuss the question informally with the British.

M. Petsche answered that he was in agreement with the arguments presented by Messrs. Snyder and Hoffman concerning the liberalization of exchanges. The first satisfaction will be given to the wishes of the United States when on October 1 the OEEC countries will present lists which reduce quantitative restrictions on imports in intra-European trade. France for her part will present a first unilateral list comprising 15 percent of her foreign trade and a second negotiable list in such a way that a total of 50 percent of the foreign trade involving the importation of goods from European sources would be freed from quantitative restrictions.

However, M. Petsche stressed that the efforts which the four countries are making aim to go further in the matter of liberalization. The breaking of the cross-rate implied by this agreement risked indirectly bringing up again the sterling problem. The French delegation would like to know the feelings of the United States in this respect.

Secretary Snyder said that when the countries reach an understanding the best manner of proceeding would be to consult with Mr. Gutt and also with the British. The United States had no objections to this procedure and would be willing to discuss a proposal which the countries considered was in their interests now or at any time in the Fund [future?]. He continued that the United States had always supported the Fund as the appropriate forum for countries to work out their problems in regard to exchange rates and exchange rate policies. Secretary Snyder concluded that if the Fund will not work in meeting concrete problems, we might as well find it out now and stop wasting our time.

M. Petsche agreed. He wished to ask a subsidiary question: under what conditions will the $150 million pool foreseen for the liberalization of European exchange function?⁹ Up to the present the views of ECA in this respect are vague. It is a matter of urgency to make them more precise. The liberalization of exchange between the four European countries can present dangers and encourage speculation. It is therefore, essential that the eventual entering into effect of the quadripartite agreement be accompanied by a precise decision regarding the use of the $150 million pool. The two actions must be concomitant.

Mr. Hoffman pointed out that Congress had not finally acted on the aid request for 1949–50 but that Mr. Harriman would handle the pool when aid was through Congress.

Mr. Harriman said that he wants to use the pool to help the Europeans adopt the proposal they were now discussing.

M. Petsche repeated that the two actions should go along together and said he envisaged asking for an American observer as soon as a proposal was definitely formulated.

Mr. Harriman said that this is exactly what is in the minds of the ECA officials.

M. Petsche recalled the conditions under which American aid for Europe has been divided for the year 1949–50. OEEC did not take into account the existence of the $150 million pool. The amount of $704 million actually attributed to France should not be reduced proportionately in case the pool should be formed. An important reduction of this amount would risk having grave consequences for the French economy during the coming year.

Mr. Hoffman said that the Marjolin–Snoy¹⁰ recommendation would be a blueprint for the last six months of 1949. The pool would be reconstituted definitely by proportional cuts. However, ECA had no commitment whatsoever on the allocations of aid for the first six months of 1950. The OEEC figures were not necessarily even a point of departure. ECA intended to give considerable weight to evidence of individual countries moving towards the objectives of ECA in determining allocations for the first six months of 1950. Somehow ECA is going to introduce an element of merit in the division of aid.

M. Petsche indicated that the French Government is at present trying to obtain private credits from American banks in order to promote equilibrium in its balance of payments with the United States in 1949–50 and to repay certain debts owed to the Federal Reserve Bank. The American Treasury has been aware of these negotiations. In the event that they should come to a conclusion, it would be necessary that the amount of ERP aid to France not be reduced.

Mr. Harriman replied that ECA would not penalize any country for initiative in meeting its problems.

M. Petsche declared that certain economic practices in Europe constitute an obstacle to the policy of liberalization of exchange. He referred especially to the British policy regarding coal which consists in selling this product at a substantially higher price for export than for British internal consumption. The Bizone acts in the same fashion and thus the raw materials placed at the disposal of the importing European countries burden their costs of production and render European competition difficult. Moreover, Western Germany has a deliberate policy of low salaries and benefits from certain dollar resources which are beyond her needs and run counter to the normal currents of European trade. France wishes to enter into negotiations with the United Kingdom and then enter into contact with Mr. McCloy¹¹ regarding the economic policy of the Bizone.

Mr. Hoffman replied that ECA had already pressed the British about the question of coal and that ECA was also discussing with Mr. McCloy the need to harmonize economic policies in Germany. He had told Sir Stafford Cripps that it was a childish game for the European countries to try to “gyp” one another in such grand style. Each country lost under such circumstances. ECA was also aware that certain policies being followed in Germany were making the United States position untenable.

