ECA message files, lot 53 A 278, box 27, Frankfurt Toeca: Telegram
The United States High Commissioner for Germany ( McCloy ) to the Office of the United States Special Representative in Europe, at Paris 1
priority
Torep 240. To OSR for Katz. Reference Department Repto 915, repeated Frankfort Repto 142.2
1. I feel that the utility of continuing economic aid to Western Germany needs to be examined in relation to broadest US foreign policy objectives rather than in connection with the new and considerably narrowed criteria indicated by reftel. In his report to the President on [Page 1624] foreign economic policies, Mr. Gordon Gray doubted that the attainment of our foreign policy objectives “… requires much more than foreign economic measures which by themselves cannot be effective. It requires adequate military defensive strength, sound political and diplomatic policies, a forceful informational program and the continual strengthening of our own economy.” The President, in endorsing the Gray report reinforced the declaration that: “The objective of our foreign policy has been and is to encourage among the nations of the free world those economic conditions and relationships essential for the development of stable democratic societies willing and able to defend themselves and raise the living standards of their peoples.”3
2. To adopt and implement the proposed criteria by suddenly terminating aid to West Germany would, in my view, constitute an administrative change which would seriously negate the thus far relatively successful administration of economic aid to West Germany under the policies in section 102 (a) (b) of the Economic Cooperation Act of 1948, as amended. During the crucial transition period, this proposal would, in effect, cancel recognition of economic recovery success under the old policies and would prejudice the defense role of West Germany under policies yet to be finalized. It would also diminish the chances of achieving a balanced and integrated politico economic foreign policy vis-à-vis West Germany’s role in the west defense complex and would create considerable and obvious difficulties for the US position in the coming Foreign Ministers conference.4
3. It is my own view that within framework of existing aid program we should use our influence to secure best economic defense posture for West Germany, leading up to the time when formal participation is assured. This has certainly been the sense of the US position in NATO and in PLI discussions.5 From this it follows that proposed legislation should not preclude West Germany from eligibility for aid in order that we may secure highest levels of economic activity of largest industrial nation in West Europe in preparation for full defense participation. In this connection it should not be difficult to demonstrate that Germany is now, in fact, making real resources contribution in forms of logistic support for the occupation forces; of coal exports to NATO countries over and above what she would export as a sovereign state, thereby diminishing her own export of finished goods exports to NATO participants.
4. If the basic policy is given that economic aid is an integral part of broader objectives of US foreign policy, then I can see practicality [Page 1625] of using principle of continued eligibility to attempt to secure from FedRep necessary adjustments in economic policy which are compatible with changing dollar aid and materials supply policies; and which are also compatible with present stages of political negotiation. But if this basic policy cannot be taken as established then the US position in Germany obviously becomes anomalous and needs to be redefined. It is on this understanding of our policy that I have today sent a letter to Chancellor Adenauer 6 stressing that the present payments crisis, the growing materials shortages, and the shifting criteria for dollar aid, require that the FedRep take the necessary credit measures and take immediate administrative corrective action in the fields of import priorities, internal allocation and priorities of materials in short supply, export priorities to essential NATO users, and effective priority for logistical support of our occupation forces. I have informed the Chancellor that “unless immediate measures are taken along these suggested lines, I can see little prospect that the Government of the United States can be persuaded to continue dollar aid or to assist the Federal Government in obtaining actual deliveries of essential materials and commodities”.
5. If this communication induces positive results, I must be in a position to ensure full amount of aid for FY 50/51 as well as eligibility for aid during FY 51/52. If the results are wholly negative and it is decided to diminish aid figure, we still need to ensure that sufficient aid and supplies are continued to avert food crisis. This will be discussed by Fraser in Washington.
