864.50/2–1546: Telegram
The Minister in Hungary (Schoenfeld) to the Secretary of State
priority
[Received February 16—9:12 a.m.]
330. The manifest possibility of engulfment of Hungarian economy in USSR has led me to analyze significance of economic developments as currently reported during the first year of Russian occupation with particular reference to the dangers inherent in the situation.
Hungary’s financial deterioration is now proceeding at runaway pace. This week American dollar increased from 800,000 to over 1,800,000 pengö, prices more than doubled and currency circulation passed 2 million millions. State expenditures in February are expected to pass 5 million millions financed almost entirely by new currency.
Time is rapidly and inevitably approaching when Hungarian currency will cease entirely to be acceptable as medium of exchange. All economic activity will then stop except that which can be transacted [Page 259] on barter basis. Most of Hungarian population is agricultural and can survive under barter economy. Balance and particularly that part of urban population which relies on money income will be driven to desperation. In Budapest where most of population depends on money income complete loss of purchasing power of money can readily lead to civil rioting and looting, especially if labor is incited to action. Under these conditions and in absence of adequate Hungarian authority public order could only be restored by army of occupation.
This course of events could probably be avoided even at this late date by prompt rehabilitation measures. Such measures, however, are beyond power of Hungarian authorities and, in my opinion, include at least four essentials (my 945, November 22, 194523):
- 1.
- Rescheduling Hungary’s foreign obligations, especially reparations, over longer period of years to accord with country’s present and prospective production capacity;
- 2.
- Reducing and regularizing claims made on country for provisioning army of occupation;
- 3.
- Providing foreign assistance in form of transport raw materials and equipment most urgently needed for resumption of production; and
- 4.
- Importing sufficient food and medical supplies to provide urban population until next harvest with minimum required for working efficiency.
During past month it has seemed evident that for the present USSR is not prepared to give Hungary assistance along lines indicated above and that apart from delayed consent to UNRRA and other minor relief Soviet policy seeks to prevent such assistance from other sources. Witness history of US offer to cooperate with UK and USSR in Hungarian rehabilitation.
Unwillingness of USSR to facilitate rehabilitation of Hungary at this time and its contribution to country’s economic disintegration is palpably part of Soviet strategy of economic penetration of Hungary which has been in process since last summer and is now in full swing. It is evident to all local observers and cannot have escaped the attention of our eastern allies that resistance offered by Hungarians to such penetration varies directly with their morale. When future appears hopeful resistance is at maximum; when morale is low it is at minimum. The feeling of hopelessness in regard to financial situation now expressed so frequently by Hungarian leaders (see, for example, my 301, February 1323) is a strong indication that Hungarians will accept Soviet economic proposals currently under negotiation. (My 277, February 11.23)
[Page 260]I anticipate a start of Soviet interest in rehabilitation of Hungary just as soon as USSR’s economic penetration program is substantially completed and no sooner. It will then be to Soviet interest to revive Hungarian economy and increase productivity of newly-acquired Soviet assets in Hungary. We may then expect Moscow to support view that Hungarian reconstruction requires foreign capital and that US should provide capital for that purpose. US will then be confronted with choice either of assisting a badly devastated area knowing that such assistance will primarily benefit USSR or of declining to render assistance with knowledge that there is still another area to threaten world peace.
In my view such Soviet strategy can be combated only along two lines: (a) unequivocal US effort to reach the earliest possible US-Soviet understanding re eastern Europe and (b) in anticipation of that eventual understanding giving Hungarians all assistance consistent with American policy and which promises to foster effort of Hungarians themselves to maintain some semblance of political and economic autonomy.
Vast majority of thinking Hungarians are, I believe, convinced that present Soviet penetration is more far-reaching and more likely to endure than recent German penetration and would strive to prevent it. However, people preoccupied with survival and threatened with immediate chaos make ineffective fighters. An economy stripped of food, transport, machines and raw materials finds it difficult to decline the proffer of any phantom assistance, however high its price. To date American attention to this problem has been relatively slight and our economic policy has given little encouragement to those opposed to Soviet penetration. In fact that policy has provided arguments to strengthen case of Hungarian minority which advocates exclusive collaboration with Soviet. (My 273 and 281, February 9.24)
It is increasingly evident that USSR through successive and individually tentative steps bids fair to advance steadily in this area and elsewhere in Europe much as Nazi Germany advanced through the late thirties. During 1945 Hungary lay in the front line; it is already becoming a Soviet interior area. It may be expected that in relatively short time Hungary will become an economic colony of USSR from which western trade will be excluded and in which western investments will be totally lost.
Sent Dept as 330; repeated to Moscow as 84; London as 91; Bucharest as 14; Belgrade as 11; Sofia as 5 and Warsaw as No. 2.