Surveys of U.S. International Finance, 1950 9781400887675

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SURVEY OF UNITED STATES INTERNATIONAL FINANCE

1950 INTERNATIONAL FINANCE SECTION PRINCETON UNIVERSITY

PRINCETON UNIVERSITY PRESS

SURVEY OF UNITED STATES INTERNATIONAL FINANCE 19 5 0 BY

GARDNER

PATTERSON AND

JACK

N.

BEHRMAN

INTERNATIONAL FINANCE SECTION D E P A R T M E N T OF ECONOMICS AND SOCIAL INSTITUTIONS PRINCETON UNIVERSITY

PRINCETON

UNIVERSITY

PRESS

Copyright, 1951, by Princeton University Press London: Geoffrey Cumberlege, Oxford University Press

Princeton Legacy Library edition 2017 Paperback ISBN: 978-0-691-62838-7 Hardcover ISBN: 978-0-691-62873-8

Printed in the United States of America by Princeton University Press, Princeton, New Jersey

P R E F A C E

IN THE preface to the Survey of United States International Fi­ nance—1949, we stated that the document was an experiment and that die preparation of similar surveys for future years would depend on whether the first one proved of value as a source of reasonably current information and as a reference to persons seriously concerned with the international financial affairs of the United States. We have been encouraged to continue the work, but the project is still regarded as an experiment. Our objective continues to be the modest one of orderly and accurate reporting. We have, therefore, except for an occasional footnote, refrained from any independent analysis of the many topics presented. There is, of course, need for rigorous analysis of the international policies and activities of the United States, and we hope this document may supply some of the raw material for such work. In an historical record such as this a source could be cited for every statement but such documentation was considered unnecessary. However, since this is a survey and no subject has been treated exhaustively, we have cited the more important sources—especially original documents—to aid those who wish more detailed information. While an attempt has been made to include enough background material to make intelligible the 1950 record as here presented, we have not repeated the material presented in the previous Survey, and many references to the earlier study have therefore been made. By and large, this document is concerned only with the year 1950, but in a few cases developments during early 1951 have been included if they appear to qualify importantly or to complete actions taken during 1950. In a few instances material which became available after going to press has been inserted in summary form in brackets. Again we would warn the reader that almost all statistics on international financial transactions are estimates and so are not only subject to considerable error but are frequently revised. In

PREFACE preparing this survey we have included the latest estimates available at the time o£ correcting galley proofs, but further revisions will doubtless be made in much of the data, and readers desiring later estimates are advised to consult the issues dated after April 1951 of the various official reports cited as sources. For security reasons data published during the last half of 1950 have not been as detailed as previously. In addition to the cooperation of members of the Department of Economics and Social Institutions of Princeton University, considerable assistance has been received from Mrs. Mary B. Fernholz of the International Finance Section, Miss Laura S. Turnbull, Curator of the Benjamin Strong Collection of the International Finance Section, and Miss Dorothea Collins, Librarian of the Pliny Fisk Library of Economics and Finance of the Princeton University Library. Several persons outside the University have been kind enough to check the various parts of the study for accuracy but they share no responsibility for the final document. While this is a staff study and no section is entirely the work of one person, Mr. Jack N. Behrman is primarily responsible for Chapters I through IV and the undersigned for Chapters V and VI.

Princeton University ApHl 19S1

GABDNER PATTERSON, Director INTERNATIONAL FINANCE SECTION

C O N T E N T S

Page

Preface

iii

Introduction

1

I. GRANT PROGRAMS Introduction A. European Recovery Program Legislative Issues and Changes ECA Programs for Europe a. Geographic allocation of aid b. Commodities supplied c. Purchases in the United States d. Technical assistance e. Industrial projects program f. Counterpartfunds g. Development of overseas territories Changing Role of ECA B. Mutual Defense Assistance Program Introduction Legislative Changes Progress toward Mutual Defense C. Yugoslav Aid Program D. Economic Aid Programs in Asia Korean Aid Program China Aid Program Aid to Southeast Asia Occupied Areas Program —Japan Philippine Aid Programs a. Private war-damage claims b. Public reconstruction c. Bell mission E. Emergency Relief and Refugee Programs International Children's Emergency Fimd International Refugee Organization Relief for Palestine Refugees F. Total United States Government Grants G. Miscellaneous Government Unilateral Transfers and Receipts ν

5 5 6 6 17 20 22 23 25 27 29 30 32 36 36 40 48 54 56 57 59 61 64 66 67 68 69 72 72 74 75 77 78

CONTENTS

Η. Financial Outlays by the United States Government to International Organizations I. Private Remittances

80 83

II. POINT FOUR PROGRAM Introduction A. Technical Assistance Congressional Action Bilateral Activities United Nations Expanded Program B. Capital Assistance United Nations Debates United States Encouragement of Private Foreign In vestment a. ECA investment guarantees b. Export-Import Bank investment guarantees c. Provision of a favorable climate (1) Treaties of friendship, commerce and navigation (2) Tax reforms and conventions C. Major Policy Issues and Expansion of the Point Four Program Expressions by the State Department Views of the Gray Report Recommendations of the Council of Economic Advisers

87 87 89 89 97 100 102 102

117 117 120 123

III. LOANS AND INVESTMENTS Introduction A. United States Government Loans and Credits Long-Term a. Export-Import Bank transactions b. ECA loans c. Lend-lease credits d. Other loans and credits e. Total long-term Short-Term B. Private Foreign Investment Long-Term Short-Term

124 124 124 126 126 127 131 131 132 132 132 132 139

107 107 109 113 113 116

IV. INTERNATIONAL FINANCIAL RESOURCES: THE BANK AND THE FUND 140 A. International Bank 141 Lending Policies and Operations 141 Marketing Operations and Financial Resources 147

CONTENTS

Β. International Monetary Fund Lending Policy Foreign Exchange Rate Policy a. Exchange restrictions b. Par values and fluctuating rates c. Multiple rates EPU and the Fund Gold Policy Tp^nniVflI Accicfanr*» C. ECOSOC Resolution on International Full Employment

149 150 151 151 154 156 156 158 IAl 161

V. COMMERCIAL POLICY Introduction A. International Trade Organization B. Reciprocal Trade Agreements Program General Agreement on TariflFs and Trade a. Fourth and fifth sessions of the Contracting Parties b. Torquay tariff negotiations Escape Clause Miscellaneous Calendar of Trade Agreements C. Tarifli Administration and Customs Simplification D. ForeignTradeZones E. First United States International Trade Fair F. Increasing European Dollar Exports G. Import Tax on Copper H. Conflicts between Trade and Agricultural Policies ....'. Direct Import Controls Export Subsidies I. Export Controls J. Stockpiling Program Procurranent and Supply Development a. General Services Administration b. Economic Cooperation Administration c. Commodily Credit Corporation d . Other K. International Commodity Agreements Pre-Rearmament Organizations a. Wheat b. Tin c. Wool d. Cotton e. Sugar f. Rubber New International Commodity Agreements

167 167 172 177 177 177 182 186 188 190 190 194 195 196 197 199 200 204 206 212 213 217 218 218 220 220 9.9,1 9.9.9. 222 225 227 229 230 231 232

CONTENTS

VL EUROPEAN ECONOMIC INTEGRATION Introduction A. European Payments Union Major Issues and Provisions a. Managing Board b. Role of sterling c. Quotas and settlement of balances d. Treatment of extreme debtors and creditors Operations during 1950 B. Trade Liberalization Measures C. Other Integration Proposals Schuman Plan Stikker, Pella5 and Petsche Plans Sub-regional Groupings D. Extent of Integration

236 236 240 242 244 244 246 250 252 255 260 260 264 266 267

VII. UNITED STATES BALANCE OF INTERNATIONAL PAYMENTS, 1950 A. Current Account Merchandise Trade a. Exports ..... b. Imports Invisibles a. Income on investments b. Transportation c. Travel and miscellaneous services Export Surplus B. Capital Account Foreign Gold and Dollar Assets Other C. Errors and Omissions

270 271 271 271 276 278 278 279 279 280 281 281 282 283

Summary

284

Index

299

L I S T O F T A B L E S

1. Aid Provided by ECA to Europe, 1948-1950 2. ECA-Financed Shipments, by Major Commodity Groups, 1948-1950 3. ECA-Financed Shipments, by Commodity Group and Area of Origin, 1948-1950 4. ECA Technical Assistance Program,· 1949-1950 5. ECA Industrial Projects, by Type and by Country, 1948-1950 6. ECA Counterpart Funds, 1948-1950 7. Sterling Area Gold and Dollar Reserves Held in London, 1949-1950 8. United States Government Foreign Grants, 1950 9. International Organizations: United States Contributions, Fiscal Year 1950 ' 10. Calendar of Treaties of Friendship, Conunerce and Navigation, as of December 31, 1950 11. Calendar of Tax Conventions, as of December 31, 1950 12. Net United States Capital Outflow, 1946-1950 13. Export-Import Bank Operations, 1934-1950 14. ECA Loans to Europe and Dependencies, 1948-1950 15. Long-Term Foreign Loans and Credits of the United States Government, by Program and by Area, 19¾) 16. Net Movements of Private Long-Term United States Capital, 1946-1950 17. Net Additions to Private United States Direct Investments Abroad, 1946-1949 18. Factors AJOEecting Value of United States Private Direct Investments Abroad, 1946-1949 19. Loan Authorizations by the International Bank, 1947-1950 .... 20. Disbursements by the International Bank, 1947-1950 21. International Monetary Fund Exchange Transactions, 19471950 v 22. Foreign Gold Transactions by the United States, 1950

Page 21 23 24 26 28 31 33 79 83 115 118 125 128 130 133 135 136 138 146 148 152 160

LIST

OF

TABLES

23. Calendar of United States Reciprocal Trade Agreements, as of December 31,1950 24. Total United States Stockpile Objectives, 1946-1950 25. Value of United States Stockpile on Hand, 1946-1950 26. Quotas and Initial Positions in the European Payments Union 27. Settlement of Members' Credit and Debit Balances with EPU 28. EPU Clearing Operations, July-December 1950 29. Value of Intra-European Trade as Percentage of Members' Total Trade, 1938, 1948-1950 30. International Transactions of the United States, 1946-1950 .. 31. Changes in Composition and Value of Exports of United States Merchandise, 1949-1950 32. Destination of United States Merchandise Exports, 1949-1950 33. Changes in Composition and Value of United States Imports for Consumption, 1949-1950 34. Sources of United States General Imports, 1949-1950 35. United States Current Account Surplus, by Area, 1949-1950

χ

191 216 218 248 249 254 269 272 274 275 277 278 280

ABBREVIATIONS FREQUENTLY USED

CCC-Commodily Credit Coiporation ECA-Economic Cooperation Administration ECOSOC—United Nations Economic and Social Council EIB-Export-Import Bank of Washington EPU-European Payments Union ERP-European Recovery Program Fund—International Monetary Fund GARIOA—Government and Relief in Occupied Areas (Program) GATT—General Agreement on Tariffs and Trade GSA-General Services Administration Gray Report—Report to the President on Foreign Economic Policies, Washington, D.C., November 10, 1950 IBRD—International Bank for Reconstruction and Development ICEF-United Nations International Children's Emergency Fund IEPS-Intra-European Payments Scheme IIAA—Institute of Inter-American Affairs IRO-International Refugee Organization ITO-International Trade Organization MDAP—Mutual Defense Assistance Program NAC-National Advisory Council on International Monetary and Financial Problems NATO—North Atlantic Treaty Organization OAS—Organization of American States OEEC—Organization for European Economic Cooperation PWDC—Philippine War Damage Commission RFC—Reconstruction Finance Corporation Survey—1949—Survey of United States International Finance—1949, International Finance Section, Princeton University UN—United Nations Organization

I N T R O D U C T I O N

AT THE beginning of 1950, most of the international economic and

financial policies of the United States were directed toward solving what were regarded as transitional postwar problems. The broad policy objectives were (a) to "contain" Communism and encourage the growth of democratic political and social organizations by increasing the real income of peoples in the rest of the non-Communist world; and (b) despite many conflicts and inconsistencies, to foster throughout the world free convertibility of all currencies and a non-discriminatory trading system with a progressive reduction of all barriers to trade. Most U.S. Government officials thought as the year began that nearly all public grant programs could and should be rapidly reduced. Aid under the European Recovery Program was to terminate in mid-1952 and expenditures were to be reduced sharply in the meantime, but it was anticipated that some $2 billion would be needed for the final year. Grants to the occupied areas were also to be cut drastically and then terminated within the near future. The program for rehabilitating fixe Philippine economy was regarded as almost complete, and efforts were being made to terminate American contributions to the various international emergency relief projects. Except for a modest three-year program of economic reconstruction in Korea and the occupied areas program in Japan, there were no indications that the Government was planning anything other than token grants to the Far East and Southeast Asia. In 1949 official Washington had concluded that the military potential of the free world should be strengthened and a coordinated and long-term program of military aid—almost exclusively to Western Europe—had been inaugurated. But the expenditures authorized for the first year were only $1.3 billion, and Administration officials stated that they hoped the first year's appropriation would be the largest. While the bulk of the official economic assistance had been, and was planned to be, in Europe, the Administration had concluded

INTRODUCTION

in 1949 that the United States should embark on a "bold new program" for the improvement and growth of underdeveloped areas. Although it recognized that one of the benefits of such a program might be to increase the supply of strategic materials needed by the United States, this was not emphasized as much as the broad humanitarian aspect of helping others to help them­ selves and the objective of preventing these areas from turning to "false doctrines." However, the Executive Branch stated that this program was to involve only small amounts of grants from the Government and that the bulk of the foreign financial require­ ments were to be met from private sources. To this end, the Ad­ ministration was working to remove the deterrents to a larger outflow of private long-term capital and was placing great em­ phasis on the desirability and possibility of an expansion in private American investment abroad. It anticipated that Government loans would continue to decline. There was much discussion in the United States as the year be­ gan of the international reserve position of the sterling area, the problem of the accumulated sterling balances, and the restrictions being applied in the sterling area to sales of petroleum products by American companies. In Western Europe a major new policy was being evolved of encouraging the economic integration of the area. Those fostering such a "single mass market" argued that it would result in an increase in production and productivity which would not only permit higher standards of living but would also improve Europe's competitive position vis-a-vis the rest of the world and so prepare her for the time when the European Re­ covery Program would end. At the beginning of 1950, United States officials were, by and large, pleased with the extensive currency devaluations of Sep­ tember 1949, believed that except in rare cases fixed rates were preferable to fluctuating ones, and urged the International Mone­ tary Fund to guard against its resources being used as long-term loans and to devote increasing attention to encouraging the re­ laxation of exchange restrictions. The Administration continued to hold to a policy of a fixed price for gold, of a willingness to buy whatever quantities were offered at that price, and of limiting international transactions in gold to those between central mone­ tary authorities.

INTRODUCTION There was much concern in both official and private circles at the beginning of the year lest the planned curtailment of Government aid to foreign countries result in large reductions in American exports, bringing unwanted domestic and international consequences. To prevent this, and to help achieve the long-term goals of expanding world trade and of freeing it from government interference, the Administration was taking steps at the beginning of the year to obtain Congressional ratification of the ITO Charter, to simplify United States customs procedures, to participate in a third round of tariff negotiations under the GATT, to directly encourage Europe to increase its exports to the United States, and to simplify American export controls and reduce the number of commodities subject to license. Although security considerations dominated the stockpiling program, it was far behind schedule and an increase in the rate of foreign purchases was being urged by many—in the United States and abroad—as an effective way of increasing the dollar earnings of foreign countries. Much of the Congressional discussion on the subject was in terms of the threat of imports of strategic and critical materials to domestic producers. In contrast with the situation at the beginning of the year, after the outbreak of war in Korea, United States international economic and financial policies were being determined and activities were being carried out in a setting of intensive rearmament and mobilization, and by the end of 1950 many of the problems appeared all too similar to prewar ones rather than those of a postwar transition. As a result, some of the policies followed at the beginning of the year had been abandoned, others were being pursued more vigorously, still others were unchanged, and several new ones had been inaugurated. The following chapters attempt to describe these developments and the specific reasons for them.

I · G R A N T PROGRAMS INTRODUCTION IN response to the deteriorating international political and mili-

tary situation, major shifts in the purposes and direction of aid were recorded in the various foreign grant programs of the U.S. Government during 1950. Previous hopes that foreign grants would decrease rapidly were abandoned. Net new grant funds provided by Congress for fiscal year 1951 exceeded by almost three-quarter billion dollars those authorized for the previous year and the preliminary estimates of requests to Congress for fiscal 1952 were almost $2 billion over 1951. Actual net disbursements fell to $4.1 billion in 1950 from the $5.1 billion recorded in the previous year as several new programs were begun and old ones were tapering off. These aggregates hide the shift away from aid for economic recovery to financing military preparedness abroad and the increased attention being given to Southeast Asia. The most important change, with respect to Europe, was the sharp curtailment of European Recovery Program activities and the beginning of large-scale assistance under the Mutual Defense Assistance Program. The shift from recovery to rearmament was also evidenced in the extension of direct grants to Yugoslavia, frankly designed to "purchase" support of the thirty odd Yugoslav divisions, and in the authorization of a loan to Spain. The war in Korea interrupted aid from ECA to that country and stopped all assistance to mainland China but accelerated both economic and military aid to Southeast Asia—an area to which the United States had previously given comparatively little attention. Aid to Japan was reduced during the year as production increased; only economic assistance was provided since her military role was as yet undetermined. The Philippine rehabilitation program was virtually completed in 1950, but plans were under way to start a new five-year program of economic aid. Early in the year the United States sought to end all strictly

I.

GBANT PROGRAMS

foreign-relief programs. Specifically, it urged the early termination of the existing International Children's Emergency Fund and the International Refugee Organization and favored the curtailment of the relief aspect of aid to Palestine refugees, though it supported an expansion of the United Nations public works assistance program there. Following the invasion of Korea, however, the United States supplied relief to that country through the Army and actively supported a large UN program for Korean relief and rehabilitation. It continued participation in a variety of international organizations (permanent and temporary) dealing with economic, cultural, and scientific relations. Private remittances during the year were again small, totalling (net) $439 million. The uncertainty as to the purpose and direction of official grants to foreign areas in 1951-1952 was evidenced in the January 1951 Budget Message of the President in which he stated that he would request Congress to provide $9.7 billion but that details would be submitted later. He had not done so when this document went to press.

A

EUROpEAN

RECOVERY PROGRAM

Legislative Issues and Changes Congressional hearings on extending the Economic Cooperation Administration for a third year were begun in February 1950. The import of the opening presentations of both Secretary of State Acheson and ECA Administrator HofiEman, as well as of the various ECA mission chiefs, was that recovery in Europe was "spectacular" but that it was not yet completed and the United States should buttress her further against the onslaught of Communism. All Administration witnesses before the Committees emphasized the intent to complete the program in 1952 and as evidence of this stated that requests for authorizations were scheduled to be reduced yearly. So great was the desire of the Congressional Committees to reduce expenditures that they requested repeated assurance on this point, and Senator Connally stated at the outset that ". . . it is entirely appropriate that we begin to cut back, with a view to teaching, or suggesting to the Europeans that they accommodate their economy to what

I.

GRANT PROGRAMS

they may expect. . . Z'1 For fiscal year 1950-1951, the Administration requested only $2950 million plus any unobligated funds remaining from the 1949-1950 appropriation, then estimated at $150 million. This figure was approximately 25 percent less than the amount provided for the previous year.2 The only other major change asked by the Administration in the existing law was that Congress specifically authorize ECA to use not more than $600 million of the above request to help finance any European organization (notably the proposed European Payments Union)8 designed to increase the convertibility of currencies and liberalization of trade, and otherwise to "reward" those going farthest in their relaxation of trade barriers.4 Mr. HofEman in his initial presentation stated that the two aims of recovery and unification were being carried forward with good results and, although the latter was slower than desired, marked success was anticipated by June 30,1950, when the new payments union was expected to be approved. With respect to the former, he testified that since industrial production was up one-third over 1947 and 20 percent over prewar, further improvement had to come from increased productivity and ECA was therefore stressing its technical assistance program and the integration of the European economy. Although Europe's dollar deficit had been reduced from some $8 billion in 1947 to an estimated $4-$4.5 billion in fiscal 1949-1950, he stressed that if the gap were closed without United States aid and with no increase in imports by the United 1 "Extension of Eiuopean Recovery—1950," Hearings on S. 3101, U.S. Senate, Committee on Foreign Relations, 81st Cong., 2d Sess., February and March 1950, p. 1. See also "To Amend the Economic Cooperation Act of 1948, as Amended," Hearings on H.R. 7378, House of Rep., OMnmittee on Foreign AfEairs, February and March 1950, for discussions of the issues involved. 2 A bilateral economic aid agreement between ECA and Western Germany was ratified on January 26, 1950; thus the funds formerly requested for Germany under the GARIOA program were put in with the ECA request, and the 25 percent re­ duction includes Germany. Korea also was put under ECA administration in 1949 so that its aid was requested under the Foreign Assistance legislation. Aid for Japan was to remain a separate program administered by the Defense Department. 8 Discussed in detail in Chapter VI, infra. 1 The Administration also requested that Congress give the President power to transfer ECA allocations for Germany to other Departments or agencies to be ad­ ministered within the purposes of the Act unless exempted by the President, and that some German ECA counterpart funds be deposited in the GARIOA Special Account and so made available to the State Department for use in the German occupation. Finally, it requested that the ECA Administrator be allowed to use counterpart funds for publicity purposes in recipient countries.

I.

GRANT

PROGRAMS

States, it would mean a reduction of $3 billion in American exports, with "catastrophic" results for Europe and "severe dislocations for the United States." To make sure that the dollar gap was closed with the least difficulty by 1952 and was narrowed considerably in the meantime, he stated, ECA was pressing for and facilitating increased production of goods now imported and those for export. These efforts were expected to reduce the reliance on dollar imports and to increase dollar exports by $1 billion, thus cutting the dollar gap to approximately $2 billion by 1952. Under these conditions, and on an assumption that private American investments would increase considerably, ECA expected that Europe, except possibly for Austria and Greece, would be free of need for extraordinary assistance. In discussing this problem, Mr. HoflEman, as well as State Department witnesses, stated in strong terms that a sine qua non for the long-term success of United States efforts to foster European recovery was a large increase in imports by the United States. In calculating the amount of funds to be requested, the Administrator stated that ECA had adopted a new procedure to encourage (rather than thwart) greater liberalization of trade and payments and more energetic efforts of self-help. Thus, instead of basing its requests for funds from Congress on carefully reviewed programs submitted by each of the EHP countries, ECA had this time set the level of aid it estimated that Europe as a whole required on the assumption that each country ". . . makes maximum efforts and takes all steps, however difficult, to minimize its requirements for dollar aid."8 Specifically, ECA's estimate of total aid required was based on an assumption of a 10 percent increase over the previous year in dollar earnings of recipient countries and an 11 percent decrease in dollar requirements through expanded domestic supplies and imports from non-dollar areas.® Once the total was established, each country, with the exception of Greece which was to receive practically as much as in 1949, was then requested to prepare its internal and external Hearings on S.3101, op.cit., p. 10. There was some evidence later in the hearings that ECA had in fact rather arbitrarily decided to reduce their requests for the third year to about 75 percent, and for the final year to about 50 percent, of the funds supplied by Congress for the second year. 6

6

I. GRANT PROGRAMS

programs on the basis of a share in the total proportionate to its share during the previous year. These topics which the ECA Administrator touched upon— the amount of funds, expanded United States imports, and the problem of economic integration—anticipated most of those in which the Committee members were interested. However, they also reviewed United Kingdom-United States relations in lengthy and often confused and complex discussions of the sterling-dollar oil problem and the "failure" by the United Kingdom to restore to an American company some seventy airplanes in Hong Kong taken over by the Communists. The latter point was part of a recurring expression of concern by Congress on the strength of Communism, not only in Europe but also in Asia. The legislators generally accepted that the Program was succeeding in the con­ tainment and partial rejection of Communism in Europe, but its spread in other areas caused Congressmen great concern. Several of them expressed interest in the formation of an Asiatic OEEC which they hoped would be sponsored by the State Department. State Department officials felt that everything possible had been done when invitations were sent suggesting such a conference by the nations concerned and that any further action would be deemed unwarranted interference. Although some of the Com­ mittee members were not satisfied with this answer and the ques­ tion was discussed later in the floor debate, no final action was taken by Congress. There was also some sentiment for establish­ ing a new committee to study and report on the advisability and need for post-ERP aid. The State Department testified that, while primary reliance after 1952 must be placed on expanded United States imports and private loans,7 some aid might be needed—not under the ECA program—in the form of military and civilian relief for certain countries, but it had as yet planned no organization to administer such assistance. Congress felt that some study should be given the problem immediately and that to this end a com­ mittee, like the previous Harriman Committee, should be formed. These suggestions, strengthened by a letter from Senator Vanden7In the hearings (Hearings on H.R. 7378, op.dt., p. 62), it was reported that Mr. Black, President of the International Bank, had stated in a conversation that with respect to public bans ". . . he felt the World Bank could handle any loan requirements of any countries, for reconstruction and development, from here on."

I. G R A N T P R O G R A M S

berg to Mr. Hoffman urging a study on United States responsibilities after 1952 as the world's largest creditor and "bulwark of peace," culminated in the appointment in late March by the President of Mr. Gordon Gray to study and make recommendations on future United States foreign economic policies and programs.8 Congress in general was disappointed with the progress of European integration and asked opinions of many witnesses on the advisability of writing into the Act some timetable of accomplishment which had to be met before aid would be continued. The consensus of the replies was that progress toward economic integration would proceed fairly rapidly and that political federation, although a necessary companion, could not be forced. However, the House incorporated in its Committee report a statement that it was the policy of the United States to encourage political federation as well as economic unification and that the encouragement of the free movement of peoples was as important as that of trade.8 During the hearings and floor discussion on the bills, one of the topics debated most heatedly was that of the impact of expanded imports into the United States. Many Congressmen saw in this Administration policy a direct threat of unwanted competition to some of their constituents. This problem is discussed in Chapter V, infra. A controversy also arose over the question of ECA investment guarantees. Mr. Hoffman argued that such activities were better incorporated under the Point Four Program and should be the responsibility of the Export-Import Bank so that worldwide coverage would be provided. Committee members, however, obtained expressions from various ECA mission chiefs that the guarantees would be quite effective if broadened to include risk 8 For these recommendations, see Report to the President on Foreign Economic Policies, Washington, D.C., November 10, 1950. Hereinafter frequently referred to as the Gray Report. 9 This action on migration was a result of the concern of some Committee mem­ bers over the overpopulation of Italy and other countries. Committee members urged that European emigrants be sent to areas where extensive land settlement and development were "possible" and "desirable" and not to the United States, where large immigration would upset 'what was regarded as the nice racial and rural-urban "balance" which exists. It should be noted, however, that the Dis­ placed Persons Act of 1948 was amended in June, increasing the total number admissible from 232,377 to 400,744.

I·

G B A N T P R O G R Α. M S

of war, revolution, confiscation, and expropriation plus the usual currency transfer guarantee, and the provisions were expanded in the final law.1 The extension of some of the aid in the form of loans, previously regarded as desirable by Congress, was hardly discussed in the hearings. ECA stated that it did not want part of the authorization set aside for loans; it was supported in this view by the National Advisory Cotmcil (NAC), which considered the debt burden of Europe so great as to make further loans inadvisable, and Con gress did not seriously question this conclusion. Another aspect of the ECA program which received only scant attention in the 1950 hearings, held before the invasion of Korea, was ECA stockpiling of strategic materials; Congressional debate on the matter centered around the desirability of protecting domestic nonferrous metal mining. A topic which many Congressional members wished to air with thie State Department officials was the relation between the economic and military aid programs. The witnesses declined to testify in public session except to admit that the economic and military programs were supplementary and should be coordinated. Mr. HofEman stated that the military programs required no change in major ECA policies since a healthy economy was necessary for military preparedness. Additional issues discussed in the hearings were ECA purchases of agricultural products—both offshore and from United States surplus stocks, the desirability of tax reforms in Europe, the publicity tactics of ECA, European land reforms, the proportion of wheat shipped as flour, and the possibility of using counterpart funds to attract tourists to Europe and to rebuild tourist accommodations there. The Senate Committee on Foreign !Relations reported a bill only slightly changed from the Administrations requests. It rejected an amendment in Committee to cut $600 million from the Administration request and adopted an amendment allowing use of up to $600 million in the form of transfers of funds to new European central institutions for direct encouragment of European economic unification. The House Committee defeated two proposals to cut the amount of the authorization, but set aside $600 1 See

Chapter II, Section B, infra, for a detailed discussion of this problem.

I.

GRANT PROGRAMS

million for economic integration and for that purpose alone. In addition, the House Committee raised the 1949-1950 provision of $150 million for investment guarantees by ECA by another $150 million and extended the scope to cover government expropriation, war, and revolution. More important, the House Committee adopted a plan by Mr. Vorys to deduct $1 billion from the authorization to be replaced by agricultural items obtained from the Commodity Credit Corporation (CCC) in an equivalent amount (market price). In the House debate on the reported bill,2 the Vorys plan was attacked most vehemently as a means of putting domestic politics and subsidies into foreign aid; it was defended as a means of getting rid of the surpluses without placing any burden on ECAa statement which ECA itself denied, wishing to be free from any restriction on the allocation of its funds. An amendment to strike out Vorys' plan was carried 254-38. But its supporters were not yet through, and an amendment to set aside not less than $1 billion for the purchase of United States agricultural products was accepted after extensive debate by 119-107, only to be rejected by a roll-call vote at the end of all debate by 198-70. Additional votes on important proposed amendments in the House were as follows: (1) An amendment to cut $500 million off the $2.95 billion was rejected 152-137. (2) An amendment cutting the figure to $2.7 billion was carried 165-163 on the ground that if less than 10 percent of this authorization could not be cut the House would be embarrassed in justifying its planned cuts of up to 25 percent on authorizations requested by the President for domestic purposes. (3) An amendment to withhold aid from the United Kingdom until it released control over Ireland and stopped all discrimination between the six northern counties and the rest of Ireland was adopted by a vote of 99-66; after more sober reflection, the House reversed itself in a roll-call vote by 226-90 at the end of the debate. The amendment was justified by its proponents as evidencing United States desire for self-determination and free elections abroad plus non-discrimination and liberalization of trade.8 A miscellany of amendments were rejected for various See mainly Congressional Record, March 29 and 30, 1950. This reversal of the House vote fulfilled the prophecy of The Economist, which had previously stated that, "The light-hearted willingness of a half-empty House to cut Britain off without a penny in order to demonstrate its impatience with 2

8

I. G R A N T P R O G R A M S

reasons. The more important among them were: to expand trade between the United States and ERP countries by encouraging United States exporters to accept foreign currencies rather than to insist on dollars; to include foreign devaluation as one of the risks insured against under the investment guarantees; to withhold expenditure of counterpart funds in countries not abiding by commercial treaties with the United States (aimed at discrimination against American citizens trading in French Morocco); to protect domestic mining of nonferrous metals against outside competition; to delete the provision for ECA encouragement of emigration from Europe; and to establish a committee to study and report on foreign economic policy and aid after 1952, specially directed to include consideration of the problems of the Far East. The bill as amended passed the House by a vote of 28786 on March 31, 1950 and was sent to conference with the Senate for reconciliation. The Administration's requests met less opposition in the Senate. It defeated, by a seven-vote margin, a proposed amendment to authorize a $100 million loan by ECA to Spain. After rejecting two amendments to cut the authorization by $600 million and $1 billion/ the Senate approved a cut of $250 million (similar to that by the Home). A miscellany of amendments, including one to disallow aid to any country newly nationalizing any industry, were rejected. The differences in the House and Senate bills were reconciled in the Conference Report sent to the Senate on May 18 and to the House on May 19. In this Report and in the final Act (Title I of the Foreign Economic Assistance Act of 1950—"Economic Cooperation Act of 1950")6 the following were the major changes in the previous law. The policy statement of the House bill including the encouragement of political federation was deleted and the word "further" placed before "unification" to indicate that progress to date was not sufficient; there was no disagreement 'partition* in Ireland and its pleasure at the arrival of the first Irish Ambassador was not expected to survive reconsideration." (April 8, 1950, p. 772.) 4During the debate Senator Taft questioned the appropriateness of any aid to the United Kingdom since it had a surplus in its overall international accounts. 6 Title Π concerned aid to the China area; Title III, aid to Palestine refugees; Title IV, international economic development; TRtle V, International Children's Emergency Fund. These will be discussed in separate sections below.

I.

GRANT PROGRAMS

as to the desirability of political federation but only as to the propriety of inserting an expression on such a development in legislation primarily economic in character.6 The House-inserted expression urging removal of the "barriers to the free movement of persons" was accepted. The duties of the Adminfetrator were expanded to include the encouragement of emigration from ERP countries to underdeveloped and dependent areas, and counterpart funds were declared available for such use by the Administrator. Additionally, with reference to the purposes of the program, the final law included in its statement of objectives that the United States favored and supported not only increased production but also "increased productivity, maximum employment, and freedom from restrictive business practices"; this statement was not considered to introduce any new sentiment but merely -to express more adequately what was formerly in the minds of Congress. Somewhat contradictory expressions of policy were also inserted to the effect that the American taxpayer should be relieved of his burden as much as possible by the reduction of dollar purchases by ERP countries to the greatest extent possible consistent with continued recovery; at the same time, this action was not to be accomplished by the imposition of discriminatory restrictions on American exports. The Act included the provisions of both House and Senate to cut the authorization to $2.7 billion plus the $150 million carryover, and no funds were earmarked as loans. Of the total authorization, $600 million was to be available "solely" for use in supporting a program of liberalized trade and payments.7 The provision on investment guarantees was expanded to cover not only convertibility but also losses from confiscation and expropriation, and the maximum amount outstanding at any one time was raised from $150 million to $200 million. Witii reference to wheat and flour, the previous requirement that at least 12¾ percent of all ECA-financed wheat exports from the United States had to be in the form of flour was 6 See Conference Report No. 2117, May 19, 1950 (to accompany H.R. 7797) for details on this and other points. * ECA has interpreted this clause as setting a "floor" on the use of funds for encouraging European economic integration; the law, however, also set a "ceiling" of $600 million for "transfer of funds directly to any central institution"—notably EPU.

I.

GRANT PROGRAMS

repealed. This action was designed to aid the American wheat producer who was suffering from Europe's using her free dollars to purchase wheat elsewhere so that Europe could use its own milling facilities and thus mill more of the husk, retain the byproducts, and retain the milling revenue. Also, the Act specified that domestic wheat and flour purchased out of ECA funds (or those of any official foreign relief program) for participants who were also members of the International Wheat Agreement should be at the prices therein specified and credited to their quotas. Counterpart funds, new and outstanding, were allowed by the Act to be used outside the area of the depositing country for the purpose of liberalizing trade and for publicity and information by ECA in Europe. Despite some pressure for it, no provision was made for use of the 95 percent counterpart funds for military purposes. The House passed the Act on May 23,19¾) by a vote of 248-88, and the Senate approved it on May 25 by 47-27. The President signed the omnibus foreign aid authorization bill on June 5, 1950. Congress was not through with ECA, however. The Committees on Appropriations were presented with much the same evidence given earlier to the Committees on Foreign Relations and Foreign Affairs; they examined it thoroughly and minutely questioned the justifications.8 Prior to the House debate on the appropriation, ECA disclosed that it would save some $276 million from its 1949-1950 appropriation rather than the previously estimated $150 million. In view of this and of Congress' economy drive to cut everywhere but in military aid and expenditures, the House reduced ECA's appropriation to just under $2.4 billion. The Senate defeated an amendment to cut the appropriation to $1.95 billion plus the carryover but adopted an amendment to increase the House figure to $2.45 billion. Finally, a figure of $2.25 billion plus the carryover (the total being about $1.2 billion under the actual 1949-1950 expenditures) was appropriated, with a limit of $500 million placed on transfers to any central organization to encourage economic unification. So intense was the drive to prune appropriations 8 'Toreign Aid Appropriations for 1951," Hearings, House of Rep., Subcommit­ tee of Committee on Appropriations, 81st Cong., 2d Sess., Februaiy 1950, pp. 1533; "Foreign Aid Appropriations for 1951," Hearings, U.S. Senate, Committee on Appropriations, May-June 1950, pp. 165-421.

