Foreign Relations of the United States, 1955–1957, Eastern Europe, Volume XXV

189. Memorandum From the Deputy Under Secretary of State for Economic Affairs (Prochnow) to the Chairman of the Council on Foreign Economic Policy (Randall)¹

Washington, November 14, 1956.

SUBJECT

• Comments on Suggested Measures to Aid Poland and Hungary Over and Above Economic Aid

Mr. Hoover has asked me to comment upon the various suggestions which you made to Mr. Jackson as to further steps which might be taken to assist Poland and Hungary.²

The events intervening since you wrote your memorandum to Mr. Jackson change the situation as far as Hungary is concerned. It is not now possible to make an evaluation as to the exact nature of the present government in Hungary. Therefore, our comments on Hungary should be read in the light of the above statement.

In the case of any satellite country, if the President is prepared to make a determination that a particular country is no longer under domination or control “by the foreign government or foreign organization controlling the world Communist movement,” the United States Government will be in a position to take a number of steps to increase trade and other economic relationships with the particular country involved. It would be possible, for example, to give economic assistance, to enter into PL 480 transactions and to extend most-favored-nation treatment. However, until that determination is made, measures which can be taken are limited. It would not now be possible to make the above determination in the case of Poland.

The Polish Government has indicated that it is not in a position to accept United States economic assistance, though it would be interested in United States credits on account of its investment and consumer needs.³

Attached are specific comments on each of the suggestions which you made in your memorandum of November 1 to Mr. Jackson.

Herbert V. Prochnow

[Attachment]

• “1. Offer to sell agricultural surpluses to Poland and Hungary at world prices for dollars. An earlier request from Poland for such action on our part was turned down quite recently.”⁴

  Urgent and continuing consideration is being given by the Department to the possibility of making surplus agricultural commodities available to Poland and Hungary at any time that such a step would further US objectives. The Polish Government has already been informed of US willingness to extend economic assistance without political strings. Agricultural products could be included under such assistance under Titles II or III⁵ of Public Law 480.

  With respect to Hungary the United States on October 29 authorized the use by American voluntary agencies in Austria of 2,000 tons of food to Hungarians needing food relief. On November 3, a program of $20 million of emergency relief was offered to the Hungarian people. Events in Hungary over the November 4-5 week-end have made it impossible for the US to ship relief goods into Hungary for the present but every effort is being made to allocate as much of this aid as is necessary for the immediate relief of some 10,000 Hungarian refugees in Austria.

  Meantime the Department is considering the advisability of a revision in US policy to permit dollar sales of agricultural products at world market prices to Poland (and perhaps Hungary, depending on further developments in that country) for cash or credit. Should the Department recommend a revision in current US policy and that recommendation were accepted, the US would be able to permit sales for dollars at world market prices for the item in which Poland thus far has shown the chief interest, namely wheat. The other major agricultural product that would be affected would be cotton. If in addition to cash sales the US should also permit extension of credit, Poland could then apply for an Export-Import Bank loan for up to 18 months. Commodity Credit Corporation also has a program of up to 3 year loans to American exporters—the benefits of which the latter are permitted to pass on to foreign buyers.

  Other avenues for making agricultural commodities available to Poland and Hungary would be through sales for local currency or barter (both under Public Law 480) provided the Congress would amend the law to permit such transactions or the President declared these countries to be “friendly” to the United States. The Administration attempted unsuccessfully during the last session of Congress to obtain an amendment to Public Law 480 to permit barter transactions with the satellite countries.

• “2. Move at once to promote trade with these two countries by taking the following steps:

  a. Extend most-favored-nation treatment to Poland and Hungary and thus make available to them tariff concessions now enjoyed by free world nations.”

  Section 5 of the Trade Agreements Extension Act of 1951⁶ reads as follows:

  “As soon as practicable, the President shall take such action as is necessary to suspend, withdraw or prevent the application of any reduction in any rate of duty, or binding of any existing customs or excise treatment, or other concession contained in any trade agreement entered into under authority of Section 350 of the Tariff Act of 1930, as amended and extended, to imports from the Union of Soviet Socialist Republics and to imports from any nation or area dominated or controlled by the foreign government or foreign organization controlling the world Communist movement.”

