Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

21. Memorandum of Conversation⁰

June 4, 1959.

SUBJECT

• Inter—departmental Meeting with Minister Erhard

[Here follows a list of 25 persons present, including Ludwig Erhard, Minister of Economics of the Federal Republic of Germany, Deputy Under Secretary of State for Political Affairs Robert Murphy, International Cooperation Administration Director James W. Riddleberger, Assistant Secretary of the Treasury T. Graydon Upton, Assistant Secretary of Agriculture Clarence L. Miller, Assistant Secretary of Commerce for International Affairs Henry Kearns, Acting Assistant Secretary of State for European Affairs Foy Kohler, Deputy Assistant Secretary of State Beale, and Special Assistant for Mutual Security Coordination John O. Bell.]

Mr. Murphy, after an exchange of courtesies, invited Minister Erhard to begin the discussions. The Minister stated he would first summarize the highlights of his meetings earlier that day with U.S. officials.¹ He referred to the importance of the stability of the dollar. He said that in his conversations he had made the point that with the disappearance of the gold standard, the dollar had become the world—wide economic measuring stick and that it was of utmost importance that the dollar should be protected. The Minister said that in taking the action necessary to protect our currencies, the United States Government and the German Government, as well as all other governments, must thwart selfish forces which are trying to advance their own interests by hindering the operation of free economy forces.

The Minister summarized the need for aid to less developed countries and pointed out that our motives must not be only humanitarian but also political since our future is very closely bound up with what happens to these underdeveloped areas. He said that he had been discussing the International Development Association with the House Foreign Affairs Committee earlier in the day and that he found a good deal of sympathy there with the idea. He said that there was also support for IDA in Germany but as yet there has been no cabinet decision concerning German participation.

Minister Erhard then referred to the German coal import restrictions and said that the restrictions had been imposed because of the huge pit—head accumulations of coal and threat of labor unrest in the Ruhr. He said that the German action on coal did not indicate a change in economic policy but that it was made principally for internal political reasons. He added that progress is being made in modernizing German coal mining and in eliminating uneconomic mines but that he did not want to exaggerate the amount of progress. The Minister said that in the case of coal import contracts which are being cancelled, honorable business practices are being followed by the Germans in paying penalties.

Mr. Murphy said that he understood that Minister Erhard had recently travelled extensively in Asia and that the meeting would be interested in hearing any observations the Minister might wish to make on economic aid for such areas. The Minister said that he found these countries wide open to Soviet influence. Soviet representatives are working hard to advance their interests in such areas and if we are to protect our political future we must act wisely and quickly. He said that we must not make the mistake of trying to impose our institutions and customs on these societies. We must help them but we must help them in a way that is compatible with their pattern of life. The Minister said that if the aid given is government—to-government aid there is a likelihood of suspicion on the part of the receiving country that political motives are foremost. There is also the possibility of embarrassment for the donor countries in such situations. The Minister said he thought it was better whenever possible to have aid made available through private commercial channels or through multilateral organizations.

One of the great problems in this connection, Minister Erhard thought, was that the less developed countries are anxious to move very fast. They are aware of the wide gap between their own economic situations and those of the Western countries and they are extremely anxious to close the gap. He said that in the less developed countries of the world attention is now riveted on China and India. The success of the totalitarian Communist approach in China as compared with the liberal capitalist approach in India may set the pattern for economic development in many other parts of the world. The Minister said that if the less developed countries followed the totalitarian path, Europe will fall before their weight in a relatively short time.

Minister Erhard said he believed we had found government—to-government aid often presented serious difficulties and that perhaps we would agree with him that a multilateral aid organization can function more effectively in terms of free world interests. Minister Erhard said such an institution could exert pressures that could not be exerted by individual governments and added that the provision of capital without the necessary discipline on the part of the receiving country is particularly undesirable. He went on to point out that he was not saying that we had to choose between multilateral and bilateral government-to-government arrangements since he thought there was room for both. However, he preferred the multilateral approach where governments of lending countries were involved. He would like to see the emphasis in that direction with a clearing house in Washington, operated either by the World Bank or the IMF. The Minister said he thought the contributing countries could get together and plan aid programs and perhaps assign certain areas to certain contributing countries.

