ECA message files, FRC 53A278, Paris: Telegram
The United States Special Representative in Europe Under the Foreign Assistance Act of 1948 (Katz) to the Administrator for Economic Cooperation ( Foster)1
Repto 856. For Foster and Bissell (limited distribution).
1. Marjolin has prepared for ministerial meeting, probably May 9, paper [TFD/DI–60 (second rev.)]2 entitled “Immediate Tasks of Economic Cooperation Between The Members of OEEC, The United States and Canada”. Expects discuss with you Monday3 so as to cable suggestions for revision by Secretariat Tuesday and discussion with heads delegations here Wednesday. Appreciate your comments Tuesday.4
2. Text given below had been discussed with US, UK, French, Italians and Dutch. May be revised in light such discussion before Marjolin delivers to you. Principal comments were:
- (a)
- We thought paper useful. Suggested rewording paragraph 27 to omit second sentence, make clear that attitude of US mentioned as important factor relevant to choice of organizational set-up rather than in context demand by PC’s that US play more active role. We indicated hope for maximum US participation but would like proceed on ad hoc basis and would not want our encouragement submission paper be construed as general commitment by US. Marjolin indicated importance exchange of views with US re such matters as price and credit policies. Hall-Patch speaking personally stressed need forum for general exchange views and coordination economic policies with US.
- (b)
- UK preliminary official attitude so far lukewarm but may modify [position?] further discussions Hall-Patch London over week-end. Believe paragraph 18 re tariffs too sweeping. Skeptical whether “tinkering with tariffs” will have long range effect against inflation. Would involve colonial and commonwealth complications. Preferable to stick to GATT. Raw material solution must come first. Why not wait and see what Stikker mission accomplishes.
- (c)
- French generally favorable. Outcome should be concentration on trade liberalization especially through common list, tariffs, coordination of internal controls and exports, procedures for expediting work of OEEC. Marjolin believes OEEC tariff program should await termination Torquay.
- (d)
- Italians suggest more emphasis need for common action but more flexibility re details.
- (e)
- Dutch would soft-pedal political issues paragraph 24. Need for common action on inflation real but hard to demonstrate.
3. In view present UK attitude Marjolin uncertain whether to present to ministers. Will decide on basis comments at Wednesday meeting.
4. If submitted, paper would be accompanied by (a) report of Stikker mission, (b) report of vertical committee work, (c) paper on urgency increased food production, (d) paper on harmonization internal controls.
5. Text follows:
“Introduction.
1. It is nearly six months since the Council examined a memorandum by the Secretary General on urgent economic problems. That paper drew the attention of the Council to a number of dangers menacing the economic stability and health of the western world. The most important, each closely linked to the other, were the following:
Inflation, and the need to combat it by all methods, in particular by increasing production.
Inequality of access to raw materials, uncertainty about future supplies and increasing prices.
Interruption of the progress towards that creation of a single market in Europe, and even reversal of the steps already taken.
2. Without recapitulating the previous paper, most of which remains valid, it is desirable to look again at those problems for which concerted action is still required. The question of where such concerted action should be taken is of secondary importance. What is essential is that agreement be reached on the major questions and action taken without delay.
3. Of the three aspects of the major problem treated in the memorandum of last October and summarized in paragraph 1 above, decisions have been taken to deal with the second aspect in Washington, and this part of the problem is not further discussed in this note.
Inflation.
4. The memorandum written last October dealt with the problem of inflation in the following words:
(Here follow three paragraphs from the October memorandum beginning ‘the forces making for inflation have not yet had time to come into full play’.)
5. Since then there has been serious deterioration of the situation; inflation is no longer merely a threat, it is a fact. Raw material prices have increased. Prices of Egyptian cotton and wool on the United Kingdom market have risen by some 50 per cent since October; the prices of mercury and tungsten have practically doubled: [Page 7] the prices of tin, paper, pulp, hides and skins have risen by 30–40 per cent. There is hardly a single important raw material the price of which has not risen substantially since October. These price increases are in addition to the very large increases which took place between June and October 1950. Largely as a result of the steep rises which have taken place in raw material prices, import prices in certain participating countries have increased from 10–20 per cent since the second quarter of 1950; they are still rising and will rise further as recent price increases become more fully reflected in the figures. The rise in import prices has been accompanied by a deterioration, since the second quarter of 1950, of the terms of trade in many participating countries.
6. There are already signs that price increases flowing from the movement of raw material prices are spreading throughout the economy of the western world. Wage rates are inevitably rising and in almost all participating countries rose by some 5 per cent in 1950. These movements can hardly be kept in check in the face of increases in wholesale prices in many participating countries of 10–20 per cent since June, 1950, marked increases in the cost of living in some and a significantly rising trend in many others.
