Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

12. Memorandum of Conversation⁰

MCT MC/16

June 10, 1958, 3 p.m.

SUBJECT

• The World Economic Situation

PARTICIPANTS¹

• United States
  • Secretary Dulles
  • Mr. Allen Dulles
  • Secretary Anderson
  • Mr. Dillon
  • Mr. Coughran
  • Mr. Reinhardt
  • Mr. Elbrick
  • Mr. Dale
  • Mr. Leddy
• United Kingdom
  • Mr. Macmillan
  • Ambassador Caccia
  • Mr. Brook
  • Mr. Dean
  • Lord Hood
  • Mr. Thorold
  • Mr. Morris
  • Mr. Leishman
  • Mr. Zulueta
  • Mr. Bishop

The Prime Minister said he had been struck by the Secretary’s recent speech to the Senate Committee on Foreign Relations on the overall situation vis-à-vis the Soviet Union.² This was a very large problem and hard to condense. He would attempt to summarize it in this way:

Looking at the military equation, it seemed clear that, so long as the West did not do foolish things, the balance of military power was such as to prevent any formal, global war because of the enormous destruction that would result. Therefore the struggle between the two contending points of view represented by the Communists and ourselves would probably move from one field to another, and specifically it would move into the fields of economics and of propaganda.

Looking at the economic field, there were two main aspects. One was what the Soviets might be able to do to us. The other was what we might do to ourselves. Our traditional economic rules of supply and demand, etc., don’t apply to the Soviet system. Our system is therefore brought up against a wholly new and different proposition, which is puzzling for us. Earlier, the economic strength of the Soviet Union was used to build up the country internally, but now it has grown so that it is able to produce and dispose of surpluses on the world market, not for normal economic reasons but to undercut the free world trading system. Therefore our former attitudes with respect to tariffs and quotas and the like are tending to become obsolete, and require change. All of this is only just beginning, and we do not yet know what the answer will be.

Turning to what we might do to ourselves, the Prime Minister observed that if we are to allow our economies to fall into a decline then we will bring about precisely what the Marxists want, and have steadily predicted. Since the war we have had a fairly continuous boom. People had come to think that the process of expansion was automatic. Now it is something of a shock to them to find out otherwise. Unless we can get our economies moving forward, we will not be able to do what needs to be done, for example, for the less developed areas. During and immediately following the war prices were good for primary commodities produced by the less developed countries. It was widely felt that the only problem was to achieve more and more development. Now it is clear that world trade is very important to these countries, and if such trade is to be sustained, the industrialized countries must keep their economies on an even keel. The UK had done its best to keep inflation down and to keep labor costs under control, but at some point it must contemplate an expanded economy. For the UK the most serious problem is how to achieve expansion without inflation, for inflation would lead to a drain on the reserves. The Western world as a whole must prove Marx wrong by avoiding booms and slumps and by assuring a steady expansion of world trade.

Referring to the liquidity problem, the Prime Minister said that it was like the chicken-and-egg argument. Some people felt that if there could be a large increase in liquidity, larger trade would follow. Others felt that if larger trade were achieved that would create a liquidity problem, which would then have to be solved.

Summarizing, the Prime Minister said that we must (1) examine what the Soviets may be able to do to us by reason of their greater economic capability and unorthodox methods and (2) consider what we might do to ourselves through failure to maintain stability, increase development and expand trade.

Secretary Dulles said the problem had to be broken down because of its many facets. We would have to look at both the national agencies and the international agencies. On the international side, we have the International Monetary Fund and the World Bank. Both have demonstrated their utility. Some question has been raised about whether these institutions have adequate resources. Domestically, in the U.S., we have the Development Loan Fund and the Export-Import Bank. For these institutions Congress has just increased by $2 billion the lending power of the Export-Import Bank and is considering legislation to increase by some $600 million the resources of the Development Loan Fund. In the trade field the US has encouraged enlarged trade and has favored a liberal commercial policy. Congress is now considering an extension of the Reciprocal Trade Agreements Act. Although this legislation might perhaps be considered as more of a symbol than as a means of achieving really substantial tariff reductions, it would be valuable in dealing with the European Common Market.

With respect to the Soviet Union, there was no doubt that the enhanced power of the Soviet Union to produce and dispose of surpluses on the world market by methods departing from normal commercial standards could do much mischief. This is of concern to us more over the longer term than immediately. Because of our concern, we have arranged for a top-level group of outstanding businessmen to study the whole matter in consultation with the various government agencies. We hope that this group may be able to report within a few months.

