Memorandum of Conversation, by the Director of the Office of European Regional Affairs (Martin)

top secret

US-French Ministerial Talks

(Third meeting, October 16, 1950)

Department of State

Secretary Acheson

Ambassador Bruce

Mr. E. Martin

Mr. Glenn (interpreter)

Treasury Department

Secretary Snyder

Mr. W. Martin

Department of Defense

Mr. Finletter

General Lemnitzer


Mr. Foster

Mr. Bissell

Ministry of Defense

Minister Moch

General Vernoux

Colonel Lasalle

Ministry of Finance

Minister Petsche

M. B. de Margerie

Foreign Office

Ambassador Alphand

French Embassy

Ambassador Bonnet

M. Schweitzer

Secretary Acheson opened the meeting with the following points:

U.S. accepts general lines of proposed French military effort for NATO and in Indochina, and is prepared to do what it can and properly should to see that it can be carried out without serious risk to French political and economic stability.
In general prefer that contributions to NAT defense be based on discussions in NATO.
Recognize, pending completion NATO work on MTDP, need for immediate contribution to NATO program and Indochina defense.
Expediting end-item programs, particularly for Indochina.
For other than end-item programs, data available make accurate judgments as to amounts required to achieve program without serious risk of inflation very difficult.
In view of above and of limit on firm U.S. commitment to funds available in our fiscal year 1951, prepared make immediate commitment of $200 million, in so far as it can be obligated up to end of U.S. fiscal year 1951, half-way through French fiscal year.
This amount will be taken into account in the multilateral distribution of defense burdens. We believe would be unwise for Petsche to count on getting, as result of NATO exercise, additional amount which would bring U.S. contribution for French fiscal year as a whole above $300-$4:00 million, and might well be less.
$200 million assumes French will proceed with military effort both in France and in Indochina along lines discussed, including HPPP, and will take vigorous measures to prevent this effort from causing inflation.
This amount will be made available (1) to cover imports, except from EPU countries, required by military production programs; (2) to procure military items produced in France for French or other use, it being understood that the dollars so received will be used not to increase reserves but (a) to pay for imports from non-EPU countries required to prevent inflation, and (b) to meet obligations to EPU arising directly or indirectly out of the French production program; and (3) to assist procurement for France from other countries of items now in the French program which NAT review suggests may be more advantageously produced elsewhere.
Procedural and substantive aspects of longer-range discussions in NATO can perhaps be explored in preliminary way with Petsche at a later meeting.

Secretary Snyder said he had nothing to add. Mr. Foster emphasized the importance to favorable action by a new Congress on any additional funds for assistance to the French of the performance by the French in carrying on with vigor their proposed military effort.

Minister Moch expressed appreciation for the generous gesture but indicated need for further explanations. If one assumed that this amount would be doubled for the calendar year as a whole to $400 million, or about half of what France requested, he presumed this could be used in three ways: (a) to import raw materials, etc. from non-EPU countries which would be a small part, not over $100 million; (b) for off-shore procurement, more important but not too clear how it would be worked out; and (c) to assist in procurement in other countries, which worried him very much. He feared intention was to arbitrarily reallocate production in way which would prevent mass-production in France. This also might cause unemployment and social disturbances, and might cause waste by taking contracts away from facilities on which capital investments had already been made.

Minister Moch also inquired whether funds could only be used in NAT countries and whether help for Indochina was outside this proposal as, for example, the 20 light bombers. He also asked whether, as he had understood us to say during the New York meetings, we intended to press for new money for the fiscal year 1951, or can new funds only be available for fiscal year 1952.

He thought it clear that the amounts mentioned would force them to reduce their rearmament program and make it impossible to equip the number of divisions originally intended for 1951–1952.

Secretary Acheson stated that on point (c) the decision as to where production would take place would be a matter of mutual agreement and not a matter of our dictating to the French. Minister Petsche inquired whether raw materials were involved in this proposal. He was told that was not our intention.

[Page 1420]

With respect to the second question, Secretary Acheson stated that the $200 million did not include end-items like the bombers. Mr. Foster added that no end-item would come out of the $200 million and that the $200 million is out of Title I, which is for NAT countries.1

As for the third question, Secretary Acheson stated that it is impossible to tell now whether a supplementary approach for fiscal year 1951 would be required. There probably is not time to get action by Congress and to use the funds which would be made available.