7. These developments are the more disquieting in that the actual impingement of rearmament on the economies of the western world is still very slight. Though large sums may be programmed for defense, or even appropriated, comparatively little has yet been spent either in Europe or North America. The events of the last six months show the impossibility of holding the economy in balance unless all available checks are imposed. Physical controls may be used to direct the supply of raw materials into the desirable channels of production or negatively to limit their use in nonessential production. Fiscal policy may be adequate in that the government accounts show a current surplus. Yet even in countries where both these policies have been adopted but have not been accompanied by a very strict credit policy inflationary pressures have developed at an alarming rate. It is essential to bring these pressures under control. If allowed to develop unchecked inflation can not only endanger the social and political fabric of the whole western world, and undo much of the recovery which has been achieved, but also frustrate the rearmament effort itself.
8. No single movement has been more responsible for the very serious deterioration of the situation since last October than stock-building. All classes of the community, merchants, manufacturers have sought to build up stocks of raw materials, manufactured goods and foodstuffs. It is this, not defense expenditure, which has led to shortages and increased prices. At this stage of the inflationary process it is essential to reduce the supply of money at the disposal of all sections of the community. Such reduction can be made either by fiscal or by credit or monetary policy. General measures of this kind have the virtue of working throughout the whole economy, without leaving the loopholes inevitable when physical controls alone are used. When such restrictive measures have been taken it may then be necessary to take carefully devised selective action in the contrary sense in order that essential production be not hindered by financial difficulties.
[Page 8]9. Responsibility for imposing the necessary restrictive measures rests on each individual government, particularly on the major powers whose economies have the major effect throughout the western world. But discussion between governments is essential for two reasons. In the first place, the inflationary pressures in each country react on each other. It is the concern of all that each take adequate steps, and it is only by a general examination that the gravity of the problem can be weighed and the adequacy of the measures taken judged. Secondly, it is certain, for some governments at least, that it will be of assistance to them in carrying out a necessarily unpopular policy if they are able to show that it is part of a collective effort to combat inflation.
10. The development of inflationary pressures during the last six months have for the most part been due not to increased defense expenditures but by a presumption that these expenditures will lead to shortages and to inflation. But during the course of 1951 the increased defense expenditures will have a direct effect; they will constitute a significant increase in the demand on available resources. Demand must be kept in balance with resources. It will be necessary at least for a period to achieve this balance by a reduction of demand, whether of investment, consumption or nonmilitary government expenditure. But the only satisfactory way of bearing the armament burden in the coming months and years is by increasing production. In view of the severe strain there will be on all resources the proper direction of the effort to increase production is as important as the effort itself. It is essential to concentrate on the key products essential for the balance of the economy as a whole.
Increased Production.
11. The most serious failure in Europe since the European Recovery Programme began has been in coal production. Production in 1950 was 7 percent below the target set at the Paris conference in 1947. The price now being paid in Europe for that failure is high, and may become higher. Unless great improvement can be achieved rapidly, the required degree of expansion of European production will not be possible. Indeed there is a grave danger that for lack of coal the present level of production cannot be sustained. Coal is the product par excellence increased production of which can yield greatest results in checking inflation. Failure to mine sufficient coal would strengthen tremendously the inflationary forces now at work.
12. This is a challenge to all Europe, and in particular to the main producing countries. Immediate action, both national and international is necessary. A plan to increase coal production, with, where necessary, cooperative action to overcome all shortages, whether of manpower, machinery, housing or materials, is called for urgently.
13. If sufficient coal is not produced, there will assuredly be an immediate shortage of steel. But, even if adequate coal can be mined it is questionable whether in present plans there will not be a steel shortage that will hinder the expansion of the European economy in the future. It may be wise to sacrifice some steel immediately [Page 9] in order to increase steel output in three years and thus be in a position either to support an increased armaments burden, or to release steel in greater quantities for civilian use. This question should be examined immediately.
14. The additional load that is going to be placed on the economy will almost certainly lead to an increased demand for foodstuffs. Yet on the other hand, if positive action is not taken to encourage food production and to ensure adequate supplies of fertilizers and agriculture machinery for the farming community, there may be a decline in food production. The same result may follow if food prices fall out of line with the prices of raw material or manufactured goods. The heavy demands for shipping space may curtail imports of bulk foodstuffs, a situation if not of acute shortage at least of tightness of supplies and consequent distribution difficulties is only too likely to develop. The guard against these dangers, a food production program should be initiated in Europe immediately.
15. The industrial countries must recognize that they will not be able to obtain increased supplies of the war materials and foodstuffs they import unless they are able to supply in return capital and consumer goods. Indeed, even the present quantities may be endangered if the necessary exports are not made available. In the absence of such exports, there will be inflation in the producing countries, and no incentive to increased production. Without an assurance that such exports will be forthcoming, the producing countries may well refuse to accept international discipline in the handling of their produce. Indeed, some of them are already adopting such a policy.
16. This is a matter of great concern to the industrial and raw material producers alike. The reverse of the adverse movement of the terms of trade for the industrial countries is a favorable movement for the raw material producing countries. Neither party is well served by movements which may disrupt the economy of the western world. There is no advantage for the producing countries in accumulating balances in the currencies of the industrial countries when their need is for goods. Yet by wise policies the interests of both can be met. Provided the exports of both consumers and capital goods can be assured, and provided that some part of the increased funds in the producing countries resulting from higher prices can be channelled into investment to increase the production of scarce raw materials, the industrial countries can be assured of increasing supplies and the producing countries will be spared inflation.
