The Secretary of State to the Embassy in Italy 1
1. Fol is joint State–ECA–Defense message promised Ecato 452 and Depcirtel 388.3 This message intended constitute framework for bilateral negots with Ital Govt regarding Ital def program for period from present to end FY 1951/52 and on US dol aid for same period. In view time factor these negots will include and merge with those contemplated in Deptel 2669, Dec 27,4 re Ital 250 billion program.
2. Basic objective US policy is maximum possible fulfillment by Ital from Ital resources of Ital share of MTDP within shortest possible time period.5 In accordance with that objective these negots have as their purpose:
- obtaining of such modifications in present and proposed Ital mil program as are necessary (based on an evaluation adequacy of that program in light MTDP requirements and Ital capabilities) assure maximum Ital contribution;
- inclusion in Ital def program of those budgetary provisions and econ and financial control measures which are essential for translation program from plans to realization;
- to give Ital Govt assurances as to extent US dol aid to be forthcoming, based upon undertaking and execution of (a) and (b). (Such dol aid to come from both MDAP and ECA appropriations [Page 553] for FY 51 and from FY 52 econ appropriations for support Eur def effort.)
3. Two facts in present situation which particularly affect both content and timing negots are:
(a) existence Ital proposals for increased def appropriations and for econ control measures;
(b) US need for reasonably clear commitments from Ital Govt prior to Mar 1, which will be convincing to us and to Congress in seeking and obtaining appropriations for FY 51/52.
Adequacy of Program
4. Clearly evaluation of adequacy is continuous and dynamic process as tasks are clarified and performance assessed. As generalization, adequacy can be measured in terms timely fulfillment assignments under MTDP. Such assignments have not yet been completely determined either for forces or for production. Time phasing for completion has not been fully determined and in any event is subj adjustment. In circumstances, clear can neither endorse present and proposed Ital mil program as fully adequate nor precisely define what fully adequate program wld be.
5. We cld, however, subj the Ital program to certain criteria which relate to adequacy:
- does program provide for raising and/or maintenance those forces which Ital shld have under present assignments and phasing of MTDP?
- does program provide for substantive improvement these forces?
- does program provide for production in Ital of equipment required by those forces to maximum extent compatible with Ital capabilities and resources? (While clearly US aid will provide substantial part of equipment requirements, increasingly important Itals recognize their primary responsibility for equipping their own forces and that US end item programs cannot and will not provide equipment which can and ought to be produced by Itals. For purposes of US evaluation only, we think a pragmatic approach to problem wld be for MAAG, taking into account current and recommended end item programs and proposed Ital production program as it is developed and refined, to identify important equipment deficiencies for forces referred to in (a) which Itals cld produce. Using Ital costing data, expression these deficiencies in financial terms cld be used to define roughly and incompletely short fall in Ital production outlays);
- does program, taking into account both polit and econ considerations, represent maximum obtainable level and speed of expenditure and real effort of which Ital is capable? (For this judgment neither we nor Itals shld regard present incomplete MTDP phasing as representing fastest pace that is desirable. Also note that 250 [Page 554] billion program now defined as 18-month effort (Rome 30616) was originally described by Pella as capable of implementation in 12–15 months (Toeca 13717) and that Blue Book revision recommended Toeca 598 also assumes completion by end calendar ’51. Obviously caution must be exercised in this connection bearing in mind present status Peace Treaty limitations. FYI we do not want Blue Book figures regarded as ceiling or maxima.)
6. Clearly answer to 5(d) is one that can be given only in terms of existing polit climate. Have been encouraged by evidences growing popular understanding in both govt and non-govt circles reflected various recent report (Rome 30579). We wld expect that as confidence is gained and strength of NATO increases it wld be possible achieve both increase in and acceleration of expenditure and effort. What is immed required is judgment of Ital program under 5(d) related to the present time. In other words, can we, in your opinion, obtain now or in the next 60 days, realistically expect obtain a higher level and rate of expenditure (or commitment thereto) than is envisaged in current Ital proposals? If we cannot, Ital program still must be assessed in light of 5(a) and (b) and production portion evaluated as is currently being done (Embtel 3061, Jan 16). If it is determined that a greater amount can be secured, such funds wld presumably be applied to either forces or production as examination of program’s adequacy might indicate most desirable. We also desire your best judgment as to what wld constitute adequate Ital def effort for next 18 months.