Minister Moch emphasized the importance of getting help to maintain the armies of the Associated States, pointing out that they need to be built up to provide a mobile, strategic French reserve, and to permit transfer of cadres to France to strengthen the French Army. He gathered we no longer intended assistance for this purpose. Secretary Acheson pointed out that specific Indochina help was entirely end-item for both French forces and those of the Associated States. Mr. E. Martin added that the $200 million was available to meet franc costs, of which Indochina maintenance costs are a part, and thus the $200 million indirectly contributes to meeting such maintenance costs and is intended as our assistance to them.

Minister Petsche said he had several questions, after which he proposed that we adjourn for ten minutes to consider our answers. For fiscal year 1951 they expected 100 billion francs of counterpart of ECA aid. He understood no definite commitment possible but wondered whether this were reasonable and whether he could expect to use these funds for purposes within his budget, as originally planned.

Before asking his second question, Minister Petsche wanted to associate himself with Minister Moch’s words of thanks. Nevertheless, the figures leave $370 million uncovered and these figures cause him great fear for the future of France. They can either slow down military effort or risk inflation. If they slow down, he understands future funds from us will probably be cut. If they have inflation, available funds will not buy as much and the result will be in fact a slow-down. Our proposal would require issuance of 300 billion francs in new bank notes and it would be impossible to stabilize the currency on this basis. He asked whether a way could be found by which France could escape financial disaster.

Secretary Snyder asked why 300 billion francs were necessary to meet a $370 million dollar deficit. Minister Petsche replied that to [Page 1421] balance their budget they must secure 420 billion francs by borrowing and other Treasury methods, some of which were inflationary. In addition, they needed 270 billion francs from us and a reduction in this amount brings him to total of 300 billion francs. He also pointed out that once inflation sets in borrowing becomes more and more difficult, and even more bank notes might be required than estimated.

At this point, the meeting adjourned for consultation of delegations.

At the request of Secretary Acheson Mr. Foster stated that the 100 billion franc figure for counterpart of ECA aid was reasonable on the assumption of an approximate six-month lag between U.S. allocations and receipt of counterpart. He also stated that Minister Petsche could plan to use it in accordance with past practice and to apply it to the present budget. He indicated that no advance information is possible on the 1952 budget pending Congressional action.

Secretary Acheson suggested that since Minister Moch had to leave shortly, he be allowed to make a statement. Minister Moch said he had made a rough calculation of the effect of the US proposal, on the assumption that France gets $400 million for the year as a whole, leaving a 30 billion franc deficit which he applied entirely to the defense budget. He did not figure any could be taken out of Indochina funds, and only hopes it will not be necessary to increase these funds. They could only decrease if the French evacuate the Tonkin delta. He can not say they will not consider doing this but France will not take such action until after consultation with the Allied Powers, since the Indochina operation is a part of the common struggle against communism.

Provisional conclusions are that a 130 billion franc cut could be accomplished by reducing by nearly half certain expenditures which might save 50 billion francs, and by slowing down the production of arms almost in half to save 80 billion francs. This latter would result in the tenth French division being ready in 1952 and not in 1951, since its cost is almost exactly 80 billion francs.

These proposals would require complete revision of the rearmament program submitted for 1951.

Minister Moch emphasized that figures of expenditures were not a measure of the French contribution, pointing out that if French soldiers were paid as well as Anglo-Saxon soldiers France could afford less than three divisions instead of ten divisions.

Secretary Acheson pointed out that he saw no immutable principles which require that the total deficit be saved out of the defense budget as Minister Moch had attempted to do. Secretary Snyder pointed out that he thought Minister Moch ought to consider that the great size of the US end-item program for France, the largest of any country, [Page 1422] ought to give Moch some room to adjust his own production program. In leaving Minister Moch emphasized the importance of keeping the amount of US aid proposed secret, until after debate in Parliament on the French budget. At this point Minister Moch left.