Secretary Anderson said that it must continue to be a basic objective of the countries of the free world to enlarge international trade. In pursuing this objective, free economic systems such as our own are under certain disadvantages in competing with a managed economy such as the Soviet Union. The less developed countries, which had suffered greatest economically over the years, were now demanding a change of status, and demanding it more insistently than ever before. They were not so much concerned over the political ideologies involved but over the practical results of bringing material improvement. That is why the USSR is such a formidable competitor against us in these countries. The US is committed to a policy of larger trade, but it can implement this policy only as rapidly as its own domestic political and economic situations will permit. The same situation faces the UK and other democratic regimes. The Soviets, on the other hand, can carry out trade transactions without regard to the desires of their domestic producers. They can import wheat under a barter deal and then tell their farmers to produce something else. Soviet loans can only be spent within the Soviet bloc, whereas the goods which flow under US loans in dollars or under UK loans in pounds sterling are competed for all around the world. Nevertheless, we believe that most of the free world governments would prefer to avoid dealing with the Soviet Bloc if they could. He felt that the Soviet economic offensive presents American private capital with a new kind of challenge. He hoped that some answers could be found through the business study group mentioned by Secretary Dulles. He felt that the US Government had to find some new method of associating its efforts with private enterprise.

World Bank and International Monetary Fund

Secretary Anderson then turned to the question of the World Bank and the International Monetary Fund. The Bank, he said, was now lending at a higher rate than had been thought possible several years ago. Loans in 1957 were running at an annual rate of $800 million. The resources for these loans were drawn not only from the members’ subscriptions of 2% in gold and 18% in cash, but also from bonds issued by the Bank on the private capital market. These bonds were guaranteed by the remaining 80% capital subscription of the member governments for which they assumed a contingent liability. The US believes that the Bank can continue to lend at the present high rate for the next year or so. But when the volume of bonds offered by the Bank approaches the contingent liability of governments with hard currencies, bondholders will want to know whether these governments will assume additional contingent liability. There is, therefore, the possibility that the Bank’s borrowing and lending operations might be expanded by increasing the contingent liability part of their capital subscriptions to the Bank (but not their contributions in gold or cash), thus avoiding any immediate burden on the budgets of governments.

With respect to the International Monetary Fund, the situation was different. The resources of the Fund could not be increased without some additional cash payments by member governments, which would result in a budget burden. The US had not as yet determined its position on this matter. We have the problem in mind and are giving careful study to it in the light of trade developments. We have no concrete views on the desirable size of additional contributions to the Fund. The immediate question was what should be said about this matter at the New Delhi meeting of the Bank and Fund in September. The US considers that it would not be wise to present any concrete proposal at the New Delhi meeting for the reason that governments would not have been fully prepared to consider and debate the question intelligently at that time. However, we believe that, if Messrs. Black and Jacobsson raise the question, it might be possible to agree at the New Delhi meeting to establish a competent committee, appointed by the governors, to consider the whole problem of what might be done about the Fund and the Bank. In this way we can proceed with an examination of the question in an orderly manner and avoid damaging debates in an open forum.

Secretary Anderson added that he thought it unfortunate that there had been growing discussion of the shortage of world financial liquidity in the UK and US press. He feared that press discussion of this subject prior to the reaching of agreement between governments could set off speculative currency movements with damaging repercussions. He said that, for example, the US had received many inquiries regarding the price of gold, and we had had to make it absolutely clear that the question of the price of gold was not even under consideration by the US Government. He understood that we could not, of course, control the press, but we should do what we could to avoid creating a climate of risk. We would hope to minimize this kind of discussion at New Delhi. The creation by the governors of the Bank and Fund of a competent committee to examine the problem might be one way to avoid this.

Secretary Anderson added that he wished to compliment the UK government on the handling of its economic problems. He admired greatly the resolute and courageous action of the UK in taking the measures which it had taken to check inflation and promote stability.

US Economic Situation

Secretary Anderson then turned to the current US economic scene. He felt that recent developments in this country must be kept in perspective. The years 1956 and 1957 were the best economic years we had ever achieved, with a gross national product of $435 billion. He pointed out that even in 1957 there had been wide fluctuations from month to month-in some months the changes had been as great as $9 billion-in the annual rate of output. Unemployment in the first six months of 1957 was 3 million. This year, 1958, the peak was slightly above 5 million. We were therefore talking about a change in unemployment of only 2 million. Unemployment was heavily concentrated in the durable goods field. Of the 2 million additional unemployed, 11/2 million were in the heavy industries-steel, autos, machine tools and the like-and only 0.5 million in other industries. For the durable industries as a whole the decline from the peak reached in the first half of 1957 had been about 16%, whereas the decline in non-durables had been only 6%. Personal income had reached an all time high in August 1957, and had never been more than 11% below this high since that time. Personal income was now going up. Farm income during the first quarter of 1958 was 11% over the comparable quarter of 1957 and was at its highest level since 1954. Retail sales were as high or higher than in 1957.

Secretary Anderson went on to say that several reasons had been advanced for the decline in the durable goods industries, which accounted for the greater part of the current recession. One factor was consumer choice-a switch from durables to non-durables. Another was the fact that in 1954–56 there had been a large increase in personal indebtedness arising out of heavy purchases of durable goods. This debt was now being worked down. The result was that savings had increased, available credit had expanded, and interest rates had dropped.