I. G B A N T P R O G R A M S

and to fit them in with the military programs that on the Senate floor an amendment was offered to throw out the ECA program entirely and insert the funds authorized into the military appropriation. The amendment was rejected on the grounds that foreign economies must be healthy before demands could be made on them for military expansion. But the debate showed the deep concern of many Senators over continued foreign spending by the U.S. Government. The question of a loan to Spain had been discussed for some two years in Congress, and as late as the 1950-1951 ECA authorizing act an amendment to extend such a loan was rejected by the Senate. During the discussion of the ECA appropriation, however, Senator McCarran introduced an amendment that $100 million of the ECA appropriation be used for assistance to Spain on credit terms, for the purpose of stabilizing its economy and strengthening its army. He stated that such a loan request had lain before the Export-Import Bank (EIB) for four or five months without action, that ECA was getting too much money, and that the "strategic value" of Spain was much more than the "economic value" of the loan. The opposition replied that domestic prices had so risen that any reduction of the ECA appropriation for original ERP countries might cripple the recovery effort. To this the Senator proposed that ECA be allowed to sell notes to the Treasury for funds to be loaned to Spain. As finally approved, a loan of $62.5 million was authorized out of money to be so obtained. Some members of Congress argued that the United States was wrong in supporting any kind of government just because it opposed Communism, especially when the country to be "bought" was already in the anti-Communist camp and when this position would not be appreciably strengthened by a loan meeting only a fraction of her economic needs. The majority supporting the loan replied by emphasizing the strategic importance of the peninsula and by recalling that not one voice was raised in the House against the recent EIB loan of $25 million to Yugoslavia or to the ECA credit of $27 million to Portugal—both of which were regarded as having undemocratic governments.® 8 On signing the bill on September 6, President Truman stated that he con­ sidered the Spanish loan provision an authorizing one (not mandatory, which he said would be unconstitutional), suggesting that this loan would not be made. How­ ever, in November ECA offered the loan to Spain, and the press interpreted this

I.

GRANT PROGRAMS

Several other amendments were introduced: (1) An amendment to stop aid to any country exporting to Russia items which might be used for maintaining her armed forces was defeated, after the President and Mr. Hoffman raised strong objections on the grounds that it would not accomplish its purpose and would so reduce East-West trade as to endanger seriously Western Euro­ pean recovery. (2) An amendment to require withholding of funds from a country not abiding by its commercial treaties with the United States was approved, although this provision was previously excluded from the authorizing act as interfering too greatly with the activities of the State Department in its rep­ resentations to France concerning the treatment of American busi­ ness enterprises in French Morocco.10 (3) An amendment, aimed mostly at the sterling area, to require the President to encourage ERP countries to forgive World War II indebtedness among themselves and their associated states so long as assistance was received from the United States was overruled on a point of order. (4) An amendment directed at enlisting more support for United States military activities in Korea, by requiring the with­ holding of funds from any country not supporting "the United Nations in resisting aggression/' was added.1 ECA Programs for Europe

It is not within the scope of this document to present a detailed account of economic developments in Europe, but it should be noted that during 1950 Europe, according to the usual indices, continued to advance rapidly toward economic recovery.2 The volume of industrial production for the year was estimated to have averaged 127 percent of 1938, as compared with 115 percent change in policy as one dictated by the increasing strategic importance of Spain, as the result of United States difficulties in Korea, and as necessary to obtain Congressional support for aid to Yugoslavia. None of these funds were actually disbursed during 1950. 10For French action in protest against this provision, see the Department of State BtMeHn, December 11, 1950, p. 950, and Department of Commerce, Foreign Commerce WeMy, Washington, D.C., November 1¾ 1950, p. 11. 1 There is no public evidence that any funds were withheld during 1950 under this amendment. 2 For a recent major study of many aspects of European recovery and American aid, see Ellis, H. S., ed., The Economics of Freedom, Coundl on Foreign Rela­ tions, New York, 1950.

I. GRANT PROGRAMS

during 1949;3 agricultural production was 9 percent over 1938, as contrasted with slightly below prewar in 1949. Although statistics are not available, it was reported that, as confidence in local currencies returned, rural-urban trade was restored in most countries. Currency stability was not fully attained in 1950, however, for wholesale prices continued upward in all but a few countries, with the average for the year being more than 10 percent over 1949, and the trend was more sharply upward as the year ended. In addition to the impact of rearmament and rapidly rising prices of imported raw materials, a factor which may have contributed to the price increases was the partial removal of price controls and rationing. Productivity increased in most countries, and unemployment was small except in Germany, Austria, Italy, and, to a lesser extent, Belgium. The level of civilian consumption during the second half of the year was higher than at any time since the end of the war. Increasing transferability of currencies and some relaxation of quantitative restrictions on trade within Europe, together with the increased production, aided the expansion of the volume of intra-European trade for the year to a level some 30 percent over 1949 and 25 percent over 1938,4 but trade with Eastern Europe was apparently still less than half prewar. The area's current account deficit with the United States was reduced from $3.1 billion in 1949 to $1.7 billion in 1950. This decline resulted from both a fall in imports from and an increase in exports to the United States. The ERP countries continued to have trade deficits with Latin America and Canada, but they were smaller than in the previous year, as Europe's exports to these areas expanded more rapidly than their imports from them. Taking into account their transactions with the United States—including $3.6 billion of Government aid—and their dollar transactions with other areas, 8 Industrial production in the fourth quarter of 1950 averaged 40 percent higher than 1938. For detailed statistics on many aspects of European recovery, see the monthly Economic Cooperation Administration, Recovery Guides, Washington, D.C. 4 Intra-European trade as a percentage of total trade—a better measure of the effects of the integration policy—was also above 1949 and 1938. Thus, the intraEuropean imports (by value) were 37 percent of total imports in 1938, 36 percent in 1949, and approximately 41 percent in 1950. For exports the respective per­ centages were 48 percent, 48 percent, and 49 percent.

I. G K A N T P R O G R A M S

the gold and dollar holdings of the ERP countries increased during 1950 by over $2.2 billion. The recovery of Europe, much more rapid than anticipated at the start of the ERP program, was still not complete at mid-year even with levels of production not previously thought possible until 1952. The problem remained of finding foreign markets for many of the goods produced so as to balance the external accounts.5 Although the "dollar problem" which seemed so intractable in 1949 appeared much less intense, it was still large and Europe was just beginning to earn hard currencies through threecornered trade. The other main problem was seen by ECA officials as the continuing maldistribution of income, which placed many workers on subsistence levels and which was regarded as an important factor in potential social and political unrest. The events of the second half of the year greatly increased inflationary pressures, which in turn intensified the problem of income distribution and, if uncontrolled, could result in a serious deterioration of Europe's balance-of-payments position. The rapidly rising prices and demand for many raw materials seemed to relieve the dollar problem, at least temporarily, for those countries whose dependent overseas territories or associated monetary areas produced such materials, but at the same time it worsened the terms of trade of the metropolitan areas, and in some countries the scarcity of these goods threatened to curtail internal production. The diversion of resources into rearmament was considered an indication of a "need" for continued large aid from the United States. In early 1951, the ECA Deputy Administrator wrote that the improvement in Europe's dollar position could not be considered permanent and that aid in the coming year might have to be "fully as large" as that provided in fiscal year 1951.® Aldiough the need for future aid was uncertain, ECAs program for Europe was markedly reduced during the year, as a result of the improved economic conditions and the pressure of Congress 6 This condition raises the fundamental question of whether the extensive "plan­ ning" and "programming" of the Evaopean countries and ECA had not resulted in establishing a structure of production which failed adequately to take into ac­ count the many changes in comparative advantage which have occurred in the last two decades. 6 Bissell, R. M., Jr., "The Impact of Rearmament on the Free World Economy," Foreign Affairs, April 1951, pp. 385-405,

I.

GRANT PROGRAMS

to eliminate as soon as possible "economic" aid, as distinct from "military" aid. Program allotments during 1950 were reduced to $2.25 billion (of which $350 million were for EPU)-a level even below the reduced fiscal 1951 appropriations—and aid to Britain was suspended, indicating perhaps that, with increased Government expenditures inside the United States, a policy was to be followed of extending no assistance to those countries whose reserves were increasing rapidly. Of the funds appropriated for fiscal 1951, it was anticipated in December that $500 million would be carried over into fiscal 1952, even after 3 percent of the total available was transferred to Far Eastern programs.7 Total aid received by Europe under the program (including Germany) was therefore cut from $4.2 billion in 1949 to $2.9 billion in 1950. In line with the previous trend away from relief to peacetime production and the later switch to rearmament, ECA programs were directed increasingly toward expanding industrial production and productivity and toward integrating the European economy. The latter policy is discussed at length in Chapter VI. ECA activities in connection with expanded European dollar exports and stockpiling are discussed in Chapter V. In this section attention will be restricted to ECA policies and activities in connection with allocation of aid, commodities supplied, purchases in the United States, technical assistance, industrial projects, counterpart funds, and development of overseas territories. Finally, brief attention will be given to the changing role of ECA under the pressure of rearmament. a. GEOGRAPHIC ALLOCATION OF AID With the exception of Portugal, Turkey, Norway, and Sweden, aid to all ERP countries was reduced during 1950 as compared with 1949 (see Table 1), but there was no proportional cut in aid to the others.8 Several of the countries sustained cuts which brought their 1950 aid to between 50 and 60 percent of the 1949 level. The United Kingdom was still the largest recipient of ECA Chapter I, Section D, infra. The press reported ECA as saying that the revised allotments reflected changed conditions in each country due to rearmament. (New York Times, October 15, 1950.) 7 See

8

I.

GRANT PROGRAMS

TABLE 1 Aid Provided by ECA to Europe, 1948-1950 (millions of dollars) 1948-1950

Country

1948 Grants and Credits

446 ran™ UnitedKingdom 717 Netherlands134 Indonesia 118 Germany 162 Italy 99 Austria 58 Greece 29 Norway 35 Denmark O Turkey O Ireland O Portugal 6 Trieste 2 Iceland 1 Sweden Belgium56 Luxembourg — EPU 8 Unallocated*1 1872 Total

Approximate Net Aid Re­ ceived after Operation of IEPS and EPU 1948-1950»

1949 Grants and Credits

1950 Grants and Credits

Direct and Con­ ditional Grants

Credits Basisa

852 1107

514 710d

1634 2193

178 342

1812 2534

2110 2070

353 491 418 202 129 66 108 30 67 0 9 5 38

314 302 269 113 118 76 55 41 55 18 8 5 45d

650 911 775 414 305 137 167 17 3 8 24 10 63

151 0 74 0 0 35 31 54 119 10 0 3 20

801 911 849 414 305 172 198 72 122 18 24 13 84

1030 810 770 600 570 350 220 130 120 30 20 10 10

253

1904 43 43 2921

448 43 81 7884

51

500 43 81 8952

-10

—

30 4158

— —

1068

Total

a) The figures for aid extended on a credit basis include under the metropolitan country loans extended by ECA to their territories out of its special fund for development of deficiency material projects. b) These data are the result of adding to the total aid extended to each country by ECA the "drawing rights" received by each under the Intra-European Payments Scheme and the amount of "initial credit balances'* utilized under the European Payments Union and sub­ tracting the "drawing rights" extended and "initial debit balances" utilized. The detailed statistics for the operations under these two payments plans are given in Chapter VI, infra. c) "Unallocated" includes both dollars and counterpart used for certain ECA administrative expenses, certain technical assistance supplied by ECA, and postal and subsidy payments on relief parcels. d) ECA was short on meeting its conditional aid due under IEPS and EPU credits extended by EBP countries in an amount of $43 million: $20 million due to the United Kingdom under EPU; $14 million to Sweden under IEPS; and $1 million under IEPS and $8 million Trader EPU to Belgium. Source: Department of Commerce, Clearing Office for Foreign Transactions.

I.

GRANT

PROGRAMS

aid, followed by France, Netherlands-Indonesia, and Germany.® Some of the aid provided by ECA has been extended on condition that those receiving it in turn extend assistance to other ERP countries through the Intra-European Payments Scheme (IEPS) and, to a more limited extent, through the European Payments Union (EPU). (These clearing mechanisms are discussed in Chapter VI.) To obtain the "net" ECA aid received by each country one should, therefore, deduct the amount of such assistance each country provided to others and add any such assistance received. Precise calculations of these operations are not possible because detailed data have not been published, because there are lags between the extension of aid under the payments schemes and the provision of "conditional" funds by ECA, and because the value of conditional dollar grants probably cannot be equated with the intra-European assistance extended. Nonetheless, account should be taken of these transactions in order to obtain a more accurate picture of the net aid received by each country under the European Recovery Program. An attempt has been made po make such an adjustment in the last column of Table 1. These data are rounded, are only approximate, and will not add to the total of ECA aid provided. When these rough adjustments are made, France becomes the largest recipient, followed by the United Kingdom, Netherlands-Indonesia, and Germany. It should be noted particularly that on this basis BelgiumLuxembourg through 1950 had granted more aid than they had received. b. COMMODITIES SUPPLIED

Reflecting the continuing shift from relief to rehabilitation and development, the commodity supply program of ECA showed a relative increase in the amounts of raw materials and semifinished 6 Adding GARIOA assistance during the year of $170 million, Germany received through ECA some $472 million, compared with $921 million of ECA and GARIOA aid in 1949 and GARIOA aid of $431 million in 1948. ECA took over the GARIOA program in late 1949 and received $187 million of uncommitted funds; these were used, as the Army had been using them, for food, feed, and cotton, with ECA regu­ lar shipments supplementing these. During the first half of 1950, $181 million were authorized for procurement out of GARIOA funds, and by the end of the year $170 million had been shipped. Since no appropriation was approved for GARIOA for Germany during fiscal 1951, no procurement was authorized after June 30, 1950; however, ECA was empowered to use some of its regular funds for Germany for the "prevention of disease and unrest" if necessary.

I.

GRANT PROGRAMS

goods supplied. Although their total value, excluding freight, dropped about one-fifth from 1949, they replaced food, feed, and fertilizer as the largest category (see Table 2). The latter group, along with fuel shipments, dropped over one-third in magnitude, thus exceeding the average 25 percent reduction in all shipments. Contrarily, shipments of machinery and vehicles remained about the same in total value. c. PURCHASES IN THE UNITED STATES

The trend to greater procurement in the United States of ECAfinanced goods, evidenced in 1948 and 1949, was accentuated during the early months of 1950, then leveled off and declined TABLE 2 ECA-Fivanced Shipments, by Major Commodity Groups, 1948-1950 1950 1st Qtr.

2nd Qtr.

3rd Qtr.

4th Qtr.

29.3 11.0

26.6 13.4

27.3 12.7

39.4 37.3 35.8 19.0 19.8 18.4 1.2 1.3 1.5 100.0 100.0 100.0 (millions of dollars) 2642 763 818 170 49 48 2812c 812 866

37.7 20.7 1.6 100.0

35.4 22.3 2.3 100.0

543 36 579

519 37 556«

Commodities

1948

1949

Year

Food, feed and fertilizer3 Fuel Raw materials and semifinished products Machinery and vehicles Miscellaneous Total

51.8 21.7

37.9 13.4

(percentages) 29.1 32.0 12.3 12.6

22.6 3.7 0.2 100.0

34.3 13.6 0.8 100.0

Total commodities Ocean Sreightb Grand total

1870 184 2054

3641 279 3920

a) Including tobacco. b) Includes small amount of technical services and ship disbursements in some quarters. c) Includes paid shipments in connection with development of overseas territories. Sources: Compiled from the Economic Cooperation Administration, Second through Tenth Re­ port to Congress, Washington, D.C., February 1949-February 1951, and Economic Cooperation Administration, "Paid Shipments," Division of Statistics and Reports, Washington, D.C., December 31, 1950, pp. 3, 6, and 7. Note: ECA-GARIOA shipments are excluded. Data through 1948 are "reported shipments." Thereafter data are "paid shipments" which are ECA program expenditures supplemented by movement reports from U.S. Government agencies. Totals for "paid shipments" are less than actual movements because of lags in receipt and processing of reports. "Reported shipments" equal "paid shipments" plus an increment for goods not yet paid for but known by the recipient country to have been shipped.

I. G R A N T PROGRAMS

precipitously during the last quarter, as inflationary pressures in the United States again became strong and as shipments of industrial commodities increased relative to those of agricultural goods. The percentage for the whole year was only slightly greater than for 1949, as is shown in Table 3. As required by law, most requests for agricultural goods which had been declared surplus in the United States were met from TABLE 3 ECA-Ftnanced Shipments, by Commodity Croup and Area of Origin, 1948-19S0 (percentages ) 1950

Area of Origin

1948 Total"

United States 53.5 Canada 24.4 Latin America 7.7 Participating countries 8.7 5.7 Other Total 100.0 Total by value (millions of dollars) 1870

1949 Totala 70.0 11.5 8.9 4.4 5.2 100.0 3641

Total 72.4 9.9 7.3 4.5 5.9 100.0 2642b

Agricul­ Industrial tural Commodi­ Commodi­ ties ties 84.6 8.6 5.8 0 1.0 100.0

61.4 11.2 8.Θ 8.5 10.3 100.0

1248

1395

a) For a breakdown of these years as Is given for 1950, see Survey-1949, p. 21. b) Including unclassified commodity refunds not available by source, but exclud­ ing ocean freight, technical services, and ship disbursements totalling about $150 million. Sources: Econcnnic Cooperation Administration, "Paid Shipments," Division of Statistics and Reports, Washington, D.C., December 31, 1950, pp. 5 and 12, and Nineteenth Report for Piwlic AdOisoru Board, Washington, D.C., Janu­ ary 18, 1950, p. 46.

United States stocks. To further encourage exports of surplus farm goods, the Department of Agriculixire continued to subsidize purchases of fruits, eggs, peanuts, flaxseed, wheat, wheat flour, and tobacco. Nearly 85 percent of all agricultural commodities were supplied from the United States, as compared with 78 percent in 1949 and 61 percent in 1948. Canada continued to be the major offshore supplier, shipping bread grains and nonferrous metals, with Latin America second,

I. GRANT PROGRAMS

shipping nonferrous metals and oil; other areas were principally suppliers of crude petroleum.1 Many of the offshore purchases of petroleum and minerals were from sources in which American direct investments were important. The legislative requirement that as least 50 percent of ECAfinanced shipments from the United States, whether cargo, liner, or tanker, be in United States vessels was met; the same requirement for incoming shipments of strategic materials purchased with counterpart funds was exceeded. Since the requirement that 12.5 percent of wheat be shipped in the form of flour was repealed in June 1950, ECA no longer reported the percentage, but as of June 1950 it had shipped 14.1 percent in the form of flour. d. TECHNICAL ASSISTANCE

ECA placed increasing emphasis during 1950 on the program of technical assistance which it had begun in April 1949. This was a reflection of the facts that existing resources in many areas were being fully employed at the old techniques, that increases in productivity were urgently needed to prevent reduction in living standards in the face of rearmament, and that Congress had insisted on greater attention being given to this technique of recovery. During the year ECA authorized about $14.4 million to be used in technical assistance projects and expended some $5.7 million, as compared with $5 million and $2.8 million respectively in 1949. The greatest attention was paid to assisting the European countries in establishing local programs for increasing industrial and agricultural productivity, but emphasis was also placed on improving manpower utilization, public administration, and transportation and communications (see Table 4 ) . The coimtry receiving the greatest technical assistance was still Greece, where many projects had been begun under the American Mission for Aid to Greece prior to ECA. Of the total assistance since the ECA program began, Greece had received over 30 percent of authorizations (and 50 percent of expenditures),8 the 1Detailed statistics may be found in the monthly Economic Cboperation Ad­ ministration, Report for the Public Advisory Board, Washington, D.C. 2ECA technical assistance programs in Greece were under the Greek-Tiurkish Aid Act of 1948. These figures for Greece do not provide a valid comparison with other programs, however, because the types of projects supported there were dif-

I.

GRANT PROGRAMS

TABLE 4

ECA Technical Assistance Program, 1949-1950 (millions of dollars)

Authorizations

Expenditures

1949

1950

1949

1950

2.3 .5 .3 1.1 .5 .2 .1 e β

5.9 2.6 2.0 1.0 1.3 .2 .2 .1 1.1 14.4

1.3 .2 .2 .6 .3 .1

2.2 1.1 .3 .6 .6 .1 .1 .1 .6 5.7

3.7 6.0 2.3 1.1 1.0 .3 14.4

2.4 .4 0

Field of Activity Industrial Productivity Agricultural Productivity Manpower Utilization Public Administration Transportation Eind Communications Marketing Development of Overseas Territories Tourism Program Management" Total

SIT

« #

2.8

Type of Assistance U.S. Experts Foreign Experts Technical Materials Basic Surveys Services of International Organizations Services of U.S. Government Agencies Total

4.0 .9

tt

O 0 O 5Λ"

2.3 3.3 «

0

β 0 β

2.8

5.7

«

«

" Less than $50,000. a) This item represents the costs to ECA of managing the entire program. Sources: Calculated from Economic Cooperation Administration, Nineteenth, Twen­ tieth, Twenty-first Reports for the Public Advisory Board, Washington, D.C., January, February, and March 1950, and Thirty-first Report for the Public Advisory Board, Washington, D.C., January 1951.

United Kingdom only 12 percent, and France, Turkey, and the OEEC each about 10 percent. In all, some sixteen countries and the OEEC received technical assistance—mostly in the form of advice of United States experts and in the travel of foreign ex­ perts to the United States. The assistance to OEEC consisted of aid in developing its technical assistance studies and financing ferent from those in other countries. They were begun in a program broader than ECA's because of the greater devastation and loss of technical and administrative personnel (private ana government) in Greece. Also, the expenditures covered types of costs (e.g., expenses of transferring personnel) not met in other European countries. ECA was also reported to be more generous in Greece because of the country's poverty.

I.

GRANT FBOGHAMS

study in the United States by groups it sponsored. These studies were progressively concentrated during the year on the underlying basis of the generally high productivity rate in the United States rather than on the specific manufacturing and scientific processes used. e. INDUSTRIAL PROJECTS PROGRAM8

As a part of its program, ECA helps finance the establishment and modernization of industrial projects which it believes will increase output and/or productivity, reduce dollar imports, improve the quality of the product, or permit a better utilization of manpower. Although ECA reported that the need for greater defense potential after the Korean invasion made this type of assistance increasingly important, approvals for industrial projects dropped sharply during the last half of 1950. For the entire year, some sixty-nine projects were approved, estimated to cost the equivalent of some $750 million, of which $212 million would be in dollars to be supplied by ECA (see Table 5). Expansion of power facilities accounted for nearly a third of the 1950 approvals and expansion of manufacturing industries—chiefly iron and steel, petroleum refining, and automotive productsaccounted for most of the rest, although irrigation and reclamation projects, the first of which were approved in 1950, were also important. While these undertakings should directly strengthen the military potential of the area, ECA provided no public evidence that the industrial structure they were helping to create was appropriate to the "integrated" European economy which they were so actively encouraging. A Congressional Staff Committee early in the year stated that as regards the iron and steel industry at least the projects approved were such as actually to retard the attainment of the integration objective.4 In view of the concern expressed by ECA in 1949 over the growth of oil-refining capacity in Europe,5 it is interesting to note that during 1950 not only were additional refining projects approved but that for the first time approval was given for drilling 8 The "industrial projects program" refers only to projects involving more than $1 million of ECA aid and therefore does not include all industrial investments which ECA has helped finance. 4 Senate Document No. 142, 81st Cong., 2d Sess., March 3, 1950, pp. 8-8. β See Survey—1949, p. 26.

TABLE 5 ECA Industrial Projects, by Type and by Country, 1948-1950 (millions of dollars) Projects Approvedβ ECACost

Total Cost» 1948-1949 1950 Type of Project Manufacturing: Iron and steel Petroleum refining Automotive products Other Power facilities Raw materials extraction Transportation and communications Irrigation and reclamation Engineering and technical services Total Country0 France Italy United Kingdom Turkey Austria Greece Nedierlands Belgium Iceland Portugal DenmarkNorway Germany (Federal Republic) Total d

1948-1949

1950

ECAPaid Shipments 1948-1950

945 698 161 44 42 111 223

383 140 74 62 107 238 34

221 167 24 15 15 62 28

117 45 U 23 87 73 11

126 87 10 16 13 15 15

157

9

25

8

13

4

1 «

78

—

5 1440

7 750

1 337

1 212

507 201 402 179 43 10 68 21

244 214 19 23 35 102

110 82 46 30 20 5 27 7

36 84 5 19 15 26

—

_

10 29 —

1440

,

30 16 26 _ —

11 750

— —

5 5 —

337

—

8 8 7 —

—

2

212

170 47 42 34 16 18 9

2 8 O

»

2 1 β

"170

* Less than $500,000. a) Industrial projects exclude technical assistance projects, strategic materials development projects, and counterpart fund projects. These are discussed elsewhere. b) Total cost includes ECA dollars, other dollars, and dollar equivalents of local currencies. c) Overseas territories are reported with recipient mother country. d) In addition, Korea received project approvals of $17.8 million total cost in 1948-194Θ (mostly in power facilities) of which $6.6 million were to be met from ECA dollars; in 1950 additional approvals of $95 million total cost ($34 million ECA) were made covering coal mining, fertilizer, cement, railroad facilities, fishing and shipping. Paid shipments were only $63,000 by the end of the year. Sources: Economic Cooperation Administration, Nineteenth and Thirtieth Report for the Public Advisory Board, Washington, D.C., January 18, 1950, p. 47, and December 27, 1950, pp. 40-41.

I.

GRANT PROGRAMS

and prospecting for oil—in France and French North Africa. It should be recorded, however, that these constituted only a small part of the programs which several of the European countries had prepared for expanding their refining and producing capacities and that the problem of an "oil surplus" which had been so acute in 1949 had been largely solved by mid-1950.e f. COUNTERPART FUNDS

Each country receiving ECA aid is required to deposit in a special account amounts of its own currency—called counterpart funds—equivalent to the dollar cost of ECA-financed goods and services received by it on a grant basis.7 Ninety-five percent of these deposits are used in the recipient country for purposes agreed to by ECA and that country, and five percent are reserved for the use of the United States in that country. In its official reports, ECA has ascribed an important role to the 95 percent counterpart funds in stimulating productivity, promoting financial stability, and meeting certain other recovery needs, but their importance should not be overestimated since they do not constitute additional real resources and in most countries amount to only a small fraction of the total government expenditures. Still, they are not unimportant and, to the extent that the funds are allowed to accumulate or are used to retire public debt held by the central bank, they are anti-inflationary, and to the extent that they are used for other purposes, ECA does exercise some influence over internal investments.8 During 1950, deposits of the 95 percent portion totalled slightly over the equivalent of $2.5 billion while withdrawals totalled over $2.8 billion, of which some $900 million were used for debt retirement. Thus, in the aggregate, the equivalent of approximately one-fourth of the deposits during the year were used to counter inflation, as compared with approximately four-fifths in 1948 and 6For an excellent discussion of this problem, see Mendershausen, H., "Dollar Shortage and Oil Surplus in 1949-1950," Essays in International Finance No. 11, Princeton University, International Finance Section, November 1950. 7 Counterpart fund deposits are also required for "drawing rights" utilized un­ der the Intra-European Payments Scheme and for "initial credit balances"' utilized under the European Payments Union as grants. 8 For a discussion of some of the policy implications in the use of these funds, see McLeod, A. N., "Local Currency Proceeds of an Knport Surplus," Staff Papers, International Monetary Fund, Washington, D.C., February 1950.

I. GRANT PROGRAMS

one half in 1949. As Table 6 shows, of the funds withdrawn for expenditure within the country, the largest amounts, as in previous years, went to finance investment in public utilities, transporta­ tion, and communications. Assistance to agriculture and extrac­ tive industries was also important and, as compared with previous years, a larger amount was used to promote manufacturing. The relief projects were primarily for Greek refugees of the war in that country. The 5 percent counterpart funds reserved for use by ECA were used for the purchase and development of strategic materials for the United States stockpile, for covering ECA administrative ex­ penses, and for informational purposes. Some funds were trans­ ferred to the U.S. Treasury account for use by other govern­ mental departments. In Belgium, since the total amount of coun­ terpart was not great, ECA ran out of local currency funds, and requested a special deposit by Belgium of francs {equivalent to $152,000), making the United States portion 11 percent of total counterpart funds; in Portugal, due to special U.S. Government expenses, the Government there advanced escudos (equivalent to $209,000) from the 95 percent account.8 g. DEVELOPMENT OF OVERSEAS TERRITORIES

The ECA program for development of the overseas territories Cooperation Administration, Ninth Report to Congress, Washington, D.C., 1950, p. 76. In Germany there were two counterpart funds: one arising out of GARIOA and the other out of ECA assistance. When in late 1949 die Department of Army handed to ECA the responsibility for administering United States aid to Germany, ECA also took over the GARIOA counterpart fund. This account is kept separate from ECA counterpart; however; the latter is used similarly to other European local currency accounts, but the U.S. High Commissioner of Germany has first call on the former. The GARIOA account is used by HICOG, after consultation with ECA and the State Department, for its administrative expenses, for reorientation and reeducation in Germany, and for miscellaneous other purposes. After these needs are met, the German Government may with ECA approval use the funds for investment purposes, similar to ECA counterpart. In order to increase the sums in the GARIOA account (amounting to the equivalent of $200 million as of mid1950 after which there was no more GARIOA authorization) ECA agreed, as permitted tinder Ae 1950 law, to deposit therein part of the German ECA counterart to be received in the latter half of 1950. Frran December 1949 through 1950, 119 million were disbursed out of the special GARIOA account, of which part were for loans to the Berlin Central Bank and to the German Government, which will be repaid to the GARIOA account; at year end the equivalent of $166 million remained in the account. 9 Economic

f

TABLE 6 ECA Counterpart Funds, 1948-1950* (millions of dollar equivalents)

Total depositsb 95 Percent Deposits: Withdrawals for: Debt retirement Promotion of utilities Promotion of transportation and communications Promotion of agriculture Promotion of extractive industries Promotion of manufacturing Promotion of stockpile materials Promotion of other production Construction of public buildings and housing Special relief projects Other Total 5 Percent Deposits: Withdrawals for®: ECA administration Deficiency materials'1 Information and special purposes Transfers to U.S. Treasury Otlier transfers Total

1948-1949

1950

4342 4146

2697 2560

1069 411 255 146 266 121 38 72 131 58 157 2724

933 332 311 372 133 260 96 203 87 104 2832

196

137

12 36 15 12

15 23 8 18 1 65

—

75

—

a) Excludes counterpart under previous aid programs, under GARIOA, and under ECA Far Eastern Programs. b) Deposits are made in local currency a:t conversion rates which are the par values agreed to by the International Monetary Fund; where no such par values exist the rates used are mutually agreed upon by ECA and the participating country concerned. These deposit figures are "adjusted" to provide comparability between deposits and withdrawals. The dollar equivalent of withdrawals made prior to the September 1949 devaluations have been computed at the average rates at which deposits were made. Withdrawals after the devaluations have been computed at the conversion rates in effect at Ae time of withdrawal which were different from the rates at which some of the deposits were made. ECA has therefore adjusted the deposit figures so as to express their dollar equivalents ". . . in terms of the rates in effect at the time the funds were withdrawn or at the tmrrent rate for balances remaining in the accounts." The unadjusted total deposit figure was $7674 million. c) Excludfog temporary advances to MDAP. d) In addition there were at the end of 1950 outstanding commitments for strategic materials of $29.6 million. This figure includes both commitments for purchases and for development of resources. Sources: Economic Cooperation Administration, Local Currency Counterpart Funds, Washington, D.C., December 31, 1949, pp. 5 and 6, and December 31, 1950, pp. 7-9.

I.

GRANT PBOGKAMS

of metropolitan Europe was expanded in 1950 with increasing emphasis on projects which would contribute to Western defense. The territories of OEEG metropolitan countries have access to five types of funds under the ECA program: (a) dollars from regular country allotments as requested by the metropolitan countries for use in the territories, (b) dollar aid through a special reserve fund for economic development set aside by ECA,1 (c) technical assistance financed from a special earmarked reserve, (d) a strategic materials development fund, and (e) counterpart funds released by the metropolitan country. Details are not available as to the amount of aid extended under (a) above, but it should be noted that in addition to such aid some countries, especially the United Kingdom, have been enabled by general ECA assistance to provide from their own resources aid to their overseas territories. With respect to (b), during the year ECA approved expenditures of about $10 million (mostly for purchases of machinery and vehicles) to help finance projects in the territories of the United Kingdom, France, and Belgium. The largest was for the development of iron ore deposits in French Guinea, and most of the remainder was for road construction and agricultural improvement in the other areas. For technical assistance projects, (c) above, ECA spent approximately $70,000 in 1950—all for employment of United States experts and the travel of foreign personnel to the United States. These expenditures were almost entirely for assisting the territories of the United Kingdom and France, with small amounts for the overseas territories of Denmark, Netherlands, and Belgium. Under (d) above, ECA during 1950 spent $5 million in dollars to develop sources of strategic and critical materials in the overseas territories, plus an approximately equivalent amount in ECA 5 percent counterpart funds. These funds are provided on a loan basis to be repaid in deficiency materials. Detads are not available with respect to (e) above, but it has been reported that only France released large amounts of its counterpart funds for use in its overseas territories. Changing Role of ECA

ECA's tentative plans in early 1950 called for a program of 1 Tliis

fund was created in May 1950 with an initial $20 million in dollars.

I.

GRANT PROGRAMS

European aid in fiscal 1952 of some $2 billion. But the impact of the rearmament program, combined with the adjustments resulting from the 1949 devaluations and increased European production, resulted in a sharp curtailment of actual expenditures during calendar 1950. In his January 1951 Budget Message to Congress the President made no specific request for funds to continue ECA, stating that fiscal year 1951 requirements would be presented later and would be a part of a program of "mutual assistance, military and economic" in which all but a small portion would be used directly to expand the defensive forces abroad. At the beginning of 1951, with Marshall Plan expenditures falling rapidly, the future role of ECA had not been settled. But it was becoming increasingly involved in the Western European rearmament program and in activities similar to those under the Point Fotir Program. The clearest sign of diminishing need for Marshall aid, for the original purposes, was the December decision to suspend aid to Britain, taken because of the spectacular increases in Britain's production and productivity and in the sterling area's gold and dollar reserves (see Table 7). Also important in this decision were TABLE 7 Sterling Area Gold and Dollar Reserves Held in London, 1949-1950 (millions of dollars)

1949: 2nd 3rd 4th 1950: 1st 2nd 3rd 4th

quarter quarter quarter quarter quarter quarter quarter

NetGold and Dollar Earnings

ECAand other aid

— 631 -539 — 31 + 40 +180 +187 +398

+370 +313 +294 +256 +258 +147 +146

Goldand Net Dollar Re­ Additions serves at End to Reserves of Period -261 -226 +263 +296 +438 +334 +544

1651 1425 1688 1984 2422 2756 3300

Source: British Infonnation Service, British Economic Record, New York, Janu­ ary 15, 1951.

the increasing demands imposed on the American economy by rearmament and tihe Mutual Defense Assistance Program. This mutually agreed upon cessation of aid was stressed as a "suspen-

I.

