Foreign Relations of the United States, 1950, Central and Eastern Europe; The Soviet Union, Volume IV

396.1–ISG/10–2550: Telegram

The United States Member at the Intergovernmental Study Group on Germany (Douglas) to the Secretary of State

secret
priority

London, October 25, 1950—8 p. m.

Sigto 199. We have reviewed Frankfort’s 3377, October 23 to Department repeated London 238,¹ together with the French note handed British FonOff October 23 which we have sent to Department as Sigto 198, October, 25, repeated Frankfort 282 and Paris 691² In general I incline to agree with McCloy’s belief that it would be well to approach the revision of PLI on two different levels. First, with the idea of obtaining as quickly as possible revision of the limitations on production and capacity that could create difficulty in the near future, and second, with a view to working put long term arrangements, possibly for approval by the FonMins sometime next year. I would prefer that we make no decision excluding an effort to deal with any given aspect of the problem until we have had the benefit of such clarification of the positions of the three governments as the Defense Ministers talks may provide. We can examine where we stand and how much further it is likely we can get before the end of this year in two or three weeks and determine then our course of action. We have not yet succeeded within the US Government in, arriving at firm views on the long-term or final security control system which we wish in Germany.

We here believe that we will have all that we can handle in the next several weeks to start work on production and capacity in the steel industry and the similar problems in other PLI commodities and industrial products;

We would appreciate suggestions on a long-term approach and believe we should exchange views as quickly as they can be developed. We recall that the Department asked HICOG for its views on the future organization of security control early last summer but do not know if thinking on this problem has progressed much since then, except as it has been incorporated in the US proposals for European defense.

In addition, the French note makes it quite clear that they would like to stall action and possibly even discussion of long-term revision PLI problems, although they may wish to defer discussion even on interim arrangement. In my view it would be a mistake to permit them to delay discussion of the production and capacity limitations, particularly interim arrangements and those modifications of PLI designed to remove a large part of the unnecessary administrative burden and to put the High Commission in a position to deal with emerging problems. The British take the same attitude and are prepared to insist that the discussions go ahead.

In dealing with the French note, as I expect we must do in the first stages of our discussions, the following points seem to me to be appropriate as replies to the line the French have taken: as we know the NY FonMins decision established three principles for ISG review of the PLI agreement of which defense was only one:³

(1) There is no apparent reason why, even should we grant the rest of the French position which we think it would be wrong to do, ISG should not consider changes justified under the first two principles which would, in our view, include many if not most, of the changes we wish.

(2) While there will not doubt be some aspects of German contribution to western rearmament which can only be determined after NATO analysis and decisions have progressed further, it seems to us a distortion of Ministers decision to argue that no action should be taken now. As we understand it, the NATO deputies estimates of requirements and productive capacities cannot reasonably be expected to be available for some time. They will deal largely, if not entirely, with military end products rather than non-ordnance products and primary commodities covered by the PLI agreement (other than Schedule A). The British have emphasized this point to us and have also expressed their belief that it would be quite impracticable to try to express in raw material requirements the kind of requirements and program data which the NATO deputies will eventually develop.

(3) The present German payments crisis, with its serious implications for German participation in EPU,⁴ underscores the necessity of maximum German production and export, as does the danger of inflationary pressures in Germany and throughout the western world.

(4) We believe the Occupation Powers must accept responsibility for planning ahead to permit the German economy to alleviate shortages when it can do so and do not consider that it would be appropriate for the Occupation Powers to dodge their responsibility by attempting to shift it to other international bodies or groups of nations.

It may be that the French meant the third paragraph of their note to be a loophole which would permit a rather limited discussion of the most urgent PLI problems. However, it seems clear to us, and I understand HICOG has also already concluded, that, aside from the possibility that the French may insist on an extreme and restrictive interpretation of the NY formula, it is necessary to take the position that the west requires maximum production of German steel within present capacity that is compatible with orderly and equitable distribution of coal, coke, ore and scrap, and to revise the NY formula to achieve this. Therefore, we think that it would be most unwise to consider extending the NY formula, which seems likely to be unworkable, to other commodities. We would prefer, when the conditions of production appear to be similar, to adapt the proposal above. After attempting to deal with this range of problems we would propose to urge that the important and urgent problems arising from capacity limitations and their administration should be dealt with, despite the possibility that only a short time would intervene before we were prepared to press the British and French for a basic reconsideration of the whole field of industrial restrictions, including wholesale elimination of restrictions of the present type.

Sent Department Sigto 199 repeated info priority Frankfort 286 priority Paris 698.

Douglas

1. Not printed.
2. Not printed; the French note stated that it would be difficult for the ISG to discharge its task with regard to the PLI before receiving information from the NATO experts on the contributions and capacities of the member countries. Accordingly the French proposed a delay in the examination of the PLI until the NATO experts presented their report. Meanwhile the interim arrangements on steel made at New York would continue in force and could be extended to other commodities if it was felt necessary. The French stressed that these proposals were not made in order to delay review of the PLI, but to make possible a more thorough study of it. (396.1–ISG/10–2550)

3. The three principles were:

   • “(a) The elimination of restrictions which have proved to be unduly burdensome in administration.
   • (b) The elimination of security restrictions which within the framework of the present relations between Germany and the Occupying Powers appears justified.
   • (c) The elimination of restrictions which would impede the common defense programme of the West.”

   For the full text of the agreement on revising the PLI, see Document 37 Final, vol. iii, p. 1286.

4. For documentation on the European Payments Union, see ibid, pp. 611 ff.