Foreign Relations of the United States, 1958–1960, Eastern Europe; Finland; Greece; Turkey, Volume X, Part 2

191. Memorandum From the Assistant Secretary of State for European Affairs (Elbrick) to the Under Secretary of State (Herter)⁰

Washington, October 20, 1958.

SUBJECT

• Special Report on Finland

Background

This special report¹ has been prepared as a result of Ambassador Hickerson’s letter of September 15² cautioning against complacency regarding the Finnish political and economic situation which he stated had definitely deteriorated in recent months.

Salient Features

The report deals with a recently developed and serious threat to the basic U.S. objective of maintaining an independent, democratic, economically healthy, and western-oriented Finland. It concludes that the present combination of an unprecedented broadly-supported moderate Government and favorable long-run economic prospects can provide the best basis for meeting the threat. The report states that substantial and prompt Western economic assistance—more specifically, U.S. assistance—would help materially in the present situation both politically and economically.

Of possible interest in connection with the OCB discussion is our conviction (1) that U.S. security interests are deeply involved, (2) that there is need for prompt action, (3) that the Finnish request for a $20 million U.S. loan is reasonable, and (4) that the Finns can be expected to put U.S. loan assistance to appropriate use. Given sufficient means and a sense of strong Western backing, the democratic Finnish forces can be expected to act with resolution and courage as they did in the critical year of 1948 when they ousted the Communists from the Government and preserved their independence in the face of threatening Soviet moves dramatically exemplified by the Czech coup and the Berlin blockade.

Possible OCB Discussion

Principal controversy has centered on the propriety of making a recommendation and on what should be included in a recommendation. Treasury, which originally opposed any recommendation, now appears willing to recommend that the operating agencies promptly reconsider the Finnish problem. Budget and Treasury in particular have questioned the propriety of including specific amounts and sources of possible U.S. assistance to Finland; ICA’s is that provision for a $10 million loan to Finland can be made in FY 1959 only in a supplemental MSP appropriation request. Defense has yet to decide whether it is agreeable to the proposed local currency loan out of the proceeds of the FY 1958 PL 480 program; such a loan would involve a reallocation of PL 480 finnmarks, part of which were originally set aside for a U.S. military family housing project. State feels that to deal promptly with the immediate problem, and in the light of other requirements, it is practicable to meet Finnish requests for U.S. aid at this time only in part, while CIA and USIA feel that the U.S. can and should provide the full amount asked by Finland immediately.

Clearances

Clearances have been obtained from IO, P, W/MSC, INR, and E. Since no one is present in the office of the Under Secretary for Economic Affairs who is qualified to give W clearance, you are asked to clear for W. In a September 19 memorandum to Mr. Smith,³ICA, Mr. Dillon listed $10 million for Finland as a “possible requirement.” He defined this category as follows: “In this category are listed those requirements which are recognized as possible claims on available funds, but are considered not at this time to be sufficiently firm or to have sufficiently high priority to be listed in the other columns. In view of the shortage of reserve funds this year, it is highly unlikely that any of these requirements can be met. However, proposals for funding any requirements now reflected in the ‘possible’ column, but considered later to have high priority, may be submitted to me (or the Under Secretary in my absence) with supporting justification.” At the time he prepared this memorandum, Mr. Dillon had not seen Ambassador Hickerson’s letter of September 15.

Recommendation

That you urge the Board to concur in the State recommendations described in the report.

Attachment⁴

October 17, 1958.

OPERATIONS COORDINATING BOARD SPECIAL REPORT ON CURRENT SITUATION IN FINLAND (NSC 5403)

1. Finland’s postwar history appears to have reached a critical stage. The country is faced with both new opportunities and serious dangers at a time when the political and economic situation is temporarily stabilized.

2. The inflationary problem that plagued Finland for years is now apparently under reasonable control. The country’s finances are currently in the hands of conservative elements. The downward trend in economic activity during the past two years seems to have slowed and may be coming to an end. Finnish foreign trade is expected to show an export surplus this year. With an eventual economic revival anticipated in Western Europe, Finland’s long-run prospects appear favorable.

