ECA Telegram Files, FRC Acc. No. 53A278, Paris Toeca: Telegram
The Chief of the ECA Mission in France (Bingham) to the Administrator for Economic Cooperation (Hoffman)
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Toeca 1392. Pass State and Treasury. Counterpart Series No. 68. Last week we precipitated talks on counterpart by informing French Government1 that under a strict interpretation of letters on counterpart our tentative estimates of inflationary borrowing by French treasury suggested that counterpart balances now in special account should be considered as not available for release for 1949 investment expenditures. Purpose of our action was not, of course, to require blocking but to stress to French Cabinet importance attached by ECA to sustained application of consistent program for economic and financial stabilization.
Petsche asked to see Harriman, Bruce and myself immediately. Clearly under strain from current cabinet discussions on budget and economic program, Petsche presented us with moving appeal on absolute necessity to continue release of counterpart in 1949 even though such a release may not be justifiable within strict technical terms of previous exchanges of letters. With repeated references to standards ECA required of France comparison to standards required of other countries, he pointed to obvious economic improvement in France which had resulted from our previous confidence in him and emphasized his 1950 budget which, with some victories and some defeats, he had fought through cabinet. Petsche stated flatly that, if he were forced to lift ceiling of advances to state at Bank of France at this time, it would destroy degree of stability attained. More serious than that, if cabinet raised question of new recourse to Bank of France during budget debate, Parliament would immediately “rush through this door” and refuse to approve new taxes requested while at same time increasing expenditures. Throughout discussion, Petsche hinted strongly at serious cabinet dissension on economic and financial program. In his view, refusal to release counterpart now in face of favorable economic results in past year would be interpreted as lack of confidence on part of United States and would lead to almost insuperable difficulties in present French Government. This is aside from question of his own resignation before he would lift ceiling of advances at central bank. Without counterpart, unless he is successful in obtaining proposed Swiss loan for SNCF, he is faced immediately with this [Page 679] decision. According to Petsche, Schuman is entirely in accord with his views and is anxious to discuss entire question with us before any precipitate action is taken.
In subsequent conversations we informed Petsche that difficult economic and financial situation in November had been expected for some time and that in connection with previous releases ECA Washington had requested adequate opportunity to review its position before additional releases were made. Petsche replied that without miracle December 5 was latest date he could wait. We informed Petsche that if his representatives would speed up preparations, we would urge Washing to complete its review by that time.
We stressed to Petsche that our basic concern was threat of a new price inflation in France. If such a development is not forestalled, new price-wages spiral would be inevitable, serious social and political crises would almost immediately result, any chance of liberalization of trade and payments on the continent would be torpedoed and, on the whole, European as well as French recovery would receive a serious setback. We asked Petsche to understand that, in the interests of France and of the other participating countries, ECA must avoid being identified in any way with such an economic deterioration in France. Next year, maintenance of remarkable recovery in France would considerably aid ECA in demonstrating that European recovery program is succeeding despite less dramatic progress in certain other respects. We told Petsche that if we were to justify a release of counterpart in December, our recommendation would be considerably strengthened if we could demonstrate that French Cabinet is fully cognizant of the problem of a threatening inflation and deterioration of public finances, and has program to forestall such developments. We urged upon Petsche the two lines of action on prices which seem immediately open to him. First is reinforcement of credit control and, second, a more rapid introduction of foreign competition through increased imports made possible by large cushion of unused drawing rights available to France.
We also asked that French Cabinet note undertaking in bilateral agreement to maintain financial stability. In our view, if efforts of French Government do not succeed in maintaining reasonable price stability, ECA could not, under terms of ECA act, agree to release of counterpart for expenditures in 1950 until such stability was again attained. In specific reply to request by Petsche for ECA commitment to release counterpart on annual basis as he has tentatively provided in 1950 budget, we indicated that for so long a time as shadow of renewed price inflation hangs over France, ECA must reserve right to review [Page 680] question of counterpart releases for expenditures, at least on quarterly basis.
Petsche made some preliminary comments yesterday. He gave usual comments on credit: (1) production times prices is higher than money supply; (2) business interests are strongly opposed; and (3) controls have no effect on nationalized industries nor on certain private industries with adequate self-financing. However, he said Baumgartner is now preparing certain specific measures to increase effectiveness of credit controls as anti-inflationary weapon. He cautioned that end of year is period of tax payments and that Baumgartner would have to take this into account.
On trade liberalization Petsche was less specific. He stressed need for time to overcome opposition from private interests, particularly agricultural. He underlined that this opposition was reflected strongly in French Cabinet itself. He pledged himself to keep his undertaking on the fifty-percent resolution of OEEC but said his task would be made much easier if he could demonstrate in his own government that France was receiving benefit of an equivalent trade liberalization in other countries. He made usual references to large percentage of government purchases in United Kingdom and referred to lukewarm reception given by Italy and Netherlands to French proposal for trade liberalization within regional grouping. He was not sanguine about his success if he is forced to appear to be liberalizing unilaterally.
We are inclined to agree with Petsche that refusal to approve further release of counterpart in 1949 would be interpreted as unjustified punitive action and would do more harm than possible good. Nevertheless, we intend to continue to make present informal representations to French Government and to discuss question on above lines with Schuman and, subject to his views, with Bidault. We are not, of course, in a position to estimate results of this approach, but it is becoming increasingly clear that continued strong representation of US views will be useful in counteracting threatening deterioration of economic policy of present cabinet. We request that you begin your review of French economic situation immediately. Necessary Information has either been sent or is currently being forwarded to you by airmail. Full statement of our representations to French Government also being airmailed.
Harriman and Bruce have participated in discussions and concur in this message.
- A new Cabinet headed by Georges Bidault took office on October 28. Maurice Petsche continued to serve as Minister of Finance and Economic Affairs, and Robert Schuman as Minister of Foreign Affairs.↩