6. Aside from the problem of defense criteria suggested by reference telegram, I cannot agree with many of its economic generalizations as related to West Germany’s present situation. Key to maximization German contribution is continuation and acceleration industrial expansion and export. Present time is most critical with, respect industrial development. German production only began to rise to significant levels during 1950, thus lagging two years behind other major PC’s. West German production index rose from 92.5 in first quarter 1950 to 130 in November (1936 as 100) compared with UK 140 to 150, and France 111 to 122 (1938 as 100) in same period. Apart from seasonal factors, which resulted in reduction index in December and January, maintenance of German production still not secure. West German economy dependent on food and raw material imports to exceptional degree, lacking DOT’s or sterling type of arrangement as source of imports and currency earnings. Aside from all other factors, I consider curtailment aid and consequent reduction imports at this time would entail serious risk of slump when essential indirect defense items first beginning to be exported in large volume. The major effect of such a slump would not be felt now, since additional aid in 1950/51 [Page 1626] can have little immediate effect on industrial development but rather on 1951/52 when Germany will undoubtedly begin to make a defense contribution as such. The depressive effects on the German economy during this period would be intensified by the restrictive actions likely considered necessary by the Central Bank. A more detailed analysis of this and other issues is being airgrammed.
7. German trade and payments position has likewise reached critical point now. Underlying causes current payments difficulties are: (a) Switch from dollar to non-dollar procurement; (b) Worsening of terms of trade since Korea; (c) More rapid and effective liberalization than EPU trading partners. Last factor largely responsible for 1949/50 payments difficulties, but carry-over remains, since amortization payments necessitated in 1950/51 and beyond.
8. Switch in German procurement from dollar to non-dollar, primarily EPU, has been most effective. Percentage total imports obtained from dollar area has dropped from 35 in 1949/50 to estimated 19 in 1950/51, while imports EPU area rose from 56 to 67. This shift has resulted in translation of major dollar deficit to major EPU deficit. As noted in the revised balance of payments forecasts 1950/51 airpouched March 2, net current balance with dollar area minus $170 million, with EPU area minus $494 million, latter requiring payments to EPU $202 million. German performance shifting procurement from dollar area recognized paragraph 7 reference telegram and I concur with OSR that we do not want Germans switch deficit back to dollar area. Recognition that dollar payments to EPU constitute part of dollar deficit and adjusting aid on this basis would give due recognition to German success in shifting procurement from dollar area and would prevent procurement reversal.
9. Dollar-wise, the worsening of Germany’s terms of trade most important factor contributing to current payments difficulties. This relative price increase obviously unforeseen at the time program developed factor and over which Federal Republic could exercise no control and has resulted in increase of deficit equivalent to roughly 10% of total imports or $340 million. Before Korea imports were beginning to catch up with exports and prospects were good foreign trade balance at low level; after Korea imports rose more quickly than exports as result of price rises and as West Germany entered new phase of greatly expanded economic activity. Therefore overall balancing of German payments has probably been delayed an additional year. In addition to normal lag between price rises of manufactured goods, which Germany exports, and raw materials, which Germany imports, a growing proportion of German exports consist of items such as machinery where prices are set well in advance of delivery. It will be several months, therefore, before the gap between import and export prices is narrowed. Unless sufficient aid is made available to bridge the gap, we [Page 1627] feel payments balance will be delayed a second additional year and total aid required for three-year period beginning 1950/51 would be $375 million greater.
10. Paragraph 6 reference telegram refers to indiscriminate commodity stockpiling and luxury consumption, charges frequently leveled against West Germany. While lack of inventory data precludes accurate determination extent, if any, of stockpiling, analysis available information does not support this charge. Stocks of imported iron ore, for example, [fell?] 11% in 1950, but in fourth quarter consumption was 19% above 1950 average. Scrap stocks fell 23% in 1950, reducing supply ferrous metallics by 400, 000 tons. Much of the dollar increase in imports, as noted in paragraph 9 reflects price increases. If this factor is taken into account, imports have increased in line with production, with the exception of some non-ferrous metals whose total volume is relatively insignificant. If dollar resources were available, a much larger volume of imports could be justified to support the expected growth in industrial output.
11. To date funds allocated covering entire recommended FY 1951 sugar program for 175, 000 tons but 557, 000 tons breadgrains and 366, 010 tons coarse grains still remain. Federal Republic has now pledged all measures recommended by me to provide maximum selfhelp to assist in solving imminent breadgrain crisis. Adenauer has increased grain prices sufficiently to expedite farm deliveries, reduce farm stocks, limit non-essential industrial use and has also increased flour extraction rate to level requested. These measures taken, although increase in bread price is very unpopular. These and other measures under way demonstrate rapidly growing awareness of Federal Republic of necessity establishing controls. Unfortunately even though these measures alleviate supply position, in view new EPU crisis, world supply outlooks, transportation difficulties, et cetera. Federal Republic must receive balance of approximately $72 million to cover balance recommended grain programs. We estimate even with balance being allotted Federal Republic breadgrain stocks end year will be at least 200,000–300,000 below last year’s highly undesirable level but expected heavy ECA arrivals July-September will assure farmers of reasonable supplies and prices during year and will create over-all outlook which will increase farm deliveries and prevent hoarding for speculation.