GHANT PROGRAMS

sion" and not a "termination." The ECA agreement was to remain in force; Britain was still eligible for aid under the technical as­ sistance, development of overseas territories, and productivity programs, and goods in the pipeline would continue to be received for many months. The official joint statement of December IS said: "The suspension of aid under the European Recovery Program does not mean that the recovery of the British economy is com­ plete or that the financial resources of the sterling area are adequate. Both Governments recognize that part of the improve­ ment in the position of the sterling area is to be ascribed to ex­ ternal factors which may well be temporary. Furthermore, new difficulties and burdens are certain to fall upon the British econ­ omy and balance of payments in 1951 as a result of the increased defense program and the impact of higher raw material prices and prospective shortages. This understanding, therefore, pro­ vides for the suspension, and not the termination, of direct ERP aid and for reconsideration if necessary."8 ECA had not suspended aid to any other European country by the end of 1950;8 during the last two quarters, however, as noted 2Economic Cooperation Administration, Press Release, No. 1932, Washington, D.C., December 13, 1950. See also New York Times, December 14, 1950. Although suspension of aid was reportedly accepted graciously in Britain there was fear in many circles there, both governmental and private, that her overall, as well as her dollar, balance-of-payments position might deteriorate in 1951. This result was expected not only because of the suspension of Marshall aid, which had accounted for some two-fifths of her increase in reserves in 1950, but also because of the increased cost of imports, a possible decrease in exports and increase in imports as internal resources were directed to rearmament, and, finally, the beginning of the first capital and interest payments to the United States ana Canada under the 1946 credits—$178.5 million are due on December 81, 1951. The Government therefore considered that strict exchange control would be necessary to husband reserves. The Economist (January 13, 1951, p. 92) opposed this view as overly pessimistic and thought that events may prove quite favorable to the British position. We might add that her problem in 1951 would seem to be not that of husbanding reserves but rather of the physical availability of imports and of accumulating debts to the sterling area. No "stabilization loan" from the United States to supplement British monetary reserves was suggested, as had been proposed in the Gray Report (op.cit., p. 44). The suspension of aid to Britain appeared to be a reversal of Mr. Hoffman's previously announced policy of distributing aid according to "merit" rather than "need" (see Survey—1949, pp. 141-142), but it must be recognized that this policy was stated under international conditions very different from those obtaining in late 1950. In fact, there is no evidence that this principle was ever put into operation. 8 Sweden announced in December that she would need no further assistance. She stated that her dollar needs could be met through exports and the operations

I. G R A N T P R O G R A M S

above, the amounts actually extended were sharply curtailed. The nature and extent of the need for "economic" aid in 1951 was uncertain since Europe was just beginning to feel the impact of Western rearmament. The Gray Report concluded that, "To facilitate the required expansion of Western European defenses in accordance with joint plans, the United States should be prepared to continue supplying aid, apart from military equipment, for another 3 or 4 years beyond the present time."4 The question of the relationship between "economic" and "military" aid and the role of ECA in the changing United States program for strengthening the West was still to be settled at the end of 1950. The shift in emphasis by ECA from economic recovery alone to a mixture of recovery and rearmament was exemplified by the changed wording of the ECA emblem during the third quarter from "For European Recovery" to "Strength for the Free World." ECA's part in the European rearmament program during 1950 was twofold. It was consulted on the amount and form of aid to be extended to increase military production abroad, and its facilities of allotment and authorization were utilized in furnishing materials, components, and equipment for expanding the foreign military production programs. It also had primary responsibility for assessing the increased economic needs arising from the rearmament program; the ECA Special Representative in Europe had been appointed ex officio chairman of the Economic and Financial Committee of the North Atlantic Treaty Organization (NATO), and ECA technical personnel were devoting much of their time to problems arising from rearmament. ECA was "at the crossroads" not only as regards its role in the of the EPU. In any case, the only direct ECA aid Sweden had received was a loan of $24 million during fiscal 1949-1950. ECA in April did withhold aid from Greece, temporarily. This decision was ap­ parently in die nature of a threat designed to force more energetic action by the Greek Government in solving internal measures needed for recovery. Aid was later restored, but the amount scheduled for the year was reduced by some 40 percent from original estimates on the ground of insufficient internal funds to carry out the previously planned projects. The possibility of additional assistance was made contingent on the Greeks taking a series of measures recommended by the ECA mission. (See International Monetary Fund, International Financial News Survey, Washington, D.C., October 13, 1950, p. 119.) Italy was also threatened with re­ duction in assistance as a penalty for what ECA regarded as ineffective internal recovery programs. 4 op.cit., p. 11.

I.

GRANT PROGRAMS

European rearmament program but also with reference to other foreign economic programs. The Gray Report had recommended that a single administration be established to coordinate all foreign aid programs.6 This had not been done at year's end, but EGA was, as is discussed elsewhere, expanding its activities in Asia and in Europe's dependent overseas territories. These operations were similar to those contemplated in the Point Four Program, but were not a formal part of it. With specific reference to Europe, ECA saw its future problems as (a) reestablishing military strength in Western Europe, (b) absorbing Germany into Western Europe as a dependable member of the community, (c) winning labor from Communism, especially in France and Italy, (d) keeping "alive in the minds of Europeans an interest in the future,"6 and establishing an independent Europe financially able to support itself. B. MUTUAL DEFENSE ASSISTANCE PROGRAM Introduction During the first four years following the end of World War II, the United States provided more than $2 billion of combat materiel to friendly foreign nations on essentially a sporadic and piecemeal basis. Beginning in 1949, foreign military assistance was approached as a continuing long-term mutual undertaking, and efforts were begun to coordinate the various programs. Many of the major policy issues concerning the emerging Mutual Defense Assistance Program (MDAP) were thrashed out in 1949, and a $1.3 billion aid program for the year ending June 30, 1950 was authorized, to be allocated as follows:7 millions of dollars

North Atlantic Pact Countries Greece and Ttirkey Iran, Korea, and Philippines General Area of China

1,000 211 28 75

6Similar proposals were made by many others, including Mr. Paul HofEman after his resignation as ECA Administrator. eECA Special Representative in Europe, . Milton Katz, as quoted in The Statist, November 18, 1950, pp. 634-635; see also Wasserman, M. J., "Modern Techniques in Trade Development," Department of Commerce, Foreign Commerce Weekly, Washington, D.C., January 29, 1951, p. 3. 7 See Survey—1949, pp. 32ff. In addition to the above appropriation, $45 million

I.

GRANT PROGRAMS

The main activity during the first half of 1950 was setting up the machinery to carry out the MDAP, especially that to Europe, and as of June 30 aid actually extended totalled only $71 million. After the outbreak of fighting in Korea in June, the size of the program for fiscal 1951 was multiplied fourfold, assistance actually provided was accelerated, increased emphasis was given to Asia although Europe was still regarded as the area of first importance, and urgent attention was given to determining the contribution of each participant to the integrated defense of the Atlantic community. However, grants during the year, consisting of military equipment as well as items to increase military production abroad, totalled only $516 million, of which nearly 90 percent went to European countries. In addition, $61 million of military aid were supplied to Greece and Turkey under the previous military programs for these countries, and nearly $5 million to China from funds provided under the China Aid Act of 1948 as amended. The Mutual Defense Assistance Act of 1949 required that, before aid could be extended, each recipient country must sign an appropriate bilateral agreement with the United States and, with respect to European countries, the President must approve the broad plans for the integrated defense of the North Atlantic area. The bilateral treaties were signed with North Atlantic countries on January 27, 1950 in a ceremony at Washington. Korea signed a similar agreement on January 26, and the Philippines on March 11. The agreement with Iran was not formalized until May 23.® The various agreements were almost identical in terms, and it was officially stated that there were no secret clauses or supplements.8 They had two objectives besides setting the terms of military aid to Greece and Turkey were included in the foreign economic aid appropriation in 1949. 8 In the case of programs designed for the "general area of China" more simpli­ fied agreements were sought. 9 The agreements contained the provisions required by the MDAP Act concern­ ing self-help and mutual aid and articles dealing with the furnishing of strategic materials to the United States, the reception, treatment, and status of personnel of one government who might be stationed in another, the provision by the re­ cipient government of local currency required to meet the local administrative expenses of the United States, the duration of the agreement, and the conditions upon which the agreement would become effective. Siiriilarily in the bilateral agreements arose out of die granting of "most favored nation" treatment to each country under which any provision agreed to with one was made available to all others. Agreements with Greece and Turkey were not signed since military aid to these

I.

GRANT

PROGRAMS

of transfer and amount of aid: 1 (1) to insure that American aid would not be used to support purely national policies of the recipient and (2) to make mutuality of assistance more than formal even though the United States supplied most of the imported materials.2 The agreements further included the principle that economic recovery was essential to internal peace and security and must be given clear priority. On the same day as the signing of the North Atlantic bilateral treaties, the President announced his approval of the broad recommendations for integrated defense of the North Atlantic area made by the Treaty Council and Defense Committee established under the North Atlantic Treaty.8 This action released $900 million of funds and contract authority made available in 1949 but frozen under the act in escrow pending his approval of these plans. The funds could not be used effectively, however, until further organizational steps had been taken in the United States and in Europe, and until individual programs had been minutely scrutinized. The authority for the overall direction of the program in the United States was placed by the President in the State Department, which was directed to consult with the Defense Department and with ECA in order to coordinate foreign military aid with national defense and the economic recovery programs.4 The Secretary of State was given authority to allocate the appropriation among the countries specified in the law, except for those retained by the President and designated for use in the couBtries is covered by previous agreements under the Greek-Turkish Assistance Act. (For greater detail on these treaties and the negotiations, see First Semi-An­ nual Report to Congress on the Mutual Defense Assistance Program, October β, 1949 to April 6, 1950, Department of State Publication 3878 (also H. Doc. No. 613, 81st Cong., 2d Sess.), Washington, D.C., June 1950, pp. 35-38). 1 France was scheduled to be the largest single recipient, getting $300 million of the original $1 billion for Europe in fiscal 1951. 2For example, the Belgian Government signed on April 20 an agreement with the United States that the remaining surplus property in which each had an in­ terest would be made available without cost to North Atlantic Treaty countries to meet military supply deficiencies; Belgium had spent some funds in rehabilitating the supplies which were valued at $30 million; it was, however, to make no charge save that of packing and shipping the items. 3 The Norm Atlantic Council had occupied its third session (January 1950) with approval of the recommendations made by the Defense Committee in its Paris meeting of December 1, 1949. * See First Semi-Annwd Report . , . , op.cit., pp. 23-24, for a statement of the separate responsibilities and orientations of these organizations with reference to MDAP.

I.

GKANT PROGRAMS

general area of China. Each of the three organizations were represented in two committees: the "Foreign Military Assistance Steering Committee," composed of the cabinet-level officers themselves, and the "Foreign Military Assistance Coordinating Committee (FMACC)," composed of representatives of the cabinetlevel officials of each of the agencies. The latter usually met at least once a week and referred unresolved problems to the Steering Committee. The officials of the Coordinating Committee were heads of special sections created in the three departments concerned: Director, Mutual Defense Assistance (now Director, Office of International Security Affairs) in the Department of State; Director, Office of Military Assistance in the Defense Department (directly tinder the Assistant to the Secretary of Defense in Charge of Foreign Military Affairs and Military Assistance); and a Deputy to the ECA Administrator.® Their jurisdiction covered all military assistance, both under the North Atlantic Pact and elsewhere. The energies of the FMACC in early 1950 were directed to establishing procedures, programs, and criteria for providing the three different types of aid authorized: (1) the supply of end items of military equipment; (2) training; and, (3) additional military production projects in the North Atlantic countries. The requests for military equipment had to be screened against criteria of their essentiality, availability through expansion of domestic production in the requesting country or through transfers among Treaty countries, and availability from military stocks in the United States. Several types of training programs were set up. The increase of the military production potential in Europe was regarded as crucial. These nations estimated that if they could be supplied with the dollars needed for certain imports they could produce high-priority items with a value of at least five times the amount of dollar aid received. Implementation was necessarily slow because of the efforts to coordinate the expanded projects among the various countries. But actual aid was further reduced by the requirement in the 1949 Act that no production equipment or machinery except machine tools could be sent abroad under the Program. The Administration therefore requested Congress in 6For organizational details of the North Atlantic Treaty Organization, see ibid., pp. 26-35.

I. G R A N T PROGRAMS

early 1950 to amend the law to permit shipment of other types of machinery and equipment. Legislative Changes Besides the above-mentioned restriction, another 1949 legislative provision which seemed to the Administration to thwart the successful attainment of the purposes of mutual assistance was the requirement that reimbursable (or non-grant) aid should be available only to those countries which had joined with the United States in an arrangement for collective regional security and that the full original cost of the equipment sold be paid by the purchasing country, regardless of its present value, and in advance of the execution of any contract or sale. The Administration requested that the 1950 legislation allow sales of items on the basis of present value to any non-Atlantic Pact nations ". . . whose increased ability to defend themselves against aggression is important to the security of the United States."® The third revision which the Administration requested was that the President be given ". . . limited authority to divert a small portion of the amount made available to any one of the groups of countries [specified in the law] in order, in the event of a serious emergency affecting the security of the United States, to provide military assistance to a nation which may not be named in the law but whose immediate, increased ability to defend itself against aggression is clearly vital to the security of the United States."7 The Administration proposed no changes in the procedures or standards being used in implementing the Program and requested a net new cash appropriation of $1222.5 million for fiscal year 1951, as compared with a total of $859 million8 cash plus $500 million of contract authorizations provided for the previous year. It also asked that $500 million be appropriated to cover the 1949 contract authorizations, that the unobligated balance as of June SO, 1950, estimated at about $214 million, be carried over, and that authority be granted to provide an additional $250 β ibid., p. 52. ibid., p. 51. Ia the first (1949) Administration request, the aid was to be dis­ tributed to any area at the discretion of the President; in the face of Congressional opposition, specific areas and amounts were named in a substitute proposal. 8 Included are $45 million for military aid to Greece and Turkey under Ihe 1949 Foreign Economic Aid Appropriation Act. 7

I.

GRANT PROGRAMS

of surplus United States military equipment. Of the $1.2 billion new cash requested, approximately 90 percent was scheduled for Europe. The public hearings on these requests were held before the invasion of Korea and touched on very few vital issues, since most of the evidence and material asked for by the Senate and House Committees and many of the policy issues were presented and discussed in "executive session." In the public sessions,® the Congressmen expressed concern over the duration of the Program. Administration witnesses testified that they anticipated that mili­ tary aid would have to be continued for four or five years, at the end of which Europe should be able to withstand an attack long enough to build up forces able to repulse it. The consensus of opinion, in contrast to the optimism of 1949, was that the amount of aid woxild probably increase in the meantime due to the intensification of Soviet activity. The Senate Committee on Foreign Relations asked about the effect of governmental changes in Exnrope upon the Treaty and MDAP, and Secretary Acheson assured it that all nonCommxmist parties voted for the Program and that "pressxire" to gain greater political integration to assxore continxiity of action in Exxrope was not desirable. The Senate Committee also raised the question whether the Program, slanted as it was towards maintaining internal as well as external stability and secxirity, was not supporting established governments regardless of their corruption or the desirability of their overthrow. Secretary of Defense Johnson's reply was heated in its denunciation of any negative policy of withdrawing support of existing regimes which, he felt, in some cases, might allow the instigation of revolt by Commxmist sympathizers. Congressmen questioned whether other coxmtries were doing all they coxild to strengthen themselves militarily. In the public hearings, the Administration did not present detailed statements of military expenditures by other coxmtries but implied that they were, by and large, doing all that coxold be expected. In a move designed to lighten the burden of the American taxpayer, some Congressmen suggested that ECA coxmterpart funds τπίΐΐΐηη

9 "Mutual Defense Assistance Program, 1950,** Hearings, U.S. Senate, Commit­ tee on Foreign Relations and Committee on Armed Forcesi 81st Cong., 2d Sess., June 1950; 'To Amend the Mutual Defense Assistance Act of 1949, Hearings, House of Rep., Committee on Foreign Affairs, 81st Cong., 2d Sess., June 1950.

I.

GRANT PROGRAMS

be used for military purposes in Europe. EGA Administrator Hoffman was "unalterably" opposed to the use of the 95 percent funds for such purposes. He argued that there were more economic projects which needed to be accomplished than there were funds available and that, if the funds were used at all, they should be for economic recovery.1 ECA agreed, however, that any surplus of counterpart 5 percent funds (available for the purposes of the Uiiited States alone) over and above its administrative expenses, informational activities, and stockpiling program should be made available for military expenditures. The amount so in surplus in mid-1950 was estimated at about the equivalent of $100 million. EGA asserted, however, that such use would probably not bring any savings in dollars, for there would still be dollar needs of the coimtries which could not be met by the use of local currencies. The Committees hardly touched on the three amendments requested by the Administration, but the Senate Committee did express itself as being against any provision that would allow Europe to build new plants for military production which would then have to be stocked with American equipment and machinery supplied under MDAP; they saw no objection in principle to the shipment of such items to rehabilitate and modernize existing plants. The Administration's witnesses replied that no new plants were contemplated. In fine, the general tone of the hearings was that the Committees merely wanted themselves and the public to be reassured that Europe was determined to make greater efforts to build its own defenses and that an increase in military strength was the way to peace. On June 21, 1950, four days before the outbreak of fighting in Korea, the joint Senate Committee on Foreign Relations and Committee on Armed Services unanimously reported the bill (S. 3809) favorably to the floor. Only slight changes were made in the Administration requests for funds.2 The Committee incorporated 1 The question may be asked whether it makes any difference where the funds come from if the real resources have to be taken for military use; that is, if the funds for military expansion have to come from a deficit-financed national budget, counterpart might as well be used. Only if the military funds come from a balanced budget does this observation not apply. 2 Iran, and' $11.5 million, was shifted' from its grouping with Korea and the Philippines to that of Greece and Turkey, and instead of allowing the President to use the full $75 million provided for the "genetal area of China" confidentially as previously (1949-1950) he was allowed to disburse only $35 million without

I.

GRANT PROGRAMS

amendments to the 1949 Act which met the Administrations requests (1) to allow shipment of production equipment in addition to machine tools since it estimated Europe could produce $6 or $7 billion of end-products from $1 billion of such aid; (2) to allow cash sales to countries which did not have collective security arrangements with the United States so that they could buy spare parts, and at a "fair value" rather than at original cost,® and without paying in full in advance;4 and (3) to allow grant aid to countries not mentioned in the Act up to a limit of 10 percent of the total appropriation in the case of an emergency. In the Senate debate on the bill, an amendment was accepted disallowing aid to any country not contributing its fair share as measured by expenditures for military programs at least as high as the largest annual expenditure during 1948-1950. Following the Korean invasion, the tone of the debate changed. Several Senators urged aid to Germany and Spain, and much more time was spent discussing the general United States foreign policy in the Far East, especially in Korea.® An amendment was offered to insert a blank in the place of a specific figure for aid to Korea and the Philippines, leaving it to the determination of the Appropriations Committee after more deliberate consideration on die basis of later information. It was rejected on the grounds that ample aid was provided under the present bill since some $200 million of new supplies could be sent (all of that specified for the "general area of China," for Korea and the Philippines, and 10 percent of the total), plus all the $250 million of surplus equipment which the bill authorized to be used. The measure passed the Senate unanimously. On July 12 the House Committee on Foreign Affairs reported the Senate bill unanimously and without amendment. The ComInvoices and of this all but $7.5 million must be reported—when made—to the Senate Committee on Foreign Relations and the House Committee on Foreign AfFairs. 3 Senator Taft initiated a full-scale debate on die question of how to value goods that did not have to be sold for original cost so as to prevent their being given away. The result was the above amendment. (See Congressional Record, Tune 27, 1950.) * The amount of "credit" so extended was restricted to $100 million, calculated as the difference between sale price and the amount of cash payment ( or install­ ment payment?) received. 8 See Congressional Record, June 30, 1950.

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mittee urged haste in action on the bill in view of current events and of the unanimity in the Senate and in the House Committee. After a message from the President on July 19 to the effect that the new issues raised by Korea would be reconsidered later under a supplemental appropriation request, the House rushed the bill through with one dissenting vote, although reservations were voiced to the effect that specific provision should have been made for aid to CJermany and, especially, Spain. The President signed the bill on July 26, 1950, and the omnibus Appropriation Act of 1951, passed in September 1950, appropriated $1678 million, of which $455.5 million were to meet contracts previously entered into under authority granted in 1949.® President Truman sent a letter on August 1 to the Speaker of the House of Representatives7 stating that the pressure of current events, especially in Korea, made it clear "... that the free nations must accelerate the efforts they are making to strengthen their common security. They now have no alternative but to increase rapidly their preparedness to defend the principles of international law and justice for which the United Nations stands. This course provides the best hope of deterring future calculated outbreaks against the peace of the world." He reported other nations were planning to increase their military production out of their own resources but stated that they would also have to rely greatly on the productive resources of the United States. He therefore recommended that Congress quickly provide another $4 billion under the MDAP. Again approximately 90 percent was scheduled for Europe. He emphasized that the military programs were no subsitute for foreign programs of' economic recovery; in fact, the former would place heavy burdens on already strained economies. Therefore, he stated, "if the free nations are to achieve the economic and military strength which are necessary for our common 6 There was no need for appropriation action on the request for use of $250 mil­ lion of excess military equipment, for the procedure used is to charge full cost of the equipment against the authorized amount less any rehabilitation cost; the cost of rehabilitation, packing, and shipping is then paid out of the funds appropriated for the recipient area. Also, no appropriation was necessary for the carryover of fiscal 1950 funds remaining. 7 H. Doc. No. 670, 81st Cong., 2d Sess.; found in "The Supplemental Appropria­ tion Bill for 1951," Hearings (on Mutual Defense Assistance Program), House of Rep., Subcommittee of Committee on Appropriations, 81st Cong., 2d Sess., pp. 274-275.

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defense we must continue to give full support to the European recovery program." There was much discussion later, but no generally agreed conclusion, as to whether rearmament and expanded United States military aid would ease or tighten the "dollar shortage." Secretary Acheson expressed uncertainty but Mr. Foster, then Deputy ECA Administrator, had no doubts as to the net result:8 "First, Europe is going to have to import more goods and services from abroad as military production increases. Second, after the pace of military production has reached the level that it must attain, Europe will not be able to export as much as we had hoped. Third, the changes in prices that are already occurring in the world under the stimulus of stepped-up demand for goods will work to the serious disadvantage of the highly industrialized European countries. " . . . Taking these three factors together, it is clear that Europe's trading position in the world is bound to deteriorate. "There will be one favorable factor affecting the financial position of the European countries which will partly offset the deterioration I have just described. As this country buys more tin, rubber, copper, and other raw material imports, the independent countries of the sterling area and many of the dependencies of the European countries will earn more dollars. On balance, however, we expect Europe's dollar position to be worse by a substantial sum in this fiscal year, even though military production in Europe cannot hit its full stride for many months. The dollar balance of payments should not deteriorate much more in 1951-52 but the increasing strain that will be felt in that year may well prevent the improvement that we have been counting on and that would otherwise take place." The House Subcommittee again questioned whether Etirope could and would do its share budgetwise. The Administration witnesses now stated that the current efforts of many countries were not regarded as sufficient, but they made it clear that aid would be geared to the rate at which Europe obtained and trained the manpower to use the equipment supplied.9 They 8 House Hearings, ibid., pp. 278, 286. No reference was made to the effect of in­ flation in the United States and expanded export controls on the dollar gap. 9 More than $2 billion of the total aid was to consist of tanks, artillery, and mod­ ern aircraft directed to withstand a mechanized assault.

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stated further that if Europe did not activate itself fast enough to use the materials produced in the United States, it was contemplated that the supplies would be available to supplement the domestic defense program. The Administration disclaimed any intent that the United States supply most of the equipment and Europe most of the manpower; rather it reported that military authorities estimated that"... production of military goods within Europe itself must be at least doubled in the near future if it is to fulfill its share of equipping the forces needed for the common defense."1 Of particular importance to the House, Senate, and Administration was the inclusion of Germany in the plans for military production. The Administration agreed that effective integration of the German economy and manpower could contribute greatly to the common military effort. However, Secretary Johnson interjected that to be successful the present military plans did not require the "militarization" of Germany.2 Secretary Acheson assured the House and Senate members that the Department was giving complete study to the question and would urge other nations concerned to accept German participation. He admitted that agreement did not exist on the inclusion of Germany at that time. Inconclusive discussions were held as to the role of Japan in Pacific defense. Congressmen also inquired about Spanish participation; Administration witnesses stated that they were requesting no specific aid to Spain but that there was nothing to stop any amount of procurement of items from that country if desired and that the President had authority to use 10 percent of the total funds to aid any country in case of emergency. In an effort to build up the military production potential abroad, the Administration contemplated that some $400 million of the total would be used to finance shipments of supplies and machinery to Europe for use in domestic industry.8 It anticipated that House Hearings, op.cit., p. 285. The then current military expenditures on production and procurement by the (European) Atiantic Pact countries were es­ timated at an annual rate equivalent to $1.2 billion (ibid., p. 347). 2 See "Supplemental Appropriations for 1951," Hearings, U.S. Senate, Commit­ tee on Appropriations, 81st Cong., 2d Sess., pp. -284-287, where the Committee considered Aat the statements of Acheson and Johnson as to the efiFectiveness of European military plans without Germany .were contradictory. 3 Under the 1949 MDAP Act, Congress insisted on not financing the erection of military plants abroad in order to avoid criticism of fostering an armaments race, but events in Korea disposed of this concern. 1

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one-third of this amount would be used in purchasing equipment in Europe for Europe; the object was not only to provide a broad economic support of Europe's dollar reserves but also to speed procurement at the least cost. Many of the issues raised by Congress in the hearings were of strategic importance and related to confidential policy, and the discussions were not made public.4 Thus, although the State Department's policy in the Far East since 1945 was rather minutely reviewed by Secretary Acheson, discussion of present policy was "off the record," as was discussion of the avowed coordination of military and foreign policy by the Secretaries of State and Defense. As before, members of Congress queried when the expenditures might end; this time no answer was offered, but official witnesses did state that the program in its entirety was aimed at making Europe, within three years, able to withstand a Russian attack. The $4 billion supplemental appropriation bill passed both Houses by overwhelming votes, and the President signed the measure on September 27, raising to nearly $5.7 billion the cash appropriated by Congress for the MDAP for the fiscal year 19501951, as follows: North Atlantic Pact Countries Greece, Turkey, and Iran Korea, Philippines, General Area of China

millions of dollars

4959.5" 324.5 394.0 5678.0"

a) Includes $455.5 million to liquidate previous contract authoriza­ tion. b) In addition to this amount for fiscal 1951, the prior contract au­ thority and previously appropriated funds were carried over, die former about $55 million and the latter over $200 million; also, $250 million of surplus property were added to the existing au­ thority to transfer $450 million of such items to foreign countries. * In answer to questions as to when Ihe supplemental program was conceived, Secretary Johnson replied, collaterally with Mr. Acheson, that it was begun by the Ministers of Defense in October 1949 when the standing Military Committee of the NATO was authorized to determine what was needed for "over-all defease." Broad plans were approved at The Hague on March 31 and April 1, 1950, and out of them came the relevant figures of a plan presented to the President on July 14, 1950. They indicated that the plans for an emergency were being de­ veloped all along and that the Korean situation constituted just such a case; prior to Korea, reductions had been contemplated in the titles of the bill relating to Greece, Turkey, and Iran, and the Far £ast, but the Korean invasion reversed the plans for these areas. ( See "The Supplemental Appropriation Bill for 1951," House Hearings, op.cit., pp. 303-304.)

I. G R A N T P R O G R A M S

A general provision was appended to the Supplemental Appropriation Act to the effect that ECA and other economic (but not military) or financial assistance might be cut off by decision of the National Security Council on its finding that the recipient was carrying on trade with Russia or its satellites which was inimical to United States security interests.6 Also, a provision was written into the Act making explicit the power of the President to transfer to the Department of Defense for its own use items of defense being procured for delivery to foreign countries tinder MDAP; this statement was inserted to make certain that the Department could take such supplies for the Korean effort. .

Progress toward Mutual Defense During March 1950, the first shipments of military supplies left the United States, and the Military Committee of NATO (the Defense Ministers of the members) met at the Hague and agreed upon additional details of an integrated defense plan for the North Atlantic countries. It was unofficially reported to have assigned responsibility for strategic bombing to the United States; for maintaining naval superiority to the United States and United Kingdom assisted by France, Italy, and the Netherlands; for supplying land forces to the Continental countries, especially France; and for short-range bombing and air defense to France and Great Britain. At these meetings the United States officials did not yet want to face the problem of creating a supreme command. The press reported they were concerned over the possibility of international disunity and bitterness arising from the selection of the person to be the Supreme Commander and, being convinced that in the end an American would be named, feared that this would result in greater claims by the Europeans for financial help.® The Production and Supply Board of NATO was assigned the task of surveying the economic and financial potentialities of members with reference to the defense plan and of preparing a detailed program for molding Western Europe's production capacity to meet the anticipated military needs. To reduce costs, NATO See Chapter V, infra. New York Times, April 10, 1950. See The Statist, Maxch 4, 1950, pp. 262&. for an analysis of the problems of a military Atlantic Union. 6 β

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members planned to concentrate production of certain items in specific countries.7 In order to equalize the burden of defense costs, some European representatives informally proposed a Federal Finance Pool into which each country would pay a fixed proportion of its national budget and out of which each would receive what it needed as determined by a central authority.8 The press reported this suggestion was not formally presented to the Atlantic Pact group in the face of opposition from the larger nations, and the United States in particular.9 Prior to the London meeting of the North Atlantic Council in May, it was evident that Europe did not fully share the United States sense of urgency in rearming, and insisted in any case on the maintenance of existing living standards. The Foreign Ministers of the Big Three agreed before meeting with the "Little Nine" that defense measures should not impair standards of living already attained,1 but the pervading fear of most of the twelve Foreign Ministers at the North Atlantic Coxmcil meeting was that the strategic plan recommended by the Defense Ministers could not be implemented without reducing living standards. Some countries considered maintenance of these standards so important as to render pointless any question of "security versus recovery," since without the latter the former would be undermined internally. The members were also reluctant to take the steps requisite to military integration, although the press reported they were slowly recognizing it as an evident necessity. There was no agreement as to how to meet the defense costs or how to 7 See New York Times, March 30, 1950. The general problem of possible con­ flicts between strategic and economic considerations in determining who would produce what was recognized both by the Council of Economic Advisers and in the Gray Report. (See The Economic Report of the President, January 12, 1951, Washington, D.C., 1951, p. 120, and Gray Report, op.cit., pp. 28-40.) 8Defense commitments outside the North Atlantic area would be taken into account. (New York Times, April 10, 1950.) In its Report on the MDAP Act of 1949, the House Foreign Affairs Committee' took the position that in financing common defense under the Adantic Treaty, "equality of burden" on incomes of the citizens of participating countries should be sought—not "equality of burden" on national budgets; equal per capita expenditures seemed an approximation to this principle. (H. Report No. 1265, August 16, 1949.) We might add that Ais result is attainable only through a common defense pool financed in accordance with federal taxation principles. 0 New York Times, April 10, 1950. 1 They also agreed that Africa should be economically developed and that greater mobility of population should be encouraged and that to this end a study of migra­ tion possibilities should be made. (New Yoik Times, May 14, 1950.)

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allocate them; nor was agreement found on the inclusion of Germany. The Council did agree that adequate military defense required the most economical and effective utilization of forces and material at the disposal of the member countries, and they therefore urged creation of "balanced collective forces," subject to the requirements of the members in meeting commitments overseas.2 It also agreed that the burden of defense should be shared "equally" and that the total resources of member countries were sufficient, "if properly coordinated and applied,"8 to attain military goals "without impairing" recovery. In the light of the many problems and the difficulties in reaching decisions, the Cotuicil also provided that a Council of Deputies be established to carry on the work of the Foreign Ministers in interim periods and to prepare the agenda for the Council meetings. In August the deputies, under the exigencies of the Korean events, requested appropriate NATO bodies to prepare expanded and accelerated military production programs for selected high priority items of military equipment and proposed that idle productive capacity in armament plants be put to work at once—even before detailed integrated plans were formally agreed upon.4 A priority production program was drawn up by the deputies, reflecting the decision that equipment was more urgent than additional men in uniform, but consultation with member governments was begun in regard to immediate steps necessary to increase the size of the military forces of the area within a year's time. No action was concluded either on internal or international methods of financing the expanded effort. At that time American officials called for sacrifices, both at home and abroad, in civilian output,8 2 See The Economist, June 10, 1950, pp. 1259-1261, for a statement of some of the economic, strategic, and sovereignty implications of "balanced collective forces." 8 New York Times, May 21, 1950. To this end, it established a North Atlantic Planning Board for Ocean Shipping to report to the Council on matters affecting merchant shipping, 4 In late July the United States prepared to place orders in Canada, Britain, Italy, and elsewhere for certain military goods which could be manufactured abroad to its specifications. 8 Secretary Sawyer stated in November that European nations would be asked to cut back civilian production equal to the percentage cuts in the United States. (New York Times, November 7, 1950.)

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qnrl on September 9, President Truman approved a "substantial" increase in United States forces in Europe. In September the Council met again and announced agreement on the establishment of an integrated defense force under a single command, ® but implementation was delayed through 1950 because of differences over the inclusion of Germany. The United States favored immediate large German participation. France violently disagreed; the major reasons were an acute fear of a resurgent Germany, a belief that so long as military supplies were inadequate the other Western European countries should be well equipped before anything was provided Germany, and a fear that inclusion of Germany on equal terms in a military arrangement would preclude agreement on the Schuman Plan.7 The September-October meeting was also marked by a lack of agreement on the distribution among the members of immediate and future aid—both necessary before most of the troops could be assigned duties. Another meeting was scheduled for November in Brussels. In December, Secretary Acheson reported that the Brussels meeting of the Council had settled many problems, that the organizational stage was nearly completed,8 and that the action phase was beginning. He reported that the Council had acted on matters concerning ". . . the creation of the united, unified, integrated army which is to provide the defense of Europe . . . the structure of that army, how it should be composed, of what troops, where the troops should come from, how it should be organized, its command structure, the higher command structure which would give that army its direction, and how the Supreme Commander should be selected and appointed."9 The Council had 6 Premier

Venizelos of Greece announced in October that efforts were being made to establish a Mediterranean Defense Pact, supplementary to the North Atlantic Pact, initially between Greece and Turkey. This proffer was met by NATO's invitation that each country accept consultative status in NATO; both agreefl. (New York Times, October 5, 1950.) ι See Chapter VI, infra. 8 Forces of the Western Union, formed under the Brussels Treaty, and its production and supply board were incorporated with the NATO. ® "United Action for the Defense of a Free World," Department of State Publication 4058, General Foreign Policy Series 41, December 1950, p. 2. The Council had unanimously asked the President of Ihe United States to select an American officer to be Supreme Commander, with a specific recommendation as to who that officer should be; the President responded immediately and that officer, (General Eisenhower, was appointed. {Department of State Bulletin, January 1, 1951, p. β.)

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also agreed on the creation of a "new vigorous and active board" to coordinate production and supply among NATO members.1 Acheson reported also that the Brussels meeting revealed that the forces in the European Command were not adequate to their task but that their number was to be increased as quickly as possible.2 Finally, he reported that the obstacles within the Coun­ cil to German participation had been cleared away and that Germany was now to be consulted on the question. Genuine con­ sultation with Germany was desirable, the Secretary said, because the Germans' "will and enthusiastic cooperation is an essential part of anything which is to be done." Germany was further notified, as an inducement, that its relations with Western Europe and the United States would be on a different plane, through an extensive revision of the Occupation Statute, if it cooperated.8 There was, reportedly, still no plan for large German military units or for extensive German production of arms and munitions, both because of French insistence that Western Europe should be rearmed first and because of a desire not to feed the fear of Germany which persisted in Poland and Czechoslovakia. The German officials later rejected the 1950 proposals of the Council, demanding equality of treatment among all participating nations, and at the end of the year the question of German participation was still unsettled. 1 The

Council had previously provided that NATO should coordinate its economic activities with OEEC by the device of a separate meeting of NATO delegates to OEEC, thus not duplicating the work of OEEC but using it. There still remained the problem of which orientation would take predominance on crucial questions and thus whether OEEC would become an NATO agency. 8Action taken by the United States outside of the NATO to increase its own defenses included: signing of a pact in October with Canada for continental defense, proposing in December a defense parley of the twenty-one American States to tighten defenses against Communism, and establishing a new Committee on International Security Affairs (T. D. Cabot, chairman) to coordinate the Government's militaiy relations with the rest of the free world. The members of the Committee include representatives of the Departments of State, Treasury, and Defense and of ECA and the Harriman Office (as assistant to the President). 8 Revision of the Occupation Statute was a formidable obstacle to obtaining German participation. AttaAed to the United States draft of the new Statute were two provisos: (1) that Boim should assume liability for the Reich debts, and (2) that it should guarantee to make raw materials available for export. Objection to the former by German officials stemmed from the confiscation of German assets abroad without crediting the Reich debts and from the proposed addition of occupation costs which Germany considered a just charge against the occupying power under the Hague Convention. (See The Economist, December 23, 1950, pp. 1133-1134.)

