Foreign Relations of the United States, 1949, Western Europe, Volume IV

ECA Telegram Files, FRC Acc. No. 53A278, Paris Ecato: Telegram

The Acting Administrator for Economic Cooperation (Foster) to the ECA Mission in France

secret

Washington, December 6, 1949—9 p.m.

Ecato 1057. 1. French counterpart policy has been reviewed by Working Group of NAC agencies and following action jointly agreed upon.

2. We approve final release of 37 billion francs for investment expenditures during month of December. Approval of this release, despite our dissatisfaction with French performance relative to commitments against inflationary financing, reflects conviction that failure to release at this time would not accomplish any improvement in French monetary policies during coming month and that adverse political repercussions of failure to release at this time would outweigh possible benefits. Approval of regularization of 30 billion franc advance on basis of bookkeeping transaction involving simultaneous release of funds and repayment by French Treasury has already been granted (Ecato 930).¹

3. We propose that release of 37 billion francs for month of December be approved in form of exchange of letters between you and Petsche, contents of which should differ somewhat from proposal contained in Toeca 1416.² Suggested changes in text of the two letters are as follows:

(a) French Government statement in connection with request for release of 37 billion francs appears unduly self-congratulatory and minimizes significance of recent inflationary developments as well as magnitude of French budgetary deficit and breach of anti-inflationary commitments as indicated in first para of Toeca 1419.³ Statement on improvement in trade balance should also be modified to indicate unsatisfactory performance in crucial sector of dollar exports. To extent that you have influence over text of Petsche’s letter, we suggest that you attempt above revisions to make letter conform more closely to actual developments.

(b) Suggest your reply take following line:

In first 8 months of 1949 French Government had made impressive progress towards restoring stability to French economy. Through its efforts to maintain over-all Government expenditures within the Law of Maxima, to raise additional revenue, and to support credit controls in the face of strong opposition, it succeeded in bringing series of inflationary movements in France to a virtual halt.

During the last 4 months, however, these movements appear to have taken on new life and we are disturbed about possibility that they will gain still further momentum and proceed to point where they may impair French recovery effort.

This development makes all the more pertinent the assurances that French Government gave the US during the course of past year concerning measures it would adopt to combat inflation in France. These assurances, which were contained in Petsche letters of April 26 and August 5, 1949⁴ concerned non-inflationary financing of French budget during 1949, maintenance of credit controls, and progressive freeing of external trade and payments. These measures have not in past several months been fully carried out and if appropriate policies are not adopted in future, French Government will be in position of contributing to resurgence of inflationary forces in France and will have ignored avenues which are open to it for checking these forces. We are fearful of effects on French economy that such a combination of circumstances might entail. In this regard attention of French might be invited not only to assurances which letters referred to above contained concerning application of measures for achieving economic stability in France, but also to terms of bilateral agreement between US and France stating that France would use its best endeavors to balance its Government budget as soon as practicable and maintain internal financial stability.

In view of these circumstances, we can only agree reluctantly to release of 37 billion francs from counterpart fund for investment expenditures in December. Such agreement on our part should not be considered as indication that the US is fully satisfied with manner in which French Government has fulfilled its assurances to US on subject of achieving internal stability, but rather in the expectation that more effective measures will be adopted during coming year, on which our mutual attention should be primarily focused at this time. In this connection, suggestion might be made for representatives of French and US Govts to meet in near future for purpose of reviewing in detail present economic situation in France and policies which it would appear necessary for French Govt to pursue in fields of budgetary, credit, and trade policy in order to assure achievement and maintenance of stability during 1950. It would be our hope that we might reach specific agreement concerning present and prospective economic developments and related policies so that we could agree to begin release of counterpart funds for 1950 in knowledge that purposes of such releases and of ECA assistance in general are being fulfilled to maximum degree possible. (End of suggestions re letr to Petsche)

4. You should indicate to French Govt either in exchange of letters as suggested above or separately, as you see fit, that ECA is in no way committed at present time to release of 250 billion francs from counterpart fund which appear without qualification in all versions of French budget for 1950. 1950 counterpart program will be reviewed in consultation with NAC following agreement between ECA and French Govt on specific economic policies of French Govt which would provide basis for these releases. In this connection, particular attention will be paid to actual developments in field of financial stabilization as well as to declared policies of French in this field.

5. With regard to 1950 counterpart fund program, we believe it is important to re-examine whole question of effectiveness our control over counterpart fund releases. We have always recognized that such control constitutes delicate and fragile weapon and that its effectiveness is limited to extent that French Govt is reluctant to request increase Bank of France ceiling or resort to other means financing if releases of counterpart funds are withheld. We must make certain that the effectiveness of this weapon is not further impaired by possible feeling on part of French Govt that in last analysis, releases will never be withheld.

Accordingly, we would suggest that as a condition of any counterpart release in 1950, French must reach agreement with us on precise commitments regarding the maintenance or achievement of financial stability and other appropriate objectives. As further condition, the French must have carried out previously agreed upon measures toward this end except in event that special extenuating circumstances (such as abatement of inflationary pressure, unforeseen economic or political developments) might have intervened.