The Minister said that we must help the less developed countries industrialize but we should not encourage the immediate establishment of big industries. He said he thought it was better in such countries to have simultaneous development of a number of smaller industries so that a sound organic growth of the social economy could take place. Techniques, skills and knowledge would be acquired by many more people where small diversified enterprises are involved. During his tour in Asia, he had concluded that the only important resentment carried over from the colonial period was in connection with the countries’ feeling they had been left with the burden of a one-crop economy and that they had to import much of their food and practically all their industrial needs. The Minister said that he thought it was desirable that these countries be enabled to improve their agricultural methods so that they would not be as dependent on imported foods. In addition, they also need to industrialize. He said that these countries in many cases have good craftsmen and that we should try to build on this asset by helping them establish healthy small industries. The Minister said we must apply a great deal of imagination to help develop these people into full-fledged consumers. He said that with development in this direction we must realize that we will have to accept changes in our own industrial structure if we wish to keep the free world together.

Mr. Murphy said that since the end of the war the U.S. had had a good deal of experience with economic aid and that we had modified our program in the light of that experience. He said that some of our disappointments had come as a result of economic programs which had to be undertaken on a crash basis as a result of political or military crises. Where there is an opportunity to plan ahead he would be in complete agreement with what Minister Erhard had said. Mr. Murphy said that one of the dangers we face is that Asians, for instance, come to the U.S. and find our methods and our economy so far beyond their own that they come to the conclusion that it is hopeless to try to follow our example. They find that Communist China, for example, seems to present a much more realizable goal, taking into consideration their own starting point. Minister Erhard said that a proposal was now before the German parliament to make certain guarantees for private investments in less developed countries. He thought that such a move was desirable and would increase Germany’s contribution toward the solution of the problem.

The Minister said that the people in the receiving countries must see improvement not only in statistics but in their personal lives. For this reason, he felt that it was often mistaken to direct our aid toward foreign government planning agencies which might put money into prestige projects which would have very little effect in the foreseeable future on the lives of individuals in the country. He emphasized again his conviction that by channeling aid through private groups the opportunities for affecting individual lives in the receiving countries were greatly increased.

Mr. Riddleberger commented that the German Government had recently guaranteed private export credits to Greece amounting to about $48 million. He said that it was his understanding that the Greeks were using the credits for importing consumers’ goods and that the drachmas resulting from their sale would be used for industrial development. He said this arrangement was somewhat surprising to him. Minister Erhard said that as far as he knew the credit was not tied to consumers’ goods but that it was a choice which the Greek Government had made. Perhaps by applying the credits to consumers’ goods they were able to liberate other funds for industrial application.

Mr. Upton said that the development of IDA would probably mean the growth in number of loans to a given country and asked whether this perhaps might be a danger. Minister Erhard said that it was true that a number of smaller loans made the matter of control more difficult but that while, from a financial and administrative point of view, it might be simpler to have a few large loans, such an arrangement might not meet the actual economic needs of a country.

Mr. Bell said that he was particularly interested in knowing what the Minister thought could be done to make people more aware of the aid being supplied. Minister Erhard replied that in many of our aid programs the donor countries seemed to be in a competition with one another to render aid. He thought that such an attitude has a very unfortunate effect on the recipient countries and that we must establish the fact that we are interested in aiding the receiving countries, not in gaining some advantage for ourselves.

Mr. Kearns asked what the Minister thought the relative force of protectionist and free trade influences was in the Common Market. The Minister answered that the treaty of the Common Market does not provide for protectionism. When the treaty was entered into, the countries in the Common Market were not of the same economic philosophy but the situation has improved with French reform of exchange rates and import restrictions. He said it is still important to try to get the Common Market and the non-Common Market countries together. He said that it was his opinion that the non-six among the OEEC countries in Europe were too heterogeneous a group to be able to form their own organization. The Minister said that last January when the first tariff reductions took place in the Common Market countries, the six decided to give these same reductions to the non-Common Market countries. He said that he considered this an indication of the long-run attitude of the Common Market which will have the goal of free trade. He said that the world has become so small that we cannot afford closed groups such as some people fear the Common Market might become. He said that a European preferential system is not the aim of the Common Market but the hope is that the development of the Common Market will be accompanied by a general relaxing of trade barriers.