7. Pertinent to foregoing, our view is that we do not want the quest for a fully adequate effort to delay taking of steps which are clearly directed toward that goal. On other hand, we do not want by aiding an inadequate program, to imply it is adequate or that it shld be regarded as anything more than step in right direction which must be followed by succeeding steps as goal is more clearly defined or capability increases. Particularly we do not wish in any way to slow up fastest initiation and implementation of 250 billion def program. Tarchiani has announced here Ital firm intention to go ahead with this program without awaiting conclusion of negots. Has any similar public statement been made Rome?[Page 555]
Economic and Financial Control Measures
8. While, as previously indicated, basic US objective is to get maximum Ital contribution to achieve goals of MTDP and securing this objective is basis for and condition of US assistance, it is view here that merely making appropriations does not constitute assurance that program will in fact be undertaken and successfully executed. Ital action reported in Embtels 293810 and 298911 indicates they realize that realization of plans will require variety concomitant econ and fin control measures.
These measures may be generally grouped in two categories:
- Those measures of [or] controls which we believe Ital Govt wld agree are essential to execution of production program and which will ensure defense producers of command over all necessary resources, both physical and financial;
- Those measures or controls which are necessary to maintenance within Ital of a politically tolerable standard of living; to assure an equitable distribution within Ital of burdens of def effort; and to assure maximum application of Ital resources to def effort, i.e., to reduce the requirement on the US for aid.
9. We regard measures falling within category 8(a) as integral parts of an adequate def program. Evidence their inclusion in govts defense program and of creation of adequate administrative machinery implement them, as well as a general undertaking or assurance with respect such measures wld be regarded as an integral part of conditions on which an agreement to provide US assistance wld have to be predicated. Such evidence might take form of an irrevocable and clear commitment by Ital Govt in a clear statement before Parliament on significance emergency powers requested, together with initiation admin machinery necessary make such powers effective.
10. Measures falling within category 8(b) are similarly related in our mind to successful realization our common objectives with Ital. It is essential that there be a sound econ and polit base if true defensive strength is to be achieved and maintained. It is also essential US aid supplement and not supplant Ital effort.
11. We realize it is unrealistic suppose that either we or Ital Govt cld postulate and define with finality or assurance measures which wld guarantee ideal result over next 18 months. Also appreciate that even though such a detailed blueprint existed, no govt cld be expected to be able secure its adoption and execution overnight or perfectly. Do not wish increase Ital reliance on US as a substitute [Page 556] for Ital initiative, nor to place ourselves in position dictating to Ital Govt ways in which it shld execute its responsibilities. Nevertheless, believe neither Ital nor US can attain their common purpose if Ital Govt does not exert itself to maximum practicable extent to do at once those things which clearly must and can be done in way of econ and fin control measures, and continuously thereafter to adopt such further measures as situation may require. The Ital Govt may also be more disposed and be in stronger position take such action prior to our making precise commitments with regard to aid.
12. In other words we desire obtain prior to committing ourselves to aid, assurances, both to Ital public and ourselves, that Ital Govt has undertaken or agreed undertake all practicable measures required assure realization plans and objectives. We realize of course we cannot expect all such measures to be taken before conclusions reached on size Ital program and US aid. Extent and nature measures, as well as scope and form of assurances with respect thereto involve reaching judgments based upon estimates of polit feasibility as tested by actual negots.
13. FYI and consideration, current Wash thinking as to what Itals might find it necessary to do to accomplish in terms objectives indicated in paras 14, 15, and 16. These are illustrative and tentative views.