  Treaties of friendship, commerce, and consular rights between the United States and Poland, and between the United States and Hungary, containing a most-favored-nation provision in customs matters, were accordingly terminated effective January 5, 1952⁷ and July 5, 1952,⁸ respectively.

  A Presidential determination that Hungary and/or Poland were not dominated or controlled by the foreign government or foreign organization controlling the world Communist movement would be a prerequisite to making available to these countries tariff concessions now enjoyed by free world nations. In the absence of such a determination the language of Section 5 would appear to preclude any other action by the Executive Branch at this time pending amendment by the Congress.

  b. Relax our export controls which sharply limit trade with Poland and Hungary, and seek to obtain appropriate relaxation of multilateral controls.

  On the basis of the brutal Soviet suppression of the revolt in Hungary, it appears that the Soviets have now determined to take a harder line in the satellites. Under these circumstances it would be premature to consider the relaxation of either our United States or the COCOM strategic controls. . . . Since the strategic control lists are highly selective, there is a wide range of possibility for an increase in trade with Poland and Hungary in non-strategic items. It should additionally be noted that since Poland is the principal trans-shipment point for shipments to Communist China, carried largely in Polish vessels, any strategic relaxation in trade controls applicable to Poland would result in increased diversions of Western-origin strategic goods to the Communist Chinese.

• “3. Advocate membership for Poland and Hungary in international financial and economic organizations such as GATT, the World Bank, and the International Finance Corporation.”

  The General Agreement on Tariffs and Trade is primarily designed to facilitate international trade among countries maintaining the essence of the free enterprise and competitive economic system. It is not particularly well geared to meet the problems of countries whose trade is entirely controlled by the central government. Portugal, Spain and Yugoslavia, for example, are not members of GATT. It is doubtful whether the economic benefits deriving from membership would be particularly attractive to either Poland or Hungary.

  Participation in GATT requires tariff negotiations with other countries prior to membership. A time gap of some length would therefore be indicated before actual membership could be effected. Tariff concessions, moreover, would have little significance in terms of imports into Poland and Hungary and other countries would accordingly be reluctant to make meaningful concessions on their part. This exemplifies the marginal usefulness to Poland and Hungary of membership in GATT.

  Poland and Hungary are eligible to join International Bank and International Monetary Fund. Poland was a member of both these institutions but withdrew. At the time of this membership, its quota in the International Bank was $125 million (of which 2% must be paid in gold or dollars). Its quota in the International Monetary Fund was also $125 million of which 25% normally would need to be paid in gold or dollars. Their interest in joining the International Finance Corporation will depend on subsequent internal developments; presumably they would not be interested unless they were prepared to foster private business enterprises.

• “4. Negotiate a treaty of Friendship, Naviagation and Commerce with Poland and Hungary such as we have with other nations.”

  a. Treaties of friendship, commerce, and navigation with Poland and Hungary were terminated in 1952 pursuant to provisions of the Trade Agreements Extension Act of 1951, the purpose of the provisions being to secure denial of trade agreement concessions to countries under Soviet or Communist domination. An attempt to negotiate new treaties with those countries would raise questions as to whether the countries are now free from such domination and are likely to remain free. It is probable also that questions of East-West trade controls and the effect of certain standard treaty provisions thereon would need to be considered.

  b. It appears probable that independent governments in Hungary and Poland will be under serious threat of restoration of Soviet dominance for some time. United States proposals for treaties of friendship, commerce, and navigation are frequently subject to attack from Communist sources as instruments of imperialistic economic domination. Since such treaties cannot be expected to immediately produce significant advantages to the signatory countries, it should be considered whether attempts to negotiate such treaties might not have an immediately disadvantageous propaganda effect, or even provide bases for some sort of intervention by the U.S.S.R.

  c. It is understood that in the case of Poland the government intends to retain its communistic system. The normal treaty of friendship, commerce, and navigation has been designed to establish standards for countries where free enterprise prevails at least to an appreciable extent. No treaty project for a country with a wholly socialistic economy has yet been devised, and there would be serious problems involved in the development of such a project. Some of the provisions of the normal treaty could doubtless be adapted, but the heart of the treaty consists in the provisions relating to private investment, and those could have little application in a communistic economy.

  d. In view of the above considerations, it would appear to be worth serious consideration whether the best policy would not be to await further stabilization of the situations in Poland and Hungary, and then to consider the establishment of treaty relationships in connection with a study of prevailing legislation and general economic policies in those countries.