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Despite continued interest by many Congressmen in establishing a Far Eastern military organization comparable to the NATO, no such body was created. In September, Australia's Foreign Minister proposed a Pacific Defense Alliance including the United States, Australia, New Zealand, the Philippines, and some of the West Coast Latin American countries. But the State Department was reportedly cool to the suggestion on the ground that too few nations were interested.4 During early 1950, however, the U.S. Government sent two separate missions to the area: the Griffin economic mission8 and a U.S. Military Survey Mission to Southeast Asia to determine the military preparedness of those countries and the character of assistance needed. These two missions reported in midyear that both economic and military aid should be extended to individual countries. The Griffin mission recommended immediate military assistance of $30 million, and the military mission reportedly suggested a larger—but undisclosed—amount. The military mission was accorded varying receptions: Malaya, Thailand, and the Philippines received the mission readily, but Indonesia allowed only an unofficial visit, and Burma refused to grant it admission. By way of granting military assistance to Southeast Asia under the MDAP, the United States signed agreements in Januaty with South Korea, in March with the Philippines, in October with Thailand,® and in December with France and Indochina. Arms aid to Burma was suspended following her refusal to receive the American Military Survey group.7 Assistance under the MDAP provided to Korea, the Philippines, and the "general area of China" amounted to $65 million during the year, of which twothirds came in the fourth quarter. Large amounts of direct military assistance to South Korea—outside the MDAP—apparently was given through the United States armed forces in the field after June SO, 1950, but the amounts have not been made public. * See New York Times, September 14, 19S0. Presumably any such alliance would in any case be postponed pending action on a Japanese peace treaty which the United States was urging in late 1950. 6 See "Aid to Soudieast Asia," in Section D, infra. 6 It was reported earlier that Thailand would receive $10 million in military aid out of the $75 million set aside for the "general area of China." (See New York Times, April 12, 1950.) 7 See New York Times, September 7, 1950. On January 11, 1951 Liberia signed an agreement with the United States covering its request for a United States mil­ itary training mission.

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G. YUGOSLAV AID PROGRAM Following the break between Yugoslavia and Russia, the United States during 1949 extended the former an EIB loan, supported loans to it by the International Bank and Fund, and granted export licenses for several items previously denied for strategic reasons. During 1950 the EIB authorized an additional loan of $20 million, and during the last months of the year a special grant program was initiated by the Administration under the title of "Yugoslav Emergency Food Assistance Program." The State Department in its justification to Congress of the proposed new grant program stated that an unprecedented summer drought had wiped out Yugoslav food surpluses and caused domestic shortages which weakened the ability of that country to withstand pressures from the Soviet Union.8 The Department stated that the policy was aimed at strengthening Yugoslav independence and at increasing American security by keeping the thirty odd divisions in the Yugoslav army out of Stalin's hands. It considered the cost of the economic support proposed small in comparison with the advantages gained by an independent Yugoslavia: a strong Yugoslav army, expanded trade with the West, and the closing of the Greek-Yugoslav boundary which cut off guerrilla action in Greece. The Yugoslav Government had requested aid of $105 million in October, including approximately $20 million for raw materials. The State Department apparently did not seriously consider providing funds for raw materials but did favor sending the foodstuffs. The Yugoslav request was based on market prices, but since the State Department planned to obtain them from Government-held surpluses it believed that $69 million would be sufficient to supply the amount requested. The Executive Branch had authorized stopgap assistance of $31 million in November, by allowing $15 million of the outstanding EIB credit to be used for foodstuffs® and $16 million of MDAP funds to be used to provide "Yugoslav Emergency Relief Assistance Act of 1950," Hearings, House of Rep., Committee on Foreign Affairs, 81st Cong., 2d Sess., November 29 and 30, .1950. 9 During November and December the EIB disbursed $3.8 million for foodstuffs. In addition, EIB disbursed $32 million to Yugoslavia during the year under the two loans authorized in 1949 and 1950. These were for capital equipment, machinery, and materials, as contemplated in the original commitments. 8 See

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food for the Yugoslav army.1 AccordiBgly, the Administration requested Congress for special legislation authorizing a grant of the remaining $38 million. The State Department stressed that the assistance proposed would fall far short of the deficit caused by the Yugoslav drought and that it was sufficient only to prevent starvation. Proposals by some Congressmen to impose conditions on the Tito Government with reference to political and economic policies —for example, to require free elections, free speech, etc.—were opposed by the State Department and were later defeated when offered on the floor. The Department considered that reasonably good cooperation was being established with Yugoslavia but Qiat it would be destroyed if such conditions were attached to the aid. It reminded the Congressmen that Tito broke with Stalin when conditions were laid down by the latter. Although many of the military considerations were discussed in executive session, State Department witnesses publicly testified that the purpose of the program was to assist in the "revolt" by satellites against Russia. Generals Marshall and Bradley testified that a sufficient military advantage existed in the YugoslavRussian rift to justify the aid. They considered it desirable to increase that rift if possible. A bill was finally approved in December by large majorities in both Houses2 authorizing ECA to use $50 million of its previously appropriated funds for aid to Yugoslavia, of which $12 million were to be used to reimburse Italy and Germany for flour they had sent to Yugoslavia. The law explicitly stated that surplus commodities were to be used to the fullest extent possible and that an agreement was to be signed with Yugoslavia providing for publicity of the aid and allowing American observers to be present to insure an equitable internal distribution. The aid was 1AIthough military assistance to Yugoslavia was not specified in the MDAP legislation, the law did permit the President to use up to 10 percent of the ap­ propriation in such other areas as he deemed desirable. Apparently none of this allocation to Yugoslavia had been utilized by die end of the year. As under all other MDAP agreements, Yugoslavia is to facilitate the shipping to the United States of strategic materials required for American defense. 2 During the debates an amendment was offered to require that the funds could not be expended until an equal amount had been spent for the Republic of China out of the $75 million authorized under the MDAP Act of 1949. This amendment was overruled on a point of order after extensive debate directed at the Adminis­ tration's policy in the Far East.

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to be terminable by the President if he deemed that it was no longer necessary, that conditions had changed, or that Yugoslavia was not living up to its agreements; also, Congress could terminate the aid by concurrent resolution. The Act also provided that counterpart funds were to be deposited equivalent in amount to the aid and that these were to be used to help the needy, children, or for charitable and medicinal purposes, or for other projects agreed upon by the two Governments. A clause was added to the effect that the assistance did not mean an endorsement of Yugoslavia's policies of oppression of free speech, religion, etc., and another requiring that 50 percent of the cargoes shipped should be in United States flag vessels if they were available. The agreement implementing the aid was not signed until January 6, 1951,® and so no disbursements were made under the new authority during 1950. Thus, total aid during 1950 under the "Yugoslav Emergency Food Assistance Program" was limited to the $12 million of wheat and flour supplied by Germany and Italy—to be reimbursed by ECA-and $4 million of foodstuffs financed by the EIB on a loan basis. D. ECONOMIC AID PROGRAMS IN ASIA The expanded American military assistance program for Asia discussed above was accompanied by many changes in the policies and activities regarding economic aid to that area. The outbreak of fighting in Korea forced a virtual abandonment of the three-year economic assistance program begun in 1949, and United States policy was directed to transferring to the UN responsibility for Korean reconstruction. The Aid to China Program was very small and almost entirely restricted to Formosa, but several new programs of economic and technical assistance were established in Indonesia, Indochina, Burma, and Thailand. Large but reduced aid was continued to Japan under the Army's program of Government and Relief in Occupied Areas. The program for compensation of war damage in the Philippines was virtually completed, but as the year ended steps were being taken to begin a new fiveFor text of the agreement with the United States, see Department of State Bulletin, January 22, 1951, p. 150. At the same time Yugoslavia signed an agree­ ment with the Economic Commission for Europe for technical assistance, under the UN program, on some eighteen industrial projects. 8

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year program of economic development and technical assistance to that country. Korean Aid Program After bitter disputes in early 1950 between Congress and the Administration, $110 million were finally provided for the first year of the three-year program for economic assistance to Korea promulgated by the State Department in 1949 and administered by ECA.4 For the second year, the Administration in February requested another $100 million from Congress, testifying that Korea was developing well under the aid and that it had become defensible against any attack by the North Koreans so long as "outside assistance" was not given them. The Senate Committee on Foreign Relations questioned whether Korea could become viable by 1952 and was assured that the dollar deficit would be manageable by that time. The Committee also asked, and received from the Administration, assurances as to the Korean Government's "satisfactory" handling of such internal problems as land reform, taxation, inflation, and the containment of guerrilla activity.5 The full amount of the request was authorized in May in the "Foreign Economic Assistance Act of 1950." The omnibus appropriation bill, passed in August, cut the amount to $90 million. This reduction was not the result of the new issues raised by the invasion of South Korea but was a part of the overall 10 percent reduction imposed by the Byrd-Bridges amendment relating to all but a few of the appropriation items. Up to the time of the invasion, the South Korean economy had shown substantial recovery, with both industrial output and food production reaching levels above prewar.® Indeed, the press reported ECA Administrator Hoffman as saying that the success of the program caused the Conununists to lose ground in South Korea and that it was a major reason for their resorting to "external aggression."7 Immediately following the outbreak of fightSurvey—1949, p. 49. See Senate Hearings on S. SlOl, op.cit., pp. 355-394. Similar discussions are found in Ihe House Hearings on H.R. 7878, op.cit. eFor a brief review of economic conditions in Korea during early 1950,. see Economic Cooperation Administration, Eighth Report to Congress, Washington, D.C., 1950, pp. 81-87. 7 New York Times, August 24, 1950. 4 See 5

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ing, the ECA program was geared into the strategy and logistics of the United Nations military forces. Imported supplies were generally diverted to other ports, and only emergency items entered Korea. Much of ECA energies were directed to civilian relief feeding. Some specialists remained to help administer various controls over the civilian economy and to maintain essential governmental services, and most of the contractors and engineers working with ECA were assigned to the Army. Wherever the military situation permitted, ECA concentrated on providing materials needed for the operation and repair of docks, warehouses, electrical power installations, and some industrial enterprises. In keeping with the United Nations character of the war in Korea, the United States during the summer strongly supported a UN General Assembly resolution to establish a UN program for relief and rehabilitation of a united Korea.8 The resolution was referred to ECOSOC for specific recommendations. Pending the adoption of such a program, President Truman directed ECA to limit its activities to providing material required to maximize agricultural and fisheries output and such industrial production as was not directly used for military purposes; to provide fiscal advice to the Republic of Korea; to train civilian administrative personnel; to prepare plans for postwar rehabilitation; and to help in distributing relief supplies. ECA was specifically relieved of all responsibilities for financing civilian relief commodities. The United States share of such needs was to be channeled to the UN through the Department of Defense. In November, ECOSOC reported unanimously a resolution, based on one proposed by the United States, recommending the establishment of a "UN Korean Reconstruction Agency" which would operate with contributions of UN members. The resolution included a proposal, also supported by the United States, that the agency should work closely with the UN Commission for Unification and Rehabilitation of Korea. The Secretary General reported that some eight requests of the Unified Command for assistance had been met by countries other than the United States, which was already providing aid from its own resources. The Joint 8 See Korea and the United Nations, Lake Success, N.Y., UN Sales No.: 1950. I. 8; pp. 26-28.

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Second and Third Cdmmittee of the Assembly approved a slightly amended ECOSOC resolution, which envisaged a program of a Tninimnm of $250 million for the period January 1,1951 into early 1952.9 By the end of 1950 some 80 percent of the $250 million had been pledged, including $162.5 million by the United States, part of which was contingent on responses of other members. In December the Defense Department requested, under the Second Supplemental Appropriation for 1951, $100 million for civilian relief in Korea up to June 30, 1951. The House approved that amount, but the Senate cut it in half on the ground that much of the area was in Commtmist hands. The final bill allowed only $50 million. United States aid to Korea, through the ECA, amounted to $41 million in the first half of the year (supplemented by $1.5 million of aid under the previous Army program) but fell during the last half to $15 million.1 It has been officially estimated that an additional $50 million of supplies and materials were taken from U.S. Army stocks in Japan and Korea to assist the civilian economy in the wake of battle. China Aid Program Economic aid to China, which had totalled nearly $2 billion during the first three and a half postwar years, was sharply curtailed in 1949 as the Communists increased the areas under their control, and in 1950 grants provided totalled only $17 million, almost entirely restricted to Formosa.2 The President had made no request for aid to China in his January 1950 Budget Message, but in the Congressional hearings on the Foreign Economic Assistance Act much sentiment was expressed for continuing some assistance to non-Communist China and the "general area of China," though there was no expressed desire as in 1949 to extend huge amounts of aid.® With the approval of the Administration, Congress added a "China Area Aid Act of 1950" as Title II of the Foreign Economic 9 See Department of State Bulletin, January 22, 1951, p. 146, for the final text of the resolution. 1An additional $1.5 million was provided out of ECA-owned counterpart for administration and services deemed beneficial to Korea. 2 In addition, $2.7 million were disbursed for aid to Chinese students in the United States and, as noted above, $4.8 million of military aid was provided. The Department of Commerce also records $650,000 of ECA counterpart funds for administration and services regarded as of benefit to Formosa. 3 See Survey—1949, pp. 43-46, 48-49.

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Assistance Act, making available until June 30,1951 "for further­ ance of the general objectives of the China Aid Act of 1948" the balance of funds remaining from the 1948 appropriation. The unobligated funds were estimated at about $100 million. The Act specified that not less than $40 million should be used in non-Communist China (Formosa) "so long as the President deems it practicable," not more than $8 million for direct relief to China mainland through private relief agencies, and not more than $6 million for aid to Chinese students in the United States.4 The balance was to be available to the "general area of China," construed by the Administration to mean Southeast Asia. The House originally included a section designed to encourage the formation of a Far Eastern organization for economic cooperation, but this was later deleted on the ground that identical language was contained in the MDAF Act of 1949.5 Early in the year ECA activities, for all practical purposes, ceased in mainland China, but they were expanded on Formosa. To mid-1950, due to the danger of Chinese Communist invasion, the program for Formosa was on a day-to-day basis, with ECA operations largely restricted to financing the import of foodstuffs, fuel, and raw fibers and providing technical assistance to the farmers. After the invasion of Korea, increasing attention was given to longer-run economic development and rehabilitation projects—especially transportation, power, and fertilizer manu­ facturing facilities.6 Since direct relief to China was not considered feasible by ECA, the President allocated the $8 million set aside in the law for this purpose to Soutiieast Asia. In December, ECA Administrator Foster requested Congress to authorize the transfer of 5 percent of the total funds available to ECA for fiscal 1951 for use in the "general area of China," pointing out that less funds were needed for Europe and more for the Far East than had been expected 4The Attorney General was also directed to promulgate regulations permitting the employment of Chinese students in the United States (theretofore prohibited) so that they would not have to return to China. eFor difficulties in the way of Asiatic cooperation, see the comments on the British Commonwealth Conferences for Aid to Southeast Asia held during the year at Colombo and Sydney in The Economist, June S, 1950, p. 1225, and The Statist, January 21, 1950, p. 58; May 6, p. 543; and May 27, p. 664. 8 For details on its China Aid Program, see the quarterly Economic Cooperation Administration, Report to Congrm1 Washington, D.C.

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when the appropriations had been requested. He planned to use a part of this in Formosa but the bulk for the Philippines and the various other Southeast Asia countries.7 In the Second Supplemental Appropriation Bill of 1950, Congress authorized the President to so transfer 3 percent—some $75 million. Aid to China (or Formosa) was not mentioned by the President in his 1951 Budget Message.

Aid to Southeast Asia Following the Communist domination of China, and even before the invasion of South Korea, both Congress and the Administration became increasingly concerned over developments in Southeast Asia, and a general policy was announced by the State Department of supporting the independence of the various countries and offering assistance to those nations requesting aid. A wide variety of aid programs was begun in 1950, but help actually extended was small because of organizational problems and because of the time required to procure and ship goods, and the operations were not yet integrated into the sort of overall, coordinated program being pursued in Europe. As noted above, there was strong sentiment in Congress for active encouragement by the United States of a more or less formal Far Eastern organization for economic cooperation along the lines of the OEEC.8 The nations of Southeast Asia apparently did not take readily to the suggestion. In February, the Bangkok Conference of the American envoys to the Far East nations was held to consider actions which the United States might take to provide assistance. It examined the economic, financial, technical, and military problems of the area as a whole, as well as those of individual nations. It was officially reported that the Conference had considered the concept of a regional association but no formal recommendations or action were taken." The aversion displayed towards a regional association of these details see Congressional Record, December 21, 1950, pp. 17060-17061. a recent discussion of existing and possible economic cooperation, see Schaaf, C. H., "Economic Cooperation in Asia," International Conciliation, Car­ negie Endowment for International Peace, New York, N.Y., April 1950. 9 For comments on these problems in Asia, see Finkelstein, L. S., "U.S. at Im­ passe in Southeast Asia," Far Eastern Survey, September 27, 1950, p. 169; and Levi, W., "Union in Asia," Fortnightly, October 1950, pp. 238-246. 7 For 8For

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countries was manifested at a conference1 held in May at Baguio on the invitation of the Philippine Government. Certain subcommittees recommended broad measures for economic, social, and cultural cooperation and for joint political action to further the interests of the area, but a Philippine proposal to establish a permanent organization of the states represented was not approved. A loose economic association was supported in principle so long as it would serve to strengthen the neutrality of the area; but proposals for a Pacific military alliance (as previously put forward by the Governments of China, Korea, and the Philippines) were not discussed. Some unofficial observers have stated this was due to objections to the support which the proposals gave to the United States policy of a strong effort against penetration of the area by Commimist forces from China. The United States seemed bent, however, on shoring up the economic and military defenses of the area.2 In the spring it sent a special study mission under R. Allen GrifiBn to Southeast Asia to determine the urgent needs of several of the countries for foreign aid, and in May Secretary Acheson talked with Minister Schuman in Paris on the problems of French Indochina. Although it was not officially confirmed, the press reported that the United States was considering coordinating aE its aid programs in the Far East into one under unified direction, establishing some sort of regional monetary clearing arrangement, and encouraging expanded trade within the area, with Japan and India supplying manufactured goods to the others in return for raw materials, so as ultimately to remove the need for outside assistance.8 The GriflBn Mission's public report stated that the immediate needs of Indochina, Indonesia, Thailand, Burma, and Malaya lPresent were representatives of Australia, Ceylon, India, Indonesia, Pakistan, the Philippines, and Thailand. South Korea and Nationalist China were excluded because they had requested a defense union against Communism, and the three states of French Indochina were not invited because they had not been generally recognized. 2 For official statements as to why the United States considered the policy so urgent, see McGhee, George C. (Assistant Secretary of State for Near Eastern, South Asian and African Affairs), "Vulnerability and Strategic Value of Near East Area," Department of State Bulletin, Jantxary 29, 1951, pp. 186fF„ and "Freedom's Stake in the Near East and South Asia," Department of State Bulletin, February 5, 1951, pp. 221-224. 8 The Statist, April 15, 1950, p. 463.

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for economic and technical assistance approximated $60 million.4 The United States had earlier advised the Indochinese states that it would extend aid through a special economic mission associated with the United States Legation; the aid would complement French assistance and be guided by separate bilateral agreements which would in no way affect their responsibilities with France. ECA was later given the administration of the program, which was to be financed out of funds provided under the China Area Aid Act of 1950. In May, ECA established a single Special Technical and Economic Mission (STEM ) to the three states, but the bilateral agreements with the United States had not yet been signed at the end of 1950. Similar missions were established during the late summer in Indonesia, Burma, and Thailand, with each signing a bilateral cooperation agreement with the United States outlining the terms and conditions under which aid was to be provided.6 These ECA missions through 1950 devoted most of their time to developing plans for using American aid and making requests for initial shipments of equipment and supplies. ECA plans at the end of 1950 called for aid totalling over $54 million through June 30, 1951 (Indochina, $21.4 million*, Thailand, $9.4 million; Burma, $10.4 million; and Indonesia, $13 million) but expenditures under the Far Eastern Program to these nations totalled only $158,(X)O during 1950.® Indonesia had also received, through the Netherlands, under die European Recovery Program 4 An additional $30 million were recommended for military aid to Indochina, Thailand, and Indonesia; these estimates were reported as increased by the Mil­ itary Survey Mission sent out by the State Department in July. See Section B, supra. eEconomic and technical assistance agreements with Indonesia, Thailand, and Biuma were identical in terms. They stated that the United States would provide economic and technical assistance to the country concerned which in turn would promote the effective use of its resources and the aid, promote economic develop­ ment of the country, stabilize its currency and maintain a "valid" exchange rate, and cooperate in the reduction of international trade barriers. The recipient country is to provide full information and publicity on aid received. It also agrees to deposit local currency commensurate with the grant aid received, to be used for adminis­ tration and for local currency needs of the projects undertaken with the aid. Finally, it agrees to make available, on terms no less favorable than to any other nations, materials in which the United States is deficient. For a brief review of the needs and conditions in each of these countries, see Economic Cooperation Administration, Ninth and Tenth Report to Congress, Washington, D.C., pp. 102-105 and pp. 86-92, respectively. 6 In addition, the Department of Commerce reports that some $318,000 of ECAowned counterpart funds had been spent for administration and other services regarded as of benefit to these countries.

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some $102 million, of which $38 million arrived during 1950. EGA planned that the program in Southeast Asia would not resemble that in Europe since the more urgent needs in Asia were for trained technicians, medicines, seeds and fertilizers, and light agricultural tools rather than food and heavy capital equipment. Further, there was less possibility of mutual aid within the area. Therefore, the Asia program had a common concept with the Point Four Program.7 In addition to these grants8 and the provision of military assistance discussed in the preceding section, the U.S. Government authorized aid to Southeast Asia during the year in the form of $2 million under the Point Four Program (actual expenditures were negligible), a $100 million EIB loan to Indonesia (no disbursements were made), and $4.5 million of ECA funds to India for the purchase of grain and sorghum (of which $0.7 million had been spent). The United States had also supported UN programs of technical assistance to some of these countries. The International Bank authorized loans of $18.5 million to India and $25.4 million to Thailand during 1950, but no disbursements were made. At the year's end the Administration was giving serious consideration to a gift of two million tons of wheat to India. In his 1951 Budget Message, the President prbposed the continuation of aid to South-east Asia but specified no amounts, promising to submit a detailed program later.

Occupied Areas Program—Japan With Korean economic aid placed under ECA administration in December 1948 and aid to Germany split in 1949 between ECA, handling economic recovery, and the State Department, handling 7 In administering these programs the United States was faced with a difficult problem: whether to operate through the European powers responsible for certain of the areas or through the existing governments. The difficulty was apparent in the case of Indochina. It was considered that the regime of Bao Dai was not strong enough to administer the aid effectively and not popular enough to warrant such direct support. However, the alternative of operating through the French Govern­ ment would place the United States in a position of accepting the colonial policy under which the Asiatics were smarting. (See Reubens, E. P., "Economic Aid to Asia: Progress Report," Far Eastern SurOey, January 10, 1951.) 8 During the year large amounts of dollars were acquired, especially by Indonesia and Malaya, through the extensive purchases at very high prices of tin and rubber for stockpiling in the United States. These payments, of course, cannot properly be called "aid."

I. GBANT PROGRAMS

administration and reorientation,9 the United States program for Government and Relief in Occupied Areas (GARIOA) during 1950 was restricted to Japan and the Ryukyu Islands, with a small additional outlay for administration and reorientation in Austria and Trieste. The President requested $320 million in his January 1950 Budget Message for the GARIOA program and later reduced it to $299.5 million. This compared with about $485 million appropriated for Japan and die Ryukyus for 1949-1950.1 The aid scheduled for Japan, mostly food and raw cotton, was calculated to be some $50 million less than the dollar equivalent of Japanese yen to be provided in their national budget toward United States occupation costs.2 In the House hearings, the Defense Department testified that there were no plans to transfer GARIOA duties to the State Department, as had occurred in Germany, because of the close personal tie of the Japanese people to General MacAuthur and because of the necessity for continued military occupation. They also stated that the program for Japan should be terminated in two or three years, at which time she was expected to be viable. But continued aid to the Ryukyus was expected to be necessary after that, although grant aid might be reduced because of dollar funds received through the employment of their citizens in U.S. Government installations. Japan had supported the Ryukyus for years for strategic reasons, and the Administration anticipated that the United States would have to and should do the same.8 In none of the Congressional discussions was there serious questioning of the need for the programs, and no fundamental policy issues were raised. In September, appropriations of $288 million 9 For the administrative expenditures of the High Commission for Germany under the Government in Occupied Areas of Germany (GOAG) program, a separate re­ quest was made to Congress for $30 million; $27 million were finally appropriated. 1 See "Foreign Aid Appropriations for 1951," Hearings, House of Rep., Commit­ tee on Appropriations, 81st Cong., 2d Sess., for a detailed discussion of tike program. 2 As an offset to the dollar imports under the program, Japan deposited counter­ part funds (similar to ECA counterpart); these yen were used, under final disposi­ tion by General MacArthur, largely for "stabilization" of the Japanese economy and retirement of the Government debt, but a small though unspecified amount was reserved for United States purposes. The yen costs of administering the GARIOA program were met by the Japanese Government and the dollar administration ex­ penses out of Congressional appropriations. 8 The President asked for $7 million for their administration in his 1951 Budget Message.

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PROGRAMS

were approved. The law also provided, inter alia, that funds for economic recovery should be spent consistent with ECA purposes and that any appropriated funds unexpended at the termination of occupation could be used by the President "to assist in the maintenance of the political and economic stability of such areas." Grants extended to Japan during 1950 declined, in view of the continuing postwar recovery, to $269 million,4 compared with $457 million in 1949; those to the Hyukyus were only $9 million in 1950, as against $15 million in 1949. The Gray Report, dated in November, was somewhat more optimistic as to the need of Japan for continued aid than the Defense Department had been early in the year. The former s conclusion was that, "With a continuation of present favorable trends . . . Japan may be wholly self-supporting, although at a level somewhat below prewar per capita income, and in possession of substantial dollar and possibly commodity reserves by the beginning of United States fiscal year 1952. Further appropriations for Japanese aid therefore should be carefully considered and measured against the effect of the changed circumstances brought about by current developments."5 In his 1951 Budget Message the President requested that continued economic assistance be given Japan during fiscal 1952 but did not specify the amounts, again promising to present details later. Philippine Aid Programs Since mid-1947 all grants by the United States to the Philippines have been under the provisions of the Philippine Rehabilitation Act of 1946. Under its terms, the U.S. Government has helped to rehabilitate the war-damaged Philippine economy by making payments both to private war-damage claimants and for the purpose of reconstructing certain public facilities and essential Government services.® During 1950 some $35 million were disbursed under the public reconstruction and training programs, and $132 million were paid against private war-damage claims out * Of this amount $105 million were estimated to have been transferred by the Aimy out of its stocks of certain civilian supplies held in Japan. These transfers are recorded in official balance-of-payments statistics but not yet in foreign aid figures. 6 op.ctt,, p. 47. ® For details on this program through 1949, see Survey—1949, pp. SO-54.

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of the $400 million authorized in 1946, leaving less than $4 million to be disbursed for claims in 1951. The Islands were still in serious internal and international economic difficulties, however, and, following a study by an official American economic mission, the Administration was making plans at year's end for a new five-year program of economic and technical aid. a. PRIVATE WAR-DAMAGE CLAIMS

The 1946 Act authorized appropriations of up to $400 million to cover private war-damage claims, specifying that all approved claims for $500 or less should be paid in full and that up to 75, percent of the residual claims over $500 might be paid. Of the total authorized, all but $40.2 million had been appropriated by the end of 1949, and in early 1950 the Philippine War Damage Commission requested Congress to make this appropriation for fiscal year 1951. It estimated the job would be completed by December 30, 1950 when all approved claims of $500 or less would have been paid in full and larger ones would have received $500 plus 45 percent of the excess.7 The 1951 General Appropriation Act approved in September allowed the full amount requested. The Philippine War Damage Commission reported to the President on March 26, 1951 that it had completed its task, having adjudicated all of the IM million claims for private damage compensation, with an average rate of disallowance of 55.7 percent. Total payments by the Philippine War Damage Commission were reported at $388 million, with claims in excess of $500 being paid $500 plus 52.5 percent of the remainder. Most small claimants used the payments to restore their homes, and most of the funds received by large claimants were reinvested in the Philippine economy. The cost of administration of the claims was less than 2.5 percent of the total sum appropriated, and the Commission returned $2.5 million to the Treasury, mostly from unused administration funds. A bill was introduced in the House in March 1950 to amend the Philippine Rehabilitation Act of 1946, by increasing the authorization by $100 million, so as to permit payments approximating 7 For details on this program, see the various numbers of the Semi-Armual Re­ port of the United States Philippine War Damage Commissiony Washington, D.C.

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75 percent on claims over $500 and to set aside some $10 million for special treatment of claims of private educational and welfare institutions regardless of affiliation.8 Hearings on this bill were held by the House Foreign Affairs Committee,® but it was not reported to the floor for action, probably because the Committee thought that any further assistance to the Philippines should await the report of the Survey Mission to the Philippines, which in fact recommended later that no additional war damage payments be made. b. PUBLIC RECONSTRUCTION

The program for reconstruction of selected public facilities and the rehabilitation of certain Government services in the Philippines under the 1946 Act has involved both cash payments by the Philippine War Damage Commission and direct construction and training by several other U.S. Government agencies. The former was completed by early 1951, with over $55 million being disbursed by the Commission over the entire period of operations.1 A few of the construction projects under the Bureau of Public Boads and the Corps of Engineers would not be finished until mid-1951, and the training of Filipinos in maritime activities by the U.S. Maritime Commission was scheduled to continue through the fiscal year 1954. The Administration requested an appropriation of only $13 million for this program—all to be used to liquidate obligations incurred under previous contract authorizations— which would bring the total expenditures since 1946 to about $138 million. Congress approved $10 million plus any carryover. This program of United States aid to the Philippines was expected to end on time,2 but the State Department stated in early 8 Earlier a bill had passed the Senate, setting aside $10 million to pay in' full the postwar replacement costs of educational or welfare institutions affiliated with similar institutions in the United States, but it was dropped in the House follow­ ing Administration disapproval on the ground that it was discriminatory among claimants. 9 "To Amend the Philippine Rehabilitation Act of 1946," Hearings on S. 1033 and H.R. 7600, House of Rep., Committee on Foreign Affairs, October 3, 1949 and February 14 and April 24, 1950. 1 The cash payments covered on the average only 44 percent of the estimated damage. Approximately two-thirds of the cash payments went to rebuild schools. 2The State Department announced in 1950 that some $4 million appropriated in 1946 for the improvement of U.S. Government properties in • the Philippines would be returned to the Treasury.

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1950 that an EIB loan might be made. Such a loan was not authorized, however, probably because of the anticipated larger grant program. C. BELL MISSION

With dollar payments from the United States declining, international reserves nearly gone, a budgetary deficit for the fiscal year ending June 1950 equal to 45 percent of the total expenditures, and an anticipated deficit of over 50 percent for the fiscal 1951 budget, a threatened "printing-press" inflation,8 low production and productivity, and serious internal political unrest, the Philippine Government turned to the United States for help. At the request of President Quirino, President Truman in June appointed a Survey Mission to the Philippines "to consider the economic and financial problems of that country and to recommend measures that will enable the Philippines to become and to remain self-supporting."4 The Mission studied the agricultural, industrial, financial, commercial, governmental, and international sectors of the Philippine economy. It found them all in a deplorable condition and concluded that the difficulties could not be expected to remedy themselves and that prompt and bold action from within and without the economy to deal with the fundamental causes of the disorder was necessary if the deterioration were to be stopped. In its report the Missicxn minced no words: "The finances of Iiie Government. . . are now critical." "The failure to expand production and to increase productive efficiency is particularly disappointing ..."... investment undertaken by Government corporations has unfortunately been ineffective. A considerable part of the large foreign exchange receipts were dissipated in imports of luxury and non-essential goods, in the remittance of high profits, and in the transfer of Philippine capital abroad. The opportunity to increase productive efficiency and to raise the standard of Iiv8 The CJovernment had borrowed the legal limit from the Central Bank, had drawn heavily on its own Philippine National Bank, and had used sinking and trust fund balances. A peso blade market had developed due to this spending and to the imposition of exchange control. (New York Times, June 4, 1950.) 4Economic Survey Mission to the Philippines, Report to the President of the United States, Washington, D.C., October 9, 1950, p. 1. The Mission was headed by Mr. D. W. Bell, former Under Secretaiy of the Treasury, and was usually referred to as the "Bell Mission."

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ing in the Philippines in the postwar period has thus been wasted because of misdirected investment and excessive imports for consumption." "Because of the deteriorating economic situation, there is a widespread feeling of disillusion." "The economy shows little inherent capacity to overcome the difficulties with which it is faced." "The public lacks confidence in the capacity of the Government to act firmly to protect the interests of all the people." The measures employed by the Phihppine Government have been "directed to the symptoms rather than the causes of economic disorder."5 On the basis of its findings, the Mission spelled out a whole series of reforms to be undertaken by the Philippine Government® and then recommended: "That the United States Government provide financial assistance of $250 million through loans and grants, to help in carrying out a five-year program of economic development and technical assistance; that this aid be strictly conditioned on steps being taken by the Philippine Government to carry out the recommendations outlined above, . . . that expenditure of United States funds under this recommendation, in* eluding pesos derived from United States loans and grants, be subject to continued supervision and control of the [United States] Technical Mission; that the use of funds provided by the Philippine Government for economic and social development be coordinated with the expenditures of the United States funds made available for this purpose; and that an agreement be made for final settlement of outstanding financial claims between the United States and the Philippines, including funding of the Reconstruction Finance Corporation loan of $60 million."7 Prior to the release of the report in the United States, die press 6 ibid.,

pp. 1-3. These reforms related to Government finances, budgeting, taxation, encourage­ ment of private industry, import taxes, commercial policy, education, housing, la­ bor organization and wages, and public administration. The scope of these recom­ mendations is unparalleled by any previous U.S. Government statement of pre­ requisites for extraordinary assistance. 7 ibid., p. 5. In addition, the Mission recomended that the proposal submitted to the U.S. House of Representatives that an additional $100 million be authorized for private war-damage claims in the Philippines be dropped since it believed that "the war damage payments have served their purpose and that reconstruction can best be facilitated by adoption of the measures recommended in its report which provide for closer direction and coordination of the disbursement of the funds for development." (p. 103.) β

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reported a violent reaction in official PhiMppine circles to many of the conclusions, findings, and recommendations. After the first flush of resentment had subsided, however, that Government indicated its general agreement with the reforms proposed, and it set about to acquaint the people with the existing conditions and the needed remedies. On November 14, ECA signed an agreement at Baguio with President Quirino providing for a new aid program to the Philippines, contingent on Congressional action.8 The Philippine Government agreed to give serious consideration to the Bell Report, and ECA stated that President Truman would ask Congress for $250 million for social, economic, and technical assistance. Pursuant to the agreement, the Philippine Government established an OflBce of Economic Administration to administer the program to be worked out by a Philippine Council for United States Aid with the assistance of United States officials.9 In mid-December this Council proposed an interim economic program requiring over $12 million of assistance from the United States. These funds, it was stated, were needed before June 30, 1951 and were part of a total of $37.4 million of foreign exchange to go with.137 million pesos to be used in the completion of certain projects already under way and in technical surveys of several others.1 ECA thereupon requested and received Congressional approval to transfer certain funds from the European Recovery Program to the "general area of China" (see above) in order, among other things, to provide $15 million to inaugurate an interim program for the Philippines. This program was not to impinge on Congressional consideration of the major program, which would not be implemented in any way without Congressional approval. However, ECA considered that some projects needed initiation at once "to develop further the enthusiasm and 8 The New York Times reported oil December 2 that the agreement was seen by ECA as a pilot plan for other areas in Southeast Asia and might indicate res­ ervations of Ae United States to the Colombo Plan of the British Commonwealth. 9 Department of Commerce, Foreign Commerce Weekly, Washington, D.C., December 25, 1950, p. 28. ECA was to provide technical assistance in setting up a program to implement the Bell Report's recommendations. 1 Canadian Department of Trade and Comerce, Foreign Trade, Ottawa, January 20, 1951, p. 101. Information on this program was evidently not publicized by the U.S. Government.