14. To meet objectives referred to in 8. Wld appear inevitable that:
- Fiscal and fin policies be adjusted and geared to attain objectives of adequate def;
- Concrete program for entire economy as well as for mil production be outlined and continually refined so that specific individual measures may be related to overriding natl aims;
- Planning be realistic (having in mind in contrast to “planning” as embodied in original Long Term OEEC program in which sets of mutually inconsistent goals lumped together without means of implementation).
15. Means available to Ital Govt appear to fall within three major fields:
(a) control of distribution of essential raw materials;
(b) credit and financial measures;
(c) effective utilization and control of state and state-owned industries.
Measures in these fields might include, inter alia, the fol (these are tentative views):
With respect to (a):[Page 557]
- Estab priority ratings for use critical materials actually or potentially in short supply, eliminating such sectors as luxury housing, cinemas, restaurants.
- Taking over distribution and allocation of some or all of these materials (especially imported raw materials), if it appears that adequate control can better be estab by direct govt operation than by attempted policing activities.
- Setting of ceilings on permitted stocks of these materials held in private hands.
- Consideration of undertaking utility, clothing and basic food rationing programs, together with price controls of such items, as possible means of protecting low income consumption standards.
With respect to (b):
- Estab of qualitative, as well as quantitative, credit control measures on basis of series effective priority ratings related to those used for material allocations. Maintenance of an effective organ for outlining and requiring bank compliance with such sector criteria.
- Making govt credit resources available in adequate quantity to defense production and related priority sectors in order to insure that these activities, perhaps less attractive from banking viewpoint, are not impeded by exorbitant bank interest rates. Low cost credit may be particularly important if govt contracts, because budgetary residue system, involve long waiting period before actual payments recd, with consequent increase in interim financing needs.
- Speediest possible implementation new income-tax law, and effective collection of taxes. (There must be greater assumption of burden by middle and upper-income groups.)
- Exploring possibility of forced savings as alternative or complement to higher taxes.
With respect to (c):
It will be necessary obtain overall improvement in planning techniques and admin machinery of state enterprises. Major share of Ital idle capacity suitable for defense production is concentrated in these industries; there are also sectors where govt has most immed available means of obtaining swift and concrete action. Therefore, recent tendency towards liquidation govt’s role in these plants shld be changed into drive towards reactivation, coordination, expansion.
16. Specific action program ought to be formulated by Ital Govt. Such program shld include not only sufficiently broad legis powers but also adequate admin machinery implement them. It will probably prove necessary adjust or change present admin machinery or create new ad hoc instruments. Defense Production body staffed so as to include non-govt experts and in which industry and labor representatives participate wld seem to be one of the first necessary steps.[Page 558]
17. Based on foregoing and your considered judgment present Ital situation, urgently desire your views with respect extent and nature assurances and evidence which shld be sought now, as well as your views re most practicable use of US elements in Rome, London, or Washington to achieve objective. We envisage negots centering in Rome but supported, if feasible and desirable, in London and Washington, and if necessary by special mission (Depcirtel 388, Section IV).
Measure of Dollar Aid Requirements
18. No meaningful dol aid requirements can be measured except in relation to: (1) specific time period and (2) needs of total economy. Dol aid can not relate solely to “incremental” defense program without reference state of or changes in rest economy. This implication seems to us constitute main drawback use unqualified multiplier approach of Ital memo. Realize that present US legis operationally incompatible with total aid approach, and will later analyze possible interim solutions and future legis outlook. These, however, are purely technical aspects and must not obscure central point that aid must relate to total needs of economy organized for certain level of mil effort rather than to mil production alone. Over and above logical and operational difficulties of segregating “additional aid” from “normal aid” is importance of maintaining principle that neither Ital nor US Govts can accept as normal any econ (or import) pattern which shows no evidence adjustment post-Korea exigencies. (This gen principle must particularly be stressed in country whose ability attain dol B/P equilibrium at tolerable standard of living was questionable before Korea. On one hand, it cannot be affirmed that Italy wld have lacked legitimate case for dol aid even had there been no question of additional defense effort. On other hand, there must be no suggestion that because of this fact Italy can expect receive “normal” aid if it fails take such steps as are necessary in light changed world situation.)