3. On the other hand, the volume of domestic and foreign trade, production, and consumption and investment are all below the level of last year. A large export surplus in trade with the USSR has developed, the Finns having accumulated a balance of 168 million rubles ($42 million) by the end of August, an amount representing almost 70% of Finnish imports from the Soviet Union during the first half of 1958. Unemployment, which has been increasing for the last three years, is now rising steeply by Finnish standards and is expected to reach record levels this coming winter. There is no present prospect of a resurgence of economic activity in the next few months which would stimulate a rise in production, absorbing a significant part of the unemployed.

4. At the end of August, after weeks of extremely difficult negotiations, the Finns resolved the immediate political crisis by forming an unprecedented 5-party Cabinet with broader parliamentary support than any previous postwar democratic coalition. The most disruptive elements—the Communists and dissident Social Democratic splinter group—are excluded from the Government. The Conservatives hold Cabinet positions for the first time since the war. The Social Democratic and Agrarian Cabinet Ministers generally represent the moderate elements of their respective parties. By their actions the democratic parties have demonstrated at least a temporary willingness to compose the deep political differences that have repeatedly frustrated efforts to establish long-term political and economic stability in the past. The Finns thus have a new opportunity to diminish bitter domestic strife, to develop more lasting and consistent national policies, and thereby to establish a sounder basis for the survival of democratic institutions.

5. However, political differences among the Government parties are merely submerged, not eliminated. The Agrarian Party, perhaps the most sensitive and unstable element in the Cabinet, was divided on the issue of taking Government posts. The Social Democrats and Agrarians are bitter competitors for rural labor support and both share suspicion toward the Conservatives. The Social Democrats are not only badly split, but they are highly vulnerable because of their governmental collaboration with the Conservatives.

6. Moreover, the Communist challenge is more threatening than at any time in the past ten years. In the July elections the Finnish Communists won the greatest popular support since 1945 (see Annex B).⁵ There has been unusually widespread consideration given to Communist participation in the Government. The Soviet Union has demonstrated its clear dissatisfaction with the present Government by harsh press criticism, by delaying trade talks and discussion of the proffered ruble loan by holding up various other economic negotiations, and by precipitately withdrawing and reassigning its Soviet Ambassador.

7. It is most unlikely that the Communist challenge can be met and the sharp intra-governmental differences kept below the surface unless the Cabinet can attain reasonable success in dealing with the nation’s economic difficulties which are the focus of political contention. Although the Government faces grave problems in balancing the budget and in revision of the farm income law, the problem of unemployment is the central political issue. While unemployment in Finland has perhaps not yet reached levels which would be considered especially dangerous in some other countries, in the Finnish case it has critical political implications, particularly because of its concentration in the underdeveloped northern regions of the country. It is in this area that the major political parties—Communists, Social Democrats and Agrarians—carry on their keenest competition. The Social Democrats and Agrarians insist that the Government attempt to deal with this problem by whatever means are available and at almost any cost. Immediate political necessity, as they see it, will require prompt remedial action.

8. In the long-term development of their economy the Finns envision a major investment program based to a large extent on foreign loans. As sources of these loans they would look to the IBRD, the United States, Western Europe and, as a last resort, to the Soviet Union. Private capital also represents a possible source of assistance, but thus far has not been attracted to Finland. (See Annex A)⁶

9. On July 2, 1958, Finland requested a $30 million loan from the U.S. as a component of an estimated $50–$60 million in long-term low-interest foreign loans which the Bank of Finland felt the country needed and could absorb and service efficiently. A second component of roughly $20 million was expected from the IBRD. As a consequence of the apparent willingness of the IBRD to consider a loan in excess of the tentative $20 million originally contemplated, the Finnish request to the U.S. has been scaled down to $20 million, a part of which could be in local currency.

10. The prospective IBRD loan will be devoted to the expansion of wood product industries, while a U.S. loan would be for hydro-electric development and the extension of credits to small industries. The great bulk of the economic development based on these loans would take place in the underdeveloped region of northern Finland. It is expected that such development would make an important contribution to the expansion of export capacity to the West, to the eventual resolution of current economic difficulties, and to the establishment of greater political stability.