I. O H A IST T P B OGH Λ IVE S

support of the Philippine Government and people." 2 Such projects would not be begun, however, until the Philippine Government had taken the necessary steps for social and fiscal reform accepted in the agreement of November 14. The determination of the Philippine Government leaders to qualify the country for American aid was shown in the recall by President Qtiirino of the Legislature in January 1951 after its failure during a special session in December to act on any of the Bell Report recommendations. In his Budget Message in January 1951, President Truman asked Congress to authorize a new Philippine Aid Program for fiscal year 1951-1952, but he did not submit specific estimates as to costs. E. EMERGENCY RELIEF AND REFUGEE PROGRAMS Despite a general policy of terminating the emergency relief aspects of foreign aid programs, with respect to international relief programs the United States appeared to have succeeded during 1950 in ending its contributions only to the International Refugee Organization. It became involved in the continuation of UN relief for children and Palestine refugees, and, as noted above, late in the year actively supported a large UN relief program for Korea. International Children's Emergency Fund The President made no request for additional funds for ICEF in his 1950 Budget Message, and the Congressional Committees did not hold hearings on the subject. The Committee Reports on the Foreign Economic Assistance bill made no mention of funds for ICEF, but in die Senate debate on the measure many mem bers supported continuing for another year United States participation in the organization, especially if it were followed by a more or less permanent UN program. Despite strong resistance in the House,8 where it was pointed out that in 1949 Congress had expressly stated that American participation would cease in mid1950, Congress finally approved, as Title V of the Foreign Economic Assistance Act of 1950, an extension of $15 million of the 2 See letter of W. C. Foster to Senator McKellar in Congressional Record, De­ cember 21, 1950, pp. 17660-17061. 8 See Congressional Record, May 23, 1950, pp. 7628ff., and May 25, 1950, p. 7849.

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unappropriated 1948 authorization and also provided that funds previously appropriated and not yet obligated (about $5 million as of June 30, 1950) were to remain available until the end of June 1951. The President was authorized to make contributions, but not directed to do so, and was given discretion to alter the 72-28 ratio of American-other contribution in the direction of equalizing the burden. He was also requested to press for a permanent UN program for child welfare. Congress did not, however, appropriate in 1950 any of the $15 million authorization extension, but it did reappropriate the unexpended balance of previous appropriations. Actual contributions totalling $15 million were made during the calendar year, virtually exhausting the available funds. In the meantime, the United States representatives in the UN had opposed the extension of the emergency ICEF organization on the grounds that it was "ineffective," that the "emergency" needs had largely been met, that it would divert attention from the permanent and fundamental problems, and that continuation of the program on the existing basis would not attract sufficient contributions. They said that these were the reasons Congress had refrained from appropriating funds under the $15 million authorization, but that the Administration would press for this appropriation if long-term arrangements were made by the UN.4 The State Department was also on record as favoring the integration of the child-welfare program with the permanent Social Commission of the UN, the expansion of technical assistance to countries faced with child-welfare problems, and the reduction of the United States share to 60 percent of total contributions. Despite United States opposition in the UN debates, the General Assembly approved the continuation of ICEF for three more years. In the final vote the United States abstained. Its representatives stated that, even though the Government had hoped the UN would approve a permanent organization, it would request Congress to grant funds for contributions to ICEF in the future. Congressional appropriations, they warned, would be largely contingent on the amount of funds other countries granted.5 United Nations Bulletin, November 1, 1950, p. 489. For a brief report on ICEF's activities during the year and its program for the future, see United Nations Bulletin, January 1, 1951, pp. 39 and 42, and Re4 See

8

I. G R A N T P R O G R A M S

International Refugee Organization The House Subcommittee on State Department Appropriations had stated in 1949 its firm intent to terminate United States participation in IRO by the end of fiscal 1950®, and it was therefore very disgruntled at a request by the President in January 1950 for $25 million to continue participation for another year.7 Some Congressmen urged that the United States cease participation altogether as a technique of forcing other countries to absorb displaced persons more quickly. The State Department's witness responded that other participants already felt that they were being hard-pressed by the United States to wind up a program which it was physically impossible to complete in die time stipulated by the U.S. Congress. He pointed out further that if the United States withdrew from the program some 250,000 displaced persons would be left as a burden on Germany, Austria, and Italy and that the United States would indirectly bear the burden through its contributions to economic recovery in those nations. TKe State Department asserted that the United States bore some responsibility for the delays—since the requirement that 30 percent of the immigrants to the United States be agricultural workers operated as a restriction on the transfer of others, with the result that the number of immigrants was 20,000 below the 200,000 quota for fiscal 1950.8 The Senate Subcommittee on the State Department appropriations was so desirous of terminating the IRO program that it took the unusual step of asking the State Department to write a letter stating categorically: (1) that the 1951 request for funds was the last and (2) that it would begin at once to press for the gradual release of IRO employees and would notify the Subport of the Economic and Social Council, General Assembly Official Records: Fifth Session (A/1345), Lake Success, N.Y., 1950, pp. 86-90; also ICEF's General Prog­ ress Report of Executive Director, U.N. Doc., E/ICEF/155, October 26, 1950. β See Survey—1949, p. 56. 7 An additional irritant was that Congress considered it had not been accurately informed as to the high percentage of United States contributions. 8 "Department of State Appropriations for 1951," Hearings, House of Rep., Com­ mittee on Appropriations, 81st Cong., 2d Sess., January 27, 1950, pp. 821-887. The Displaced Persons Act of 1948 was amended in June 1950, increasing from 232,377 to 400,744 the number of such persons admissible to the United States.

I.

GRANT PROGRAMS

CQinmfttee of the progress. 9 After receiving written assurances from the State Department along these lines, Congress approved the appropriation requested. Disbursements of $51 million were made during the year to IRO by the U.S. Government. In its 6th Session, during October 1950, the IRO decided to continue operations to October 1, 1951 (rather than March 1, 1951)1 since the processing of displaced persons for settlement in the United States and AustraHa had been delayed 2 and because it would not need to request any more funds to cover the extended period.8 The UN General Assembly gave final approval on December 14, with United States support, to the establishment of a High Commissioner's Office for Refugees as of January 1, 1951. Detailed plans for its operation were laid down, and the High Commissioner was called on to provide "international protection" for the refugees within his responsibility and to seek "permanent solutions" for their problems; his duties include the promotion of international conventions and special agreements to improve the situation of refugees and to allow their migration.4 Relief for Palestine Refugees Following the recommendations of the UN Economic Survey Mission to the Middle East,® President Truman had stated that • "Departments of State, Justice, Commerce, and the Judiciary Appropriations for 1951," Hearings, Part 1, U.S. Senate, Committee, on Appropriations, 81st Cong., 2d Sess. pp. 497f, 553f, 557f, and 590. 1The United States had previously told the General Council of IRO that no more American money would be contributed after March 1951. (New York Times, March 21, 1950.) 8 For a survey of IRO's activities during the year, see United Nations Bulletin, Januaiy 1, 1951, pp. 28-29. For a description and analysis of its work from the beginning, see Ristelhueber, Rene, "The International Refugee Organization," In­ ternational Conciliation, Carnegie Endowment for International Peace, New York, N.Y., April 1951, No. 470. 8 The Administration had two sources of funds, aside from appropriations for IRO, which it could use even after March 1951 to finance migration: ECA funds under the 1950 Act and counterpart funds in countries where displaced persons resided, namely, Germany, Italy, and Austria. 4 See United Nations Bulletin, January 1, 1951, pp. 61-66, for a review of refugee status and UN action; also Report of the Economic and Social Council, General Assembly OfiBciaI Records: Fifth Session (A/1345), Lake Success, N.Y., 1950, pp. 98-97, and Riggs, F. W., "The World's Refugee Problem," Foreign Policy Re­ ports, January 15, 1951, pp. 190-199. β See Survey—1949, pp. 57-59, and Clapp, G. R., "An Approach to Economic De-

I. G R A N T PROGRAMS

the United States should assume half of the cost of the recom mended Palestine relief and public works program for the period through Jime 30,1951. In his 1950 Budget Message the President requested $27.45 million to be contributed to the UN Relief and Works Agency for Palestine Refugees in Iiie Near East. He stated that, besides the humanitarian aspect, the purpose of the agency was to take a part of the burden of support of these peoples off the area and so encourage the governments concerned to concentrate on a peace settlement. As part of its justification to Congress, the State Department asserted that it considered the strategic value of the area to be of "incalculable importance" because of the oil reserves and the communications facilities. In the House hearings,® the Administration stressed the plan to shift assistance to this area from direct relief to work relief. The UN had estimated that the erection of small dams, irrigation projects, tree planting, terracing, etc., would provide jobs for the able-bodied (about 25 percent of the total) which in turn would take most of the families off the relief rolls so that by the end of 1950 no direct relief would be needed. The public works program provided for projects costing the equivalent of $34.7 million; these projects were small-scale and were selected because of a high labor factor in the cost, the possibility of early commencement, usefulness in increasing productivity, and contribution to overall economic development of the area. Mr. Clapp emphasized before the Committee that the present program, scheduled to end in 1951, was essentially a stopgap measure and was not a complete solution of the refugee problem. He thought that some assistance might be necessary after that date and testified that if the United States were interested in the strategic value of the area and its continued stability, ". . . it presumably will want to think carefully and seriously in the years ahead as to how it can help in a way acceptable to those countries, to improve the economic lot of these people."7 During the House hearing^, Mr. Vorys threatened to "gear this relief need in with our local domestic agricultural problem," but velopment in the Middle East," International Conciliation, Carnegie Endowment for International Peace, New York, N.Y., April 1950. β "Palestine Refugees," Hearings on S.J.Res. 153, House of Rep., Committee on Foreign Affairs, 81st Cong., 2d Sess., February 1950. ·> ibid., p. 47.

I.

GRANT PROGRAMS

his colleagues did not agree. An amendment to cut the United States contribution proportionately to the amount by which the aggregate of other contributions fell below $27.45 million was also rejected, and the authority to participate and to appropriate the requested amount was included as Title III of the Foreign Economic Assistance Act of 1950, with the RFC empowered to advance $8 million in anticipation of appropriations. The appropriation hearings and debate raised no new issues and provision of the full amount was made in August, after a small cut was restored on the Senate floor. The UN expressed "keen disappointment" in the response to its call for contributions to the $54.9 million program, and through 1950 only the equivalent of $10 million had been provided; Britain and the United States made the only significant contributions. (The United States disbursed $20 million during the year to this program and its predecessor.) As a result, the four "pilot projects" which were to be the first step in a long-run program of developing the area's resources did not get under way, and the major energies and resources of the UN Relief and Works Agency for Palestine Refugees were devoted to distributing relief food rations to over a million persons. There was a lack of the intense interest in the program which characterized its beginning in 1949, and its use as a base for a wide "area program" seemed to have been dropped or postponed. During November the United States representative on the UN ad hoc Political Committee drafted a resolution, along with three other countries, supporting a continuing program of aid to Palestine refugees for relief, repatriation, and reintegration. It provided for $20 million for relief during fiscal 1952 and $30 million for reintegration during fiscal years 1951 and 1952. This program was to be carried out by the UN Relief and Works Agency. The General Assembly approved this resolution without debate on December 2, 1950. In his 1951 Budget Message, the President asked Congress to support the program of reintegration of Palestine refugees. F. TOTAL UNITED STATES GOVERNMENT GRANTS Total aid extended under the fdregoing foreign aid programs of the United States Government are shown by program and by

I.

GRANT

PROGRAMS

area in Table 8. Attention is called to the fact that ECA aid extended on a credit basis is not included in this table. These figures are gross, and during the year the United States received reverse grants and returns on grants valued at $153 million, of which the equivalent of $144 million were counterpart fund deposits reserved for United States use,8 and $9 million represented returns of lend-lease naval vessels, mostly from Russia. Thus, net disbursements were estimated at $4084 million under the official foreign grant programs. G. MISCELLANEOUS GOVERNMENT UNILATERAL TRANSFERS AND RECEIPTS In addition to the official grants discussed in the foregoing sections and aggregated in Table 8, the United States made certain "miscellaneous unilateral transfers." These consisted mostly of pensions, grants of services paid for out of ECA 5 percent counterpart funds, and some small payments on United States informational activities abroad. Such transfers totalled $87 million, compared with $132 million during 1949. Unilateral receipts by the U.S. Government, in addition to the $153 million of reverse grants and returns on grants mentioned above, were $21 million, accounted for by vestings by the Alien Property Custodian. When the net miscellaneous transfers of $66 million are added to the net disbursements under the grant programs, the net unilateral disbursement by the U.S. Government during 1950 totalled $4150 million.9 8 This figure on 5 percent counterpart fund deposits exceeds by $7 million that given in Table 6, supra, and is accounted for by the inclusion in the present case of counterpart funds deposited under the Far Eastern programs and under the GARIOA program as well as the European program. Actual expenditures of these funds during the year amounted to $70 million and were largely for ECA adminis­ tration, the purchase and development of strategic materials, and information projects. There was left the equivalent of $74 million, which is recorded as an increase of U.S. Government short-term assets abroad. (See Chapter ΙΠ, Section A, infra.) 9 This figure exceeds by $17 million that recorded in the balance of payments for net grants and unilateral payments of the U.S. Government (see Table 30). The discrepancy is reported as due to the inclusion of preliminary data in certain of the official balance of payments estimates.

I. GRANT PROGRAMS TABLE 8

United States Government Foreign Grants, WSOa (millions of dollars)

By Program European Recovery Occupied Areasb Korean Aid0 Southeast Asiad China Aid Economic Military

By Area 2719 456 109 38 17 5

Mutual Defense Yugoslav Aide PhUippine Rehabilitation Private Claims 132 Public Reconstruction 35 Greek-Turkish MUitary Aid Intprnational Refugees Palestine Refugees Chfld WeHare Technical Assistance Institute of Inter-American Affairs 4 United Nations 4 Informational and Educational 3 Other' Total

ERP Europes Other Europee Latin America Middle Easth Far East1 Unallocable* Total

3410 0 20

20

682

105 4237

516 0 167 61 51 20 15

11 49 4237

a) In most instances these data represent shipments where goods are procured by the U.S. Government agencies and cash payments by the Government where other methods of procurement are used. Includes ECA-owned counterpart funds spent for administration and other services of benefit to the countries concerned in an amount of $28 million in Europe, $1.5 million in Korea, $.6 million in China, and $.3 million in Southeast Asia. Dollar costs for administering all aid programs are included. ECA aid extended on a credit basis is not included here but in Table 15. b) Includes grants to Germany of $9 million remaining under the Army GARIOA program, and the $169 million of expenditures by ECA after taking over the Army program. In addition to the GARIOA expenditures of $164 million in Japan and $9 million in the Ryukyus, it includes certain transfers of civilian supplies by the Army to Japan estimated at $105 million; these transfers are recorded in official balance of payments statistics but not yet in those on foreign aid. c) Includes ECA and GARIOA aid and certain civilian supplies and materials estimated at $50 million which are known to have been transferred to Korea from United States Army stocks; these are recorded in official balance of payments statistics but not yet in those on foreign aid. d) Indonesia only; represents supplies received in 1950 under the earlier ERP allotment to the Netherlands. e) The $16 million of aid to Yugoslavia under the emergency food assistance pro-

(Notes continued on next page)

I. GRANT PROGRAMS

H. FINANCIAL OUTLAYS BY THE UNITED STATES GOVERNMENT TO INTERNATIONAL ORGANIZATIONS In addition to the emergency relief organizations, discussed above, and the International Fund and Bank, treated in Chapter IV, the United States belongs to a large number of international organizations, both multilateral and bilateral. Some of these organizations are permanent while others are only temporary, and occasionally new ones are created and existing ones are abolished. The information given here applies to fiscal year 1950. United States expenses resulting directly from its participation in multilateral organizations include the cost of its annual con­ tributions to the budgets of international organizations, the cost of participation in meetings and conferences of international or­ ganizations, and the cost of United States missions located at the seat of international organizations or of United States missions on special assignments pertaining to international organizations. Most of the multilateral organizations have annual budgets to gram was limited to credits by the EIB and to wheat and flour shipments from Italy and Germany, the latter against future reimbursement by ECA. f) Consists of $36 million (at support prices) for donations of surplus farm goods by the Department of Agriculture to private welfare agencies for distribution abroad and $13 million of United States contributions to joint projects with Mexico for eradication of foot and mouth disease. g) Includes participating dependent areas and the $43 million' grant to EPU. h) Includes contribution to UN Relief to Palestine Refugees and negligible amounts of technical assistance to Iran and Saudi Arabia. In addition Iran may have received some MDAP assistance; this is included with Europe since no breakdown is available. i) Burma, China, Formosa, India, Indochina, Indonesia, Japan, Korea, Philippines, and Thailand. Includes $65 million of MDAP funds used for Korea, the Philippines and the "general area of China." j) Includes United States contribution to International Refugee Organization, International Children's Emergency Fund, UN Technical Assistance, and the Department of Agriculture donations mentioned in footnote (f) supra. Source: Department of Commerce, Clearing Office Jor Foreign Transactions. Note: The data presented here do not correspond precisely with those given in official publications of the Department of Commerce to date (e.g., Survey of Current Business, Washington, D.C., March 1951, and "Foreign Aid," For­ eign Transactions of the U.S. Government, Washington, D.C., March 1951.) The major differences, as noted above, are the inclusion here of $155 million of civilian supplies furnished to Japan and Korea by the Army from its stocks, and of certain donations by the Department of Agriculture. Also, in the above, ECA aid to Indonesia through die Netherlands is given as to "Southeast Asia" and not as for "European Recovery," and all aid to Korea is shown separately rather than under "Occupied Areas" and "Far East."

I. GRANT PROGRAMS

provide for their secretariats and to carry out their programs. These budgets are usually financed by assessments against the members of the organizations on the basis of contribution scales approved annually or stipulated in the statutes of the organization. Ftmds for payment of United States assessments to the large majority of these organizations come from appropriations to the Department of State, although contributions to six of the smaller organizations have been financed from appropriations to other Government agencies.1 United States contributions to international organizations for the fiscal year 1950 amounted to $123.6 million, of which all but $27.2 million were for emergency relief and other special activities. The percentage of the United States contributions to the total was 51 percent, but if the larger proportionate contribution to emergency relief programs is taken out, the United States contribution to all other organizations with multilaterally financed budgets was only 37 percent. The distribution of the total and the percentage of the United States assessments or contributions are shown in Section A of Table 9. In addition to the organizations financed multilaterally by direct contributions from members, there are other organizations in which the United States participated in the fiscal year 1950 which required no direct annual contribution to a multilaterally financed budget. The secretariat expenses of certain of these organizations are met by revenue other than member contributions. The secretariat costs of others are paid entirely by one. Government. Still other organizations, rather than meeting the costs of a central stafiF through a multilaterally financed budget, have followed a procedure whereby each Member Government contributes staff and directly pays the salaries of its own nationals. These staff personnel are actually employees of their governments rather than members of an international secretariat. A listing of the organizations in which the United States participated during the' fiscal year 1950 but to which no direct financial contribution to a 1 Special programs of organizations which extend beyond their regular activities and die programs of those organizations which carry out emergency relief activi­ ties on a large scale are generally financed by voluntary contributions from in­ terested governments rather than by assessments. United States voluntary contribu­ tions to* international orgainizations for the fiscal year 1950 were financed from ap­ propriations made to die President and allocated to the Department of State or by appropriations made directly to the Department of State.

I.

GRANT PROGRAMS

multilaterally financed budget was required is included in Section B of Table 9. The cost of United States participation in meetings of international organizations includes expenses in connection with the travel of United States delegations to and from meetings and the cost of maintaining them at the meetings. The cost to the Department of State of United States participation in those meetings of international organizations which involved expenses for it is estimated at $1.2 million for the fiscal year 1950. A breakdown of meeting costs for the fiscal year 1950 was as follows: United Nations and Specialized Agencies, $989,000; Inter-American Organizations, $26,000; all other, $166,000. The cost of United States missions to international organizations includes the expenses of maintaining permanent United States representation to certain international organizations at their seat both in this country and abroad. The United States also pays expenses of missions on special assignments, which include the cost of maintaining United States representation on certain committees or commissions which are established by international organizations for specific purposes and which are of a temporary duration. The fiscal year 1950 cost to the Department of State of United States missions to international organizations is estimated at $1.8 million, and of United States missions on special assignments pertaining to international organizations, $236,000. The distribution of these mission costs was as follows: United Nations and Specialized Agencies, $1,774,000; Inter-American Organization, $16,000; all other, $288,000. Finally, the United States meets expenses resulting from its participation in several Materal commissions to which it is a party. In the case of these commissions, there is no budget assessment but rather a sharing of expenses incurred in carrying out approved projects. The expenses to the Department of State of United States participation in bilateral commissions are estimated at $6.8 million for the fiscal year 1950, distributed as shown in Section C of Table 9. The House Committee on Appropriations reported in March 1950 that it was concerned over the large number of organizations to which the United States was 'required to contribute." It urged that every effort be made to reduce the unusually high United

I.

GRANT PROGRAMS

State proportionate contribution "as quickly as the economic con­ ditions of other member countries make possible their assuming a more equitable share of the cost."2 I. PRIVATE REMITTANCES Private charitable remittances, both in cash and in kind, are estimated to have made a net contribution of $439 million to financing the 1950 surplus in the United States balance of in­ ternational payments. Receipts were estimated at $54 million and were approximately the same as in the previous year. Payments in 1950 totalled $493 million, as compared with $562 million during the previous year, showing a decline which was anticipated with the restoration of production abroad and the satisfaction of some of the more urgent relief needs growing out of the war. To encourage larger private gifts, ECA has subsidized the ocean transportation costs of relief packages sent to ERP countries by individuals and by voluntary non-profit relief agencies. Such ship­ ments declined during 1950, and at the end of June ECA discon­ tinued the subsidy on shipments by individuals except those des­ tined for Austria, Greece, Italy, and Trieste. ECA expenditures in 1950 for these purposes were about half those in 1949 and totalled $5.5 million. 2 "General

Appropriation Bill, 1951," House Report No. 1797, March 1950, p. 35.

TABLE 9 Iraernatiorud Organizations: United States Contributions, Fiscal Year 1950 (thousands of dollars and percentages) U.S. U.S. Contributiona Percentage6 A. ORGANIZATIONS ENTABLING CONTBIBOTIONS TO A MULTILATEBALLY FINANCED BUDGET

I. United Nations and Specialized Agencies 1. Permanent Organizations6 United Nations Food and Agriculture Organization International Civil Aviation Organization International Labor Organization International Telecommunication Union United Nations Educational, Scientific, and Cultural Organization Universal Postal Union World Health Organization Sub-total

83

16,601

1,250 464 848 146 2,887

12

1,918 24,127

40 27d

18 18 8

38 4e 39 35

I.

GRANT PROGRAMS

TABLE 9 (continued) International Organizations: United States Contributions, Fiscal Year 1950 (thousands of dollars and percentages)

_

—-

Contributiona PercetOageb 2. Emergency Relief and Other Special Activities International Civil Aviation Organization Joint Support Program International Refugee Organization United Nations International Children's Emergency Fund United Nations Relief for Palestine Refugees, United Nations Relief and Works Agency for Palestine Refugees in the Near East Sub-total

548 70,448

52 57

15,356 8,000

72 45

2,000 96,352

50 58

II. Inter-American Organizations American International Institute for the Protection of Childhood 2 i Inter-American Conference on Social Security Inter-American Indian Institute 5 Inter-American Institute of Agricultural Sciences 149 β Inter-American Radio OfSce Inter-American Statistical Institute 30 International OfiSce of Postal Union of Americas and Spain 2 Pan American Institute of Geography and History 10 Pan American Railway Congress 5 Pan American Sanitary Bureau 1,153 Pan American Union (including all organs of the Organization of American States,. the Inter-American Defense Board and Inter-American Commission of Women) 1,247 Sub-total 2,610 III. Other International Organizations Bureau of the Interparliamentary Union for the Promotion of International Arbitration Caribbean Commission Central International Office for the Control of the Liquor TrafiBc in Africa Liternational Bureau for the Protection of Industrial Property International Bureau for the Publication of Customs Tariffs International Bureau of the Permanent Court of Arbitration International Bureau of Weights and Measures International Commission of the Cape Spartel Light International CoimciI of -Scientific Unions and Seven Associated Unions International Criminal Police Commission International Hydrographic Bureau International Meteorological Organization International Penal and Penitentiary Commission

15 122

36« J 23 79 26 52 8« 36 42 72

72 70

20 38

k

k

2

6

2

4

1 θ

5 17

1

8

7 3 9 4 5

9 18' 13 4* 32

I.

GBANT

PROGRAMS

TABLE 9 (continued) International Organizations: United States Contributions, Fiscal Year 1950 (thousands of dollars and percentages) U.S. U.S. ContHbutiona Percentageb International Sugar Council International Whaling Commission International Wheat Council Permanent International Association Navigation Congresses South Pacific Commission Sub-total

of

IV. Temporary Organizations or Organizations in Which United, States Participation is Tem­ porary (other than those listed under 1-2 above) Central Commission for Navigation of the Rhine Inter-Allied Reparation Agency International Authority for the Ruhr International Cotton Advisory Committee International Seed-Testing Association International Tin Study Group International Union of Official Travel Organizations Rubber Study Croup Sub-total B. OHGANEZATIONS NOT ENTAILING A CONTEUBUTION MULTILATERAIXY FINANCED BUDGET 1»

Allied Commission for Austria Allied Council for Japan Allied High Commission for Germany Committee of Control of the International Zone of Tangier Coutfcil of Foreign Ministers Far Eastern Commission Interim Commission for the International Trade Organization North Atlantic Treaty Organization Tripartite Commission for the Restitution of Monetary Gold International Wool Study Group C. BILATERAL COMMKSIONS

International Boundary and Water Commission, United States and Mexico International Boundary Commission, United States, Canada and Alaska International Fisheries Commission, United States and Canada International Joint Commission, United States and Canada International Pacific Salmon Fisheries Commission, United States and Canada Total

7 * 19

22 8 17

2 20 227

18h 12 20

9 120 98 12 * 5

17 28 20 16 10 12

3 β 252

IO1 14 "22

TO A n

ο » ρ β r β n

* « U.S. Expenditures 6,400 66 33 208 129 6,836

I.

GRANT

PROGRAMS

* Less than $500. a) United States contributions to the international organizations listed are paid from appropriations made or allocated to the Department of State, except for those indicated in notes e, f, g, h, i, below. Contributions to parent organiza tions (e.g., United Nations and Organization of American States) cover all subordinate bodies. The amounts shown are contributions paid. In some cases differences exist between the amount of the U.S. assessment and the U.S. contributions because of such factors as credits applied toward U.S. assessment or because of U.S. statutory limitations on the amount authorized to be appropriated annually for payment of the U.S. share at the time the appropriation was approved. In September 1950, these limitations were raised and part of the funds appropriated for the fiscal year 1951 were used to pay fiscal year 1950 arrearages. b) The percentages shown are percentages of total scheduled assessments, except in the cases of the IRO, UNIGEF, UNRPR, and UNRWA for which contributions are voluntary and not assessed. c) This list does not include the International Bank for Reconstruction and Development or the International Monetary Fund, -which are financed by capital subscriptions from member governments and income from operations rather than by annual contributions. d) Contribution was less than assessment because of a legal limit (see note a), but percentage is based on U.S. assessment as part of total assessment. e) Contribution by Post Office Department. f) Contribution by Department of Justice. g) Contribution by Department of Commerce. h) Contribution by Department of Army. i) Contribution by ECA. j) Contribution of $13,613 paid in 1946, 1948, and 1949, equalling 45 percent of total scheduled assessments; no assessment from the United States was required for 1947 or 1950. k) Contribution of $46 was assessed in fiscal years 1947 and 1948, equalling 14.29 percent of total assessments. m) The list in this section may not be current due to creation of new institutions, liquidation of existing ones, or omission of extant organizations which have been or are in the process of merging with other bodies. n) Hie United States bears the expenses of its own element. o) The secretariat costs are paid by Japan and occupation authorities. p) Costs are borne by the revenue of the zone. q) The records of the Council are maintained by the United Kingdom. r) The United States pays the cost of the secretariat as host as well as of its own delegation. These costs are estimated at $176,389 for the fiscal year 1950. s) Expenses were paid out of a loan from the United Nations which was to be a charge under the first budget of the ΓΓΟ; the treatment of the expenses incurred in case the ITO is not constituted has not been decided. The Interim Commission is reimbursed by the Contracting Parties to the General Agreement on Tariffs and Trade for its services to them. t) Costs are a charge against the gold itself. u) United Kingdom provides the secretariat. Source: Department of State, Division of International Administration.

II · POINT FOUR PROGRAM INTRODUCTION United States, acting through the Government directly and through international and private organizations, has for many years been providing technical assistance to underdeveloped countries and participating in capital investment in these areas. During 1950, the ECA expanded its activities in Asia and in the territories of the metropolitan European countries, and both the ExportImport Bank and the International Bank gave increasing attention to aiding underdeveloped countries. These operations, closely related to the Point Four Program and involving relatively large expenditures, are discussed in Chapters I, III, and IV respectively in this Survey. The Administration's proposals for a "bold new program" for the "improvement and growth of underdeveloped areas" went beyond these activities and encompassed them in concept—though not organizationally. !•Implementation of the "new" program was begun in mid-1949 when the United States joined in approving an expanded UN program of technical assistance * At about the same time, the President requested Congress to approve two separate pieces of legislation: one giving him broad authority to "plan, undertake, administer, and execute technical cooperation programs" both bilaterally and through international organizations, and another authorizing the Export-Import Bank to extend investment guarantees intended to encourage an expanded outflow of private capital. The Executive Branch drew a clear distinction between technical assistance and capital assistance, believing (until late 1950) that the Government could and should provide much of the former with little cost, while the latter should come primarily from private sources with official action largely restricted to removing some of the deterrents. Congressional hearings on the technical assistance measure were begun in September 1949.1 In the meantime, Congressman Herter THE

Survey—1949, pp. 67-85, presented a record of the program and policies through 1949; this background will not be repeated here. lThe

II.

POINT FOTJB

PROGRAM

had introduced a bill, prepared after discussions with several business groups, which authorized a more limited program of technical assistance with grants to be conditional on foreign governments improving the "climate" for private foreign investment. After much debate, Congress approved in May 1950 an "Act for International Development" as Title IV of the Foreign Economic Assistance Act of 1950, which was a compromise between the original Administration and Herter proposals. Under this authority the Government during the last quarter of 1950 negotiated several bilateral technical assistance agreements, continued previous programs, and contributed to the expanded UN program. State Department expenditures during the year for technical assistance totalled only $11 million, practically all in the form of a contribution to the UN program and for activities of the Institute of InterAmerican AfEairs.2 Congress also held hearings in the late summer of 1949 on the proposal that the EIB guarantee private investments, and a bill was favorably reported to the floor of both houses but was not debated. A new bill was introduced in 1950 and passed the House but was not debated in the Senate, although Congress did broaden ECA's investment guarantee authority. It appeared at the end of the year that the Administration would not press the 1951 Congress to approve the EIB measure. During the year under review, the Administration actively attempted to negotiate new "Investment Treaties" and "Tax Conventions" designed to encourage private foreign investment, and it worked hard, and successfully, in the UN to prevent action there calling for an expansion of lending by international institutions and to obtain approval of resolutions placing on the underdeveloped countries responsibility for encouraging an inflow of private capital. At year's end, however, the Administration was beginning to despair of obtaining what it regarded as an adequate flow of private foreign investment and was contemplating an expansion in official grants and loans to implement an enlarged Point Four Program which, it appeared, would be directed in large measure to increasing the production of scarce raw materials needed in the rearmament programs of the West. 2 Technical assistance is extended by the Government on a grant basis and ex­ penditures are so classified in official statistics (see Table 8).

II. POINT FOUR PROGRAM

A. TECHNICAL ASSISTANCE Congressional Action One of the main concerns Congress expressed during the 1950 hearings on the proposed technical assistance program8 was whether it committed the United States to continued large ex­ penditures and therefore launched a vast new "giveaway." The Administration witnesses replied that, while the duration of the program would be measured in decades, it would not involve large Government grants. They stressed repeatedly that, during the first year of the program, the United States would provide only $45 million, including about $10 million under previous activities which would now be coordinated with the new program; further, they asserted that the cost to the United States would diminish as recipient countries increased their contributions. But many members of Congress remained uneasy over the possible scope of the program, and some justification for their concern was pro­ duced during the Senate debates when a letter from the State Department was read showing that various Administration plans to expand similar activities under other programs resulted in a total of technical assistance proposed for fiscal year 1951 of over $65 million: $2.9 million under the Smith-Mundt law, $6.5 million under the Institute of Inter-American Affairs (IIAA) (plus $14 million in contract authority), $15 million under ECA, $2.8 million for Korea, $2 million for miscellaneous UN organizations, $1.6 million to staff missions to various international organizations deal» Altogether, Congress was presented with four separate bills dealing with the technical assistance program: H.R. 5615 (the Administration's original measure introduced in 1949), H.R. 6026 (Mr. Herter's 1949 bill), H.R. 6834 and H.R. 6835 (identical bills introduced by Messrs. Kee and Herter respectively on January 18, 1950, following informal conferences among representatives of the Administration, Congress, and businessmen), and, finally, as a result of the Committee hearings and executive sessions, H.R. 7346 (introduced by Mr. Kee on February 20, 1950). All of these bills were concerned with assistance to underdeveloped areas except Herter's H.R. 602Θ, which applied to aH. nations outside the Soviet orbit. In addition, another measure (S. 2917) was concerned with the investment guarantee aspect of the program. This was being considered by the Committee .on Banking and Currency, but the House Committee on Foreign Affairs frequently discussed investment guarantees as well as technical assistance. (See "Act for International Development," Hearings on H Jl. S61S, H.R. 6026, H.R. 6834, H.R. 6835 and H.R. 7346, Part 2, House of Rep., Committee on Foreign Affairs, 81st Cong., 2d Sess., January 1950, and "Act for International Development," Hearings, U.S. Sen­ ate, Committee on Foreign Relations, 81st Cong., 2d Sess., March 30 and April 3, 1950.)

II. POINT FOUR PROGRAM

ing with technical assistance, $0.5 million for miscellaneous activities, and, finally, the $35 million for the expanded program.4 One Congressman later accused the Administration of actual deception because of an announcement, after Congress had approved the technical assistance program, that $85 million of ECA funds would be used for technical assistance in Asia.6 In an effort to hold the program within narrow limits, and because of political considerations, some Congressmen argued that assistance should be carried out under existing legislation,® especially the Smith-Mundt Act and the Fulbright Act, and/or through UN organizations. Administration spokesmen supported the passage of new legislation on the grounds that it would widen the scope of the program beyond the cultural and educational projects already allowed, that it would extend it to areas outside of Soutii America, and that a "bold new program" would have much greater propaganda effect. One gathers from the hearings that the latter argument clinched the case against the use of existing legislation. The pressure by some Congressmen to channel all technical assistance through the UN structure raised another major controversial issue, that of bilateral versus multilateral assistance. Some Congressmen pressed for a purely United States program, arguing that it would be more "efficient" and that, since the United States was supplying most of the funds, it should directly control their use. The Administration favored extensive, though not exclusive, use of UN agencies (as well as private organizations) chiefly on the grounds that there were many excellent technicians available to these organizations from foreign countries and that operating through die UN would allay fears abroad of 4Even some Administration supporters became concerned over the volume of funds likely to be involved. See, for example, the exchange between Senators Connally and McKellar on May 5, 1950 in the Congressional Record, p. 6559. 5 Congressional Record, August 30, 1950, p. 14043. β The hearings show that there were personal and party bases for the controversy over use of existing legklation or passage of a new law. Several Republicans were vexed because the authority requested was not presented in the form of amend­ ments to the Smith-Mundt Act and the Fulbright Act passed by the 80th Congress. The Economist (June 3, 1950, p. 1222) commented: "The Republicans, who were expected to embrace with enthusiasm a relatively inexpensive foreign aid pro­ gramme that offered a large role to private enterprise, looked the gift-horse in the mouth, and suspected it of being of Trojan descent, as well as too personal a crea­ tion of a Democratic President."