12. There is certainly basis for the contention that consumption of luxury items has increased. Imports of tropical fruits, vegetables, etc., have risen while imports of breadgrains have fallen in 1950. This spirit resulted from liberalization and served to improve both quantity and quality of German diet, which still lags behind other major West European countries in relation to prewar. International comparisons of per capita income and consumption are difficult to make, but examination of UN data for the other West European countries shows [Page 1628] that per capita income had exceeded prewar levels at 1948 in all countries but Germany and Italy. By 1949/50 it is fairly certain that other countries had reached or surpassed prewar per capita consumption. Germany’s consumption per capita in 1949/50, on the other hand, was about 90 percent of 1936, and 75 percent to 80 percent of 1938. By the end of 1950, it had probably reached 95 percent of 1936.
It is my view that consumption must continue to rise in the next years partly because of the incentive factor and partly because governmental policy should tend to maintain present workers wage levels, increase disposable income of presently unemployed, and scale down consumption upper income groups. This would spread consumption pattern more equitably but would result in total rise of between 5 and 7 percent by 1952/53.
13. To date Germany has received $270.1 million aid, consisting (a) $250.6 million regular allotment, (b) $8.2 million Yugoslav wheat and (c) $11.3 million GAEIOA transfers. In light of foregoing paragraphs, it is my considered judgement that total 1950/51 aid of $385.7 million be granted to Germany, made up of (b) and (c) above, $341.2 million S/M, and $25.0 million which I pledged on basis agreement reached with OSE and ECA/W in lieu of granting Germany initial EPU position and because of impossibility solving problem of drawing rights. In terms of revised balance payments estimates, this would involve increasing German reserves by $62 million while curtailment further aid would decrease reserves by $33 million. Federal Republic reserves $170 million June 30, 1950 and $168 million February 27, 1951. Paragraph 8 reference telegram agrees Federal Republic dollar reserves entirely inadequate now; further reduction $50 million could be seriously depressive and result in completely inflexible import program geared to dollar quotas imposed by exchange shortages rather than by industrial needs for defense program. Use of ECA aid concurrently to build dollar reserves not wholly without precedent. UK (sterling area) reserves rose by $400 million while receiving ECA aid from June 30 to September 30, 1950. French reserves, unchanged during same period, over $500 million. German reserves $170 million only 2.5 per cent current annual trade volume, the lowest of any major nation.
14. It seems to me that in the immediate instance the really pertinent question is this: Will the interests of US foreign policy and of western defense be better served by keeping the ECA allotment and maintaining the principle of continued German eligibility for aid or by cancelling them. In my view the answer is unequivocal. Given the present difficulties with the grain supply and the EPU crisis; given the impact of an increased occupation budget, the climaxing phase of Schuman Plan negotiations,7 the approaching Foreign Ministers [Page 1629] conference, and the complex divergences in German public opinion respecting defense participation, a cancellation of the ECA allotment and an undermining of the principle of future aid eligibility would seriously jeopardize the objective of US policy to “encourage those economic conditions and relationships essential for the development of a stable democratic society willing and able to defend itself and raise the living standard of its people.”
- Repeated to Washington as Toeca 244 for Acheson and Foster. This telegram was transmitted in three sections.↩
- Dated February 27, p. 1618.↩
- For documentation on Gordon Gray’s report to President Truman concerning foreign economic policy, see Foreign Relations, 1950, vol. i, pp. 831 ff.↩
- For documentation on the Four-Power Exploratory Talks at Paris, March–June, see pp. 1086 ff.↩
- For documentation on the revision of the Prohibited and Limited Industries: Agreement, see pp. 1344 ff.↩
- Not printed.↩
- For documentation on the Schuman Plan, see volume iv .↩