In response to a request by Mr. Murphy, Mr. Terrill² explained that the commitment of the Soviet Government under the seven-year plan will mean enormous need for capital goods. He said that it had been noted that the Soviets in their plan have not increased provisions for exports to earn foreign currency. As a result they are looking for outside capital and credits. Whatever they do export on a large scale will probably be sent to the less developed countries for political motives. For these reasons Mr. Terrill said that he felt it was important that we should not facilitate Soviet reaching of objectives by supplying them with credits.

Minister Erhard replied by saying that he agreed with this analysis, particularly in respect to withholding products concerning which we have an advantage over the Soviets. The Minister said that he also agreed that it was undesirable to give credits to the Soviet Union. He urged that a common policy be agreed within NATO on this subject and this policy be adhered to by all the participating countries. Otherwise, some governments, such as the Federal Republic, might be placed in the position of discriminating against their own suppliers. Minister Erhard said that when the Soviet-German trade agreement was signed, and the figure of DM 500 million in annual trade was established, the Germans had a very difficult time trying to reach that volume. He said that all the Soviets wanted to sell was coal and oil. The Minister then went on to say that what would really make him applaud the Soviets would be their improving consumer welfare. He said that there was definitely a push for better life within the Soviet Union but it was not possible to tell how potent these forces are or how far they would go to achieve their objective.

Mr. Miller said that there was interest in the American agricultural community as to what the effect of the Common Market would be on our agricultural exports. Minister Erhard replied that there was protection of agricultural items in the Common Market and he asked if Mr. Miller could name any country that does not protect its agricultural producers.

Mr. Murphy asked the Minister why he thought the Soviets chose this particular time to raise the Berlin problem. The Minister replied that he sees the Soviet move as part of a whole pattern of East-West tensions. On his recent trip to Iran, he found that the Persians believe that the Russians moved against Berlin in order to distract attention from expected moves in the Near and Middle East. He said that the Russians have found that we are not soft regarding Berlin and that they must now discover a graceful way of retreating. In so doing, they would pose as the champions of peace. He said that the Russians turn truthfulness and morality upside down. They thought that by their timing of this maneuver they might have some chance of splitting the West at a time when elections were being held in England and other countries.

Mr. Frank³ said that we all were gratified at the end of the recent GATT meeting to find Germany was able to liberalize further and that Dr. Erhard’s promotion of convertibility had been so successful. However, we were disturbed by the residue of bilateralism which remained in German trade policies and that we felt that such arrangements could not be justified any longer on the basis of balance of payments problems. Minister Erhard replied that Mr. Frank was correct in principle but that he must realize that the economic situation in each country requires special study. The Minister said that the U.S. practices protectionism to some extent as does every other country. He said that he is glad that GATT is in existence and believes it is doing a good job but that the organization cannot take care of all the complicated problems existing in each country’s economy. He said that the GATT rules were particularly hard to apply to countries in transition toward a mature economy.

Mr. Beale said that he and the rest of the American delegation at Geneva were most appreciative of the excellent job which the German delegation had done in Geneva under the leadership of Dr. Klein and that we were grateful for what Minister Erhard had done in resolving the problems which remained at the end of the meeting. Minister Erhard thanked Mr. Beale for the important contribution he had made to the successful negotiations in Geneva.

(During the course of the meeting the Minister received a three-page telegram which, it later became known, contained the first news of Adenauer’s decision to remain Chancellor. The Minister carried on the balance of the discussion without being visibly affected.)

0. Source: Department of State, Central Files, 033.62A11/6–459. Confidential. Drafted by John E. Devine of the Office of German Affairs and approved by Murphy.
1. A memorandum of a conversation that day between Minister Erhard and members of the Council of Economic Advisers is ibid. An extract of the memorandum of a conversation the same day among Erhard, Secretary Anderson, and Acting Secretary Dillon is scheduled for publication in the European regional compilation in volume VII.
2. Robert P. Terrill.
3. Presumably Isaiah Frank, Deputy Director of the Office of International Trade.