II. POINT FOUR PROGRAM

"intervention" and would serve to reduce the force of Communist propaganda to the effect that the program was just another example of American imperialism. In this connection, the Administration and its supporters stressed that the Point Four Program was an ideological counterpoise to Soviet propaganda and a successor to ERP, not in the sense of closing any remaining dollar gap but in the sense of aiding countries to raise their own consumption standards and attain economic recovery. The Administration emphasized, and Congress agreed without question, that raising living standards was a most effective way of halting the spread of Communism. Interjected into the discussion was the question of whether the Administration planned to use domestic agricultural surpluses to aid backward areas by raising their calory consumption. Secretary Brannan replied that the program did not encompass such direct aid but rather had as its objective the making of supplies available from the soil of the other nations. However, the Secretary did give assurances that under the program no assistance would be given to production abroad likely to compete with United States agricultural exports,7 and other Administration witnesses gave similar general assurances in connection with other sectors of the American economy. However, some supporters of the program (Congressional and private) stated that such assurances could not be carried out and that they only made foreign countries more suspicious of the intent of the U.S. Government. Some of the private witnesses (mostly representing labor) were more concerned lest the legislation fail to provide adequate safeguards against "exploitation" by the American companies. If such safeguards were not incorporated, they said, the goodwill sought by the United States would be dissipated.8 Congressman Kee, Chairman of the House Foreign Affairs Committee, thereupon pointed out forcefully that "missionary" work to obtain "goodwill" of other nations was not a primary purpose of any of the postwar aid programs of the United States. Rather, he stated, they were oriented toward military defense or the cold necessity of erecting bulwarks against the spread of disease and unrest conducive to the rise of Technical Cooperation Act of 1949," Hearings on H.R. S61S, House of Bep., Committee on Foreign AfiFairs, 81st Cong., 1st Sess., September and October 1949, pp. 57 and 80. 8 "Act for International Development," House Hearings, op.cit., pp. 437-448. 7 "International

II.

POINT

FOUR PROGRAM

Communism and that the programs would not have been passed by Congress for any other (i.e., humanitarian) reason. He did not mean that goodwill was not a desired by-product—only that it was not the primary objective. Congress raised relatively little objection to the technical assistance program, provided it remained a small one, as presented. It recognized that such activities had been carried on by the United States for many years, and thus made no strong objection to the amount of funds involved for the first year. But many Congressmen and non-Government witnesses were concerned over the long-run commitment envisaged and, more importantly, over the implication that technical assistance carried with it an obligation of the Government to provide capital assistance. The Administration recognized that in most instances technical assistance would be effective only if accompanied or followed by capital assistance,9 but it insisted that the bulk of this capital would come from private sources. To encourage such private capital. flows, it stated that it was carrying forward its negotiation of investment treaties and double taxation conventions and was currently proposing an expanded program of investment guarantees.1 The Administration itself separated the technical and capital assistance aspects of the Point Four Program, which met with the approval of the Senate. But the House Committee proposed to consider both aspects at the same time, and there was much support for Mr. Herter's substitute bill, drawn up after extensive consultation with private business groups, which would permit the Government to extend technical assistance and loans for limited purposes, but only to countries which had signed treaties 9 Foreign capital assistance would not always be required for development projects. As pointed out in the hearings, there are funds in many of die underdeveloped areas held in hoards or invested in the industrialized countries which could and should be tapped. In addition, there are many projects which can be carried out with no, or a minimum of, foreign assistance since there are numbers of unemployed who can dig ditches for irrigation and sanitation and can make terracotta and other crude substances required for sewers, etc., with only the technical assistance provided from abroad. 1 See Section B following. The bill providing for investment guarantees had been given to the Committee on Banking and Currency for hearings, and the .Committee on Foreign AfiEairs was vexed at not having full information and so not being able to consider conjointly the technical and capital assistance measures which they thought to be complementary.

II. POINT FOUR PROGRAM

providing a "favorable climate" to private foreign investors.2 Some of the witnesses before the House Committee supported these provisions as being the only realistic ones if private capital investment were to be forthcoming. A witness representing labor attacked them as creating favoritism for United States corporations and as constituting a program to 'lose friends and influence nobody," since, he argued, a foreign government would be required to accept humiliating agreements before receiving either private or government aid. He also believed that the private interests would be so long in entering the areas with funds that the program would decay. A representative of the National Foreign Trade Council spoke for a larger number of private witnesses when he wholeheartedly supported Mr. Herter's proposals, saying that these composed a technical assistance program designed "to encourage and certainly not to interfere with or restrict the operation of private enterprise. . . ," that "the treaties of friendship, commerce and navigation, of convertibility of service on capital, and on taxation" were necessary, and that a third prerequisite was the "continuance of the historic function of the State Department of protecting American nationals abroad against confiscatory and discriminatory practices of foreign governments."8 In order to obtain this "favorable climate," he favored the provision that no technical assistance be started until these treaties were ratified. The House Committee on Foreign AfiEairs finally reported, as Title III of its omnibus foreign assistance bill, provisions which incorporated the main aspects of the Administrations original requests with reference to technical assistance, but the title also included many of Mr. Herter's suggestions on a favorable climate, without making their implementation a prerequisite to a country's obtaining technical assistance. When reported on the House floor, this tide was immediately attacked as being a hodgepodge and an authorization to let anyone do anything. A motion to strike out the whole title was defeated, but the authorization was reduced to $25 million (including the $10 million for IIAA and See Survey—1949, pp. 83-84, for a more detailed summary of this bill and the published views of many business organizations. 8 "International Technical Cooperation Act of 1949," House Hearings, op.dt., p. 116. 2

II.

POINT FOUR PROGRAM

activities under the Smith-Mundt Act). Several amendments were offered, but rejected: to extend the Bill of Rights to colonial countries and to prevent exploitation by investing interests; to strike out entirely the section allowing use of multilateral organizations; to require that no more than 40 percent of the funds could be channeled through the UN; and to withhold assistance from a country sponsoring an attack on or attempting to undermine the U.S. Government, not supporting the UN, engaging in aggression, or shipping goods to any country for which an American exporter could not obtain an export license. The Senate, which from the beginning had preferred a separation of technical and capital assistance, passed a bill providing only for a $45 million technical assistance program and omitting any reference to "investment atmosphere" such as was contained in the House bill. In the Conference on the measure to reconcile the differences, almost all of the House expressions on the responsibilities of foreign countries for creating a favorable investment climate were retained. Some Senators strongly opposed the compromise bill on the grounds that the statements concerning a favorable climate for private investment were not germane to technical assistance and implied that the U.S. Government was responsible, in some unspecified fashion, for seeing that there was a large outflow of private capital. The Senate managers from the Conference countered that these provisions did not alter the essential restriction of the title to technical assistance, that they had agreed only to comfort the House, and that the title included only certain "findings" by Congress about private investment which would be considered as bases for treaties if any were concluded. As finally passed, Title IV, "Act for International Development,"4 occupied over six of the finely-printed thirteen-page Foreign Economic Assistance Act of 1950. A large portion contains the legal "boilerplate" necessary to get such a program going, including the administrative aspects of the advisory board, the coordinator, and the joint United States-recipient country committees to be established. The substantive provisions of the Act are given below in some detail because they establish the basis for what may be a large4 P.L.

535, 81st Cong:, 2d Sess.

II. POINT FOUR PROGRAM

scale, long-term program and they set forth Congress' views as to conditions necessary for private investment participation in such a long-range assistance program. The Act, after indicating that Congress finds it of mutual interest to exchange technical knowledge and skills and to encourage the flow of investment capital, states: Technical assistance and capital investment can make maximum contribution to economic development only where there is understanding of the mutual advantages of such assistance and investment and where there is confidence of fair and reasonable treatment and due respect for the legitimate interests of the peoples of the countries to which the assistance is given and in which the investment is made and of the countries from which the assistance and investments are derived. In the case of investment this involves confidence on the part of the people of the underdeveloped areas that investors will conserve as well as develop local resources, will bear a fair share of local taxes and observe local laws, and will provide adequate wages and working conditions for local labor. It involves confidence on the part of investors, through intergovernmental agreements or otherwise, that they will not be deprived of their property without prompt, adequate, and effective compensation; that they will be given reasonable opportunity to remit their earnings and withdraw their capital; that they will have reasonable freedom to manage, operate, and control their enterprises; that they will enjoy security in the protection of their persons and property, including industrial and intellectual property, and nondiscriminatory treatment in taxation and in the conduct of their business affairs." The law declares that the United States is interested in aiding countries, which are themselves trying to develop economically, by the exchange of technical assistance. Li reviewing requests of governments for such assistance, agencies of the U.S. Government are to take into consideration: "(1) whether the assistance applied for is an appropriate part of a program reasonably designed 6 The Act defines the term "technical cooperation programs" as "programs for the international interchange of technical knowledge and skills designed to con­ tribute to the balanced and integrated development of the economic resources and productive capacities of economically underdeveloped areas. Such activities may include, but need not be limited to, economic, engineering, medical, educational, agricultural, fishery, mineral, and fiscal surveys, demonstration, training, and sim­ ilar projects that serve die purpose of promoting the development of economic re­ sources and productive capacities of underdeveloped areas.

II.

POINT FOUR PROGRAM

to contribute to the balanced and integrated development of the country or area concerned; (2) whether any works or facilities which may be projected are actually needed in view of similar facilities existing in the area and are otherwise economically sound; and (3) with respect to projects for which capital is requested, whether private capital is available either in the country or elsewhere upon reasonable terms and in sufficient amounts to finance such projects." The Act also specifies that in reviewing requests for assistance "due regard" shall be given to the "encouragement" by the recipient country of the "flow of productive local and foreign investment capital" and to efforts by them to facilitate the development of their dependent areas. Programs are to be initiated cmly when the President determines that the country being assisted "pays a fair share of the cost of the program," provides "all necessary information," gives the program full publicity, coordinates all technical cooperation programs in the country, cooperates with other nations in exchanging technical knowledge and skill, and "endeavors to make effective use of the results of the program." To accomplish the purposes of the Act, the U.S. Government is authorized to contribute to and participate in programs of technical assistance promulgated by the UN "which will contribute to accomplishing the purposes of this title as effectively as would participation in comparable programs on a bilateral basis." Participation in programs carried on by the Organization of American States and similar international organizations is also authorized. It is further stipulated that "the participation of private agencies and persons shall be sought to the greatest extent practicable." The authority of the Act is given to the President, who is empowered to delegate it to some other officer. An advisory board of not more than thirteen members is to be appointed, without regard to political affiliation and without affiliation with the U.S. Government as employees, to "advise and consult.. . with respect to general or basic policy matters arising in connection with operation of the program." Joint commissions are to be formed, at the request of a foreign country, to examine the resources and policies of the recipient country and to make a report to the proper authorities containing recommendations on any specific projects

II.

POINT FOUR

PROGRAM

they deem desirable for economic development. Finally, the enabling legislation authorized an appropriation for fiscal year 1951 of $35 million, including any sums appropriated to carry on the activities of the Institute of Inter-American Affairs and to finance technical cooperation programs under the Information and Educational Exchange Act of 1948. The General Appropriation Act® provided $26.9 million for the international development programs, another $5 million for IIAA (plus $1 million of contract authority), and authorized transfer to the development program of $2.6 million from appropriations for information and educational activities. It specified also that (1) none of the funds should duplicate activities under any other program in which the United States participated; (2) no funds should be used for construction projects other than demonstration and instruction facilities; (3) no survey or technical assistance constitutes an obligation of the U.S. Government to make any loan or grant for the execution or construction of any project or completion of any program; and (4) the Secretary of State must give written notice to all recipient nations of the above provisions. Bilateral Activities After deducting funds promised to the UN and allocated to existing agencies, some $14.5 million of this appropriation were left for an expanded program of bilateral technical assistance. Even before the appropriation was made, requests had been received for technical assistance on sixty foreign projects. Additional requests were expected, and the State Department estimated that during fiscal 1951 over one thousand technicians would be sent abroad and an equivalent number brought to the United States. The State Department was given responsibility for the Program under Executive Order 10159, issued September 8, 1950. The ® P.L. 759, 81st Cong., 2d Sess. The Senate Appropriation Committee was much

aroused over the previous pledging by the State Department—contingent upon a subsequent appropriation—of certain funds to the UN Technical Assistance pro­ gram. Several members strongly objected that such commitments by the Adminis­ tration in fact bound Congress to provide the funds. They stressed that Congress alone had the authority to make appropriations, and, at one point, the Committee considered cutting off some similar appropriation just to make the Administration realize where the authority really lay.

II.

POINT FOUR

PBOGRAM

Order also established an International Development Advisory Board to consult with the Secretary of State, who in turn was directed to create an Interdepartmental Advisory Council on Technical Cooperation from the participating Government de­ partments. In November, Nelson Rockefeller was named as Chair­ man of the International Development Advisory Board,7 and Henry G. Bennett as Technical Cooperation Administrator. Mr. Bennett assumed his duties on December 1,1950. The Administra­ tor is assisted by the field staffs of the Foreign Service and main­ tains liaison with the UN and its specialized agencies. Operations in the field are carried out by various Departments and agencies of the Government, which receive allocations of funds for this purpose from the Administrator. The U.S. Ambassador or Minister in each country is responsible for negotiating agreements, and under his direction a technical cooperation officer supervises the approved projects. In the United States technical direction of the project comes from the agency designated by the Administrator.8 The State Department announced that primary emphasis would be placed at first on agricultural, health, and education projects, to be supplemented later by assistance to transportation, labor standards, public administration, and social services.8 Most of the 7 The Advisory Board consists of the following members: Robert P. Daniel, president, Virginia State College; H. S. Firestone, Jr., head of the Firestone Tire and Rubber Company; James W. Gerard, attorney and former Ambassador to Germany; John A. Hannah, president, Michigan State College; Margaret A. Hickey, educator, lawyer, businesswoman, and former president, National Federation of Business and Professional Women; Lewis G. Hines, American Federation of Labor; Bertha C. Joseph, businesswoman of Baltimore; Thomas Parran, dean, Graduate School of Public Health, University of Pittsburgh; Clarence Poe, editor, Progressive Farmer·, J. F. Potofsky, president, ACWA; John L. Savage, engineer; Charles L. Wheeler, executive of Pope and Talbot, a steamship company. The first meeting was in late November to consider the relevant sections of the Gray Report (see Section C, below). 8 See "The *Point Four' Program," Department of State Publication 4042, Economic Cooperation Series 25, December 1950, p. 4. 9 A problem which would not arise for some time was the difficult one of obtaining industrial experts, due to the fact that the most desirable experts probably have close ties to their own industry and are rather reluctant to break them. Only if the Department could send them on rather temporary projects (of the one-shot type) could it probably obtain them, but industrial projects are not usually of this type. The alternative facing the Department would be that of taking younger men willing to leave for longer periods of time at fairly remunerative salaries. In addition, a fine problem of patent rights on techniques introduced abroad by American experts would arise, A State Department study indicated that there was a great need for a more e£Fective international patent system to protect the "intangible and intellectual", property of Americans—both experts and investors. (See

II. POINT FOUR PROGRAM

specific Jprojects envisaged would require only one or two technicians. In all of its operations, the Department planned to cooperate with the UN Technical Assistance Board so as to avoid duplication; the Department emphasized the strengthening of the UN which the technical assistance program would bring about and the fact that the UN's own program made a more extensive source of experts available to developing countries. The first Technical Assistance Agreement under the Act for International Development was signed with Iran on October 19, 1950, and as of February 1951 agreements had been signed with Ceylon, Libya, Paraguay, Brazil, Liberia, Panama, Nicaragua, Costa Rica, Chile, Peru, Nepal, Saudi Arabia, India, Pakistan, and Afghanistan.10 A few of these agreements covered specific activities, but most of them were almost identical "umbrella" agreements, relating to administration of the assistance, information and publicity, certain provisions to be included in the specific project agreements, personnel, and duration of the agreement.1 Techniques which are to be employed in almost all the programs follow those which have been used for several years by the IIAA: the demonstration center and the "Servicio"2—a cooperative service which provides "good opportunities for close understanding, cooperation and integration" in the administration of projects in food and agriculture, health and sanitation, and education. In addition, as provided in the "Act for International Development," there will be established in cooperation with each recipient country a "Joint Economic Development Commission" to survey resources of the country and recommend a balanced development program. It is planned that these commissions will continue to review and recommend changes in the programs. The selection of a particular project to be financed under Point Greenwald, J. A., "Technological Development and International Patent Problems," Department of State Bulletin, June 26, 1950, pp. 1027-1033.) 10 Technical assistance to Southeast Asia is provided by ECA under funds re­ maining from die China Aid Act of 1948; the program was scheduled to involve some $50 million for fiscal 1951 ( see Chapter I, Section D, supra) and is not under the legislative authority of the "Act for international Development." 1 See, e.g., the Agreements with Liberia ( Department of State, Press Release No. 1254, December 22, 1950) and with India (Department of State, Press Release No. 1261, December 28, 1950). 2 "Servicios" are cooperative service agencies established as part of the govern­ mental structure of the foreign country, staffed jointly by local and United States personnel, and financed jointly by the United States and the foreign country.

II.

POINT

FOUR

PROGRAM

Four, the State Department said, would be governed, in addition to criteria set in the law, by whether the project was voluntarily sought by the foreign government and by whether it would raise the living standards of the people. A request for aid on a project sets in motion the following procedure: (1) examination and evaluation of the plans by the United States diplomatic mission in the country initiating the request, (2) review, by the Administrator and other agencies concerned, of the proposal and the diplomatic mission s evaluation, (3) coordination of the program with those of the UN, and, finally, (4) development of specific plans by the appropriate United States agencies.8 By the end of the year, much had been done in the way of planning and organization, but actual expenditures for technical assistance totalled only $11 million, composed of payments of $4.5 million under the IIAA, some $2.7 million under the information and educational programs which were in operation prior to 1950, and the $4 million contribution to the UN program.4

United Nations Expanded Program Because of the delay in availability of funds from the United States, the UN expanded technical assistance program, authorized in 1949,® made little progress in 1950.® In June 1950 the UN Technical Assistance Conference convened at Lake Success to ascertain the total amount of contributions to be made available for the first period of operation of the program— See "The "Point Four' Program," op.cit., p. 5. In addition to the bilateral projects and Uie contribution to the UN program, the State Department pledged $1 million to the Technical Cooperation Program of the Organization of American States (OAS). This pledge was met in part by an initial payment of $250,000 in January 1951. 5 See Survey—1949, pp. 71-74. 8 The UN Technical Assistance Committee in August 1950, with obvious ref­ erence to the United States, "noted with satisfaction the declarations made by some governments that they envisaged making available to the TAB [Technics Assistance Board] information on their bilateral or regional programmes of tech­ nical assistance. The view was expressed that the existence of such bilateral or regional programmes should not affect the eligibility of recipient countries to re­ ceive technical assistance requested from the United Nations and specialized agen­ cies in accordance with the principles laid down by the Council; the assistance provided through bilateral and regional programmes would be complementary to that provided through the United Nations and the specialized agencies and not a substitute." ("First Report of the Technical Assistance Committee," UN Doc. E/1833, August 15, 1950, p. 4.) 8

4

JI

POINT FOUR

PROGRAM

July 1, 1950 to December 31, 1951—and to secure final consent from the participating countries as to the allocation of the contributions. Contributions totalling just over $20 million were pledged by some fifty countries, with the United States—subject to Congressional appropriation—committing $12.5 million as a maximum, so long as its contribution was not over 60 percent of the total. The Conference agreed that all of the first $10 million received and 70 percent of the second would be available automatically for distribution to the participating agencies; 30 percent of the second $10 million and all contributions above the $20 million mark would be retained for later allocations. The total funds were to be distributed among the participating agencies as follows: Food and Agricultiure Organization, 29 percent; United Nations Organization, 23 percent; World Health Organization, 22 percent; United Nations Educational, Scientific and Cultural Organization, 14 percent; International Labor Organization, 11 percent; International Civil Aviation Organization, one percent. As of the end of 1950 only $7.5 million had actually been received from all sources, including $4 million from the United States. Operations under the program were begun only in the last three months of 1950, but by year s end 265 requests for technical assistance had been received; and 145 projects had been started, or were definitely scheduled, in thirty-eight countries by six of the participating organizations of the UN. In addition to technical assistance, sixty-three countries and dependent territories shared in expert services, fellowships, scholarships, and participation in conferences and seminars. Expenditures under the program totalled the equivalent of $1.3 million ($.7 million for technical assistance in economic development; $.5 million for social welfare advisory services; and $.1 million for public administration programs) plus $.3 million spent by recipient governments.7 The UN Technical Assistance Board maintained close contact with the U.S. Technical Cooperation Administration, and it also approved appointment of a liaison officer with the Colombo Plan Council of the British Commonwealth program for economic development. 7 See Report of the Economic and Social Council, General Assembly OfBcial Records, Fifth Session, Supplement No. 3 (A/1345), Lake Success, N.Y., 1950, pp. 29-26; United Nations Bulletin, Februaiy 15, 1951, pp. 163-170; and The Statist, February 10, 1951, p. 190.

II. POINT FOUR PROGRAM

B. CAPITAL ASSISTANCE The U.S. Government has recognized that capital assistance is generally a necessary supplement to technical assistance in the development of backward areas. To encourage the flow of private American capital, the Administration urged Congress to authorize the Export-Import Bank to extend investment guarantees and vigorously attempted to negotiate new investment treaties and tax conventions. In the UN, it has argued that most of the funds for development abroad should come from domestic sources and that any foreign capital should be supplied mainly by private sources, supplemented by some public loans, largely bilateral. Most of the borrowing countries opposed the American position in the UN. They argued that local resources were grossly inadequate, that although they would welcome private capital its flow was not large nor sufficiently steady, that a larger flow of foreign government loans was necessary, and that multilateral lending was preferable to bilateral.8 United Nations Debates The ECOSOC during its Tenth Session studied means of financing the economic development of underdeveloped countries.9 Representatives of the underdeveloped and some European countries stated that they fully recognized the need for a maximum use of domestic capital resources but that local private savings were very small and an expansion of bank credits for this purpose would be inflationary. Many delegates urged an expansion of the activities of the International Bank to finance projects of "vital" importance (consumer goods as well as capital goods) for which private capital was not available. 8 The OEEC, however, placed more emphasis on a larger flow of private funds. In its Report on International Investment (Paris, 1950, pp. 71-83 and 92-96) it emphasized the need for an expanded role of public foreign lending, but it also paralleled the United States policy of encouraging private foreign investment by recommending an extension of investment guarantees, investment treaties, and tax conventions. For, an excellent broad analysis of many current foreign investment problems and possibilities, see Sir Arthur Salter, "Foreign Investment," Essays in Interna­ tional Finance, No. 12, International Finance Section, Princeton University, Febru­ ary 1951. 6 The United States has eschewed the official use of "industrialized" and "unindustrialized" in an effort not to associate economic development with indus­ trialization.

II. POINT FOUR PROGRAM

The U.S. delegate, Assistant Secretary of State Thorp, called for a policy of more extensive mobilization of domestic financial resources, cooperation "with capital-exporting countries in making effective arrangements which would ... encourage investment and protect the investor against discrimination and unjust treatment,"1 and the use of non-dollar sources of foreign capital. He spoke at length on proposals that some foreign loans be extended to provide for the borrower's local-currency needs. He did not exclude the possibility of foreign loans for local-currency expenditures but stated that the conditions surrounding each project and the local capital market structure would have to be examined closely. In any case, he considered that the problem of localcurrency versus foreign-currency financing would disappear if convertibility of currencies were restored.2 The Cotuicil decided to defer action on these problems until its next session to allow time to obtain "more definitive data" and to examine more closely the various UN reports and studies on the subject.8 To facilitate future action, the Sub-Commission on Economic Development was instructed to meet during the interim and to draft recommendations. The Sub-Commission reported after its Fourth Session that the deterrents to an expansion of private foreign investment lay "rather in the existing obstacles to the transfer of funds between countries than in the lack of agreement on codes, treaties and 1 UN Economic and Social Council, Official Records, 369th Meeting, IOth Ses­ sion, March 1, 1950, p. 188. 2 ibid., pp. 188-189. 8 During late 1949 and early 1950 the UN prepared the following documents on capital assistance to developing areas: "Survey of Policies AfiFecting Private Foreign Investment," (E/1614/Rev.l). "Methods of Increasing Domestic Savings and of Ensuring their Most Ad­ vantageous Use for the Purpose of Economic Development," (E/1562). "Methods of Financing Economic Development in Under-developed Countries," (UN Publications, Sales No. 1949. II.B.4). "Relative Prices of Exports and Imports of Under-developed Countries," (UN Publications, Sales No. 1949. II.B.3). "International Capital Movements during the Interwar Period," (UN Publica­ tions, Sales No. 1949. II.D.2). "The Effects of Taxation on Foreign Trade and Investment," ( UN Publications, Sales No. 1950. XVLl). "Economic and Legal Status of Foreign Investment in Selected Countries of Lat­ in America," (E/CN.12/166 and Adds. 1 to 9 inclusive). "Foreign Investment Laws and Regulations in the ECAFE Region," (E/CN.ll/I and T/25).

II.

POINT

FOUH

FBOGBAM

general principles,"* and that private foreign investment was not expected to increase substantially in the near future because it woidd take many years to build up "good faith and confidence, a sense of welcome, a sense of co-operation and a favorable re­ sponse of investors."6 It concluded that international public loans from national and international sources should be expanded. The Sub-Commission did not consider the Export-Import Bank to be adequate because of its limited resources and historical orientation toward facilitating American exports. In any case, it was an instru­ ment of one government. It urged the IBRD to make loans at rates of interest and terms of amortization placing the smallest "feasible burden" on underdeveloped countries and to lend for "package" projects; that is, a group of projects some of which might not be self-liquidating but which were considered pre­ requisites to commercially profitable investments.® The full Council met in July for its Ilth Session and most of the debate was a repetition of that in the Sub-Commission.7 The final resolution adopted by ECOSOC on August 12, 1950 broadly reflected United States policy.8 It recommended a maximum use 4 Report of the Economic and Social Council, General Assembly Official Records, Fifth Session, Suppl. No. 3 (A/1345), Lake Success, N.Y., 1950, p. 16. This statement was in response to the request of the Brazilian delegate to the Tenth Session of ECOSOC (who also represented the International Chamber of Commerce) for an endorsement of the "Code of Fair Treatment for Foreign Investment" adopted by the International Chamber of Commerce in June 1949. β UN Doc. E/CN.1/80, May 19, 1950. β However, some delegates did not think that even the IBRD was able to handle many of the low- and slow-yielding basic projects. Mr. Rao, therefore, personally (not as Chairman of the Sub-Committee) proposed again, but did not press for, the creation of a UN Economic Development Administration to lend money for type of essential project. Several non-American members responded that the main burden would fall on one group—the United States taxpayers—and the proposal was not formally debated. The same proposal had been defeated in 1949. ( See Survey—1949, pp. 75-76.) 7 In the debate on capital assistance, the Council also discussed at length the issues which were being debated on the full employment resolution. So far as these issues concern international economic policy, they are discussed in Chapter IV, Section C, infra. See also UN Economic and Social Council, Official Records, Ilth Session, 383rd Meeting, July 11, 1950, p. 55, and 384th Meeting, JuIy 11, 1950, pp. 01-62; United NcOions Bulletin, September 1, 1950, pp. 209-210; and Carnegie Endowment for International Peace, "Issues Before die Fifth General Assembly," International Conciliation, New York, N.Y., September 1950, pp. 398-400. 8For the full text, see Department of State Bulletin, September 25, 1950, pp. 497-498, or UN Doc. E/1843, August 17, 1950. See UN Docs. E/AC.6/SR 90, 91, 95, 96, 97, September 2-6, 1950 for die discussion during ECOSOCs meeting.

II. POINT FOUR PROGRAM

of domestic financial resources; in addition, underdeveloped countries were urged to attract foreign capital into essential projects by the formation of banking syndicates or development banks with the participation of domestic banks and industrial enterprises. With reference to the flow of international capital, the resolution recommended (1) that bilateral and multilateral agreements be employed to afford some confidence of equitable treatment to private investors, (2) that governments of more developed countries encourage directly the flow of private capital funds to underdeveloped areas, (3) that more of the non-dollar countries allow the IBRD to use part of their 18 percent contribution for economic development loans and to place bonds in their financial markets, and (4) that "governments extend progressively, so far as their balance of payments position and prospects permit, the principle of untied lending to all governmentally controlled or guaranteed foreign lending."8 Recognizing a need for financing of non-selfliquidating projects and the lack of a "direct logical connection between the immediate expenditures in local and foreign currencies on the one hand and the desirable amount of domestic and foreign financing, on the other," and taking note of the IBRD's expressed policy of considering loan applications on the basis of "a borrowing country's investment programme as a whole ["package" loans], as well as the details of the selected ,projects," ECOSOC recommended that nations present "integrated programmes" as the basis of borrowing, that government and intergovernmental credit organizations "consider means . . . to help carry out integrated investment programmes," and that international lending institutions give consideration to the indirect foreign costs arising from the drain of capital projects on local labor and resources. The United States was a member of the Drafting Committee of the Economic Committee of ECOSOC which drew up the tentative resolution. It is not known wjiat influence it had on the various parts except that it did suggest inserting recognition of the expressed willingness of the IBRD to make, under appropriate circumstances, "package" loans and suggested recommending that Implementation of this principle would require a change in die policies of the Export-Import Bank. 9

II.

POINT FOUR

PROGRAM

governmental credits be extended for "integrated investment programmes."1 The ECOSOG resolution was referred to the Second ( Economic and Financial) Committee of the General Assembly for debate during October 9-19, 1950.2 The major new issue raised was whether capital assistance should be provided under global programs, regional programs, or bilateral arrangements. The United States supported the last, except for International Bank operations. A "World Plan for Mutual Aid" suggested by the United Kingdom gained little support in the Committee. Discussion of proposals for regional programs showed that allocations and priorities among the countries involved would be a source of serious friction.8 The final resolution adopted by the General Assembly, with full United States support, called for no direct action and was less detailed in its recommendations than that of the ECOSOC, but it was important in that it specifically stated that private capital could not be expected to flow in adequate volume and in that it emphasized the desirability of expanded public lending. It stated in part: "Being convinced that the volume of private capital which is currently flowing into under-developed countries cannot meet the financial needs of the economic development of the underdeveloped coimtries and that those needs cannot be met without an increased flow of international public funds, "Taking account of the fact that some basic development projects are not capable of being adequately serviced through existing sources of foreign finance, although they contribute directly or indirectly to the increase of national productivity and national income, "Recommends that the Economic and Social Council, in giving further study to the problem of the financing of economic development, consider practical methods, conditions and policies for achieving the adequate expansion and steadier flow of foreign capital, both private and public, and pay special attention to the iSee UN Docs. E/AC.6/L.12; E/AC.6/L.13; E/AC.6/L.12/Rev. 1; and E/1817 and E/1843, August 5-7, 1950. 2 See "Speeding Economic Progress," United Nations Bulletin, November 15, 1950, pp. 547-557, for the record of the major issues and obstacles discussed. 8 For example, the Saudi Arabian representative, evidently thinking of Israel, said it would be unfair to give priority to a state with a considerable force of trained immigrant labor and access to foreign capital.

II.

POINT

FOUR

PROGRAM

financing of non-self-liquidating projects which are basic to economic development."4 United States Encouragement of Private Foreign Investment In order to induce the private capital flows envisaged in the Point Four Program and hoped for upon the cessation of ERP aid, the State Department and the EIB conceived a program of investment guarantees, broader than those currently provided under the Economic Cooperation Act,8 supplemented by treaties of friendship, commerce and navigation, double taxation conventions, and certain United States tax reforms. a. ECA INVESTMENT GUARANTEES

The Economic Cooperation Act of 1948, as amended in 1949, authorized the Administrator to guarantee, for a fee, that certain returns from approved direct investments® which could not be converted through normal channels could be sold to ECA, or its agent, for dollars. The 1949 Act limited the total amount of guarantees which could be outstanding to $150 million, of which $10 million were to be available for conversion guarantees each year to American enterprises producing or distributing informational media in ERP countries. Extensive use of these investment guarantees was not made in either 1948 or 1949.T In the 1950 hearings on the extension of ECA, the House and Senate Committees favored an expansion in the coverage of the investment guarantees. Various ECA Mfesion Chiefs agreed that 4 General Assembly, Official Records: Fifth Session, Supplement No. 20 (A/1775), Resolution 400 (V), 312 Plenary Meeting, Lake Success, N.Y., Novem­ ber 20, 1950, pp. 26-27. 5 The idea did not arise from United States business or foreign governments and seemed generally to be opposed by the former and supported by the latter. 8 The 1948 Act authorized ECA to guarantee, up to the amount originally in­ vested, the conversion of the income, repayment of principal, or return of receipts from sale, of new investment projects approved by me Administrator and the par­ ticipating country concerned. The 1949 Act extended coverage to include "actual earnings and profits" in addition to the amount of dollars originally invested. "In­ vestment" was broadened to include expansion, modernization, and development of existing enterprises, as well as "new" investments. It also included as "invest­ ment" the "furnishing of capital goods items and related services for use in connec­ tion with projects approved by the Administrator pursuant to a contract providing for payment in whole or in part after Jime 30, 1950." 7 See Survey—1949, pp. 77-79.

II.

POINT FOUR

PROGRAM

a wider scope of the guarantees would make them more attractive to private investors and therefore effective in expanding the flow of capital funds. However, Administrator Hoffman was skeptical and stated that in any case guarantees were more appropriately a responsibility of the EIB and that a separate program was being proposed to Congress. He also asserted that, since the EIB guarantees proposed would extend to investments throughout the world, ECA guarantees (restricted to Europe) were unnecessary. Congress, however, thought that investment guarantees should be an integral part of the ECA program, but there was disagreement between the two chambers with respect to expanding their coverage, and this issue was argued more exhaustively than any other in the Conference of the Houses on the Foreign Economic Assistance Act. In addition to the convertibility guarantees previously authorized, the House wanted to authorize an immediate compensation in dollars for any or all of a guaranteed project lost through war or revolution or from seizure, confiscation, or destruction under any law, ordinance, or other governmental action. The Senate opposed any such protection against war risks, and the final Act restricted compensation to losses from "expropriation or confiscation by action of the government of a participating country." In return for such compensation payments, the U.S. Government will take over all claims by the private investor against the foreign government, including local currency received. The law provided that this coverage would be retroactive at the choice of the investor having a previous guarantee. The 1950 Act specified that investors wishing protection against expropriation and confiscation would be charged a fee varying with the degree of risk involved and nature of the investment, but not to exceed 4 percent per annum of the amount of the guarantee; in addition, all convertibility guarantees would be charged for at a rate not greater than one percent per annum. The fees charged are to be used to meet liabilities under the guarantees. Any payments by ECA in excess of the fees received are to be out of appropriations or, if such are not available, from public debt transactions. The definition of investments for guarantee purposes was also broadened and was restated in the law as follows: "the term 'investment' includes (A) any contribution of capital goods, ma-

II. POINT FOUR

PROGRAM

terials, equipment, services, patents, processes, or techniques by any person in the form of a loan or loans to any enterprise to be conducted within a participating country, (B) the purchase of a share of ownership in any such enterprise, (C) participation in royalties, earnings, or profits of any such enterprise, and (D) the furnishing of capital goods and related services pursuant to a contract providing for payment in whole or in part after the end of the fiscal year in which the guaranty of such investment is made." The amount of the guarantees which could be outstanding was increased to $200 million, of which not more than $10 million per year may be used for informational media guarantees. As in the previous Act, all guarantee contracts must terminate not later than April 3,1962. During 1950, ECA extended $20.8 million of "currency transfer" guarantees on industrial investments, making the total outstanding $24.6 million. Practically all the 1950 activity was in the first six months, and $14.5 million were for one guarantee to Standard Oil of New Jersey on funds used to purchase half the capital stock of a new Italian petroleum refining corporation; a program of modernization and expansion of existing facilities was planned. No guarantees were issued for the broader risks of expropriation and confiscation since ECA policy was not completely formulated. No disbursements were made on any of the investment guarantees during the year. Informational media guarantees granted during the year totalled $4.9 million (mostly for films and books distributed in Germany) making the aggregate $7.8 million. At the end of 1950, $4.5 million of informational media contracts were still outstanding; $1.9 million had been cancelled by ECA purchases of foreign currencies—almost all German marks—and $1.4 million had expired or been reduced. b. EXPORT-IMPORT BANK INVESTMENT GUARANTEES

As its major new scheme for encouraging larger private capital flows in support of its program for hastening "the improvement and growth of under-developed areas," the Administration in 1949 requested a short amendment to the Export-Import Bank Act of 1945 allowing the Bank "To guarantee United States private capital invested in productive enterprises abroad which contribute

II. POINT FOUR

PROGRAM

to economic development in foreign countries against risks peculiar to such investments." Congressional hearings were held during August 1949, and bills were reported out favorably only to be lodged in the Rules Committee.8 These bills authorized the EIB to ". . . guarantee United States private capital invested in productive enterprises abroad which contribute to economic development in foreign countries by assuring either or both (i) the conversion into United States dollars of foreign currency derived from an investment and (ii) compensation in United States dollars for loss resulting from expropriation, confiscation or seizure (by action of public authority)." (House bill only. )8 On April 18, 1950, a new bill (H.R. 8083) was introduced in the House. No hearings were held and, as reported on the House floor after passing through the Rules Committee by a close vote, it differed in only two respects from the Committee-approved 1949 bill. Specific provisions were included requiring that "an appropriate" fee be charged by the EIB and limiting the aggregate amount of guarantees issued and outstanding at one time to $250 million. The Committee report emphasized that the guarantees would not extend to ordinary business risks and that the limitation of guarantees to "productive enterprises" would prevent guarantees from being given to investments in projects which would duplicate productive facilities already in the United States. It stated that guarantees were needed to cover risks other than convertibility because, though treaties could do much to prevent their occurrence, expropriation or confiscation might be considered necessary by a foreign public authority to protect the public interest. In response to concern expressed in private circles, the House Committee requested clarification as to priority of claims between service on guaranteed and unguaranteed investments. Mr. Gaston, Chairman of the EIB, replied unequivocally in a letter of June 1950 (prior to the House debate) that"... our purpose is that the service on a guaranteed investment shall 'take its place in line' behind other unguaranteed claims of similar class and that there 8 See Survey—1949, pp. 79ff., for a review of the 1949 discussion and statements of the major issues. β S. 2197 and H.R. 5594, 81st Cong., 1st Sess.

