Memorandum of Conversation, by Mr. Edgar J. Beigel of the Office of Western European Affairs
US-French Ministerial Talks
(Second meeting, October 13, 1950)
[Here follows list of persons present—the same as at the first meeting, with the addition of Mr. Beigel.]
Secretary Acheson summarized as follows the problem of matériel supply for Indochina from existing funds:
- The A, B and C lists have been approved and much of the matériel requested has been delivered or is in the process of delivery.
- The remaining lists which have been submitted exclude matériel for the Vietnam National Army, and the funds presently available are insufficient to provide such matériel in addition to that already requested for Indochina. It is therefore necessary to review the lists in order to insure that they provide matériel required for 18 battalions for the V.N.A., since any further requests must be met out of future appropriations. French representatives should meet promptly with the Defense Department to work out the consolidation.
Secretary Marshall said that as rapidly as the French determine priorities, including those for the 18 additional native battalions and the 40,000 territorials for the V.N.A., the Defense Department will screen the requests and proceed with the supply program. General Marshall emphasized that the French must screen their requests themselves as carefully and as realistically as possible in view of the overall short supply of matériel. He felt strongly that the French should arrange that requests submitted by the field commander in Indochina be assigned first and second priorities, so that maximum benefit may derive from proper consignment of matériel available.
With regard to the French request for light bombardment aviation, Secretary Marshall explained that B–25 aircraft are mostly being used as transports or in mothballs and that personnel cannot be spared to ready them for combat. He said that he will therefore issue instructions that one squadron of B–26 aircraft (15 and 5 reserves) [Page 1402] plus necessary spare parts be diverted from the Korean pipeline to Indochina, for delivery December 1–15, or earlier. He said that consideration will be given to diversion of a second light bombardment squadron, depending upon the course of operations in Korea.
Secretary Marshall said that a French vessel left Hawaii on September 30 bound for Indochina, carrying 24 landing craft, including six LS/SL.
Minister Moch expressed his deep appreciation for the US decision with regard to B–26 aircraft and said that he would immediately inform General Carpentier and Premier Pleven of the decision. He said that to avoid confusion he wished to point out that the matériel necessary for the formation of 18 additional native battalions in Indochina is in addition to the matériel requested for the first 12 battalions. He said that the requirements for matériel for the 18 battalions is of a lower priority than the matériel on lists D, E and F, since the latter matériel is intended for units already in combat. He said that the French delegation will meet with the Defense Department on Saturday1 to deal with this matter.
Secretary Acheson said that the US wishes to provide matériel for the 18 additional battalions out of existing appropriations, and that the military staffs should therefore undertake to incorporate the matériel requirements for these additional native forces into the French lists that have already been submitted.
Minister Petsche said that he wished to associate himself with M. Moch in expressing his appreciation to Secretary Marshall for the assignment of B–26 aircraft to Indochina. He said that the statement of Secretary Marshall with regard to the optimum use of available matériel underlines the objectives of the French Government, which are to avoid waste in the use of funds devoted to armament, particularly by avoiding duplication among the various branches of service and among the various participating countries. He said that with this objective, the French Government has put forward its proposals for a common high command, which is about to be realized, a common production authority and a common budget. This last device is intended to insure an equitable distribution of the financial burden of rearmament so that each participating country may avoid a disproportionate degree of inflation arising from the joint defense effort.
M. Petsche said that he did not now intend to discuss such matters as the common budget and other multilateral controls, except to emphasize the undesirable consequences arising from an inflation induced by increased military expenditures and by rising prices for raw materials. M. Petsche said that these questions would be discussed [Page 1403] later. At this time, he said, he wished to take up the problem of immediate aid which France feels essential (1) to place orders as soon as possible under the military production program for 1951, and (2) to prepare the presentation of the 1951 budget to Parliament. He recalled that the 1951 military budget is estimated at 850 billion francs ($2.4 billion), or 975 billion ($2.8 billion) by NATO standards.
M. Petsche said that even before Korea, France had been able to maintain financial stability and progress toward economic convalescence only with ERP assistance coupled with continued sacrifices by the French people. He said that in 1951 the Treasury problem will become even more acute in view of the decline in counterpart accumulation by as much as 150 billion francs (from 250 to 100) and in view of the increased expenditure necessary to service the public debt. He said that the civil budget for 1951 will be brought partly into balance only by reducing the investment program, by realizing 50 billion in civil budget economies, and by increasing taxes.
At the same time the Treasury must find 430 billion in additional resources for military expenditures, since the military budget for 1951 represents a doubling of the present rate of military expenditures, which already represent 12 percent of French national income, or 15 percent by NATO standards. M. Petsche proposed that taxes would be further increased to an estimated limit of 200 billion francs, and that another 80 billion would be realized through additional budget economies. These economies would be realized primarily in the reconstruction sector, and would in effect oblige 75,000 families to remain in provisional and inadequate housing accommodations. With regard to the tax increases, M. Petsche said that they would rise to the maximum burden believed possible, and will take up an even greater proportion of national income than the present 34 percent.