17. It is important that the maximum emphasis be put on the production of raw materials and foodstuffs. In order that balance in the economy of the western world may be preserved, industry as such must not be built up far in advance of the forseeable raw material supplies.
Reduction of Trade Barriers.
18. The present dangers of inflation make essential reduction of barriers to trade, whether those take the form of tariffs or quotas. Immediate and empirical action is needed. Each country not hindered by balance of payments difficulties should take individual [Page 10] action, if necessary for a limited period, to reduce or suspend its customs tariffs and to remove quantitative restrictions on imports. When the major danger is inflation, there is no justification for maintaining obstacles to trade where they cannot be demonstrated to be essential, and particularly when they are protective in their effects.
19. In addition to these empirical and individual measures, the present circumstances afford a favorable opportunity for a further collective advance in this field, provided that new methods are now adopted. While it is not true to say that the limit has been reached of what is desirable to do in the way of eliminating quantitative restrictions, it is probable that no further advance can be made for the moment by the percentage method. Action now needs to be taken in the field of tariffs and by methods more general and more automatic than have hitherto been followed in the GATT negotiations. In that field in particular there is advantage in action being taken on as wide a front as possible, not confined to Europe only.
20. For such action a decision of principle of governments is necessary. The delay in working out of the plans submitted to the organization last summer by the governments of the Netherlands, Italy and France shows how necessary such preliminary decisions of principle are, if action is to be taken promptly.
21. The action already being undertaken by the organization with a view to the harmonisation of controls both of internal consumption and exports must be pushed on with all speed if an attack on trade barriers is itself to have any chance of success. It is unlikely that progress can take place in the absence of such harmonisation; indeed, if no such harmonisation can be achieved, there is even a serious risk of nullification of the measures which have already been taken. But the implementation of the unilateral measures suggested in paragraph 17 should not be delayed while such harmonisation measures are being worked out.
Summary of Urgent Tasks.
22. In this memorandum attention has been concentrated on the need for decision and action to deal with a limited number of the most urgent problems with the exception of those connected with the distribution of raw materials of worldwide interest. The following are the problems which have been sketched.
- a)
- The need for a strict credit and fiscal policy to restrain the existing inflationary pressures.
- b)
- The need for a plan to increase production of coal and steel.
- c)
- The need for increased production of foodstuffs.
- d)
- The need to assure exports of capital and consumer goods to the countries producing raw materials and foodstuffs.
- e)
- The need to reduce trade barriers, both by individual and by collective action.
23. These immediate problems are very closely linked together. All are directed towards maintaining stability throughout the free world and combatting inflation. Some of them are entirely within the immediate responsibility of the governments to which this [Page 11] memorandum is addressed. Some are of world concern, affecting other governments whose interests must be respected and who must in some way be consulted. But these latter affect so vitally the twenty governments that it is not possible to ignore them in this document. Indeed the economies of some of those twenty countries are so powerful and their importance in world trade so great that to a large extent they are able by their decisions to affect fundamentally, whether for good or for ill, the economies of the whole free world.
The Problem of Organization.
24. Previous memoranda submitted by the Secretary General have ended with detailed proposals on the place and the method for dealing with the problems raised. The problems raised in this paper are so urgent that it would have been desirable on this occasion also to make proposals for dealing with them. Unfortunately, such is the present organizational complexity that it is not possible for the Secretary General to make detailed proposals without dealing with problems that are beyond his competence. The most important issue is the discussion and solution of the urgent problems dealt with in this memorandum, and organizational problems are of but secondary importance. Nevertheless, decision on organization for discussion and solution of these problems is nonetheless most urgently required. It appears that any decision on this organizational question should be made in the light of the following considerations.
25. Firstly, while governments are today faced with a series of urgent problems dealt with in this paper, new problems will arise tomorrow. It is essential that arrangements be made for discussion and solution of urgent problems as they appear. We cannot afford to waste months in deciding in respect of each problem where it shall be treated.
26. A second consideration is that the problems arising cannot be discussed piecemeal. One part of the problem, that of the distribution of raw materials of worldwide concern, is already to be treated in Washington. Provided that very careful arrangements are made for coordination and liaison, it is possible for the other aspects of the problem to be treated in another continent and a different organization. But further fractionalising of the problem is not compatible with the efficient conduct of business, and will lead to confusion, not solutions.
27. The last and overriding consideration in deciding the place and organization for such discussion is the position of the United States. Without the full participation of the United States, no fruitful discussion can take place. It is not only that by its very weight and power the United States is by its own policies able to influence more powerfully the march of events than any other member of the Atlantic community; other members who have worldwide interests and commitments, will find it increasingly difficult to discuss the heart of the problems facing them if the US is not participating fully.
[Page 12]28. It is for governments to decide the most appropriate place for discussion and solution of these problems in the light of these and other relevant considerations.”