11. If the Government loses its opportunity to establish a basis for long-run stability in the framework of Finland’s present independence and Western orientation, there is grave danger that intense political conflict among the several democratic groups will break out anew and return Finland to the disturbed economic and political condition that has marked its postwar history. In the event of the Government’s collapse in the near future, there is strong probability that its successor would include the Communists. The inclination to solve pressing economic problems and carry out industrial expansion by inflationary measures and the inefficient use of resources would increase; the pressure for closer economic ties to the USSR would inevitably mount.

Conclusions

12. The present fortuitous combination of a broadly-supported moderate Government and favorable long-run economic prospects can provide the best basis for meeting an increased threat to the U.S. objective of “continuance of an independent, economically healthy, and democratic Finland, basically oriented to the West (but with no attempts to incorporate Finland in a Western coalition), neither subject to undue reliance on Soviet bloc trade nor vulnerable to Soviet economic pressures” (NSC 5403).

13. Substantial and prompt Western economic assistance would help materially in meeting the threat. A major portion of that assistance will be forthcoming from the IBRD, but Finland has requested an additional amount for which political considerations indicate a need. Finland’s excellent credit record reflects a conservatism and scrupulousness in matters of this kind which make it unlikely that the Finns would borrow more than they can service. The Finns are looking to the U.S. as a principal source of the additional amount they desire and do not consider presently-available high-interest medium term credit from private West European sources as a satisfactory alternative.

14. While U.S. aid at this time cannot be expected to solve the immediate unemployment problem, it would have a major political and psychological impact by demonstrating to the Finns that they can rely on Western support when needed, thereby strengthening the democratic forces and, if given promptly, considerably improving the chances for survival of the present Government, the preservation of which is clearly in the interest of the United States. Moreover, in conjunction with IBRD assistance, it would provide long-term economic benefits. Finally, it would afford the Government an opportunity to settle for token assistance from the Soviet Union.

State Department Recommendations

15. In the light of the above, the U.S. Government should make every effort to ensure that current Finnish requests for loans from the U.S. and the IBRD are met as fully and as promptly as practicable. (CIA and USIA concur; ICA, Treasury and Defense reserve.)

16. Taking into account other U.S. requirements, it is considered practicable to meet the Finnish request for U.S. governmental loan assistance at this time only in part as follows:

a. by an immediate Finnmark loan of the equivalent of $3 million to be funded from the proceeds of the FY 1958 PL 480 program; and

b. by a dollar loan of $10 million to be funded in FY 1959 if during the course of the fiscal year it develops that MSP funds can be made available for this purpose. (State will recommend to the President that any necessary funds for this purpose be included in any Congressional presentation of an FY 1959 supplemental MSP appropriation request.) (CIA concurs; USIA concurs with the following substitution for b.: “b. by an immediate dollar loan of $10 million”; Treasury, ICA and Defense reserve.)

Notes:

(a) State has surveyed all possible alternative courses of action but has found no other practicable means of meeting immediate needs.

(b) It is the opinion of our Ambassador in Helsinki that the promptest possible action is required; that the proposed partial response in paragraph 16 to the Finnish request may be adequate to meet the immediate political dangers; that the situation is critical and should remain under close scrutiny, and that continuing consideration should be given to the need for additional loan assistance.

17. The U.S. Government should also make every effort to encourage other Western sources to provide loans to Finland to meet further Finnish credit requirements. (All agencies concur.)

0. Source: Department of State, OCB Files: Lot 62 D 430, Finland. Secret. Drafted by Nelson.
1. Attached below.
2. Document 187.
3. Not found in Department of State files.
4. Secret. This report, prepared by the OCB Working Group on Finland, was transmitted to the full Operations Coordinating Board in a memorandum dated October 20 from Acting OCB Executive Officer Roy M. Melbourne. At the initiative of the Department of State, the Board at its September 24 meeting had requested the Working Group to prepare the “Special Report.”
5. Annex B, a table entitled “Electoral Return Analysis in Finland (Communist Vote),” and dated October 17, is not printed.
6. Annex A, a fact sheet entitled “Foreign Economic Aid to Finland,” with details of recent Finnish loan requests and possible sources of aid to meet Finnish requirements, is not printed.