Economic Assistance to Less-Developed Areas-Commodity Problems

Mr. Dillon observed that while we had put a substantial amount of aid into the less-developed countries, the price declines for the major exports of these countries have meant for them a much greater financial loss than the financial gains they have received from our aid. The US has therefore felt that it must address itself to commodity problems more vigorously than it had before. We still feel that we cannot support world prices through governmental support measures but we may be able to do more in searching for a solution to these problems than we have in the past, when we frequently took the position that we were not even willing to discuss such problems. For this reason we have agreed to participate with the Latin American countries in a study group on coffee, the first meeting of which will be held tomorrow here in Washington. African countries have been asked to send observers to the meeting, and may decide to participate. The Australian government had suggested a somewhat similar approach to the problems of lead and zinc. We have not yet reached a conclusion on this but are studying the proposal sympathetically. We would like to work more closely with the UK in this whole field.

Mr. Dillon said that in the field of development we would also like to work more closely with the UK. Some of our ICA people believe it would be useful to meet with British officials in London in order to exchange experiences from which both might gain. Mr. Dillon then referred to the various suggestions which have been made to step up aid to the less-developed areas through multilateral action. These suggestions had come, for example, out of the Council of Europe, from the OEEC, and from individual governments as in the case of the Pella Plan. He referred in this connection to the consideration now being given in the Senate to the establishment of an International Development Association under the World Bank. It was anticipated that the Senate would adopt a resolution urging study of this proposal, which would enable the Bank to make soft loans to less developed countries. At some stage we would like to obtain the UK’s ideas on this. We have not made up our own minds as yet but want to explore it. If such a new multilateral agency were to be established, it would have to be one to which all countries would contribute real resources and could not be merely a facade for US assistance.

Continuing US-UK Economic Consultation

Mr. Dillon commented on the work of the US–UK study group, to examine the Soviet economic offensive and the problem of counter-measures, which had been set up following the Prime Minister’s last visit. He felt that one of the results of these discussions had been to reveal to both governments that neither of them was very well organized to cope with this problem and that early attention would have to be given to internal organization within the governments.

Reverting to Secretary Anderson’s statements on the US economy the Prime Minister observed that perhaps there had been a tendency for those not having responsibility to exaggerate the gloomy side of the US recession, while those in charge felt otherwise. It was very hard to achieve a right balance. This illustrated how important it was for the two governments to keep in close consultation on economic problems. He thought that it was very important to continue the US–UK group on counter-measures and that it might be well to set up an expanded or separate group to keep in touch with broader economic developments. The UK was very anxious that something be accomplished at the forthcoming Commonwealth meeting, but was also anxious that whatever was done at the Commonwealth level should be kept in step with the wider interests of the free world. The idea would be to steer the results of the Commonwealth meeting into the general theme of free-world cooperation. He would like to have US–UK consultations of a broader and more permanent kind in this field.

(The Prime Minister then referred parenthetically to the German economic situation. He had had some good talks with Chancellor Adenauer. He recognized that the Germans have a very serious problem because of the preoccupation of their people with the spectre of inflation arising from past experience with two total inflations. The Germans were perhaps more afraid about inflation than unemployment and therefore they have a tendency toward deflation which helps to create balance of payments problems for other countries. The Prime Minister felt that it was no good trying to push the Germans into extending economic assistance directly. The only way to draw them in would be by getting them to contribute to international organizations, whether this might be through the OEEC, the EPU, the Common Market or other means. It is probable that they will agree to make contributions to organizations, whereas they would be very reluctant to adopt special legislation or facilities for direct bilateral assistance on a government-to-government basis.

Secretary Anderson agreed with the Prime Minister’s analysis of the German “psychosis” about inflation. He remarked that the US perhaps had a psychosis about unemployment.)

Secretary Anderson stated that the US would like to be as cooperative as possible with the UK, but that whatever consultative methods were adopted should be very informal and not organized.

The Prime Minister suggested that the US–UK counter-measures group might well be broadened or raised to a higher level for the purpose of discussing these wider economic issues which went beyond the immediate problems of the Soviet economic offensive.

Mr. Dillon agreed with the Prime Minister’s suggestion, stating that, as necessary, representatives from the Treasury Department and he could attend meetings to discuss wider subjects of this kind.

0. Source: Eisenhower Library, Whitman File, International Series. Secret. Drafted by Dillon’s Special Assistant John M. Leddy and cleared with Dillon and Reinhardt.
1. British Prime Minister Macmillan visited Washington, June 9–11. Participants not previously identified include Assistant Secretary of the Treasury Tom B. Coughran, Department of State Counselor G. Frederick Reinhardt, Assistant Secretary of State for European Affairs C. Burke Elbrick, British Joint Secretary of the Treasury Sir Norman Brook, Deputy Under Secretary of State Sir Patrick Dean, Minister of Embassy Viscount Hood, and Economic Minister Guy Frederick Thorold.
2. On June 6; for text, see American Foreign Policy: Current Documents, 1958, pp. 34–46.