19. Appropriate amt aid for Italy shld cover impact on dol balance of payments generated by needs basic econ operating at level capable supporting necessary defense effort. Noted that Ital Dec 19 memo, in original form, advanced claim for dol aid cover any worsening in total B/P position. Agree completely with Mission’s disallowance this claim. We wld of course expect reasonable utilization on part Ital Govt of existing non-dol reserves and credit balances as part adequate defense effort. At same time, we realize that substantial and protracted worsening of total B/P position wld, under present EPU and other payments arrangements, lead Italy into dol settlements, which we wld be prepared consider as legitimate claim.[Page 559]
20. We have already accepted and in fact emphasized fact Ital defense effort will inevitably increase consumption and therefore import demand those sections population previously unemployed or underemployed. So far as this import need is (1) dol and (2) clearly of reemployment character rather than across-the-board consumption increase, we consider it legitimate charge on defense program and claim for aid. However, US acceptance such charge must be accompanied by appropriate and effective steps on part of Ital Govt control rise in import demand generated by unjustifiable increase in consumption on part other sectors of population.
Techniques of Extending Aid
21. FYI we are outlining methods extending aid immed available US Govt with respect funds presently appropriated under ECA and MDAP Act. Reiterate, however, we consider various alternative methods purely as techniques; their differences must not be allowed obscure previously indicated necessity for considering aid requirement as totality. Also wish emphasize two related points: (a) we must not delude ourselves or Itals into believing that increase in actual physical supplies over legitimate requirements levels—or indeed over levels set by world supply position—will automatically flow from increase in dol aid estimate. (b) Secondly, specifically, in Italy and at this stage Ital reserve position, we cannot assume or imply additional dols which cannot be translated into legitimate commodity needs are justifiable. Such dols wld simply go towards increase Ital reserve level. Quite apart from dubious anti-inflationary effect in any country of such increase, this tendency cld be particularly questionable in Italy as evincing continued existence of what might be called “reserve” as opposed to “real resources” approach fiscal policy. Feel it important establish these points to prevent any possible confusion over purpose or effect such techniques as off-shore procurement in Italy or “liberalized AMP” procedure. In line with this approach, present thinking in executive branch is directed towards legis for next FY under which there wld be no administrative distinction between ECA and mil funds.
22. Fol four techniques for extending dol aid either from MDAP or ECA appropriation available for current FY:
- Present AMP project procedure. Forthcoming response Rome 296612 will deal in detail with suggested res of difficulties that have arisen in Italy over use this method.
- Somewhat more liberalized AMP procedure. This might develop along fol lines: ItalGov wld submit on Form 202 request for imports, [Page 560] requiring payment in dols, of materials of type also being consumed in production mil end-use. For example, if certain tonnage of cotton will be consumed in Italy for uniforms production for balance of current FY, ItalGov cld submit on Form 202 request for MDAP fin this quantity imports of US cotton, regardless of whether particular cotton imports financed with MDAP funds were or were not used for uniform production. This procedure might also be conveniently applied nonferrous metals. Possible advantage this method wld be purely in US administrative flexibility, since procedure wld free ECA funds pro tanto for fin additional dol imports if such freeing considered desirable or necessary. Procedure cannot be considered as waiving of requirement that request must be for legitimate dol import requirements under criteria spelled out above.
- Offshore procurement using MDAP funds. It is legally possible to use MDAP funds for offshore purchases in third areas of imports requiring payments in dols, provided these imports are used directly and specifically in Ital defense production. It is also possible to use MDAP offshore procurement dols purchase defense items in Italy for account either other NATO countries or even ItalGov, thus providing ItalGov with dols. Such dols might or might not be made subj programming requirement similar to ECA dols or liberalized AMP procedure outlined para (b) above. On whole, feeling here is that these off-shore procurement techniques are neither desirable, practical, nor expeditious method of extending dol aid and shld therefore not be used unless combination of other methods proves inadequate to extend amt of dol aid which we wish make available.
