Foreign Relations of the United States, 1951, European Security and the German Question, Volume III, Part 1

740.5/1–451: Telegram

The United States Deputy Representative on the North Atlantic Council ( Spofford ) to the Secretary of State ¹

secret

London , January 4, 1951—4 p. m.

Depto 385. From Spofford and Breithut for Perkins pass to Knapp.

1. Memo “Reflections regarding production military equipment in Europe” received from Van Zeeland. Copy pouched January S.² It is proposal for stimulating NAT arms production of items for transfer by NATO guarantee of compensation to producers. In accordance his request, memo has been circulated to deputies D-D (51) 1.³ As indicated telephone conversation January 1, Spofford-Achilles,⁴ it will be on agenda meeting January 4. We plan suggesting deputies referring it to PWS/DFEC for study.

2. Main points memo follow:

(a) Cites MTDP as establishing minimum size of required forces and indicates types of needed equipment now also known. Indicates this information provides basis for determining what equipment is needed and how much. Remaining problem is to assure producers of payment.

(b) To extent that producing countries procure for their own forces they can themselves give assurance of payment. However, in case of arms provided for other countries, producing countries cannot be expected to assume the risk of production, exclusively on own responsibility.

(c) Proposes solving latter problem by promise or guarantee of payment by 12 NAT countries collectively, including US.

(d) Indicates 2 methods of implementing this proposal: maintenance of book accounts with settlement of net debit and credit balances every 6 or 12 months; or through EPU appropriately amended. No specific amendments or means of using EPU are outlined.

(e) Concludes with some suggestions for stimulating internal shift of manpower and resources to defense production in producing countries by paying premiums. Suggests fund created by each country contributing percent excess profits (probably means tax). Suggests as one specific use of fund, financing of migration and housing costs of skilled labor as growth of production makes shortages of technicians acute.

3. Although memo not explicit, fund appears not related to guarantee arrangement.

4. Reports from Embassy Brussels (Embtel 1021 to Department December 21⁵) and discussion here with Bastin (Belgian delegate PWS DFEC) indicated early version Van Zeeland plan unacceptable to FinMin and National Bank. However, inclusion in present proposal of possible use EPU may have made proposal acceptable.

5. As presented proposal might involve open end guarantee of payment for armament production, and in present form is too vague for realistic consideration.

6. We have been thinking about less ambitious scheme for implementing HPPP by establishing 1 to $200 million fund various currencies to provide 90 percent guarantee so that producers while having some assurance of payment will also continue to have incentive to find buyers. Latter considered important as providing motive for maintaining quality of production standards. Some obstacles re:

(a) Some NAT participants presently unwilling to let contracts on basis of MTDP’s commitments. If financial and economic limitations result in reduction of procurement below requirements, some high priority items might be slashed disproportionately or eliminated entirely.

(b) SG determination of acceptable types not construed as meaning that types designated as acceptable to meet needs of producing country would necessarily meet needs of NAT partners for such equipment. For example, international financing of Italian truck production based on overall NAT truck needs and SG designation of Italian trucks as “acceptable” might be rash, if other countries refuse to consider such trucks acceptable to them.

(c) MPSB data do not at present provide basis for elimination inefficient high-cost producers. Thus financing of all high priority projects outlined in PWS D-D/175,⁵ by international commitment might result in NATO misdirection of resources and in group acquiring high-cost unsaleable equipment.

7. We believe above problems may be solvable, and basic suggestion of international financial commitment as instrument for stimulating armament production for others merits exploration. Believe basic question to be answered soon is whether US opposed in principle to such scheme or willing to consider participating if above problems solved.

8. Would also welcome OSR’s reactions, possibly during Triffiirs expected visit here, with whom Breithut had discussion substance paragraph 6 above

[ Breithut ]
[ Spofford ]

1. Repeated to Paris for OSR and to Brussels.
2. Not printed. A copy of the original text and translation were transmitted to Washington in airgrain 770 from Brussels, January 4. (740.5/1–451)
3. Not printed.
4. No memorandum of this conversation has been found in the Department of State files.
5. Not printed.
5. Not printed.