M. Petsche answered that France has during the past several months suppressed the greater part of the artificial elements of her economy. If there are any left, they are remnants of the past which he is ready to see disappear. She wished that this question be examined as a whole by the interested European countries.

Mr. Harriman suggested that a consultative group be formed in OEEC to handle this question. It would then be much easier for the United States to support publicly the need for the European countries to change their double-price policies.

Mr. Hoffman said that he would say to the consultative group exactly what he had just said to the French representatives. He continued that Mr. McCloy is fully aware of the fact that the recovery of Western Germany must proceed within the recovery of Western Europe. He had himself told the Germans that their recovery must in fact be subordinate to European recovery.

M. Schuman believed that the orientation which is to be given to German economic policy within the European framework is of great importance.¹² It is urgently necessary to reform the present tendencies at the time when Germany will recover part of her autonomy. If the policies followed lend themselves to criticism when they are directed by German guardians, that country would persevere in its present errors when it became more independent.

Mr. Hoffman then commented briefly on the question of dismantlement in Germany which was a serious political problem in the United States. He urged that United States, France and the United Kingdom recognize the desirability of getting this question out of the way. For every machine tool taken from Germany now the Allied countries were losing far more in good will. He urged continued negotiations to settle the matter but stressed his view that no further dismantlement should take place.

M. Schuman wished to answer on the subject of dismantling in the course of his next private interview with Mr. Acheson. M. Petsche asked one last question: that of the economic consequences of the great financial efforts with which France will find itself faced. It is first necessary to cover her costs of reconstruction which are still enormous.

There is also the question of military expenditures. In this respect the Minister of Finance thought first of the burdens which France has in Indochina. He suggested that a solution be studied whereby the stocking of new American armaments in France would enable France to send her used material to Indochina. Secondly, M. Petsche recalled the progression of general military expanses of the French budget which should have been limited this year to 300 billion francs and which, as a matter of fact, has reached 385 billion, with the requests for credits for the coming year being approximately 500 billion.

This burden is such that there is risk of compromising the financial equilibrium acquired with such difficulty and, in consequence, the results of the Marshall Plan. It is desirable in this respect that a misunderstanding be cleared up. The United States has requested the different countries signatory of the Brussels Pact that an added effort be made in connection with the defense of Europe. The French Government, however, has always understood that did not necessarily mean an increase of its military expenditures. This contribution is evident when one considers the exceptional circumstances which have led to an increase of the military expenditures of France in 1949.

In fact, the Minister of Finance estimates that if the amount of these expenditures goes much above 300 billion francs in 1950, the financial situation would be gravely affected. He would like in this respect to know whether these views correspond to those of the American representatives in order to avoid any misunderstanding.

After some discussion, Secretary Acheson advised the representatives of the French government that in view of the technical aspects of those questions the United States would need more time to consider them. He said that recently a committee had been formed including representatives of State, Defense, and ECA. He would ask Mr. Surrey¹³ of his staff to consult these three agencies and suggested that the French representatives contact Mr. Surrey. During the discussion, the American representatives agreed that the priority for France as for all European countries was to achieve rapid progress towards economic and financial recovery. This had been stressed in all MAP discussions.

1. This memorandum was presumably prepared in the Executive Secretariat of the Department of State.
2. Henri Bonnet, French Ambassador in the United States.
3. Hervé Alphand, Director General for Economic, Financial, and Technical Affairs in the French Foreign Ministry.
4. Guillaume Guindey, of the French Ministry of Financial and Economic Affairs.
5. Post, p. 833.
6. For documentation on efforts to strengthen the OEEC, see pp. 367 ff.
7. Ernest Bevin. British Secretary of State for Foreign Affairs.
8. Sir Stafford Cripps, British Chancellor of the Exchequer.
9. For related documentation on the questions of liberalization of trade and arrangements for intra-European payments, see pp. 367 ff.
10. Robert E. Marjolin, of France, and Baron Jean-Charles Snoy et d’Oppuers, of Belgium, were Secretary General and President of the Council, respectively, of the OEEC.
11. John J. McCloy, U.S. High Commissioner for Germany.
12. For documentation on economic problems relating to Germany, see volume iii .
13. Walter S. Surrey, Deputy Coordinator for Foreign Military Assistance Programs in the office of the Secretary of State.