II.

POINT FOUR

PROGRAM

will be no agreement, request or pressure that these claims be serviced ahead of existing claims and existing investments."1 House debate on the measure, frequently characterized by a lack of knowledge of the bill and its purposes, lasted only one day. Some members expressed a dislike of guaranteeing "Wall Street investments." Mr. Herter opposed the bill on the floor, as he had in Committee, on the grounds that its whole "psychology" was in error and that the previously passed Act for International Development contained, in its emphasis on bilateral treaties to provide a favorable climate, all that it was necessary for Congress to do at that time to encourage private investment. Some members also attacked the bill on the grounds that it did not define sharply enough the conditions calling for payment on a guarantee and that it might result in the Government granting financial relief to United States foreign enterprises for losses of a kind for which no relief would be granted in the United States.2 A motion to recommit the bill, because there had been no hearings during the year while international conditions had changed and because there was little chance of its getting through the Senate, was defeated. Despite assurances of the Committee, noted above, some House members were concerned over the effect of American capital being invested abroad to make products with "cheap foreign labor" which would be exported to the United States.3 An amendment to deny guarantees to investments which would result "in uneconomic and unsound duplication and expansion of production and productive facilities already existing in the United States and other countries" was agreed to, without debate. 1 Export-Import Bank, Press Release, June 27, 1950, p. 2. The EIB also stated that the same policy would apply to any foreign currencies accumulated by it in making good its guarantees. 1Iliese funds, it stated, might be used by the United States for local expenditures abroad or they might await convertibility after the guaranteed and unguaranteed claims of private investors. (Congressional Record, July 10, 1950, p. A 5250.) 2 In particular, House members agreed that losses of profits and ultimately of in­ vestment due to adverse effects of labor legislation passed by a foreign government were not entirely excluded from a guarantee since this case might be classified as a risk of "confiscation by public authority." s In his testimony before the Senate Committee during 1949, Under Secretary of State Webb made the remark that "Competition should be avoided wherever it is in the common interest to do so," and that the projects and programs approved "will have to fall in line with die kind of things which will provide a stable platform for world affairs. . . ." ('Toreign Investment Guaranties," Hearings on S. 2197, U.S. Senate, Committee on Banking and Currency, 81st Cong., 1st Sess., August 9 and 10,1949, p. 23.)

Ill

II

P O I N T J-OUR PBOGRAM

Another amendment was introduced requiring a prior treaty including: (a) non-discrimination against United States as compared with other foreign investors, (b) compensation for expropriation, assumption by the government of normal business control, or impairment of the value of the enterprise through government competition, and—most importantly—(c) assurances by the foreign government that, "subject only to the essential needs of such foreign country," it would permit an appropriate share of the earnings and any compensation under (b) above to be converted into dollars and transferred.4 The State Department had earlier asserted, and their views were repeated by Administration supporters on the floor, that treaties were not needed with some countries and a mandatory requirement might offend them; in others, it would be impossible to conclude treaties with these provisions. Some Congressmen feared that the requirement of a treaty in all cases might tie the hands of the Administration in guaranteeing private investments since treaties require long negotiation.® The amendment was accepted, however, and the bill was then passed on a roll call vote by 195 to 151 on July 12, 1950. The House bill was placed on the Senate calendar but was not considered during the year. In his various economic messages to the new Congress in January 1951, the President made no mention of investment guarantees, indicating that this part of the Point Four Program was at least temporarily dropped.® * In the hearings, the Administration had objected to proposals that foreign na­ tions be required to "guarantee" American investments on the grounds that con­ vertibility depends not only on willingness and good faith but also on availability of dollars. Administration supporters in the floor debate raised little objection to the above qualified provision. 6 On the other hand, the Export-Import Bank had previously stated that "no in­ vestments will be guaranteed without a general treaty or other satisfactory arrange­ ment with the country concerned as to investments in general as well as an agreement with the Export-Import Bank with respect to the treatment of guaranteed investments." (See Export-Import Bank, Press Release, June 27, 1950, and Con­ gressional Record, July 10, 1950, p. A5250, where the Export-Import Bank's an­ swers to some specific questions are recorded.) eThe OEEC in its Report on International Investment {op.cit., pp. 102-103) supported the provision of investment guarantees by lending countries and espe­ cially by the United States. It stated that their effectiveness would depend on their scope and on flexibility of administration. Specifically, it emphasized that: (a) a wide range of non-commercial risks must be covered and guarantees offered to all types of investment; (b) war risks can be attenuated only by a guarantee of the lending country and should be included among the risks covered; (c) a transfer

II.

POINT FOUR

PROGRAM

C, PROVISION OF A FAVORABLE CLIMATE

Since the proposal for investment guarantees was not enacted into law, Administration encouragement to private investment during 1950 (except for ECA investment guarantees and specific measures such as public loans which lay the groundwork for private investment) was limited to negotiation of various treaties designed to improve the climate for foreign investment.7 These agreements took the form of treaties of friendship, commerce and navigation, and treaties on double taxation of income and estates. The State Department was also urged by many to en­ courage unilateral action by foreign governments looking toward an increased flow of private capital.8

(1) Treaties of friendship, commerce and navigation Since its founding, the United States has entered into 130 commercial treaties which attempt to define how businessmen may operate in each others' country. Some thirty odd such treaties were in effect just before World War II. Most of these were drawn up prior to the 1930's—some were over 100 years old—when international economic relations were much less complex, nar­ rower in scope, and were conducted with a minimum of governguarantee should apply not only to the full value of the investment but to dividends, capital profits, and earnings from patents and processes; (d) the guarantee should apply to both direct and portfolio investments; (e) it should apply to tied and untied loans and to loans made anywhere in ..the world; (f) only a modest cost should be imposed in granting the guarantee; (g) die total amount of guarantees available should be not less than the amount of investment funds potentially available; (h) full publicity should be given to the facilities offered to gain wider use, and (i) administration should be simple so as not to drive off applicants. These suggestions obviously went beyond what the Administration or Ckaigress considered was practical. 7 In addition, in mid-year the United States occupation authorities in Germany agreed to some relaxation on the previously imposed embargo on foreign investments in that country. Earlier the U.S. Assistant High Commissioner for Germany in effect told a group of investment bankers in New Yoik that a duty to lend to Germany existed. (For the text of his interesting remarks see Commercial and Financial Chronicle, May 18, 1950, pp. Sff.) 8 Unilateral action in the form of relaxing restrictions on foreign investment was taken during the year by Turkey, Israel, Ethiopia, India, Iran and Panama. (See, e.g., Goldberg, S., "Turkey He-orients Polky toward Foreign Capital,'* Department of Commerce, Foreign Commerce Weekly, Washington, D.C., July 3, 1950, p. 3, and "The Law for Encouragement of Capital Investments," lsraei Economic BiAletin, Ministry of Trade ana Industry, Hakirya, May 19, 1950, p. 7, and International Monetary Fund, International Financial News Survey, Washington, D.C., September 29, 1950, p. 104.)

II.

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FOUR

PROGRAM

ment interference. Thus, their coverage does not extend to many of the present problems, and they do not meet many of the requirements designated in the 1950 Act for International Development. The State Department since the war has been attempting to negotiate new treaties with many countries,9 designed, among other things, to assure potential investors that they would receive non-discriminatory treatment, that they would receive prompt and adequate compensation for any project expropriated, and that they would be given reasonable opportunity to manage their property and to withdraw both earnings and capital.1 Progress has been slow, however, in part because of mistrust of foreign enterprises in some countries, in part because the treaties run counter to the trend in some countries toward economic nationalization, in part because the U.S. Government can give no assurance that private capital will follow the treaties, and in part because foreign countries see little point in negotiating treaties since the United States as a matter of course gives what is generally regarded as good treatment to foreign investors and businessmen. New treaties were signed with China and Italy in 1948 and with Ireland and Uruguay in 1949.2 The latter two were ratified by the Senate in 1950. During the year it was officially reported that twenty more treaties were under active consideration or varying stages of negotiation, and while none were signed in 1950 it was anticipated that four or five at least would be agreed to in 1951. The treaties in force at the end of 1950 are shown in Table 10. During debate on aid programs, Congress discussed at length the question of whether the United States should employ its loans and grants as bargaining weapons in treaty negotiations. Some members of Congress indicated that they thought it would be desirable to write into the legislation concerning Point Four and other foreign assistance programs that no funds could be used until treaties providing a favorable climate for private investment were 9 Multilateral attempts to create a favorable climate for foreign investment were made in the ITO Charter. These were generally regarded as unsatisfactory by potential United States investors, and, in any case, the State Department decided in late 1950 not to resubmit the ITO Charter to Congress for ratification. 1 For a recent official statement of most of the problems covered here, see Setser, V. G., "Treaties to Aid American Business Abroad," Department of Commerce, Foreign Commerce Weekly, Washington, D.C., September 11, 1950, pp. 3ff. 2 See Survey—1949, pp. 87-88, for a brief discussion of these postwar treaties and the special arrangements with the Philippine Republic.

II. POINT FOUR PROGRAM TABLE 10

Calendar of Treaties of Friendship, Commerce and Navigation, as of December Sl, 1950 Country Argentina Austria Belgium Bolivia Borneo China Colombia Costa Rica Denmark® El Salvador Estonia Finland Germany6 Honduras Hungary0 Ireland Italy Latvia Liberia Morocco Muscat (& Zanzibar) Norway Paraguay Poland Spain Switzerland Thailand United Kingdom Uruguay Yugoslavia

Signed July June Mar. May June Nov. Dec. July Apr. Feb. Dec. Feb. Dec. Dec. June Jan. Feb. Apr. Aug. Sept. Sept. June Feb. June J«iy Nov. Nov.* July Nov. Oct.

27, 1853 19, 1928 8, 1875 13, 1858 23, 1850 4, 1946 16, 1846 10, 1851 26, 1826 22, 1926 23, 1925 13, 1934 8, 1923 7, 1927 24, 1925 21, 1950 2, 1948 20, 1928 8, 1938 16, 1836 21, 1833 5, 1928 4, 1859 15, 1931 3, 1902 25, 1850 13, 1937 3, 1815 23, 1949 14, 1881

Effective Date Dec. May June Nov. JulY Nov. June May Aug. Sept. May Aug. Oct. July Oct. Sept. July Juiy Nov. Jan. Sept. Sept. Mar. July Apr. Nov. Oct. July

20, 1854 27, 1931 11. 1875 9, 1862 11, 1853 30, 1948 10, 1848 26, 1852 10, 1826 5, 1930 22, 1926 9, 1934 14, 1925 19, 1928 4, 1926 14, 1950 26, 1949 25, 1928 21, 1939 28, 1837 30, 1835 13, 1932 7, 1860 9, 1933 14, 1903 8, 1855 1, 1938 3, 1815 d Nov. 15, 1882

a) Abrogated April 5, 1856 but revived January 12, 1858. b) With respect to the effect of war on the operation of the provisions of this treaty and of treaties in general, see the decision of the U.S. Supreme Court in Clark v. Allen, 331 U.S. 503, and the cases cited therein. c) Maintained in force by notification given to the Hungarian Government on March 9, 1948 in accordance with Article 10 of the Treaty of Peace with Hungary. d) Ratified by the U.S. Senate on August 9, 1950 but as of January 1951 not ratified by the Uruguayan General Assembly. Source: Department of State, OfiBce of Public AfiEairs, "Commercial Treaties and U.S. Economic Foreign Policy," Washington, D.C., 1950. Note: In addition to the treaties listed above, there were also in force less comprehensive treaties relating to commerce and general economic relations with the following countries: Ethiopia (1914), France (1822), Greece (1936), Iraq (1938), Netherlands (1852), and Turkey (1929, 1931).

II.

POINT FOUR PROGRAM

completed. The Administration, however, has not seen fit to so condition the granting of assistance. The State Department has argued that, since the purpose of the treaties is to achieve the adoption of principles, they are not a "fit subject matter for barter, purchase, and sale" and that, if belief in the principles does not exist, obtaining acquiescence to them by exerting such pressure could not be expected to result in wholehearted cooperation, meaning that, if accepted under duress, they would be circumvented. It has also stated that legislation making treaties mandatory would run counter to the operation and jurisdiction of some foreign federal governments which are unable to so bind their segments; it would make relations more difficult with a coimtry which may be progressing fairly rapidly towards those principles but should not be pushed; and it might prevent any negotiations with a country which does not want a treaty because of a "most-favored-nation" clause it may have with a third country. ( 2 ) Tax reforms and conventions The President, in his 1950 tax message to Congress, recommended that, in order to stimulate the flow of private investment abroad, steps be taken to postpone the United States tax on corporate income earned abroad until it is brought home, ". . . to extend and generalize the present credit for taxes paid abroad, and to liberalize the foreign residence requirements for exemption of income earned abroad."8 Congress took no action on these suggestions during the year, presumably because of the pressure of other work rather than lack of sympathy with the proposals. In view of their frequent demands for such tax reform, the business community gave surprisingly little support to the proposals. Another device designed in part to encourage private foreign investment and in part to prevent fiscal evasion is the tax convention to remove double taxation by allowing a credit against the United States tax for a tax paid to a foreign country. In many cases two conventions are involved, one relating to taxes on incomes and one to taxes on estates and inheritances. During 1950 the Executive Branch continued its efforts to revise or negotiate sNew York Times, January 24, 1950. See ako the New York Times, January 21, 1950 for a National Advisory Council report on the specific changes it thought de-

II. POINT FOUH FBOGfiAM

such conventions. On February 20 two conventions were signed with Greece following discussions which had taken place mostly in 1948. On June 12 supplemental tax conventions were signed with Canada, and on July 14 a supplemental tax convention was signed with the Union of South Africa. Negotiations were reported to have reached an advanced stage during the year with Colombia, TABLE 11 Calendar of Tax Conventions, as of December 31, 19S0 Country

Signed

Conventions relating to taxes on income: Sweden Mar. France (2d treaty) July Supplemental Oct. Canada Mar. Supplemental June United Kingdom Apr. Netherlands Apr. Denmark May Union of Soutih Africa Dec. Supplemental July New Zealand Mar. Belgitun Oct. Norway June Ireland Sept. Greece Feb.

23, 25, 18, 4, 12, 16, 29, β, 13, 14, 16, 28, 13, 13, 20,

1939 1939 1946 1942 1950 1945 1948 1948 1946 1950 1948 1948 1949 1949 1950

Conventions relating to taxes on estates and inheritances: Canada June 8, 1944 Supplemental June 12, 1950 United Kingdom Apr. 16, 1945 France Oct. 18, 1946 Union of South Africa Apr. 10, 1947 Supplemental July 14, 1950 Norway June 13, 1949 Ireland Sept. 13, 1949 Greece Feb. 20, 1950

Effective Date

Jan. Jan. Jan. Jan. Jan. Jan. Jan.

1. 1, 1, 1, a 1, 1, 1, a a a a a a a

1940 1945 1950 1941 1945 1947 1948

June 14, 1941 a July 25, 1946 Oct. 17, 1942 a a a a a

a) Not yet ratified by the United States. Source: U.S. Treasury Department. Note: The effective date of some treaties was set so as to put the treaty retro actively in force. For example, the treaty with Canada on estate and inheritance taxes states in Article XIV.2 that "This Convention shall be deemed to have come into effect on the fourteenth day of June, 1941." (Department of State, Treaty Series 989, Washington, 1945.) It was not proclaimed until March 6, 1945.

II.

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PROGRAM

Uruguay, Switzerland, Israel, and Finland; and the Treasury Department was exploring the possibility of conventions with Argen­ tina, Brazil, Cuba, Italy, Luxembourg, Mexico, Venezuela, and the Philippines. The Senate, however, was exceedingly slow in approving tax conventions. Its last action was approval in 1948 of the conventions with France. It took no action during 1949 and 1950, with the result, as Table 11 shows, that less than half the conventions signed by the Executive Branch were in effect as of the end of 1950. Again, the business community has shown relatively little interest in obtaining ratification of these conventions. C. MAJOR POLICY ISSUES AND EXPANSION OF THE POINT FOUR PROGRAM Expressions by the State Department At the end of 1950, the State Department reported that the CongressionaIly approved Point Four Program, which was just getting under way, was confronted by several major policy "dilemmas" which, it anticipated, would usually be resolved on a caseby-case basis. The existence of an "Imperialist Dilemma," arising out of antagonism in many recipient countries to any foreign supervision and the desire of the United States to play an active role—even to assisting in public administration—in order to prevent the aid from being "dissipated," was seen by the State Department as an unavoidable source of friction and a danger to pacific public relations, but it believed the program constituted no threat to the sovereignty of a receiving country. The "Timing Dilemma" was regarded as more serious.}This was seen as developing out of the need for haste in improving living standards, so as to arouse the hopes and capture the imaginations of the people of the area, while the use of resources to increase consumption would retard capital formation and lengthen the whole process of economic development. A "Trade Policy Dilemma" was also recognized as a major policy problem. It grows out of the urge in many recipient nations to become more self-sufficient industrially, bringing with it demands for protection, which conflict with United 4Thorp, W., "Basic Policy Issues in Economic Development," Department of State Bulletin, January 15, 1951, pp. 94-99.

II.

POINT

FOUR

PROGRAM

States policy of fostering lower barriers and non-discriminatory multilateral trade. Two other "dilemmas" cited were of greater immediate importance, for they contained elements promising to change the method of financing, the immediate objectives, and the size of die program.'The "Private Enterprise Dilemma" was characterized as a clash between the United States desire to promote private enterprise abroad and more opportunity for its citizens and the wariness of private enterprise on the part of many underdeveloped countries due to past exploitation. In discussing this problem, Assistant Secretary of State Thorp reported that, while official American policy was one of strongly supporting and encouraging a greater role for private American capital abroad on a freeenterprise basis, private enterprise simply was not "doing the job." The implication was clear that official contributions might be much larger than had been planned when the program was first submitted to Congress. The "Allocation of Resources Dilemma" was regarded as particularly urgent. This was seen as stemming from the current rearmament effort which requires decisions as to the allocation of resources between long-term economic development and immediate military production—not only in the United States but also in the recipient countries. The United States has no choice, the Department said, but to create a military power which Russia will not dare to confront. Mr. Thorp stated that while this means it will be difficult for the United States to supply the resources needed by the underdeveloped countries, the threat of war increases the need for many economic development projects abroad, both to expand the supply of strategic materials6 and "to create situations of political and economic strength in are£s whose weakness may otherwise invite aggression, direct and indirect." The significance of this, as supported by other official statements,7 5 The question was not raised in discussing this point as to whether such develop­ ment projects are the type now desired abroad or appropriate in a post-crisis period and, even if so, whether they will even be acceptable unless assurances are given that American export controls will permit the dollars received from the subsequent export of materials to be used to purchase goods in the United States. 6 op,cit., p. 99. There were no public official statements as to the priorities be­ tween these two objectives if, as might occur, they were in conflict. 7 See Hayes, S. P. (Director, Program Planning and Advisory Staff, Technical Cooperation Administration), "Point 4 After Korea," Department of State ButteUn, February 5, 1951, pp. 225-228.

II.

POINT FOUR

PROGRAM

appears to be that the State Department was contemplating a greatly expanded program of aid to underdeveloped areas and that the fostered development was to be closely integrated with efforts to increase the military strength of the United States. Views of the Gray Report In its November Report,8 the Gray group, charged by the President in March with studying and making recommendations as to future American foreign economic policy, urged an expansion of the United States program of assistance to underdeveloped areas, the provision of large amounts of Government gifts and loans, and the use of the program to develop additional sources of critical raw materials. It considered this action a necessary means of gaining the United States objectives of strengthening the free world against Communism and of continuing to lay the groundwork for international trade and financial relationships which will promote progress on a self-supporting basis. The Report recognized that there were limitations on the ability of these areas to absorb foreign capital assistance, whether in the form of gifts or loans.9 Nevertheless, it urged an acceleration and expansion of the program because "There is no reason to believe that the obstacles to development cannot be gradually overcome." The fact that grants or loans cannot by themselves rapidly break down deeply rooted barriers to political and economic progress only means that United States aid must be channeled to those areas where effective use of this assistance can be expected." The program of United States assistance envisaged included reliance on private investment. But it was recognized that there Report to the President on Foreign Economic Policies, Washington, D.C., No­ vember 10, 1950. 9 It stated that financial and credit institutions to handle aid were often lacking. Further, in many cases there were, due to the existing poverty, acute shortages of local capital needed to supplement the outside aid. The ability to absorb capital effectively was often limited "by the inertia of custom and tradition . . . a lack of enterprise and willingness to take risks . . . by lack of sufficient experienced technical, administrative and managerial personnel, and in many cases by Iadk of concrete and technically and economically sound plans for use of capital." Political and social problems (e.g., the indifference or opposition of dominant or governing groups) might in some areas be more resistant to solution than economic obstacles. There was also sometimes a fear of foreign intervention, and this constituted "one important reason why increasing reliance should be placed upon international agencies." (ibid., pp. 57, 58.) 8

II. P O I N T POUB F B O C B A M

were at the moment important limitations on a large movement of private capital. ® The Report stated, however, that "The United States Government can and should take action to overcome these obstacles. It should press the negotiation of investment treaties, which can be important devices for formalizing and regularizing the status of the foreign investor. In addition, the pending proposal to authorize Government guarantees against the risks of nonconvertibility and expropriation is a worthwhile experiment. Further, the provision of technical assistance, especially assistance of a survey character, may reveal hitherto unknown resources and opportunities. The Government should treat foreign investments no less favorably than domestic investment. Further study should be given to the desirability and possibility of promoting private investment through tax incentives, in areas where economic development will promote mutual interests, but where political uncertainty now handicaps United States private investment."3 Taking into account the present deterrents to private investment, the Gray group estimated that net private foreign investment in the next few years would at most only equal from $500 to $800 million per year and of this only a small amount would be in areas outside the Western Hemisphere in properties other than oil. It therefore concluded that the program of assistance must be heavily implemented by public funds, in the form of both loans and grants.4 The group stated that in the next few sCited were international tension, past unsatisfactory experience with foreign lending, "expressed unfriendly attitudes of other governments toward foreign capi­ tal, political instability, fear of government control, or expropriation; and economic difficulties, particularly those resulting in exchange restrictions.*' (ibid., p. 61.) β ibid., p. 62. 4The United States was invited to participate with loans or grants in the Co­ lombo Plan of the British Commonwealth for economic development in South and Southeast Asia. The original Plan called for investment of the eqmvalent of £1,868 million, of which £1,084 million was to come from foreign sources (pri­ vate, gpveniment and international organizations), £246 million from release of sterling balances, and £839 million from other sources. (See The Economist, De­ cember 2,1950, ppi. 928-929, 951-952; The Banker, Januaty 1951, pp. 20-26; and Cair-Gregg, John R. E., "The Colombo Plan," InternaHontd Conciliation, Carnegie Endowment for International Peace, New York, N.Y., January 1951, No. 467.) The United States representative at the February 1951 conference of the Con­ sultative Comxnittee on the Colombo Plan was informally presented with requests for $2 billion in assistance; he replied that Point Four and EGA. technical assistance was already forthcoming and that any additional loans would be under bilateral agreement only and not through some central agency representing the area's in­ terests. Secretary Acheson said in Februaiy 1951 that, though the United States

II. POINT FOUR PROGRAM

years the IBRD and the EIB together "should seek an annual net flow of investment funds in the range of 600 to 800 million dollars a year."5 While it was hoped the International Bank would play the primary role, with many of the dollars coming from sources other than the U.S. Treasury, the Report concluded that there would be scope for annual net lending by the EIB of from 200 to 400 million dollars a year. It therefore suggested that the approval of Congress be sought for expanding the lending authority of the EIB by $1.5 billion. The Report emphasized that loans should not be tied to purchases in the United States, for this practice was ". . . inconsistent with the need to achieve optimum use of the resources of the free world and with our objective of a multilateral, nondiscriminatory international trading system."8 Further, loans should be permitted to meet other than direct foreign costs of new development projects since such projects may divert resources and materials from other production and even away from exports, thus reducing foreign exchange earnings and/or increasing the need for imports to maintain consumption levels. With respect to grants, the Report suggested that the United States expend annually up to $500 million for several years, tapering off as progress was made. It stated that, in deciding whether aid should be in the form of grants or loans, "a basic question . . . is whether the need to repay external capital assistance would slow up a country's development below a rate which the common interests of the free nations require."7 Although their statement is not clear,8 it appears that the Gray group also believed that the extension of aid in the form of grants rather than loans would permit the United States to attach conditions—such as a matching of funds by the recipient government and its taking certain steps to make the aid effective—which would increase productivity by "considerably more than would result merely" from the amount was sympathetic to the Plan, it would assist its ends only to the extent of carrying out its own program of technical assistance and development in Southeast Asia. ( N e w Y o r k T i m e s , February 22, 1951.) B op.cit., p.- 65. β op.cit., p. 71. 7 Tlie use of loans was supported in the Report by the statement that "The servic­ ing of development loans will generally not cause trouble in the future if we achieve the goals of an expanding free world economy, and the reasonable flow of such in­ vestment that this expanding economy requires." (ibid., pp. 63-64.) 8 See ibid., p. 67.

II.

POINT

FOUR PROGRAM

of foreign assistance involved. Grant aid of this character was thought to be especially useful in connection with agricultural development in Asia.

Recommendations of the Council of Economic Advisers Jtrhe Council of Economic Advisers also urged a larger Point Four Program, which it believed would serve to keep many areas free from Communist domination and so contribute to United States security.| It also recommended that greater attention be put on increased production of scarce materials and on projects which would produce results quickly! While believing that private investment could make important contributions and that it was desirable to continue to negotiate investment treaties and to enact legislation authorizing investment guarantees, the Council stated that much of the burden for the necessary lending would fall on the Government, and so it recommended that the lending authority of the Export-Import Bank be increased by one billion dollars. In his various reports to Congress early in 1951, the President stated that the program was "vitally important" and indicated that additional funds would be requested. Except for asking that die Export-Import Bank's lending authority be increased by one billion dollars, however, he gave no indication of how large a program was anticipated, saying only that later he would present detailed recommendations on all international economic programs. The policy statements of the other officials cited above pointed to the probability that the Administration was no longer going to concentrate its foreign aid program almost exclusively in Western Europe and the occupied areas, that the program of Point Four assistance would be much larger than as originally presented to Congress, that the major source of funds would be the Government and not private investors, and that in the immediate future at least it would be directed toward strengthening the military defenses of the West. 9Council of Economic Advisers, The Annual Economic Review, Washington, D.C., January 1951, pp. 121-122.

Ill · LOANS AND INVESTMENTS INTRODUCTION DUBING 1950, the more important United States policies and controversies with reference to international investment did not arise from official foreign lending, which totalled a net of only $159 million, but rather in connection with the Point Four Program and attempts to create a favorable climate abroad for private investment, discussed in the preceding chapter, and with proposed changes in the scope and operations of the International Bank and Fund, discussed in Chapter IV. While total net United States long- and short-term investments (government and private) during 1950 were preliminarily estimated at only slightly below those recorded in 1949 and represented a slightly higher percentage of American current-account exports, the net outflow of Government credits was only about one-fourth as large as during the previous year and was the smallest of any post-World War II year, as shown in Table 12. Despite the increasing international political and military tensions, net private capital outflows, on the other hand, were greater than in any postwar year, but the volume was still not equal to what the Administration regarded as adequate—as to amount, purposes, and distibution—to meet the broad Point Four objectives. A. UNITED STATES GOVERNMENT LOANS AND CREDITS Having concluded in mid-1947 that most foreign countries would have serious difficulties in the foreseeable future in financing dollar imports, let alone servicing dollar debts, and that any large increase in Government loans would prejudice the ability of many foreign countries to attract private capital, the U.S. Government continued during 1950 the policy of extending most official foreign aid on a grant rather than on a loan basis. Gross Government long-term loans in 1950 totalled only $451 million, while principal and interest collections on previous loans reached

III. LOANS AND INVESTMENTS TABLE 12 Net United States Capital Outflow, 1946-1950a (millions of dollars) Total as Per­ centages of Exports of Goodsand Services8 Total 1946 1947 1948 1949 1950P

21 23 11 8 9

3361° 7956°·« 1884« 1279« 1249«

Government Long-term. Short-term 3262c 6849® 999 470 125e

-250 108 - 92 173 34

Private Long-term Short-term 59 810« 761« 800« 950«

310 189 116 -164 140

p. Preliminary a) Excludes Government grants, unilateral transfers, and private remittances. b) In calculating these percentages, subscriptions to the International Bank and Fund and net purchases of Bank debentures by private sources (notes c and d) have been excluded. c) Includes subscriptions to International Bank and Fund of $323 million in 1946 and $3062 million in 1947. d) Includes net purchases of debentures sold or guaranteed by tie International Bank of $243 million in 1947, $7 million in 1948, $20 million in 1949, and $1 million in 1950. e) The discrepancy of $4 million between this figure and that of $129 million calculated from Table 15 below is due mostly to rounding. It should be noted, however, that the Department of Commerce includes in the latter but excludes from the above data the $35 million Philippine refunding operation and the $7 million credits by and $41 million repayments to commercial banks on loans made at the risk of the EIB. Also, the above table includes $7 million of miscellaneous loans and $8 million of repayments (consisting of U.S. Government—RFC—investment in abaca plantations and the returns from the sale of the product), iWhich are not included in Table 15 below. These differences account for $2 million of the discrepancy. Source: Department of Commerce, Suroey of Current Business, Washington, D.C., June 1950, pp. 11-18, and March 1951, pp. 9, 11.

$322 million and $109 million respectively. If one excludes that portion of ECA aid which was extended on a loan rather than a grant basis as required by law and the funding of short-term advances made to the Philippines in 1948, principal and interest collections by the U.S. Government on long-term debt exceeded capital outflow by $166 million. Governmental short-term capital movements were small during the year. 3L2S

III.

LOANS AND INVESTMENTS

Long-Term Net long-term public loans and credits utilized during 19¾) accounted for only slightly more than 3 percent of total net foreign aid extended by the U.S. Government, as compared with some 8 percent in 1949 and nearly 50 percent during the first three postwar years. The bulk of the loans were extended by tibie ExportImport Bank under its regular program and as agent for ECA in extending ilxat part of ECA's assistance which Congress specified was to be on a credit rather than a grant basis. The rest represented utilizations of the loan to help finance the XJN headquarters in New York, credits to Japan by the Defense Department for purchases of raw cotton, a funding of previous advances to the Philippine Government, and a winding up of the Lend-Lease program. a. EXPORT-IMPORT BANK TRANSACTIONS

The Export-Import Bank of Washington during 1950 authorized loans in a volume more than double those of 1949, although net disbursements were practically the same. The majority of its commitments were for the economic development of backward areas, in line with the Point Four Program. In keeping with wellestablished policy, the loans were to be spent in the United States. In February, the EIB authorized a $100 million credit to Indonesia; the United States was especially interested in restoring production of rubber, tin, palm oil, sisal, and other strategic commodities produced by the newly independent nation. It opened a credit for Yugoslavia of $20 million, which was originally intended for the importation of capital equipment, machinery, materials and spare parts to maintain its development programs, but which subsequently was used in part for urgently needed food because of the droughts Saudi Arabia received in August a $15 million credit to finance development projects, and Iran a $25 million credit for development of agriculture, highways, and electric power. A $35 million loan was committed to Israel for agricultural development to finance purchases of equipment, materials, and services. Finally, a $150 million line of credit was established in favor of Mexico to assist in specific development projects in 1 See

Chapter 1, Sec. C, supra.

III. LOANS AND INVESTMENTS TABLE 13

Export-Import Bank Operations, 1934-1950» (millions of dollars)

Loans DisAwthoriza- bursed by New Hons Ex- EIB ir Its Credits Aupired or Agent thorized Cancelled Banks By Area—1950

Principal Collected by EIB itIts Agent Banks

Interest and Commissions Collected

Amounts Outstanding Dec. 31

0 35.0 340.8 75.2 114.7

β 0 4.5 0 30.0

26.5 41.0 74.0 42.4 10.5

89.5 8.0 46.0 1.0 15.5

45.8 4.1 12.9 1.0 0.4

1574.8 174.7 362.5 63.6 36.9

0.1 565.8

2.5 37.0

5.6 199.9

0.1 160.0

0.2 64.4

6.9 2219.5

241.0 138.3 614.1 1211.0 2308.5

19.4 325.9 23.5 122.7 438.3

184.8 428.9 824.5 1036.5 555.8

143.7 261.1 95.5 40.1 310.5

60.9 57.3

2179.6 2138.5 1970.7 1241.7 245.3

Cumulative Total, 5078.7 Dec. 31,1950

966.8

3230.4

1010.9

268.4

ERP Europeb

OtherEuropec Latin America Middle Easta FarEaste Other and Un­ allocated* 1950 Total By Period

1949 1948 1947 1946

1934-1945

85.8

* Less than $50,000. a) Figures on outstanding loans during 1949 and 1950 exclude $7 million of loans through the participation of another agency. The data include operations through commercial banks at EIB risk; these banks during 1950 disbursed $7 million, collected $41 million of principal, and had loans outstanding at year end of $66 million; interest retained by these banks is not included. In official statistics on U.S. Govenxment aid, these loans are usually considered as governmental, but in balance of payments statistics they are included with private capital movements. Thus, Table 12 above counts them as "private" capital and Table 15 below counts them as Government capital. b) Austria, Belgium, Denmark, France, Greece, Italy, Netherlands, Norway, Sweden, and Turkey. c) Finland, Poland, Yugoslavia. d) Egypt, Iran, Iraq, Israel, Saudi Arabia. e) China, Japan, Philippines, Indonesia. f) Canada, Ethiopia, Liberia, Portuguese West Africa. Sources: Compiled from Export-Import Bank of Washington, Tenth and Eleventh Semi-Annual Report to Congress, 1950 and 1951, and from Department of Congress, "Foreign Aid," Foreign Transactions of the V.S. Government, Washington, D.C., March 1951, App. Tables 11-13.