Minister Petsche said that unorthodox Treasury devices will again be necessary to cover 420 of the 690 billion budget gap. He said that savings have not recovered to the prewar level and that it is almost impossible to float any but short-term loans, and that in 1950 about half of the 320 billion increase in public debt was achieved through inflationary borrowing. He said that in 1951 the French Government will probably reach the limit of such borrowing which is possible without creating serious inflationary pressures. In 1951, moreover, the situation appears likely to be the reverse of the deflationary environment of 1950, when extensive inflationary borrowing was possible. M. Petsche said that even after the estimated limit of borrowing will be reached, there will still remain a gap of 270 billion francs, which must be covered by external assistance if France is to avoid [Page 1404] the danger of destroying the economic and financial recovery achieved thus far.
Minister Petsche said that France needs reassurance at the outset of her rearmament program, and that the US is already providing such reassurance through the provision of MDAP assistance to France. In his view, however, the present legislative authority is inadequate to satisfy all possible requirements for expenditure under the MDA Program and he suggested that certain legislative adjustments may be necessary. M. Petsche concluded by saying that if serious inflation in France becomes unavoidable, all prices will rise, including military costs, and the result will be to render impossible the fulfillment of the 1951 military program. He said that any serious increase in the wage-price spiral would help only the internal enemies of France, and would in effect be as serious as an external defeat.
Secretary Snyder said that he was acutely aware of the urgency of the military problem in Indochina, as well as the problem of the longer-range French defense program. He said that the problems outlined by Minister Petsche are strikingly similar to his own, particularly their mutual concern over the problem of inflation. He said that US plans for peaceful economic expansion as well as our hopes for a balanced budget have all been upset by the well-timed strategic attack in Korea. He said that during the past several years the US has willingly given extensive foreign assistance but only with discomfort, and the provision of recent supplementary military assistance funds has required an increase in US tax rates; and that still higher taxes will be requested when the Congress reconvenes.
Secretary Snyder emphasized that the US is also presently threatened with acute inflationary pressures and must carefully scrutinize any figures submitted to support a request for further financial assistance to France. He suggested that since additional documentation has only just arrived from Paris, a further report should be received from the joint technical staffs, particularly since the US staff feels that the French estimated budget deficit may be subject to further reduction.
Minister Petsche said that from the balance of payments data which has just arrived, he can quote one impressive figure: the launching of a rearmament program will induce an overall French franc area balance-of-payments deficit in excess of 380 billion francs ($1.1 billion) in 1951.
Mr. Bell explained certain US preoccupations with the French projected military production program. He said his comments were to be taken as incomplete and tentative and as related only to major production items. He said that no consideration has been given to the [Page 1405] military acceptability of the items which the French propose to produce, since that is properly a function of the MPSB. He said that the US is concerned about the phasing of French production, that from US experience the French projected production schedules appear unduly optimistic. Mr. Bell said that it is our understanding that the French program is based on the assumption that necessary funds will be available by November 1 and that production will begin by January 1.
With regard to naval vessels, the French production program, from the point of view of timing, appears reasonable. Production of naval aircraft appears to require engines from abroad, and production of at least half the air items appear to require imports of machine-tools as well as extensive plant modernization. He said that two naval aircraft, the interceptor aircraft, and a good many of the army items, according to our information, are only in prototype and not in production. He concluded that it would consequently be difficult to spend funds as rapidly as the French have anticipated.
Secretary Marshall said that he wished to clarify any possible confusion which may exist between budgets, fiscal years, and plans for the defense of Western Europe. He said that it is to our advantage not to commit more funds than can be used during the coming year. He said that if the French request for assistance exceeds the French capacity to use funds during 1951, then that is an important consideration, but that such a factor should not be confused with the French long-term program covering the period up to 1954, the fulfillment of which is essential if we are to provide an adequate defense for Western Europe. General Marshall emphasized that we are not only concerned about the 10 divisions to be mounted in 1951, but are also concerned about the funds necessary in 1951 for material which will be completed in 1952 or 1953.
Minister Moch, in reply to Mr. Bell, said that in general the French military production program will take up about 10 percent of French capacity in the steel and aluminum industries and will consume about one day’s production of electricity per month. Steel requirements, for example, will only amount to the difference (1.5 million tons) between the present annual rate and the peak 1949 rate of steel production. He said the program will consume a similar proportion of French output of less important materials. He said the Standing Group has not yet passed judgment on any of the items in the French program, but that he has reason to believe that it will accept the items included in the French HPPP, for which production assistance is now requested. He said that the entire program could proceed without US assistance, but that US machine-tools in particular have been requested in order to [Page 1406] modernize production plants, and that certain special machine-tools are made only in the US.
