751.00/9–351: Telegram
The Ambassador in France (Bruce) to the Secretary of State 1
1412. Pass Harriman. This tel contains Emb’s analysis French econ and fin situation promised Embtel 1408, Sept 2.2
After postponement of as many decisions as possible during the pre-electoral period and long Cabinet crisis,3 new govt now attempting to formulate future econ and fin policies. All economic and financial indices indicate that it must do so against background of rapidly developing price inflation and attendant labor, budget, and balance of payments difficulties. Many of the decisions to be taken will be necessitated by previous but as yet uncompensated deterioration.
(1) Fol is price and wage picture. Recent 38 percent increase in price of wheat will soon be followed by increase of perhaps 30 percent in price of bread, as well as higher prices for many other agricultural products. Meat prices are already 42 percent over pre-Korea level. Price of coal, scheduled for increase of probably 10 percent, as well as prospective increases in electricity and transportation, will in turn exert upward pressure throughout industry. Influenced primarily by world inflationary developments fol outbreak Korean war, increase in gen wholesale price level in France amounted to 36 percent in first ten months after Korea. Some improvement since because of decline in prices of raw material imports, but new upturn now inevitable because of domestic price developments.
Since Korea wage levels have twice been revised upward, 11 to 12 percent fol re-establishment collective bargaining procedure in Aug 1950 and 6 to 7 percent fol revision of legal minimum wage in Mar 1951. However, deterioration in position of labor since March adjustment, brought on by rise in consumer price level of roughly 7–8 percent, plus further price rise now taking place or anticipated, make imperative new correction in field of wages. It is expected that minimum wage will be increased by at least 10 percent in early Sept and that gen wage increase of similar proportions will be obtained from forthcoming collective bargaining negots with employers. This will unquestionably create new upward pressure on prices. Renewed tendency of Frenchmen generally to hold goods in preference to cash can also be expected to accentuate problem.
(2) Position of French Treas has been one temporary source of encouragement during first six months of year. Tax receipts have held up very well because of improved collection methods and high [Page 423] yield of indirect taxes resulting from upward movements in production and prices. On expenditure side Ministries have been slow in making use of their appropriations so that Treas has been almost in balance during this period. However, govt may be plagued by financing difficulties towards end of year because (a) expenditures, particularly mil, are scheduled to increase sharply in last quarter, and (b) recent inflationary spurts appear to have substantially diminished even limited borrowing resources previously counted on for financing of investment program. Obvious necessity of eventually seeking increase in ceiling of direct advances from Bank France will be continuing source of concern.
(3) Recent developments in field of money supply and credit confirm inflationary signs noted in other areas. Available statistics for period since first of year suggest policy of considerable leniency on part Bank France in granting credit facilities to econ. Continuous upward revision ceilings on rediscounts established pursuant 1948 quantitative credit controls has resulted in swelling of discount portfolio to record levels. At same time Bank France has greatly stepped up open-market purchases (mainly Treas paper) to point where now almost double end 1950 figure. Since this shift of Treas paper from banks to Bank France not matched by increased purchases by banks from Treas, result has been provide banks with addtl resources for credit to business. In addition to steady rise in level of money supply, velocity deposit money now reported to be about 20 percent above 1950 rate of turnover. These inflationary factors in field of credit have been offset in part by deflationary effects developing B/P deficit and until recently by strong position of Treas. With upswing expected in public expenditures as rearmament program continues, credit policies and developments will become more crucial in struggle to hold inflationary forces in French econ under control.
(4) Industrial production has been expanding despite materials and coal shortages, but increases have not been spectacular. Figures for the second quarter were at an all-time high and preliminary reports for July show only a moderate seasonal decrease. Metal fabrication industries important for defense production finally regained their previous postwar peak in the second quarter of 1951 and maintained a high level in July. Steel production has been high but increases are unlikely and even maintenance of the present level is threatened by a shortage of coke and steel scrap. Increased imports of US coal are essential, not only for steel but for gen industrial production.
Present agric forecasts indicate some reduction from 1950 in most crops, with wheat output this year probably at least 10 percent lower. However, harvest shld be adequate to meet almost all France’s current consumption requirements, altho increasing concern is being expressed about next year’s level of stocks.
(5) Most immed cause for concern is uncertainty re extent of difficulties France will experience with its external financial position. Amount of Amer assistance and extent of US def expenditures in France are major unknown factors. Exports to all foreign countries have leveled off to annual rate of 2.7 billion dols while imports have increased sharply from annual rate of 3.2 billion dols in [Page 424] March to an annual rate of about 4.0 billion dols during June and July. Increase is for most part due to price increase in imports. Demands for free market dols after being substantially below offers since beginning of 1950, have been exceeding offers since middle of June 1951 and excess of demands recently has been substantial. Cumulative French creditor position in EPU has dropped sharply from 260 mil dols in middle of Apr 1951 to 158 mil dols on Aug 2, 1951. Official gold and dol holdings have fallen 80 mil dols (about 10 percent) during same period. Gold and dol quotations have also deteriorated somewhat during past month. The napoleon has risen from 4100 francs to 4300 and black market dol from 365 francs to 390 francs. This development has occurred altho tourist season is in full swing and farmers have not yet entered gold market with harvest profits. Further indication that flight from franc has increased is fact that substantially larger number of tourists are financing themselves with imported French francs purchased on free currency markets New York or Switzerland at roughly same price as Paris black market rates.
It is in this atmosphere that Mayer must present his 1952 budget to Parliament and make a decision as to the extent of increases possible in military expenditures. He must also take into account a number of other unfavorable factors, of which most important are declining budgetary receipts from ECA assistance and addtl demands on Treas to cover social security deficit and finance price subsidies on certain imports, particularly coal. No reliable breakdown of 1952 budget figures now in preliminary stages of discussion in French administration is yet available to us. However, assuming mil budget in 1952 at level used by ECA in congressional presentation (1120 bil francs in 1950–51 prices) and making generous allowance for new taxes, French officials say budget deficit wld still be such as to necessitate considerable volume of direct advances or other forms of inflationary financing by Bank of France.