861.50/1–2749: Telegram
The Secretary of State to the Embassy in the Soviet Union
108. Depts comments on recommendations urtel 212 Jan 271 fol:
(a) Agree background and meaning “Council Economic Mutual Aid” shd be exposed. This being done VOUSA etc.
(b) Problem relationship US gold policy to Sov economic warfare under study by interested agencies, distinction being made official (intergovernmental) and private (black, gray and legal free market) operations. Except for Pol gold sale in 1947, preliminary survey indicates [Page 87] official US-USSR and satellite transactions sporadic and small recent past (mostly limited to recall from earmark accounts in US) practically coming standstill by near exhaustion such accounts.
Re private (free market) transactions involving USSR and satellites, systematic but uncompleted analysis tentatively indicates: (1) sizeable volume such transactions; (2) violent price fluctuations in same markets; (3) wide price margins in different markets at same time; (4) higher prices in Near East and still higher in Far East markets compared to West Eur, explaining continuous flow gold so traded from West Eur to Near and Far East; (5) supply only minor extent coming from US via Latin America, with bulk after exhaustion West Eur excess hoardings recently from USSR and satellites.
Hope analysis will enable arrive conclusions (a) whether and what extent Sov bloc participation gold trade constitutes vehicle Sov political-economic strategy and to what goal; (b) if so, what countermeasures can be taken.
Would appreciate further clarification re (b) esp which kind Sov “interference functioning ERP” Emb has in mind. Believe illegal, esp subversive, operations unlikely be significantly curtailed by controlling legal transactions; other means foreign and domestic policy appear better designed achieve this objective. Problem difficult, however, and under active study. Re circumvention export controls, believe this can best be combatted by enforcement US controls and parallel policies ERP countries. See (c) below.
(c) Agree on need tighten checks on communication lines from Bizone and other ERP countries re illegal shipments East. Bizone taking strong steps prevent illegal trade. Smuggling rings being tracked down, centralization border control forces recommended, Tripartite Customs Com formed. As Emb aware, Dept and ECA currently attempting negotiate parallel export control policies with ERP countries. Commerce also seeking their assistance in enforcement US export controls.
(d) Since Embs and Depts chief concern is what Sov bloc does with dollars earned thru exports to US of luxury goods other nonessential items, believed export controls best means taking care problem insofar legal use dollars involved. Re illegal or subversive use dollars, believe problem can best be attacked thru other means than import controls. US import controls cannot be established without legislation. Not only importers luxury goods etc. strongly opposed establishment import controls but entire business community strongly averse introduction additional controls any kind. Problem further complicated by fact that, to be effective against Sov bloc, US import controls may have to be instituted vis-à-vis all foreign countries. This problem under study together with problem proceeds of gold sales discussed in (b).
[Page 88](e) Agree re offering all aid and comfort to technical and scientific fugitives from East Eur countries.
(f) Review of export licenses for Amer machinery to East Eur countries intended insure increased deliveries to West indicates shipments to ERP countries have so far had results intended, though time period short one. E.g. re mining equipment licensed for Pol under Eximbank credit, Pol to date given no indication intention curtailing coal exports to West but have actually increased such exports beyond our estimates. This undoubtedly due Pol need foreign exchange, but this and similar quid pro quo transactions specifically based by US such self-interest East Eur countries in order insure ERP countries raw materials from non-dollar sources.
For your information Dept believes more difficult situation likely respect US export control policy shortly: Seller’s market prevailing to date has made imposition and enforcement security export controls relatively simple. However signs multiplying that seller’s market falling off, esp such industries as machine tools, locomotives, bearings etc. Affected interests may press for relaxation export controls to East Eur, directly and via Congress, esp because West Eur competitors not hampered controls as strict, and impossible secure West Eur cooperation restricting exports extent US has to date.
Pouched Belgrade, Bucharest, Budapest, Geneva for Porter, Helsinki, London, Paris for Harriman, Praha, Sofia, Warsaw.