With regard to interceptor aircraft, M. Moch said that production is under way but could be accelerated with US aid; that it is his hope to accelerate production as rapidly as possible, and not only in view of the long-term program. He said that orders have been placed for 240 Vampire aircraft and 150 Marcel Dassault (MD–450) aircraft. The latter aircraft appear to be superior to the Vampire, and the order will be increased to 750 as soon as the financial resources are available. All prototype tests have been concluded on this aircraft and it is now in mass-production. He said that no prototype has been developed for the carrier-based anti-submarine aircraft, but that production of this aircraft is not contemplated until the end of 1952. With regard to the land-based anti-submarine aircraft, the Breguet 764, M. Moch said that production will require US engines.
M. Moch said that orders have been placed for 135 12-ton tanks and that four production lines are in operation, that three production lines are producing an initial order of 280 armored reconnaissance cars, and that the scheduled production of both items is intended to be completed by next July 14. In addition, he said, orders have been placed for 4,000 modernized jeeps, 20,000 bazookas, and several hundred thousand anti-tank mines.
Minister Moch said that France has obviously passed the prototype stage for these production items. He said that France can get into production more rapidly than the US because French production lines employ considerably less new machine-tools, but that over a longer period the acceleration of French production is considerably slower than US production. For that reason, France has requested US machine-tools in order to modernize her production lines. He emphasized that he prefers to accelerate production as rapidly as possible in 1951 rather than later, and that the program as presented is technically less than France is capable of producing in 1951. He said that with additional machine-tool assistance in particular, even the proposed program could be surpassed, particularly in view of the small proportion of French total production capacity that the present program will take up.
Secretary Acheson said that the US is concerned about the French budget deficit which is roughly of the same magnitude as the French military production program. He said that we doubt whether the proposed 1951 production program can be fulfilled during 1951, and that to the extent that it is not, the French Treasury deficit should be reduced. He said that his doubt is equally shared by Secretary Snyder and by Mr. Foster, even after taking into account the ability of France to get into production rapidly.[Page 1407]
Mr. Foster emphasized that the question is one of timing of expenditures and not the size of the program. He said that this problem is particularly important from the Congressional point of view.
Mr. Martin (State) said that in looking at the non-military parts of the French budget estimates, we have been equally concerned about the inflationary impact of a budget deficit. He said that capital expenditures are estimated at 860 billion francs, for public works, war damage reconstruction, and investments. With regard to the investments sector, he said that we understand that the French intention is to continue only work in progress as well as to slow down the rate of expenditure on such work. He said that since the military construction program is likely to force building materials into short supply in France, there may be reason for a further scaling-down of such expenditures. Mr. Martin said that we nevertheless favor the proposed expenditure of 35 billion on low-cost housing, and would hope that for the purposes of public morale such expenditures could in fact be increased.
Minister Petsche said that with regard to housing, no new construction is to be initiated but that work in progress is to be completed. He said that it is politically impossible to suspend any construction that is already under way, and that any further cut in the reconstruction budget would run the risk of a ministerial crisis. He said that all investments have been reduced except those necessary to break production bottlenecks, particularly expenditures on increased power capacity which is related to the military production program. He said that during the visit of Minister Moch to the Defense Department yesterday it was suggested that certain transfers may be possible: that US orders may be placed in French merchant shipyards, which could then cancel similar French orders without running the risk of increasing unemployment in this politically vulnerable industry.
Mr. Martin said that on the receipts side of the French budget estimates, insufficient allowance may have been made for additional receipts arising from higher prices and increased economic activity during 1951, even after considering that increased prices will cause an increased rate of expenditure which may tend to cancel out receipts arising from increased activity. He said that we feel that overall receipts may have been underestimated by some indeterminate amount. He also suggested that receipts from the proposed new taxes may be less than we all should like to see them.
Minister Petsche said that during the past two years US experts have been telling him that his projections of budgetary receipts have been consistently overestimated, but that experience has substantiated the accuracy of the projections. He said that in projecting only a 5 percent increase in receipts he wished to be prudent, and that the projection [Page 1408] represents a net increase after taking into account an increased rate of expenditure. He said that after the experts have had an opportunity to consider the French national accounts and balance of payments projections, which have just arrived from Paris, he would be happy to discuss the budgetary accounts with Mr. Martin, particularly the problem of private savings.
Secretary Acheson said that General Marshall will have more specific answers to certain of the military questions by Monday. He said that the experts should continue their examinations of the French financial presentation over the weekend, so that the next ministerial meeting may consider both the military and non-military budget problems, leaving the long-run matters for later talks. The Ministers adjourned after agreeing upon a draft release for the press.2