711.41/9–651
Memorandum of Conversation, by the Assistant Secretary of State for Economic Affairs (Thorp)
Subject: Report on Meeting at ECA at 2:30 p.m.
| Participants: | Mr. Hugh Gaitskell, Chancellor of the Exchequer, Sir Edwin Plowden; Mr. Denis Rickett; Sir Sydney Caine; Mr. Armstrong (Mr. Gaitskell’s private secretary); Sir Leslie Rowan; Mr. A. Christelow; Mr. Stevenson; Mr. Rolle; and a military man. |
| Mr. Richard M. Bissell, ECA; C. Tyler Wood, ECA; Harlan Cleveland, ECA; Lincoln Gordon; Col. Robert Ward; George Willis, Lane Timmins, Messrs. Cabot and Thorp, State Dept. |
Mr. Bissell started the discussion by saying that certainly one item which required discussion was that of the so-called burden-sharing exercise. On this subject, he feared that there was substantial disagreement. So far as the United States is concerned, our preoccupation has been with the problem of how to get a larger effort. Burden sharing was difficult unless there was agreement on the total burden to be shared, and the purpose of the exercise should be the leveling up of contributions. The British, on the other hand, had focused rather more on forming a judgment as to the relative equities arising out of current programs. He offered this as a statement of the problem. Cabot said that he had no comment at this point. Gordon said that he thought one other factor was the problem as to just what time period was contemplated, since in one instance one was thinking of the current distribution of assistance and in the other the situation to be reached by 1954.
Gaitskell said that he agreed that there was a wide gap in the two approaches. As background, he wished to outline the British situation and then presented his balance-of-payments analysis. He said that the defense program was not the chief cause of the British situation. In fact, he did not feel that their own actions were responsible, but that they were caught by world economic developments. In any event, the standard of living of the British people will be seriously affected and they are threatened with a long series of deficits. So far as NATO is concerned, the medium-term defense plan never was accepted outright, but only on a best efforts basis. The British Cabinet regarded a $6 billion expenditure as moonshine and had difficulty with 4.7 billion last December when [Page 967] the situation was much less grim. Any increase is out of the question. In fact, the problem is whether the present program can be maintained. So far as the interim forces arrangements for the U.K are concerned, considering also their non-NATO commitments, the shortage of equipment is exceedingly serious, in the neighborhood of 2 billion pounds. Therefore, the medium-term defense program is completely impracticable for the U.K. Of course if there were war they would do much more, but in peace one must balance defense with the economic and political realities. In U.K. the political difficulties are not great. It is much more economic. They are accepting a lower standard of living, but there is a limit and they are greatly concerned about maintaining solvency. They do believe that the U.K. is now carrying all that can reasonably be expected.
There are some specific factors calling for comment—the supply of steel will affect the level of production and the East-West trade controls are making things difficult. Timber and coarse grains are fiendishly expensive, and it now looks as if the U.S.S.R. would have a surplus of sterling from the trade. They are worried with respect to Germany, and while they favor the military plan for the European army, they cannot undertake to carry their present occupation costs.
The burden-sharing exercise should be completed as quickly as possible. Historically, this was created as a way of settling the extent of assistance and the British Government has regularly said that this would determine the possibility of adjustments in programs or in military or economic aid. Any further delay would be unfortunate and very bad for the European morale. Finally, he feels that we are not making much progress on the end-item program. We must find some way whereby whatever military assistance there is to be can be more assured. Incidentally, in England there is considerable worry about Germany being rearmed at the expense of U.K. supply needs. He regretted the necessity of presenting such a gloomy picture, but most of the difficulties had come from outside. They do hope to come forward with more specific programs at a later time.
There then was some rather general discussion concerning the relationship of the armament effort and balance of payments, which brought out the fact that the two meet in the engineering industries and that there was not merely a dollar limitation but a very real physical limitation on meeting the demands of the two. Bissell pointed out that it would be difficult in the U.S. to get much sympathy for steps related to the same old dollar gap. Thinking here was now much more focused on supporting the defense effort.