In absence of these conditions, we would be prepared to refuse counterpart releases and this position should be made perfectly clear to French. If releases of counterpart in 1950 are geared thus to review, in light of existing and future economic situation, of French performance compared with specific commitments on economic objectives and policies related thereto, our position with regard to releasing or not releasing would be less equivocal. This appears to coincide with your views expressed in para 5 Toeca 1392.⁵

We would, of course, have to recognize that in considering a refusal to effect a release of counterpart, political or other consequences of such refusal would of necessity be taken into account.

Further recommendation is that releases be made on quarterly basis following joint review of situation as described above. Monthly releases tend to weaken our bargaining position and are particularly susceptible to incomplete review of situation and exchange of promises which cannot be or are not realized.

6. We suggest that you invite French Govt to discuss immediately with you specific program which could provide basis for NAC approval of releases for 1950. Agenda for this discussion has not been referred to Working Group: following are brief ECA comments of illustrative nature on some possible subjects.

(a) 1950 Budget. New budget represents substantial progress on receipts side, provided that measures of fiscal enforcement and new taxation will be pushed with full vigor by French with ECA support. Substantial increase in programmed expenditures is cause for alarm, however, particularly since experience indicates that French expenditures are always higher, and receipts lower, than initial forecasts. Present budget leaves door open for inflationary financing of deficit which will remain under most favorable of circumstances, and makes adoption of further anti-inflationary policies imperative. We recognize that it is probably impossible for tactical reasons to obtain further budgetary economies at this time, however desirable they may be, but government will undoubtedly require strong pressures to remain within present ceilings. In this connection, adoption of new law of maxima must be prerequisite to any release of counterpart in 1950. Can you suggest specific commitments re fiscal enforcement or government expenditures that could be conditions for future releases?

(b) Credit Restrictions. Contents of Toeca 1418⁶ have not yet been fully digested. We suggest that you consider whether Bank of France replies are technically accurate and whether further pressures for tighter restrictions would be effective and are necessary. Bank of France statement that rise in rediscounts not subject to ceiling is due to loans to nationalized enterprises may place blame in proper quarters but does not solve problem of large credit expansion not subject to control via rediscount ceiling. 1950 budget apparently closes this loop hole, and it is important that some such scheme prevent deficit of nationalized enterprises from mounting continually via easy credit facilities. Utilization of qualitative controls to bring pressure on distributors margins in special sectors would appear to be very worthwhile program. We also suggest consideration of qualitative credit controls in sectors where inventories are abnormally high for speculative purposes or where price-fixing practices are apparent.

(c) Trade Liberalization. French performance in this field particularly unsatisfactory and we note discrepancy between avowed French leadership on trade liberalization and concrete measures adopted which are less impressive than for most other ERP countries. Reimposition of tariffs and recurrent evidence of resurgence of cartel agreements minimize effectiveness of those procedures which have been adopted. It may be desirable to set as firm condition for release of counterpart in 1950 French achievement of 50% removal of quantitative restrictions accepted as goal by OEEC and pledged by Petsche in Toeca 1416. We recognize that 50% figure may be somewhat arbitrary, but suggest that ECA insistence upon substantial measure of trade liberalization based on specific figure of this kind may serve useful purpose of bolstering government position in face of strong opposition voiced by agricultural and industrial groups. In turn, we might consider use of a portion of counterpart funds, to cushion temporary dislocations taking form of reduced output and unemployment in sensitive areas.

(d) Price Policy. The prevalence of restrictive business practices in France poses serious obstacle to all measures designed towards price stabilization. If the necessary adjustments in wage structure which will result from decision to return to collective bargaining produce general increase in wages, and if restraints of competition threaten to translate these increases into price rises, direct remedial action will be imperative. The beneficial impact of trade liberalization measures will also be imperilled by such price-fixing agreements. General policy statement on restrictive practices in participating countries is being prepared in ECA/W. Bilateral Agreement contains strong French anti-cartel commitment, but we should consider whether counterpart fund is appropriate additional device for getting some real performance under this commitment. Possible economies in social security should also be considered in relation price structure.

Pass to OSR.

Foster

1. October 27, p. 673.
2. Telegram Toeca 1416 from Paris, November 29, 1 p. m., not printed.
3. Telegram Toeca 1419 from Paris, November 29, not printed; it reported a considerable deterioration in French public finances, related particularly to costs of military operations in Indochina, difficulties of the French railroad system, and problems of foreign exchange and balance of payments (ECA Telegram Files, FRC Acc. No. 53A278, Paris Toeca).
4. Neither printed.
5. Telegram Toeca 1392 from Paris, November 21, 8 p.m., p. 678.
6. Telegram Toeca 1418 from Paris, November 29, 2 p. m., not printed; it reported on recent discussions by ECA Mission officials with officials of the Bank of France, who recognized inflationary dangers and were willing to go as far as they could, within existing controls, to restrict credit. It further stated that the Bank was at that time not “prepared to go seriously beyond present controls, to undertake actual reduction in outstanding credit, or, in general, to take any drastic deflationary action.” The French Government, in addition to its anti-inflationary policy, was committed to maintenance of full employment and high economic activity, and the Bank was unwilling to jeopardize these objectives. (ECA Telegram Files, FRC Acc. No. 53A278, Paris Toeca)