• “5. Review the advisability of further adjusting claims which the United States may have against Poland or Hungary, such as those arising out of World War I debt, nationalization and expropriation, lend-lease, defaulted dollar bonds, and surplus property sales.”

There would appear to be little room for beneficial adjustment as concerns Polish World War I debts. Most foreign countries consider World War I debts as completely dead, and Poland doubtless has no thought of ever resuming payments. Its last such payment was in 1930, and with the exception of Finland no other debtor countries are making payments. Furthermore, a unilateral adjustment with Poland would raise problems regarding the status of all World War I debts.

Surplus property credits also do not lend themselves well to adjustment. The magnitude of these claims is relatively well established and similar claims exist against a number of other countries. In such cases, it has been United States policy not to write down claims even when United States aid is simultaneously extended to the country in question. Poland has been making regular dollar payments on the annual principal installment of these credits, but not on the interest installment.

There is no lend-lease account outstanding with Poland.

The settlement of defaulted dollar bonds held by private United States residents is a matter ordinarily negotiated by the Foreign Bondholders Protective Council, Inc. We might wish to suggest to the Poles that they reopen these negotiations if this should be consistent with our broad approach to Polish debts.

The value of United States claims arising out of Polish nationalization and expropriation has never been calculated closely. As an example: very rough estimates made in 1946 and 1951 vary from $80 to $150 million. There is obviously much room for adjustment as concerns these claims. We should welcome reopened negotiations, but would want to examine the individual claims closely before arriving at a precise magnitude in our negotiating position.⁹

1. Source: Eisenhower Library, CFEP Chairman Records. Secret.
2. On November 1, the Secretary of the Council on Foreign Economic Policy, Paul H. Cullen, addressed a memorandum to Randall suggesting that agricultural surpluses be offered to Poland and Hungary at prevailing dollar prices; that most-favored-nation treatment be extended to them; that their membership in international economic and financial organizations such as GATT and the IBRD be advocated; and that unilateral and multilateral export controls be reviewed with an eye toward their relaxation. (Ibid.) These recommendations were incorporated in Randall’s November 1 memorandum to William H. Jackson. In addition, Randall suggested the negotiation of a treaty of friendship, navigation, and commerce and he also called for a review of the advisability of adjusting existing claims against Hungary and Poland. Copies of the memorandum were sent to the Secretaries of Commerce, State, and Treasury, the Administrator of ICA, and to the President’s Administrative Assistant. (Department of State, Central Files, 411.4841/11–256)
3. See Document 186.
4. The Counselor of the Polish Embassy, Henryk Jaroszek, informed the Department of State on July 31, 1956, that his country was still interested in purchasing wheat. (Memorandum of conversation by George Lister, July 31; Department of State, Central Files, 848.49/7–3156)
5. Title II of 68 Stat. 454 was “Famine Relief and Other Assistance”; Title III was “General Provisions.”
6. As enacted on June 16, 1951, Public Law 50 (65 Stat. 72) extended the authority of the President to enter into trade agreements under Section 350 of the Tariff Act of 1930 for 2 more years dating from June 12, 1951. The Tariff Act of 1930 (46 Stat. 590) was amended on June 12, 1934 by the addition of Section 350 entitled “Promotion of Foreign Trade” to Title III. (48 Stat. 943)
7. For text of the treaty with Poland, signed on June 15, 1931, see 48 Stat. 1507.
8. For text of the treaty with Hungary, signed on June 24, 1925, see 44 Stat. 2441.
9. Secretary of Commerce Sinclair Weeks replied to Randall on November 16. He thought it might be appropriate to sell Poland surplus agricultural commodities at world dollar prices. If Poland took the initiative, he indicated his receptivity to any effort that nation might take to join international economic and financial organizations. He considered the conclusion of a treaty of friendship, commerce, and navigation to be premature, because Polish internal conditions precluded agreement on many points the United States believed essential. Finally, he supported opening negotiations to settle outstanding claims. (Eisenhower Library, CFEP Chairman Records, Poland & Hungary File)