311. Memorandum From the Director of the International Cooperation Administration (Smith) to the Under Secretary of State for Economic Affairs (Dillon)0


  • Release of Counterpart in Austria

As you know, Ambassador Matthews has withheld release of counterpart since September in the hope that this sanction would hasten Austrian agreement on settlement of the outstanding problems of the Jewish persecutee claims and U.S. oil investments.1

We had agreed on settlement of the counterpart problem as an objective but also agreed to defer to the Ambassador’s plan, with the then prospect of settlement of the persecutee and oil problems by Christmas.

Since then, a counterpart loan of $4 million in Austrian schillings to the Hilfsfond has moved toward settlement those aspects of the persecutee claims which can be resolved bilaterally between Austria and the U.S. The remaining claims involve France and the U.K., as well as the U.S.; we understand that France and Austria have several unresolved issues in the matter. Thus, although this multilateral package of claims may be settled soon, the exercise of a bilateral sanction such as withholding counterpart would not seem to be a primary consideration in such settlement.

Insofar as the oil problems are concerned, the withholding of counterpart does not seem to have hastened either party toward an agreement. So far nothing has been done of which we are aware.

In view of the apparent liquidity of the short-term loan market in Austria, the effect of withholding counterpart apparently has been negligible insofar as major investors are concerned; they have simply renewed short-term notes as necessary. Investors in risk ventures or small industry, however, may have borrowed on a short-term basis at interest rates of 8 to 10 percent, anticipating the usual early release of counterpart from which investment loans of a longer term could be had at 5 percent. As the months go by without release those small or marginal firms which are unable to continue paying the higher rate may have to suspend and delay indefinitely their programs, thus contributing to increased winter unemployment in Austria.

[Page 800]

While not primarily ICA’s concern, I am nevertheless disturbed over the possible adverse political and psychological results of appearing to infringe on a free nation’s sovereignty by freezing its investment funds.

It may be, of course, that a salutary result of withholding counterpart up to now will be increased interest on the part of the Austrians in reaching an over–all settlement which will leave the management and utilization of the funds entirely in their hands.

The latest message on this subject from Ambassador Matthews (Embtel 1689, January 20, 1959)2 again emphasized his desire to withhold action on the counterpart release pending settlement of both the Jewish claims and oil problems. It would seem to me that the results to date on the settlement of these two issues suggest that the further withholding of the counterpart release would be of questionable effectiveness.

In view of these considerations in particular, it is recommended that you approve the attached airgram3 requesting the Embassy to either release and proceed with settlement or, if over–riding considerations favor not releasing just yet, proceeding to negotiate terms of settlement to be formally agreed upon at or after the release is made.4

J.H. Smith, Jr.
  1. Source: Department of State, Central Files, 763.5–MSP/1–2759. Confidential.
  2. See Document 306.
  3. sent to Under Secretary Dillon, telegram 1689 from Vienna urged that settlement of negotiations under the Vienna Memorandum and implementation of Article 26 of the Austrian State Treaty be made major topics of conversation when Pittermann arrived in Washington on February 9. (Department of State, Central Files, 033.6311/1–2059)
  4. Not attached to the source text. The reference is unclear.
  5. In a memorandum of February 2, Merchant recommended to Dillon that the proposed shift in policy be disapproved. (Department of State, Central Files, 763.5–MSP/2–259)