[Page 968]Gordon asked about the post–1952 prospects. Gaitskell said that the U.K. may not be in deeper trouble in 1952 than in 1951 but that the depressing factors were by no means merely temporary. However, it was difficult to guess. So far as the military program is concerned, the U.K. would be happy to have a longer period.
Cabot asked what part of the 4.7 billion was maintenance and Eric Rolle stated that it was 20 percent of total military expenditures in the current year; and 18 percent in the next year. Rowan pointed out that it was much more difficult to find substitutes for dollar sources than it was in 1949. Willis asked what had happened to the physical volume of trade. The estimate was presented that so far as the increased British imports were concerned, 300 million was for stockpiling and machine tools and the remaining might be defined one-third in terms of increased volume of imports and two-thirds price changes. Probably for the rest of the sterling area a little more emphasis could be placed on volume. However, Mr. Gaitskell undertook to get a more accurate reply to the question. Gordon asked about internal prices in the U.K. Gaitskell said that if world prices could be stabilized they could certainly hold the line. Their increase in 1951 will be perhaps 11 to 12 percent, and the 1952 problem will depend on whether they can hold the line on wages.
Cleveland said it sounds as though Washington was worried about the medium-term defense plan but that it had been written off in London. Could it be said that the present national commitments represent a judgment of the economic limitations and of all that needs to be done? Gaitskell pointed out that he was Economic Minister and could only speak with respect to economic limitations. It was his feeling that the weakness of NATO was that the military and economic have never had a meeting of minds. In this discussion, he commented on the fact that OEEC was popular as an agency which gave things to Europe, and NATO unpopular since it took things away. Bissell stated that the U.S. had urged the acceptance of the military task but it was true that the military claimants had never been confronted with the economic and finance ministers. He would hope that the FEB would work more in the field of means in the long run. It is hard to see how one can consider matters unless one has considered the size of the task. Gaitskell did not like the word “task” because there are many choices. He preferred to use the word “program.”
Cabot pointed out that there was a flexibility both as to amount and date, that the key measurements were those of the dangers involved and the availability of resources. Gordon pointed out that if we were not going to follow the medium-term defense plan there [Page 969] was a danger of imbalance. Whatever was done had to be done in terms of a complete plan.
Rolle then described the role of the FEB. He said that the U.K. felt it was taking its fair share. It was in the middle as between some continental countries who were doing too little, overrepresenting, and emphasizing economic development for its own significance. On the other hand, the U.S. was anxious to minimize the economic difficulties and wished to act on the medium-term defense plan. The U.K. seeks judgments on relative capabilities and equities. It was very true that what was needed was to achieve a confrontation. This could be done best by keeping the 1951–1952 exercises and thereby finding out the areas of special weakness and their relationship to equity.
Gaitskell said what is the sense of talking about larger programs. However, we can talk about the capabilities of the U.K. and how does the U.K. program compare with what the French are doing? In any event one must recognize that military programs must always be reduced. This is a matter of elementary governmental procedure. Bissell said it seems clear that the economic and military must be brought together. It cannot be ruled out that we may have to end up with something between the present position of the military program and the economic and financial programs. It is certainly urgent to start the processes of give and take. Gaitskell said that they have felt that the burden-sharing exercise was, first, to establish criteria and, second, to apply them to the programs. It must be done for (1) public opinion and (2) in connection with the discussion of the allocation of aid. Of course, everything must be taken into account, and there is no exact formula. It is important however that people not be misled as to the prospect of aid. In that case, we will be misled in making our program.
Rolle stated that another important item is the coordination of end-item and production programs. Bissell said that steps were being taken now to tighten up the situation. With our limited funds, it will be more necessary than ever to tie up closely many different forms of extending aid.
Mr. Cabot said that Congress is insisting that the end items and the aid programs be closely integrated. He did wish to state that it was not contemplated that the U.K. program would be seriously interfered with in the effort to get items to Germany. Finally, as to East-West trade, he did agree that it must be put on a reasonable basis, but the fact remains that it is a highly political issue here. Bissell closed the meeting by saying that he would set up a group to compare figures so that we would all have a common understanding with respect to the prospects; that there seems to be agreement on the need for confrontation of military requirements [Page 970] and economic capabilities, and we all ought to turn our minds to considering how this could best be brought about.