Foreign Relations of the United States, 1952–1954, Western Europe and Canada, Volume VI, Part 2

751.5 MSP/3–2153: Telegram

No. 576
The Ambassador in France (Dillon) to the Department of State

secret

Paris, March 21, 1953—7 p.m.

5177. Limit distribution. This is a joint Embassy/MSA Mission message. Department pass MSA/W for Timmons and pass Treasury. Re Department airgram A–1587, March 6.¹

1. Since closing weeks 1952 when French external position took decided turn for the worse, we have been maintaining close watch on French balance of payments and have been making special effort to get fuller idea French thinking re means of dealing with continuing deficit both in immediate future and over longer term. Embassy and MSA Mission officers have gone over this ground in a number of discussions with Bourges-Maunoury, Buron, Guindey, Clermont-Tonnerre and other French officials concerned.

2. Salient point emerging from this series of discussions is that French authorities have no comprehensive plans for dealing with situation.

(a) It is generally acknowledged that “technical” measures to curb external deficit have already been pushed to an extreme licensing controls on imports and invisible payments have been severely tightened, and tax rebates on exports could not be expanded much farther. Nevertheless, in face of continuing EPU deficits, French have been studying possibility of further cuts in import program for that area.

(b) There have been many allegations to the effect that sterling import restrictions are at boot of French difficulties in EPU, and one line of French policy has been to try and obtain some concessions from UK in this regard. However, most French experts admit that even if sterling markets were re-opened to other EPU countries—and British appear on the eve of some steps in that direction as it is by no means certain, given generally high level of French costs and prices, that franc could take sufficient advantage of such an opportunity to redress her sterling position fully.

(c) There is little hope, from political and social point of view, of implementing oft-repeated suggestion that French costs must be deflated to bring them more in line with production costs of France’s major trading partners.

(d) It is clear from French comments that government is reluctant to reverse policy established by Pinay on question of adjusting franc rate, unless it can find some sort of facesaving device through which the real nature of the operation could be disguised.

3. In face of this impasse only visible French plan for immediate future is to continue to struggle along, thanks primarily to the various categories of extraordinary dollar receipts, until such time as some external development as for example, some action on the part of the British with respect to sterling—provides them with an opportunity to proceed gracefully with a rate adjustment. This appears to be motive underlying their efforts to obtain line of credit from Exim-bank against expected $255 million in budget-supporting OSP. It was also consideration which prompted them to raise possibility of allotment of special resources out remaining defense support aid to cover their EPU deficit from February. Notwithstanding decision of Ministry of Finance to withdraw request for allotment to cover February deficit, it is not to be excluded that similar request may be made in connection with anticipated March deficit.

5. [sic] Thus until now, although there has been considerable pressure on French to come to grips with the problem created by the overvaluation of the franc, they have been able to withstand that pressure through a series of makeshift devices. In one sense granting of Export-Import Bank credit against budget-supporting OSP contracts would mean giving the French another facility which would enable them to postpone any decisions in the exchange rate field. At the moment, the French net loss of dollars is very slight, and if a substantial amount of budget supporting OSP is mobilized, they may be able to get along (despite debt service payments due July 1) until another “run” on their foreign exchange resource occurs. That this will develop sooner or later is a foregone conclusion in the light of the unsatisfactory underlying situation. Such postponement implies during the interim continuance of the distorted pattern of French trade and its adverse effects on other EPU countries.

6. Embassy and Mission are aware that a refusal to grant Export-Import Bank loan would not necessarily precipitate any action on part of French. For one thing they might be able to find private US banks which would be prepared to extend them dollar credit against budget-supporting OSP contracts (even though they have informally indicated their reluctance to deal with private banks in this connection). Nevertheless, we believe US Government should weigh most carefully any proposed action which would tend to relieve balance of payments pressure on French at this time, in order to satisfy ourselves fully as to whether such a development would serve either our objectives in France specifically or our interests generally.

7. Moreover, we recognize that certain arguments can be made in favor of granting French request:

(a) The demands on French dollar availabilities may become acute enough, without mobilization of budget-supporting OSP contracts, to oblige French Government to draw upon gold reserve of Bank of France to cover payments deficit. It is possible that US might be tagged with bill for this development on argument that it could have been avoided through Export-Import Bank loan. In any case, such a development would in all likelihood provoke increase in volume of capital flight and this exacerbate deficit over short-run. However, this would have to be regarded as a necessary concomitant to objective of forcing French to decision. If handled correctly, rate adjustment could be occasion for definite reversal of capital movements, so that money which leaves France during period when pressure is building up would not be permanently lost.

(b) If refusal of credit facilities should in fact cause French to draw on Bank of France gold, it is possible that attendant financial and economic consequences would produce climate which could prejudice ratification EDC.

(c) As indicated paragraph 3 above, one of principal elements behind French procrastination appears to be their hope that British will shortly make some move in external financial field, with which franc rate adjustment could be associated. Obviously such timing would be extremely helpful to French in limiting adverse psychological effects of devaluation. Embassy and Mission are naturally not in position assess possibilities any early British action. However, it is our feeling that it would be unfortunate to assist French to continue to drift merely on an outside by [but?] unconfirmed chance that favorable opportunity might arise out of British situation.

8. We do not mean to suggest that we think exchange rate adjustment would automatically solve all economic and financial difficulties of France. There are number of other necessary and desirable reforms. However, overvalued currency appears to be most urgent problem, for the longer it is allowed to continue, the greater the anomalies and distortions which it produces in French economic structure and activity and the greater the amount of foreign exchange resources dissipated in uneconomic operations.

9. We will continue to follow situation and to report any additional information developed re French plans to deal with continuing payments deficit. We recommend that in any case no decision be taken on request for Export-Import Bank loan until after Mayer visit to Washington, since discussions should provide opportunity to draw French out on problems alluded to in this telegram.

Dillon

1. This airgram requested the views of the Embassy concerning the possible adjustment of the phasing of French dollar receipts from the United States and a summary of French notions regarding their dollar outlook for the next 4 to 6 months. (751.5 MSP/3–653)