The Ambassador in France (Bruce) to the Secretary of State 1
Reference Embassy’s Despatch 634, March 24, 1950.2 Following is annex to report dated March 11, 1950 from ECA Special Mission to France on Mission’s MDAP and NAT activities (this report should be read in connection with and be considered a supplement to the Embassy’s MDAP Section Monthly Report No. 1 dated March 16, 1950, reference Embtel 1427, March 28, 1950, 1 p. m., sent London 416).2
- In accordance with the instructions contained in OSR Repto Circular D–42 of February 23, 1950,2 the Mission will include in an annex to the regular monthly report data on current Mutual Defense Assistance Program (MDAP) and North Atlantic Treaty (NAT) operations and problems in which the Mission is involved, including the financial and economic impact on ERP. The present document is the first such annex, and future annexes will be prepared whenever warranted by the volume and significance of MDAP and NAT material.
- As it has been requested that this first annex cover all significant developments through February, it seems appropriate to review the organizational arrangements in existence between the Mission and the Embassy on MDAP matters. Minister Charles E. Bohlen is Special Assistant to the Ambassador for MDAP, assisted by Mr. E. G. Trueblood. The Chief of the Military Assistance Advisory Group in the Embassy is Major General George J. Richards, U.S.A. The officer representing the Chief of Mission in MDAP policy matters is Mr. B. E. L. Timmons, Deputy Chief of Mission. Close contact between the Mission and Embassy has been established and maintained on MDAP, and it is believed that both are in full agreement regarding the nature of ECA participation and responsibilities in MDAP matters. The Mission’s advisory role to the Embassy in MDAP is completely understood. Messrs. Bohlen, Richards, Trueblood and Timmons all had the advantage of being present at the meeting held at [Page 1366] the U.S. Embassy in London on January 11–12–13 to coordinate MDAP activities. It is anticipated that the Mission will continue in the future, as in the past, to handle MDAP work through the regular staff of the interested divisions, including Finance, Trade, Industry, Program Review and Labor. The Deputy Chief of Mission will represent the Mission at MDAP and NAT policy discussion, accept work assignments for the Mission, and ensure that a sufficiently high priority is accorded to such work. He will review all documents on MDAP and NAT matters for technical and policy conclusions, and direct their forwarding to the MDAP Section of the Embassy; Director of MDAP Liaison, OSR; and/or U.S. Representative on the Permanent Working Staff of the NAT—Defense, Financial and Economic Committee (PWS of NAT–DFEC); as appropriate.
- It may be added that the Mission has been closely associated, through the Deputy Chief of Mission and the Mission’s Finance and Trade Adviser (Mr. W. M. Tomlinson, also U.S. Treasury Representative), with the work carried on during the entire past twelve months by the Embassy in aiding the preparation of the MDAP program.
- The French Minister of National Defense submitted to the Embassy, in December 1949, an outline of the French “additional military production” (AMP) program, originally involving an estimated $53 million (which later information indicated might be reduced by some $15 million) in MDAP dollar financing for machine tools and raw materials to be imported from the dollar area (this amount to be, of course, in addition to the franc cost of financing the scheduled production). The Mission and Embassy have to date examined 23 specific projects under this program, the Mission considering them particularly both from the standpoint of the general financial and economic impact on the economy, and from the standpoint of screening the requested imports of raw materials and machine tools. As regards raw materials, the important question is whether the source could be switched from dollar to non-dollar areas. The screening of the source of machine tools is more difficult, and it does not appear possible for the Mission, without undue diversion of personnel from other high priority work, to carry out a detailed survey of whether the machine tools requested by the French under MDAP dollar financing are available in France or in other participating countries.
- It is not intended here to cover in detail the types of equipment to be manufactured by the French, the total cost thereof, the firms involved, or the specific items requested for MDAP dollar financing and the Embassy–Mission recommendations in regard thereto. These and other matters are covered in considerable detail in the French project submissions and the Embassy–Mission covering comments [Page 1367] (Embassy Dispatch 443 and 444 of March 6, 1950)3 and are doubtless now available to the Director MDAP liaison, OSR, and to ECA Washington through FMACC. It will be of interest, however, to indicate briefly in the following paragraphs the Mission’s present thinking on the question of the impact of the AMP program and MDAP generally on French recovery.
- Minister of National Defense Pleven has stated to the Embassy and the Mission that the total franc expenditures on all AMP projects in 1950 will be compressed into the French national defense budget, which is part of the over-all French expenditure program enacted in late January 1950. The total French budget for 1950 is approximately 2,250 billion francs and the national defense budget is approximately 400 billion francs.
The question of analyzing the possible financial impact of the additional military production program in France is obviously not a simple one. At one level it is a question of whether the expenditures forecast for additional military production will of themselves have an adverse impact upon French recovery and economic stability. In concrete terms, this might be regarded as whether such military expenditures of themselves would cause the French Government to resort to inflationary financing. At the present point in the French fiscal year 1950 the answer must run in terms of anticipations. As indicated above, the French Government expects to compress all military expenditures in 1950, including those of AMP, in the over-all military budget. In general the French expenditure program is covered by three broad categories of non-inflationary receipts: taxes and other revenues, counterpart funds, and non-inflationary borrowing. Nevertheless, the Treasury has already had recourse to certain forms of inflationary financing and, as the year progresses, it may require further inflationary resources in order to cover its operations. However, the amount of such financing now foreseen is not expected to be large. Under these circumstances the additional military production expenditures should not have any adverse financial impact. Furthermore, it is improbable that military expenditures in 1950 would be less if there were no AMP program. The 1949 military budget amounted to some 385 billion francs, only slightly less than the estimated budget for 1950.
At the next higher level of analysis the problem obviously becomes one of the success of the whole complex of the French financial and economic policies designed to promote recovery and to maintain internal economic and financial stability. It is always possible that adverse developments—increased expenditures not covered by non-inflationary [Page 1368] receipts, shortfall in receipts, inflationary wage increases, crop failures, inflationary increases in private credit, etc.—can in France lead to a resumption of inflation which would obviously in turn have an extremely adverse effect upon French recovery. If any unfavorable developments were to occur in the field of the budget, i.e., should expenditures during 1950 outrun non-inflationary receipts, then it could be said that the totality of French expenditures were creating a situation having an adverse effect upon recovery. There has been a chronic tendency in France to overestimate receipts and underestimate expenditures. In such a situation obviously all major sectors of the French expenditure program would bear a share for the adverse effect on recovery.
The burden of the foregoing analysis is simply this: insofar as it is possible to consider the problem of adverse impact upon recovery at the present time and with the information now at our disposal, the French expenditures under the AMP program should not have any adverse effect on recovery as long as Minister Pleven is able to compress, in accordance with his intention, all military production expenditures within the figure voted by the French Parliament. There remains, however, the larger problem, of which the military expenditures are only a part (and the AMP expenditures are in turn only less than one-quarter of total military expenditures), as to whether the Government can hold its expenditures in 1950 reasonably within its receipts. If recent experience is any guide, the success or failure of this policy will be one of the major factors in determining whether economic stability will be maintained and strengthened in France during 1950 or whether the situation will deteriorate.
As the foregoing report will indicate, there has been close cooperation between Embassy MDAP Section and the ECA Special Mission to France in connection with economic and financial problems arising in the program.