At Secretary Acheson’s request, Mr. Snyder answered Minister Petsche’s second question. He pointed out that it was pertinent and that he could understand fully Minister Petsche’s fears about inflation since we in the United States had equally great fears and difficulties. We have tried to meet the major part of the French problem. This and other measures have required us to undertake new taxes, to make drastic economies in our domestic program, and to introduce some controls. He suggested that Minister Petsche ought to be able to manage a deficit of 130 billion francs by the various means which had been previously suggested such as temporary budget economies, the failure of military spending to rise as rapidly as expected, the possibility of adjusting the large end-item program from the US to cover some items proposed for production in France and other measures of like character. He also pointed out that France has an especially favorable credit balance in the EPU which would enable her to substantially increase her imports if necessary to take certain inflationary measures such as issuing a limited number of new bank notes. These imports would soften the impact of such devices.

In addition Secretary Snyder pointed out that as the program advances there will be NATO review which can take account of the pressures and give us a chance to take another look at the French situation and make adjustments if required.

Mr. Foster emphasized the possibilities of increasing imports, particularly from EPU countries, as giving Minister Petsche another important and substantial tool.

Minister Petsche expressed concern in the implication that he had come to us with a request for 270 billion francs without doing everything he could do to reduce that figure. He felt the French budget proposal represented a maximum effort at economizing and at increasing revenue. The investment program had already been cut 200–300 billion francs and they were almost at a point of incurring penalities for breach of contract by stopping work already started. Because the defense program is the largest and had asked for the major increase, it is reasonable to talk in terms of additional reductions in that area. Minister Moch was trying to put into effect our suggestion to slow down defense expenditures but this may be dangerous. He pointed out that only Moch could comment on our proposal for adjustments which took into account our end-item program. France is getting the greatest share of this program but is also providing the most men with a ten-division [Page 1423] program as compared with the 3½-to-4 division program of the UK. He felt there was no real solution to the defense budgetary problem without adequate review by the military staff.

With respect to the use of EPU credits, he believed that in presenting his balance-of-payments position these had already been taken into account. He pointed out that France had already done much to increase imports and has been the only country favoring complete freeing of the exchanges. He suggested that the price problem was already making imports almost impossible and must be brought under control if we are not all to succumb to inflation.

With respect to reconsideration in NATO, it will not be of much value if undertaken only after inflation has come. However, he is impressed by our offer of immediate assistance and realizes the difficulties of our doing more. He expressed concern primarily about our statement that he could expect only $100 to $200 million later as an additional amount. If Secretary Snyder means to give France moral reassurance subject to the results of our Congressional elections, and if the proven speed of the French rearmament effort cannot be maintained on the basis of our present proposal, and this amount can be reexamined, he would have some reassurance about going ahead with his budget but he would like us to know he is still very much worried for the future of France from an economic, financial and social point of view.

Secretary Snyder pointed out that he was also worried about the US future as a result of inflationary pressures. He also asked permission to add that any reexamination of the French position would be affected materially by the vigorousness of the French effort and the adequacy of their performance. Minister Petsche replied that he was in complete agreement but hoped we would not refuse to recognize the seriousness of the situation. He agreed that in all probability the effort would get under way slowly in the first year, but in 1952 and 1953 expenditures may be expected to rise rapidly. He agreed with Secretary Snyder that the problem is of world dimensions and that is why he had suggested several months ago that the task of financing the rearmament effort be approached through a common budget, in the hope that international coordination could bring about savings in national expenditures.

Secretary Acheson summed up by expressing our desire to work out a solution but recapitulated the various means which he thought might be used to cover in part the 130 billion franc deficit and place the inflationary problem within manageable bounds.

Minister Petsche expressed the view that he could only repeat his previous statements that all possible efforts had been made and that [Page 1424] perhaps the only way of reconciling the difference of view would be for the experts to spend some further time examining the figures. While he wanted it clearly understood the French were not asking for US help to pay for things the French themselves should clearly support, on the other hand, he did not want France to be in a state of continuing governmental crises, which he thought might be the result of our proposals.

It was agreed that the financial experts and the military experts would meet separately to consider further the US proposals for the inflationary problem. It was agreed that there would be another ministerial meeting Tuesday afternoon, and a further meeting on Wednesday.

At the close of the meeting, Minister Petsche again emphasized the importance of not letting any figures get into the press.

  1. The reference is to the Mutual Defense Assistance Act of 1949 (Public Law 329, 81st Cong., 1st sess.; 63 Stat. 714), Title I, North Atlantic Treaty Countries, and to an amendment of July 26, 1950 (Public Law 621, 81st Cong., 2d sess.; 64 Stat. 373).