Foreign Relations of the United States, 1949, The Near East, South Asia, and Africa, Volume VI

501.BB Palestine/8–2549

Memorandum of Conversation, by the Deputy Assistant Secretary of State for Near Eastern and African Affairs (Hare)

top secret

[Washington,] August 25, 1949.

Subject: Status of PCC Activities and Export-Import Bank Loan.

Participants:	Mr. Eliahu Elath, Ambassador of Israel
	Mr. George C. McGhee, Assistant Secretary
	Mr. James G. McDonald, American Ambassador to Israel1
	Mr. Raymond A. Hare, Deputy Assistant Secretary

Action Required:

To explain our position on the above to the Israeli Ambassador and to make similar explanation to the Israeli Government through the American Embassy in Tel Aviv.

Action Assigned to:

NEA; NE.

Discussion:

In the course of a luncheon conversation on August 25, Mr. McGhee mentioned to the Israeli Ambassador the discouragement which we had felt as the result of reports given us by Mr. Paul Porter, American Representative on the PCC, regarding failure to achieve sufficient progress by the conciliation process. However, Mr. McGhee expressed confidence in achieving an ultimate solution and was particularly hopeful that events might take a more constructive turn with the setting up of the Economic Survey Mission. He was confident that the Israeli Government would understand the significance of this measure and would afford the Mission full cooperation.

Mr. Elath replied that he did not share Mr. McGhee’s pessimistic impression of the course of the conciliation talks and he was convinced of the importance of keeping such negotiation on an active basis. However, he was in agreement with Mr. McGhee as to the promising possibilities of the economic approach and felt that it might do much good provided that it were made clear that conciliation was not being put on the shelf. Mr. McGhee said that he was in entire agreement regarding the desirability of not discouraging the conciliation process in any way. He felt, however, that by putting emphasis at this stage on the economic aspect of the problem, the prospect of general settlement would be considerably brightened.

Mr. McGhee then observed that he had been informed that Mr. Souers, of the Export-Import Bank, had recently talked with Mr. Gass² regarding the status of the Export-Import Bank loan to Israel. From what Mr. McGhee had been able to learn, it would appear that the matter as presented to Mr. Gass might well have given rise to misunderstanding and he wished to make a few remarks by way of clarification. There was no question of suspension or cancellation of the loan, but merely of reviewing the situation in the light of recent developments, which, unfortunately, had not borne out the hopes for a peaceful settlement on which the original decision had been taken. However, this was only an act of prudence and in line with procedure normally followed in evaluating conditions for foreign financial assistance in reaching final decision on specific projects. Furthermore, it was anticipated that the situation arising out of the appointment of the Survey Mission might inject a more constructive note into the situation and make for greater clarification.

Mr. Elath responded with obvious emotion that the report which he had received from Mr. Gass had been extremely upsetting to him since it cut across the type of relationship which he felt should exist between Israel and the United States and of which he was a personal exponent. According to the information which he had received from Mr. Gass, the Export-Import Bank had stated: (1) that the decision to hold up action on the remainder of the loan had been taken very reluctantly by the Bank after long discussion in which the Bank had on several previous occasions refused to take action on economic or refugee grounds despite urging by the State Department; (2) that the Bank did not consider that there were economic grounds on which to justify the action taken; (3) that the decision reached had been as a result of a State Department “veto” for purely political reasons. Mr. Elath said that he had sent a full report on the matter to his Government and had not yet received their reply, but in the meantime his personal reactions were the following:

(1) The action taken by the Bank at the apparent behest of the State Department clearly constituted a “breach of promise”. Not only was it thus a question of principle, but it would also have certain very specific repercussions in Israel, where commitments had been made on projects covered by the remainder of the loan.

(2) The decision could only be interpreted as attempted duress but it should be made clear that such tactics would not succeed. In fact, they could only be expected to have the opposite result.

(3) Action of this type, if it became known, could only serve to weaken the present government of Israel. Any such weakening would be contrary to the interests of the United States since another government could not be expected to be as friendly or cooperative.

(4) Such action would serve to render more difficult the efforts at conciliation being made at Lausanne and would be particularly unfortunate in connection with the activities of the proposed Economic Survey Mission.

Mr. McGhee thereupon reviewed and amplified the statements which he had previously made, particularly emphasizing the fact that there was no suspension of the loan as such and that any suggestion of failure to live up to a commitment was completely untenable. He added that there was no intention to exert duress, as should be evident by the timing of the discussions with the Bank and the fact that there was no specific action which this Government was currently urging the Israeli Government to take. Mr. McGhee said that as far as the Economic Survey Mission was concerned, it was entirely by chance that these two matters had come up at the same time and that there was absolutely no connection between them. In conclusion, Mr. McGhee said that he was glad to have had this occasion for a frank exchange of views and was confident that any present doubts in this connection could be dissipated in the course of subsequent discussions.

Mr. Elath expressed regret that he had felt impelled to speak so strongly in the course of a friendly luncheon conversation, but added that, like Mr. McGhee, he was glad to have been able to discuss the matter in full sincerity and frankness.

1. Ambassador McDonald left Israel on August 9 to return to the United States for consultation. On August 25, he saw President Truman. At various other times he spoke with Clark Clifford, Under Secretary of State Webb, George C. McGhee, and other State Department officers and with Pentagon and other Government officials. He also spoke extensively with nongovernmental persons. The Ambassador’s account of his consultation is given in his My Mission in Israel, pp. 184–191.
2. The names of Messrs. Souers and Gass are obviously transposed in the source text.