ECA message files, lot 53 A 278, box 30, Paris Repto: Telegram

The United States Special Representative in Europe ( Katz ) to the Administrator for Economic Cooperation ( Foster )1

secret
priority

Repto 915. For Foster and Bissell.

1. We have given much thought to problem of aid to FedRep in fiscal 50/51, and have great difficulty finding any valid basis giving further aid. Dollar area balance payments clearly does not justify allotment full Snoy/Marjolin share of $341 million. In addition, in our view, FedRep has failed take adequate corrective measures since November EPU crisis, and continuation ECA direct aid may be taken advantage of by Germans as means of avoiding facing up to measures necessary to correct their lax policy.

2. We are considering, therefore, following program which we set forth for your comments before developing with you final US position for presentation to FedRep authorities.

(a)
We must suspend further direct ECA aid for this fiscal year; that is, we are not prepared provide aid beyond $270.1 million allotted to date. This is extension of our position that US will not provide additional dollar aid from special assistance fund with which to meet further gold payments to EPU.
(b)
Although we should not instruct FedRep authorities on specific measures, we must make clear to them that we expect them to put their economic house in order with aim of living within their resources outside assistance. This must be related to their contribution to new Western defense effort and clearly traceable to such effort.

3. Background our thinking follows:

4. ECA re-examining basis aid before and this fiscal year and before S/M total reached in case of other PC’s with particular reference to dollar balance of payments, dollar reserves and degree of effective self-help; and is taking firm position that further dollar aid will be related solely to direct and demonstrable indirect requirements arising out of building West defense. Although too early specifically to relate German position to their participation in West defense, we believe further dollar aid must be related to those actions Germany is in position [Page 1619] to take which would support defense effort of US and other defense partners. Therefore, from now on, US economic aid to FedRep will have to be evaluated and administered on new basis analogous to new approach for other PC’s. Clearly we are not justified discriminating in favor Germany and against others by excepting Germany from such considerations.

5. Without defining methods of getting US views across to FedRep Government as to what measures they should take in absence further US aid, believe action is necessary in following areas: (i) satisfactory measures to control imports from all sources so long as necessary; (ii) effective measures to stimulate exports, including establishment of D.O. priority system for goods needed by NAT countries, and introduction control measures to allocate imported and indigenous scarce raw materials toward export and essential investment and limit their use for domestic consumption, non-essential investment, export to east, or speculative purchases raw materials; (iii) such system of directing production to essential purposes to be undertaken within general framework of continued expansion total level FedRep production and continued absorption unemployed manpower in productive work. Believe this should be possible in view German capacities and potential large defense orders from other West countries.

6. Even if recent rise of exports to dollar area does not develop further, would seem hard to accept a legitimate deficit justifying full S/M allocation since we believe recent level FedRep imports unjustified by current needs of an economy unburdened by rearmament, but represents in too large part scramble to put any available resources; into goods. FedRep must no longer be permitted such indiscriminate commodity stockpiling, speculation and increased consumption of other than basic commodities. As other PC’s have been told, ECA dollar aid and scarce world commodities are not available as basis for stockpiling or other forms of speculative accumulation, nor can ECA aid any longer be permitted to provide basis for expanding consumption or investment unrelated to primary objective Western defense. (Berlin stockpile, of course a special case).

7. FedRep deficits with EPU and with dollar area are directly related. Admitting that recent relative good showing dollar area balance payments resulted in part from shifting procurement and deficit from dollar to EPU area, we do not want Germans to continue to escape needed corrective measures vis-à-vis EPU, by switching deficit back to dollar area. Control over German economy’s excessive imports must now be attained by suspending outside (especially ECA) support from both EPU and dollar positions.

8. We agree that FedRep dollar reserves entirely inadequate. However, misuse made by FedRep of this year’s unexpectedly good dollar exports and of EPU special credit does not engender confidence in [Page 1620] their ability to use wisely higher reserves if they had them. There are many factors involved in establishing exact US position in dealing with such case as Germany, involving relationship direct dollar aid to EPU deficits and surpluses and to changing levels dollar reserves. We expect discuss this thoroughly before reaching final decision, but major emphasis will have to be on legislative history governing criteria under which direct country aid can be given and justified to Congress.

9. Finally, our position on suspension program dollar aid remainder this fiscal year does not foreclose reconsideration if FedRep turns in satisfactory performance on type of action program outlined in paragraph 5 above. This would imply demonstration of a legitimate need for program funds to cover added dollar imports needed in support of the attainment of higher level of exports to Western defense nations. However, hard presently to see how effects of action even if taken will develop soon enough to justify further aid this FY.

10. Obviously, above general outline raises many difficult and as yet unsettled problems concerning US and HICOM attitude and position relative German economic system, controls, limitations production, et cetera. Propose confer with HICOG and mission on substance this telegram and develop jointly proposals covering US position on possible German action.

Katz
  1. Repeated to Frankfurt for McCloy and Cattier.