- Final method is increase in ECA allotment in order extend amt of dol aid determined necessary and justified. These funds wld of course be administered under ECA procedures and screened according to criteria paras 18, 19, and 20.
23. In gen, our feeling is that combination of (a), (d), and possibly (b) above will prove most expeditious and simple method extending aid during FY. Your views and suggestions desired.
24. You are accordingly requested negotiate with Ital Govt with view obtaining commitment to level of mil effort for current and next fiscal year which is adequate in terms criteria indicated paras 4 and 5. If in your judgment 250 billion expenditures program in 12 months period is maximum obtainable commitment during next 60 days (para 6) you are authd advise and negotiate with Itals on this basis:
- We regard program as less than adequate in terms fulfillment MTDP and wld expect Itals make adjustments in level and rate of effort as needs of MTDP are more clearly defined.
- We are gratified by Ital initiation budgetary outlays and control measures as indicative their realization magnitude problem.
- Itals may be informed that varying with scale of Ital mil
expenditures in 1950/51 and 1951/52, we are prepared
consider US aid (from both ECA and MDAP
funds for FY 1951 and from
new appropriation for FY
1952) within ranges of $80–$100 million for 50/51 (over and
above last ECA allotment)
and $150–$275 million for 51/52, to support of adequate
effort measured in terms criteria indicated paras 18 and 19
above, provided we can be satisfied:
- Program is militarily sound in composition;
- An adequate program of control measures is being undertaken;
- Need for greater effort will be continuously reviewed.13
25. Meantime ur views questions raised paras 6, 7, 17, and 23 urgently desired.
Drafted by John O. Bell, Assistant Director of the Office of International Security Affairs, and cleared with Harlan B. Cleveland of ECA, Colonel Van Syckle of Defense, and Whitman and Petersen of EUR; sent by pouch to London, Paris, and Heidelberg.
In a memorandum to the Director of the Office of Western European Affairs, Homer Byington, Peterson compared the original ECA draft of this telegram with Bell’s first draft and stated that Bell’s draft was a great modification of the original which “was highly critical of Italian defense efforts and contemplated far-reaching socialist type controls of great specificity to be demanded as a condition of U.S. support.” Both the ECA draft and Bell’s draft were subsequently modified before concurrence was received from EUR which objected to the idea of spelling out in great detail how the Italians should run their own economy. (Memorandum, January 25, 765.00/1–2551)↩
- Not printed.↩
- For circular telegram 388 of January 15, which outlined the framework for negotiations with NATO countries concerning their defense efforts, see vol. iii, Part 1, p. 29.↩
- Telegram 2669 provided the Embassy in Rome with tentative suggestions concerning how to negotiate with the Italians concerning an increase in their defense production. (765.5 MAP/12–1950)↩
- For documentation concerning NATO’s Medium-Term Defense Plan (MTDP) under reference here, see vol. iii, Part 1, pp. 1 ff.↩
- Telegram 3061 informed the Department of State of conversations with Italian defense officials who explained the tentative breakdown of Italy’s military production and procurement program for the next 18 months. (765.5 MAP/1–1651)↩
- Not found in Department of State files.↩
- Not printed.↩
- Telegram 3057 reported that the CISL was urging the government to approve of emergency measures for the rearmament of Italy, recommendations which in certain respects were “ahead of those of [the] government”. (765.00/1–1651)↩
- Document 242.↩
- Telegram 2989 reported that the Italian Government approved of a provisional measure whereby a census of existing stocks of certain critical raw materials would be taken. (865.00/1–1151)↩
- Telegram 2966 requested that the Department of State inform the Embassy whether or not procedures had changed or were being relaxed for securing support for AMP projects. (765.5–MAP/1–1051)↩
- Telegram 3150 to Rome, January 24, informed the Embassy that the following sentence should be inserted at this point in the source text: “As to exact amount such dol aid, for balance 50/51 and for 51/52, we await your recommendation after full review adequacy mil effort and problem adequate internal economic policies and measures.” (765.5–MAP/1–2451)↩