58. Telegram From the Department of State to the Embassy in France1

1955. This message in two parts (A) general considerations underlying our thinking on French financial situation and (B) action to be taken respectively by Embassy and USRO.

  • Part A. This is FYI only.
    Recognize continued deterioration French situation could seriously endanger broader US interests in Europe. Restoration of economic and financial stability in France is essential among other things to permit France to play its necessary role in Atlantic alliance and insure Common Market and EURATOM treaty commitments be carried out by France, especially initial tariff and QR measures scheduled one year after entry treaties into force.
    However we are also convinced no foreign assistance can prevent or even significantly delay continued financial deterioration unless French authorities promptly and courageously undertake more [Page 206] drastic program of corrective action. Internally this would involve reduction total government expenditures to eliminate budgetary deficit, and reduction both short-term and medium-term bank credit particularly rediscounting such credits at Bank of France. Total internal demand must be reduced so as to reestablish confidence in value of franc and franc savings, prevent any further wage-price spiral, and release French production for export. Moreover widely believed here substantial over-valuation franc still to be dealt with by further exchange rate adjustment.
    Believe with proper policies France inherently capable stabilize its domestic finances and foreign balance at high and growing level business activity. Consider most important any financial aid France obtains from external sources should serve to assist and hasten accomplishment this objective and not be wasted in hopeless effort postpone essential corrective actions. To allow already serious French financial situation to deteriorate further would probably make long-term solution more difficult. We realize Gaillard cabinet undoubtedly wishes avoid measures that could lead to renewed political crisis with eventual outcome uncertain and even holding ominous possibilities. At same time we have great difficulty accepting bland statements that any hard decisions whatsoever would lead directly to this end.
    Since Gaillard appreciates need for true stabilization, we would hope significant external pressure for an adequate program and continued firmness in refusing any substantial foreign credits in absence such a program would encourage him to press for adequate corrective measures to permit this important result. However economic and financial program to date is totally inadequate in this respect and we are sure this judgment fully shared by von Mangoldt2 and Jacobsson. Believe therefore Gaillard and Pflimlin must be brought to understand clearly that in our opinion and presumably that of all possible lenders what has so far been done or indicated as intended is not adequate as basis for external assistance.
    Outside pressure on France will be more effective if executed through international agencies, which means EPU and IMF, but we feel most important we not create any possible impression we think that negotiations these agencies can rapidly or easily produce acceptable French program. Believe EPU and IMF should spearhead effort push French into taking effective measures and we should be prepared to give fullest support to efforts both institutions avoid acquiescing in inadequate French program. We wish minimize if not avoid altogether any impression bilateral US-French bargaining in order avoid anything [Page 207] like Pinay incident of October 1952 in which Gaillard was involved.3
    Baumgartner has invited Jacobsson to come to Paris in personal capacity to advise on necessary corrective measures and be in contact with French cabinet. We have told Jacobsson we agree his Paris trip is useful but that we also agree his view that range and difficulty technical matters which must be covered, together with inadequacies existing program, make it clear that technical consultations with EPU and IMF cannot be hurried and it is unlikely results can be assessed earlier than 60 to 90 days at best.
    In light fact 70 percent French gold and dollar losses past two years have flowed [to] other European countries through settlements with EPU and in light vital political interest European countries as well as US have in successful implementation Rome treaties, believe European countries generally and Germany in particular should provide correspondingly large part of whatever total external credits may ultimately be needed to help France resolve current financial difficulties. We have serious doubts Mangoldt–Calvet formula (Polto 1294 and Embtel 2513)4 involving not more than $200 million credit through EPU compared equal or greater amount from non-European sources would meet this test particularly since mechanics this formula would require France in effect pay out to other European countries through EPU $200 million from their outside credits in order obtain full use of EPU credit. German suggestion (expressed in restricted MB meeting by von Mangoldt) that EPU cannot provide any major credit to France except after, or any credit at all except simultaneously with, French drawing from IMF is highly undesirable.
    Imminent exhaustion gold and dollar balances of French Stabilization Fund raises danger French may make emergency request for help on purely political ground attempting by-pass need for further French economic and financial measures. This most unfortunate any case but especially so at time December NATO meeting. To avoid this we would be prepared give support to some such measure as limited deferment for brief period of French gold and dollar settlements with EPU as least undesirable form of stop-gap outside assistance. Assume 25 percent of credit involved such deferment would be financed by [Page 208] EPU creditors under existing quota and rallonge commitments. Believe remainder should be financed primarily if not entirely by Germany whether by deferring payments from EPU, by gold deposit with EPU or otherwise. If proposed use EPU capital finance any part such deferment with consequent increase in risk EPU drawing on $123 million deposit here we would have consider in light problem described Polto 1437 para 3.5 In connection such stop-gap deferment EPU settlements believe serious consideration should also be given appropriateness and feasibility requiring France make stop-gap use their own potential resources. End FYI.
  • Part B. Action to be taken respectively by Embassy and USRO:

    For Embassy: You should talk to French along following lines: On basis all information so far available as to nature measures taken or contemplated by French we regard these measures as quite inadequate and insufficient to lead to internal and external stability which would restore confidence in franc and prevent continuance of wage-price spiral and hence to provide basis for outside financial assistance. This issue of an adequate stabilization program is a technical and not a political problem and in this connection we feel France should consider whole range of their fiscal and monetary policies. You should encourage French discuss with IMF and EPU nature of an adequate stabilization program. Such discussion will in all probability take approximately 60 to 90 days since inadequacies of present program are substantial and IMF in particular must be fully assured that program is decisively adequate. Jacobsson must be able satisfy his Executive Board that French program fully meets requirements of IMF policy. It would be damaging to France and IMF if inadequate program were to be submitted for financial support by IMF. French should be able find ways meeting foreign exchange deficit in next 60 to 90 days by use of own resources. (You should avoid being drawn into detailed discussions with French of US views on particular measures they have taken or expect to take, though we wish continue receive information and your judgment as to such measures.)

    For USRO: You should explore informally with Mangoldt and others as appropriate possibility stop-gap measures with EPU as indicated above. Also desire your recommendations this subject in time send instructions for November 29 meeting.6 In exploring subject you may make clear our view stop-gap measures could be justified only if [Page 209] serious consultations are taking place to determine what further steps will be taken by France to achieve internal and external stability and thereby make any further external aid meaningful.

  1. Source: Department of State, Central Files, 851.10/11–2157. Confidential; Priority. Drafted by Edgar J. Beigel and approved and signed for Dulles by Dillon. Repeated to London, Bonn, and Luxembourg.
  2. Baron von Mangoldt-Reiboldt, Head of the German Mission to the OEEC.
  3. Reference is to the domestic political use made by Pinay of certain conditions which the United States required to be met before it would extend aid to France, conditions which were characterized as U.S. interference in French internal affairs, and attempts by Pinay to “blackmail” the United States into giving more aid than intended in return for French adherence to the European Defense Community.
  4. Pierre Calvet, Under-Governor of the Bank of France. The formula in question dealt with the terms and conditions of the proposed EPU loan to France. Polto 1294 from Paris, November 15, and telegram 2516 from Paris, November 16, discussed the French request for an EPU loan. (Department of State, Central Files, 851.10/11–1557 and 851.10/11–1657, respectively)
  5. Not printed.
  6. Apparent reference to a meeting of the restricted group of the EPU Managing Board, described in Polto 1564 from Paris, November 30, to consider the French loan request. (Department of State, Central Files, 851.10/11–3057)