III. LOANS AND INVESTMENTS

transportation (rail and highway), agriculture, communications, and electric power. The EIB granted several smaller loans to individual foreign business enterprises, some of them for production of strategic materials—as, for example, the loan of $20.8 million to a company in Peru for production of zinc. An unusual "commercial" loan was that of $125 million to a consortium of Argentine banks for the liquidation of unpaid Argentine commercial credits, designed to allow the resumption of normal commercial relations between the two countries and to provide a basis for restoration of Argentina's credit standing. This loan came in for widespread criticism, largely on political grounds. It was unofficially reported that objections were heard in the National Advisory Council (NAC) from ECA, Commerce, Treasury, and even the EIB itself, on the bases that the United States should not "help a tyrannical regime whose treatment of its own citizens was as notorious as its perennial sabotaging of U.S. hemispheric policy," nor tax U.S. citizens to bail out investors caught in Argentina's acute dollar shortage.2 The State Department justified the loan on the political basis of aiding even doubtful friends in a cold war, especially when United States allies needed Argentine foodstuffs and the United States itself needed hemispheric solidarity.8 The Administration also justified the loan economically on the basis of raising agricultural productivity so as to lower the cost of Argentine foodstuffs to Europe. Total operations of the EIB during the year, and from its inception, are summarized in Table 13. The President, in his 1951 Budget Message, following the recommendations of the Gray Report, the Council of Economic Advisers, and the EIB Board of Directors, proposed to Congress that the lending authority of the Bank be increased by $1 billion on the ground that the "increased undertakings to expand output of defense materials adds to the importance of the functions of the Export-Import Bank at this time." b. ECA LOANS

Overriding Administration objections, Congress in the 1949 2

Fortune, August 1950, p. 60. Department of State Bulletin, May 22, 1950, pp. 800-803.

8 See

III. LOANS AND INVESTMENTS

Economic Cooperation Act specified that $150 million of the authorized aid for fiscal 1950 should be extended on a credit basis (compared with $1 billion in the 1948 Act4). The EIB acts as ECA's agent in extending these loans, but the countries to receive them and the terms, which have been very lenient,® are determined by ECA after consultation with NAC. None of these $150 million were allocated during calendar 1949, but during 1950, $143.8 million were apportioned, raising the total to $1116 million, of which $61 million remained imutilized. Actual utilizations of these ECA loans during the year totalled $151 million, as shown in Table 14. In providing funds for ECA's third year (1950-1951), Congress in the main respected the Administration's wishes that the administrator be given discretion to extend assistance either on a grant or a loan basis. (A special loan of $62.5 million to Spain was authorized in the appropriation act.) In the hearings, ECA spokesmen stated that if they were given this discretion it was probable that "only a very small" amount of the aid would be in the form of loans. Through the end of calendar year 1950 none of the 1950-1951 assistance had been extended on a credit basis. In addition to its aid extended on a credit basis to European metropolitan countries, ECA began in 1949 to make advances of both dollars (out of a "special reserve fund") and 5 percent counterpart funds in connection with contracts for the exploration and development of strategic material resources in certain European countries and their overseas territories. These advances are regarded as loans to be repaid in strategic and critical materials whose production they facilitate. During 1950, approximately $12 million ($5 million in ECA dollars and $7 million in 5 percent counterpart funds) were advanced, compared with less than $1 million in 1949. This loan program was being accelerated by ECA after the outbreak of war in Korea, but its commitments for such purposes at the end of 1950 were only $20 million in ECA dollars and $22 million in 5 percent counterpart funds. * Of which $27.7 million were later set aside by ECA for investment guarantees. See Survey—1949, pp. 10-11, for a summary of the Administration's objections to extending ECA aid on a loan basis. 6 See Survey—1949, p. 91, for a brief review of these terms.

III.

LOANS

AND INVESTMENTS TABLE 14

ECA Loans to Europe and Dependencies, 1948-1950 (millions of dollars) Country Aid to Europe on a Credit United Kingdom France Netherlands Ireland Italy Turkey Norway Belgium-Luxembourg Denmark Portugal Sweden Indonesia Iceland Sub-totalb

A.

1948 Basis 232.5 127.5 47.7 37.5 11.8 17.3 —

____

Utilizations0· 1949 1950

80.5 44.5 83.0 63.9 29.5 22.8 23.2 50.9 13.7

1.9 476.3

____ 15.0 0.4 427.3

B. Strategic Material Project Loans French Morocco 0 0 Jamaica Italy 0 French Equatorial Africa 0 Belgian Congo 0 Portugal 0 Turkey 0 Southern Rhodesia 0 Sub-totalc δ Grand Total 476.3

0.7 0 0 0 0 0 0 0 ~07 428.0

23.9 __ 2.8 54.8 6.0 31.3

Total

9.8 20.4 2.2 0.2 151.4

336.9 172.0 133.5 118.7 73.0 54.1 35.0 50.9 31.0 9.8 20.4 17.2 2.5 1055.0

4.1 4.6 1.5 0.9 0.4 0.3 0.2

4.8 4.6 1.5 0.9 0.4 0.3 0.2

Ιϋδ 163.4

12.8 1067.8

«

«

° Less than $50,000. a) $61 million of allotments remained unutilized at the end of 1950: Turkey, $20 million; France, $10 million; Ireland, $10 million; Portugal, $18 million; Belgium-Luxembourg, $2 million; and Iceland, $1 million. b) Data given by the EIB on its disbursements of loans under ECA allotments differ from the above data because ECA frequently extended assistance on an indeterminate basis and subsequently classified it as a "credit." In such cases, the EIB makes its disbursements at the time of classification rather than when the aid was actually utilized, which is the basis for Department of Commerce data given above. c) Of this, $7.2 million were in ECA 5 percent counterpart funds and the rest in ECA dollars. Source: Department of Commerce, "Foreign Aid," Foreign Transactions of the U.S. Government, Washington, D.C., March 1951, App. Table 11.

III. LOANS

AND INVESTMENTS

C. LEND-LEASE CREDITS

At the end of 1949 Lend-Lease settlements were still to be negotiated with Russia and China. No attempt was made during 1950 to settle the Chinese account, but the State Department in June and again in November renewed its request to Soviet Russia concerning the settlement of the account,® the return of 100 naval vessels, and compensation to six United States firms for use of patented processes. Finally, on January 15, 1951, nego­ tiations with Soviet Russia on settlement of these accounts were resumed in Washington. During the year some $3 million of previously established LendLease credits were recorded as "utilized'' (mostly by Latin American countries), principal repayments on outstanding credits amounted to $13 million, and interest collected to another $13 million. d. OTHER LOANS AND CREDITS

In November 1950 the Philippine Government funded $35 million of claims against it by the U.S. Government arising from advances made by the latter during 1948.7 No other new loans were authorized during the year, but disbursals under the 19481949 United Nations loan were $22 million. Only negligible amounts of surplus property credits were utilized, but principal amounts collected during the year (including Maritime Admin­ istration and GSA credits)8 equalled $43 million. Repayments β The Government asked Russia to pay $800 million for the reimbursable portion of wartime Lend -Lease but nothing for military supplies furnished during the war. The postwar Lend-Lease pipeline credit of $223 million extended to Russia in October 1945 was in arrears for $6 million of interest at year's end; principal repayments do not begin until 1954. 7 The United States had advanced funds to the Philippine Government to mfeet claims for pay arising from operations of the Philippine Army and guerrrilla forces during World War II. Tbe unexpended balance, $35 million, was to have reverted to the U.S. Treasury by the end of 1949, but in November 1950 an agreement was reached to permit repayment over ten years. 8 During the third quarter of 1950, the Maritime Administration declared the Nationalist Government of China to be in default of credits on thirty-three ships. Five vessels were recovered and the notes, amounting to $3.5 million, cancelled. Two vessels were lost and four had been taken by the Communists; the U.S. Government claimed reimbursal from the insurance companies concerned. On November 15, 1950, the Maritime Administration gave Nationalist China until February 15, 1951 to bring current all payments of principal and interest. China did so by selling four vessels in which their equity was larger than the unpaid balance of the

III.

LOANS AND

INVESTMENTS

under RFC credits amounted to $53 million ($52 million from Britain and $0.5 million from Canada). Japan repaid in full the $54 million of Defense Department credits extended to it, largely for the purchase of raw cotton in the United States, during the fifteen months ending Jime 30,1950. e. TOTAL LONG-TERM

Data on total long-term U.S. Government loans and credits by program and area are presented in Table 15. Except for World War I debts, payments in default or in arrears ninety days or more on all U.S. Government credits totalled $28 million on principal, and $11 million of interest, at year end. Short-Term U.S. Government short-term assets abroad increased by only $34 million during the year, all of which was accounted for by an accumulation of ECA counterpart funds available for use by the Government. An increase in the balance of ECA 5 percent counterpart funds of the equivalent of $74 million occurred during the year, but this was offset by Mexican repurchases of $37 million of pesos from the United States under their stabilization agreement. The remaining $3 million decrease in foreign shortterm assets of the U.S. Government were mostly from liquidation of currency holdings in the Far East. B. PRIVATE FOREIGN INVESTMENT

Despite the attempts of the U.S. Government to encourage a larger and more diversified outflow of private American capital (see Chapter II above), little success was recorded in removing the many obstacles to large private foreign investment (the threat of war—always a most potent deterrent—increased) with the result that total net private long-term investment during 1950 was still less than $1 billion. Long-Term

Preliminary data show that net private long-term foreign investment (excluding reinvested earnings for which data are not mortgages. {Department of Commerce, Survey of Current Business, Washington, D.C., March 19S1, p. 18.)

III.

LOANS

AND

INVESTMENTS

TABLE 15 Long-Term

Foreign

Loans and Credits of the United by Program and by Area, 1950 (millions of dollars)

Government,

Outstanding Indebtedness Dec. 31, 1950*

Principal Collected?

Interest bCommissions Collected°

119 41 0

64 — 0

2*161 66 1,068

54

*

0

0

0

44

0

0

. 35

0

0

0

3,750

1 2 0 * 0 0 0 0 451

6 7 0 24 18 0 53 1 322

0 13 0 20 7 0 5 * 109

54 1,232 291 983 175 20 110 17 10,006

186 24 5 5 28 124 41 73 42 76 32 451

171 57 22 35 23 34 9 82 1 57 3 322

78 3 47 7 10 11 11 5 1 13 • 109

8,305 4,798 2,037 417 356 696 530 543 107 420 102 10,006

Utilized* Bt Program A, Current and Active Programs Export-Import Bank: Direct® 193 Through agent banks 7 Economic Cooperation Administration* 163 Defease Department: Natural Fibers Revolving Fund 28 State Department: United Nations Building Loan 22 Treasury Department: Philippine Funding 35 B. Completed or Nearly Completed Programs Treasury Department: Special British Loan Lend-Lease Credits: Lend-Lease Current Credits Credit Offsets to Grants Lend-Lease Silver* Surplus Property Credits Maritime Administration Defense Department—China Reconstruction Finance Corporation General Services Administration Total By A r e a ERP Participants United Kingdom France and possessions Netherlands-Indonesia Italy Other Other Europe11 Far East1 Middle Eastf Latin America Other and Unallocated 6 Total

States

'Less than $500,000. a) "Utilized" means cash disbursements for loans and value of goods delivered under the (Notes continued on next page)

133

III.

LOANS

AND INVESTMENTS

available) totalled $950 million during 1950. This was the largest recorded since the war but a fourth of it represented portfolio investments, and direct investments were less than in 1949 and 1947, as is shown in Table 16. Gross portfolio capital outflows soared during the year to $691 million, more than double any other postwar year. The increase was more than accounted for by two extraordinary outflows. The Department of Commerce reported that speculative movements to Canada during the summer and fall accounted for $175 million of this total and that there was no significant repatriation of these funds after the Canadian dollar ceased to rise. In addition, a $225 million loan was given to France during the summer by a consortium of American banks, and France used most of the pro­ ceeds immediately to purchase U.S. Government securities. This unusual financial operation was undertaken to facilitate the French Government's borrowing francs from the Bank of France.8 various property credits, or principal amount of mortgages received or sales contracts, β billings. For ECA loans these data are "amount of aid extended on a credit basis" and differ from "disbursements" as reported by the EIB; this discrepancy apparently arises lie cause ECA frequently pays for and ships goods prior to determining whether they will be classified as "grants" or "credits." b) Principal collected represents the payments received and applied to the reduction of w| standing indebtedness. c) Interest and commission collected represents the payments actually received. d) Outstanding indebtedness represents utilizations from beginning of program through 1¾ less principal repayments. e) In "outstanding loans" is included a participation of $7 million by another agency. f) Utilizations include $12 million of advances on deficiency material projects, and "outstant ing" $13 million. g) Loans of silver bullion by the U.S. Government to be repaid in kind. h) Czechoslovakia, Finland, Hungary, Poland, USSR, and Yugoslavia. i) China, India, Philippines, Japan, Burma, Korea, and Thailand. j) Israel, Egypt, Iran, Iraq, Saudi Arabia, Lebanon. k) Australia, Canada, Ethiopia, Liberia, Jamaica, New Zealand, Union of South Africa, and United Nations. Source: Compiled from data given in Department of Commerce, Survey of Current BtwiMi Washington, D.C., March 1951, pp. 15-18; and from "Foreign Aid," Foreign TransaiM of the U.S. Government, Washington, D.C., March 1951, App. Tables 10-13. Notes: Because of revisions in official data, chiefly in surplus property credits outstandig figures for 1950 outstanding credits are not comparable with those for 1949, as given in Survey—1949, p. 99. Excluded from this table are short-term indebtedness to the U.S. Government and il extended on a basis which may or may not call for ultimate repayment. Aid rendered οι the latter basis is included in "grants" in the official statistics. 8

For details of this operation, see Journal of Commerce, August 18, 1950,

III.

LOANS

AND

INVESTMENTS

TABLE 16 Net Movements of Private Long-Term United States Capital, 1946-1950 (outflow ( + ), inflow (—); millions of dollars) Year

Total

Direct

Portfolio

1946 1947 1948 1949 1950P

+ 59 +810 +761 +800 +950

+183 +724 +643 +834 +718

-124 + 86 +116 - 34 +232

ρ) Preliminary Sources: Department of Commerce, Survey of Current Business, Washington, D.C., June 1950, p. 18, and March 1951, p. 11. It is to be noted that the data for the years 1946-1949 have been revised by the Department of Commerce and differ substantially from those given in Table XVI q£ our Survey—1949. Note: Portfolio investments consist of Ae holdings of miscellaneous foreign securities which do not involve any controlling interest by the American investor. Direct investments represent the extension of American business into foreign countries and consist largely of foreign branches and subsidiaries of United States companies. Included in the portfolio data are net purchases of debentures sold or guaranteed by the Internatioiial Bank of $243, $7, $20, and $1 million respectively in 1947, 1948, 1949, and 1950.

The outflow for portfolio securities was offset by inflows of $459 million, mostly for debt retirement and purchases of U.S. Govern­ ment securities, leaving the total estimated market value of the United States foreign investment in securities at around $4 bil­ lion.1 Detailed data on direct private foreign investment during 1950 are not available since there is a lag of over a year in processing the information. Preliminary estimates of net direct capital out­ flow in 1950 put the total at $718 million—a decline of about 14 percent as compared with 1949. For the first year since the end of the war, Canada displaced Latin America as the area receiving the largest flow.2 This reflected mainly a decline in oil investment in the latter and the expansion of oil fields in the former. The year also saw an increase in direct capital movements to the ERP countries, primarily in connection with an expansion of oil1Not included are portfolio investments of certain real property, estates and trusts which were estimated to total approximately $1.5 billion at the end of 1948. 2 See Pizer, S., and Cutler, F., "Private United States Direct Investment Abroad," Department of Commerce, Survey of Current Business, Washington, D.C., January 1951, pp. 20-23; this is the source of the information given here.

III.

LOANS

AND INVESTMENTS

refining facilities. As in the immediately preceding years, the bulk of such capital came from a relatively few companies out of retained earnings rather than from borrowing in the United States capital market. Data on reinvested earnings for 1950 are not yet available. Taking into account both new capital outflow and reinvested earnings of subsidiaries, the yearly additions to the value of direct foreign private investments increased steadily in the period 1946 through 1949, as shown in Table 17. These investments were concentrated in the Latin American Republics, Canada, and the Middle East. One half of the total increase since the war went into the petroleum industry (mostly new capital outflows) and nearly one-third into manufacturing (largely reinvested earnings), while total investment in public utilities—a favorite during the 1920 s— actually declined. TABLE 17 Net Additions to Private United States Direct Investments Abroad, 1946-1949 (millions of dollars) Area and Industry

1946

1947

1948

1949

Area·. Canada American Republics ERP countries ERP dependencies Other Europe All other countries Total

136 147 79 27 4 92 485

162 570 111 98 4 177 1122

300 489 143 105 -13 205 1229

283 578 106 58 17 216 1258

Industry·. Petroleum Manufacturinga Distribution Mining and Smelting Agricultureb Public Utilities Miscellaneous Total

231 183 69 -2 27 -80 57 485

588 317 78 47 40 -9 61 1122

619 401 101 26 47 12 23 1229

695 314 67 69 4 27 82 1258

a) Includes paper and pulp enterprises. b ) Includes fishing enterprises. Source: Department of Commerce, Survey of Current Business, Washington, D.C., January 1951, p. 22. Note: For important qualifications to this table, see Note to Table 18.

III.

LOANS AND

INVESTMENTS

At the end of 1949, the last year for which detailed information is available, outstanding direct private foreign investment stood at $12.5 billion,8 having been increased during 1949 by $1.3 billion, 0f which $0.5 billion were reported as reinvested earnings. The increase, the largest in any postwar year, reflected the development of a relatively small number of large-scale projects. Petroleum investment hit a postwar peak, amounting to about $700 million, of which over half went to the American Republics. Direct investment in foreign manufacturing enterprises dropped in 1949 to slightly over $300 million, compared with just over $400 million in 1948. An investment of nearly $70 million in mining enterprises in 1949 showed a flow of funds considerably larger than in previous years. Nearly all of this was in the Western Hemisphere for the initiation of projects which when completed, it was estimated, would increase by $1 billion the total investment in the mining and smelting industry of the area. This type of investment will probably be further stimulated by the search for new sources of raw materials to supply the accelerated program of rearmament. For the first four postwar years, the total increase in the value of American private direct investment abroad was $4.1 billion, but as Table 18 shows, only $2.4 bilhon of this was represented by net new capital outflows and the balance consisted of reinvested earnings of subsidiaries.4 Reinvested earnings have been large since the war in part because of the present and prospective profitableness of many of the foreign enterprises6 (especially in such areas as Canada which are regarded as politically and economically stable) and in part because of the blocking of earnings in some countries and the effect of high United States taxes on remitted earnings. The amount of total earnings reinvested in foreign enterprises would have been even larger than is shown in 8 The

estimated book value of American interests In foreign enterprises. , of subsidiaries are their undistributed profits. "Earnings" on foreign investments, as defined by the Department of Commerce, consist of these undistributed profits plus "income" on foreign investments, which includes distributed profits of subsidiaries plus branch profits, interest, and common and preferred dividends. Thus, the balance of payments records as current account in­ visible inflows the distributed and undistributed profits of branches but only the distributed profits of subsidiaries. 5 Ih 1949 the ratio of earnings to total American equity in foreign direct invest­ ment exceeded 14 percent. 4 "Reinvested earnings"

III. LOANS

AND INVESTMENTS

Table 18 if account were taken of that part of distributed income received from the foreign investments which was used for new capital investment. In fact, income receipts on direct investment in foreign branches and subsidiaries (excluding "reinvested earaTABLE 18

Factors Affecting Value of United States Private Direct Investments Abroad, 1946-1949 (reduction (—); millions of dollars)

Area and Industry

Value End of 1945

1946-1949 Capital Reinvested Movements Earnings

Other Factors

VaZwe End of 1949

Area·. Canada American Republics HRF countries ERP dependencies Other Europe All other countries Total

2527 2999 1689 264 329 561 8369

234 1249 147 155 20 557 2362

647 547 292 133 14 133 1766

2671 1538 1357 1064 671 518 550 8369

198 1762 -75 97 143 48 189 2362

1027 388 28 45 174 70 34 1766

—

-12 -22 -34

3408 4783 2128 552 341 1261 12462

idustry: Manufacturing" Petroleum Public utilities Mining and smelting Distribution Agriculture 1» Miscellaneous Total

-10

-17 - 3 - 2 - 2 C C

-34

388Θ 3671 1307 1204 986. 636 778 12462

a) Includes paper and pulp enterprises. b) Includes fishing enterprises. c) Less than $500,000. Note: Capital movements represent the net known new investments less liquidations. Reinvested earoings are the undistributed portion of the United States equity in the net earnings of foreign-incorporated subsidiaries. Other factors affecting the change in value include some allowances for losses on liquidation and from nationalized investments in Yugoslavia for which compensation has been paid. Value is the book value of the American equity in direct investments abroad and includes expropriated property for which compensation has not yet been received and properties in Germany and Japan. No allowance has been made for war damage or for fluctuations in foreign exchange rates, except that current transactions included in columns 2 and 3 above are converted at current exchange rates. Source: Department of Commerce, Survey of Current Business, Washington, D.C., January 1951, p. 22.

III.

LOANS AND

INVESTMENTS

iags," i.e. undistributed profits of subsidiaries) reached $1.1 billion in both 1948 and 1949 and was sufficient, in the aggregate, to finance the net capital outflow from parent companies in the United States. This relationship did not, of course, hold for each company. For example, only two of six petroleum companies, accounting for 60 percent of all capital outflows, had receipts greater than net capital outlays, but the entire group received during 1947-1949 only $100 million less than their net capital outlays of $1.3 billion. Short-Term Private short-term capital, in official statistics consisting of bank deposits held by United States banks for themselves or for customers,® flowed out of the United States during 1950 in a net amount of about $140 million. Most of this was reported as speculative to take advantage of anticipated currency revaluations: in Canada and the United Kingdom in the third quarter, and in Mexico in tibe fourth. Trade credits to Latin America increased slightly, along with an expansion of trade. eA short-term capital flight taking the form of a purchase of securities would be recorded by the Department of Commerce as a long-term "portfolio" capital movement since intent of the purchaser is not known.

IV · INTERNATIONAL FINANCIAL RESOURCES : THE BANK AND THE FUND THE United States plays ail active and important role in the

International Monetary Fund and the International Bank for Reconstruction and Development (IBRD).1 The Bank concentrated its activities in 1950 on aid to underdeveloped countries and thus supported the objectives of the Point Four Program. The Executive Branch of the U.S. Government continued to believe, as outlined in Chapter II above, that the bulk of the capital needed in developing countries should be provided from domestic sources and that most of the foreign assistance from public sources should be on a bilateral basis. Therefore, in the United Nations, Ae United States supported the Bank in its resistance to proposals for an expansion in its lending power, a liberalization of its lending criteria, and an assumption of responsibility for maintaining a stable flow of international investment. At the same time, American officials encouraged the other Bank members to make available, for lending by the Bank, larger amounts of their currencies. Loan authorizations and disbursements by the Bank were larger than in 1949, but net dollar disbursements totalled only $37 million during the year, one million dollars less than in 1949. Despite criticisms in many quarters that the International Monetary Fund was an impotent organization, the U.S. Administration supported its policies and successfully resisted attempts to have it 1 Membership changes in both the Bank and Fund during 1950 were as follows: Poland withdrew in March (Czechoslovakia remained), Paldstan was admitted in July, and Ceylon in August, bringing the total to forty-nine. Applications by Li­ beria and Haiti had been approved, but they did not sign during 1950. The Netherlands declared Indonesia no longer to be a territory on whose behalf it had signed, and so did the United Kingdom with respect to Newfoundland. Indonesia, Burma, Jordan, and Sweden had applied for membership as of February 1, 1951, but no action had been taken by the Boards of Governors. A Czechoslovaldan resolution during the Fifth Meeting of the Board of Gover­ nors of the Ftmd in Paris in September 1950 to oust Nationalist China was not approved.

IV.

INTERNATIONAL

FINANCIAL RESOURCES

assume automatic counter-cyclical responsibilities directed toward stabilizing the flow of international trade. United States officials expressed concern over the long-term character of the Fund's previous loans and urged a policy of conserving the Fund's resources for the time when their use might be more effective in achieving its original objectives. The Ftmd sold no currencies during 1950, and though repurchases by members of their currencies were small, they were larger than in any previous year. Exchange devaluations, which constituted an important issue in 1949, received relatively little attention in 1950. The Ftmd continued its efforts, with but moderate success, to obtain relaxations of exchange restrictions. A. INTERNATIONAL BANK Lending Policies and Operations While the U.S. Government expressed general satisfaction with the policies and operations of the International Bank,2 and most of its loans in 1950 went to underdeveloped areas, the September meeting of the Board of Governors and the various sessions of the UN Economic and Social Cotmcil brought increased demand from many countries that still greater technical and capital assistance be extended to backward areas.8 In reply, the Bank repeated that it was not because of lack of interest on its part or of funds that its loans had been no larger but that in many cases applications were rejected because they were not carefully prepared and the projects presented were not well planned. In this connection, the Bank considered that its careful investigation of individual projects had been fruitful in reducing costs, in finding substitute undertakings which were more helpful in advancing 2 See National Advisory Council, Second Special Report on the Operations and Policies of the International Monetary Fund and the International Bank for Recon­ struction and Development, Washington, D.C. (H. Doc. No. 611, 81st Cong., 2d Sess.), May 31, 1950, pp. 11-12. For other analyses of the policies of the Intemational Bank, see Organization for European Economic Cooperation, Report on International Investment, Paris, November 1950, and Sir Arthur Salter, 'Toreign Investment," Essays in Interna­ tional Finance No. 12, International Finance Section, Princeton University, Febru­ ary 1950. 8 Under pressure from the borrowing countries, the Bank reduced the commit­ ment rate charged on the undisbursed portion of loans from 1¾ percent to 3/4 per­ cent per annum.

IV.

INTERNATIONAL FINANCIAL

RESOURCES

development in the country concerned, and in familiarizing the borrowing countries with methods of investigating projects and the proper criteria to employ, so that they could apply the same standards as the Bank to investment programs financed out of their own resources. In acting on applications by many underdeveloped countries, the Bank said it was also often hampered by the absence of the financial and monetary stability requisite to the proper disbursal and repayment of a loan. The Bank's position as to remedial measures in these cases was to accept a half way house between prior adoption of all measures necessary for stability and a mere representation by the government that measures would be taken. The Bank reported that it required ". . . concrete evidence that the government is actually taking appropriate steps to establish stability, but, once given such evidence, it is usually willing to make a loan concurrently with the execution of the measures adopted."4 The existence of unsettled debts was also cause for hesitation on the part of the Bank because, in the absence of evidence of a willingness to reach a fair and equitable settlement, "the granting of a Bank loan might properly be regarded as, in the long rim, hindering rather than promoting the flow of international capital."® The Bank further stated that, if backward areas ". . . are effectively to translate external financial assistance into the concrete substance of development,"® they must not only maintain internal financial stability and carefully formulate their development programs so that investment expenditures are properly allocated among individual projects and are within the capacity of the country to absorb and repay, but they must also adopt means to achieve a fairer allocation of resources among the people, to increase their productivity, and to improve health, education, and public administration. In an attempt to provide a better basis for loans to backward areas and thus safeguard its resources, the Bank emphasized its program of technical assistance. Technical assistance has been a primary function of the Bank from the first, taking the form not only of suggesting modifications in applications for financial 4 International Bank for Reconstruction and Development, Fifth Annual Report, 1949-1950, Washington, D.C., September 1950, p. 13. 6 loc.ctt. 6 InternationsJ Bank for Reconstruction and Development, Proceedings, Fifth Annual Meeting of the Board of Governors, Paris, September 1950, p. 11.

IV. INTERNATIONAL FINANCIAL RESOURCES

assistance, but also of advising on management and marketing problems, of assisting in the reformation of domestic financial markets to increase the sources of domestic capital, and even, in some cases, of studying and of analyzing the political and social conditions. By the end of 1950, thirty-five of the forty-nine member countries had been visited in order to obtain first-hand information and/or to help develop programs for increasing their productive capacity.7 The U.S. Government placed strong emphasis on this aspect of the Bank's activities since it dovetailed with the Point Four Program. On the one hand, the United States Program would increase the number of carefully thought out projects which the Bank might consider for financing, and, on the other, the Bank itself could give valuable assistance to the UN expanded program of technical assistance.8 In reply to criticism that the Bank, by lending only for specific projects, had not devoted itself to broad enough development programs in certain countries, the Bank stated during 1950 that it "would prefer to go farther, wherever that is feasible, and base its financing on a national development program, provided that it is properly worked out in terms of the projects by which the objectives of the program are to be attained."8 The criteria for lending on such programs were set forth as follows: (a) "creditworthiness"—meaning not the repayment capacity of the project or program for which the loan was extended but rather the overall balance-of-payments position of the member which must show ian ability to repay the currency involved; (b) 'economic meritsrelating not to the self-liquidating character of the projects . (in foreign exchange or even in local currency) but rather to the direct or indirect benefits, the latter often being the most important. Excluded from the criteria was any question of "profitability" of the individual projects.1 Many countries, but not tie United States, during the year In view of the scope of some of these reports and the possibility of their arous­ ing controversy, the Bank considered it necessary that the country concerned sin­ cerely desire me Bank's advice. It believed that the international character of the Bank and its missions contributed to an atmosphere which encourages this desire and a thorough examination of the recommendations made thereafter. (For a re­ view of "The Technical Assistance Activities of the International Bank," see ibid., pp. 46-50.) 8 National Advisory Council, Second Special Report . , . , op.cit., p. 8. 9 Fifth Annual Report» op.cit., p. 8. , 1 See "Lending Policies and Procedures of the International Bank," International Bank for Reconstruction and Development, Proceedings, op.cit., pp. 37-40. 7

IV. INTERNATIONAL FINANCIAL RESOURCES

emphasized the desirability of government-to-goverament loans and of reducing the "private" character of the Bank. The Bank reported that a majority of loans already were to governments because it found that there was a general reluctance of governments, "for entirely understandable political reasons," to guarantee loans to private enterprises:2 charges of favoritism would be leveled against the government, no matter how well it chose the projects to be guaranteed, and, conversely, private corporations were reluctant to seek government-guaranteed loans for fear of the extension of government participation in management. The Bank considered that it began both to meet the objection that its loans were too narrow in scope and to partially circumvent the difficulties of government guarantees on individual loans by lending to banks for relending to private borrowers to finance imports in connection with development projects. (The individual loans by the foreign banks are subject to prior approval of the International Bank.) Three such commitments were made during 1950: one consisted of a $9 million loan to the new Turkish Industrial Development Bank, which the International Bank helped establish; another was a $10 million line of credit to a consortium of eight Mexican commercial banks, together with the Nacional Finaiiciera; and a third was for $2 million to a new Development Bank in Ethiopia, where the funds would be made available to individual agricultural and industrial borrowers. This technique has been called a "new phase" in international lending and may be a means of expanding the Bank's operations.8 Through this technique the Bank is enabled to provide, indirectly, foreign exchange to small businesses, which could not otherwise get an IBKD loan because of the disproportionately large administrative costs to the Bank in handling the loans on an individual basis. Domestic banks now bear these costs. Further, the individual loans do not necessarily require a guarantee from the government. The foreign government does, however, guarantee the total IBRD loan. In addition, the borrowing banks are expected to be prepared to provide the local currency needed to finance the projects. 2 The Artides of Agreement require that the Bank obtain government guarantees on all non-government loans.

8

See The Statist, February 25, 1950, p. 237, for additional comment.

IV. I N X E B N A T I O N A L F I N A N C I A L B E S O U B C E S

An aspect of the Bank's operations which was given close scrutiny during the year, by both the Bank and its more critical members, was that of making loans for local currency needs of development projects. "Local currency loans" discussed were of two types: (1) a loan of the currency of the borrower to cover the local expenses of a project, and (2) "a loan to meet local currency expenditures although, strictly speaking, it is a loan in foreign exchange needed because of foreign exchange requirements indirectly resulting from expenditures in local currency."4 The Bank said each of these types was allowable "in exceptional circumstances/' although the former case had not come before it. Close study had been given to the latter, and the Bank concluded that a country should defray the local currency part of its investment program from its own resources if it could do so without inflationary effects.5 However, since it considered that in some cases the development of backward countries would probably involve difficulties in both foreign exchange and domestic financing, the Bank issued a policy statement as to the conditions under which such countries might turn to it for local currency loans: "In general, the Bank's policy may be summarized by saying that local expenditures may be financed if the following conditions are satisfied: (a) if the project to be financed is of such economic urgency that the country's ability to undertake foreign borrowing—which is more or less limited in all cases—is better utilized in financing this project than in financing the direct foreign exchange costs of alternative projects; (b) if the local currency costs of the project cannot reasonably be met out of available domestic resources; and (¢) if it is apparent that, unless foreign exchange is made available to the borrowing country to be employed for the import of either consumer goods or raw materials, the local currency expenditures involved in the project will lead to inflationary pressures."8 Loan commitments during 1950 totalled over $279 million (see Table 19)—mostly for basic development of backward areas. Power development projects were financed in Brazil, India, Uru* Fifth Annual Report, op.cit., p. 10. 6 During the year the Bank gave advice and assistance to El Salvador in floating a bond issue to cover the local cuirency costs of a project financed in part by a loan from llie Bank. ® Fifth Annual Report, op.cit., p. 11.

IV.

INTERNATIONAL

FINANCIAL

RESOURCES

TABLE 19

Loan Authorizations by the International Batik, 1947-1950 (millions of U.S. dollars)

Date 1947

May August August August

1948ί

Member Country Concerned France Netherlands Denmark Luxembourg »

Principal Amount 250.0 195.0 40.0 11.8

496.8

16.0 12.0

28.0

24.1 75.0 16.0 8.8 12.5 32.8 5.0 10.0 2.7 2.3 12.5

201.7

>

March July

Chile b Netherlands

January January March

Mexico a Brazil Belgium Netherlands 8 Finland India f Colombia India Yugoslavia Finland El Salvador

1949I

July

August August August September October October December

1950I

April April May June

My

August August September October October October November December Total

0

India Mexicos Brazil Iraq Turkey Australia Uruguay Ethiopia Mexico Turkey Thailand Colombia Colombia

18.5 26.0 15.0 12.8 16.4 100.0 33.0 7.0 10.0 9.0 25.4 3.5 2.6

279.2 1005.7

a) This loan authorization was originally for $12.0 million but $0.2 million were cancelled in 1949. b) Two separate loans. c) -Six separate loans. d) Two separate loans: originally $34.1 million, but $10 million were refunded in 1950 (see note (g) below). e) Originally $15.0 million, but $6.2 million were cancelled in 1950 at the request of the Netherlands. f) Originally $34 million but $1.2 million were cancelled in 1950.

(Notes continued on next page)

IV.

INTERNATIONAL

FINANCIAL

RESOURCES

guay, and Mexico; port development projects in Turkey and Thailand; irrigation and flood control in Lraq and Thailand; roads in Ethiopia; agricultural projects in Turkey and Australia; and mining and manufacturing projects in Australia. Disbursements out of past and current loans totalled only $75 million during the year, mostly in United States dollars, as compared with $68 million in 1949 (see Table 20).7

Marketing Operations and Financial Resources Although the Bank repeatedly stated that lack of funds was not a limiting factor in the volume of its lending, it did during the year carry out several marketing operations designed to increase its resources. The Bank, encouraged by the United States, wanted more nondollar funds in order to be able to lend to countries which were already in debt in dollars and which could obtain the imported goods desired from non-dollar sources. Incareasingly stringent export controls in the United States presumably also strengthened the desire of the Bank to obtain non-dollar currencies. Efforts to obtain the consent of other members to the use by the Bank in its lending operations of that portion of the Bank's paid-up capital represented by the 18 percent local currency contributions were successful, and by the end of the year twenty-three countries had given such permission for all or a part of their subscription, as compared with only five at the end of 1949.8 g) The Interim Loan of January 1949 to Mexlight for $10 million was refunded on June 30, 1950 and disbursement thereunder charged to this loan. Source: International Monetary Fund, International Financial Statistics, Washing­ ton, D.C., January 1951, p. xv. 7 The operations of the Bank brought in a net income for the year of approxi­ mately $14.5 million, raising the General Reserve against losses to $84.6 million. Commissions on loans during 1950 were over $3.1 million, which brought the Spe­ cial Reserve to $16.8 million as of the end of the year. It is also to be noted that because of the large expense and the duplication of duties between the Executive Directors and their Alternates, it was agreed during 1950 that, except in special circumstances, only one of the two woi3d be available at the Bank at all times. This system went into effect at the September meeting of the Governors. A prior adminstrative decision was that the Bank's Advisory Coimcil was of little use be­ cause, as constituted, it was generally unable to agree on any recommendations*. Consequently, no new appointments were made in 1949 or 1950. 8 Dviiing January 1951 three more countries authorized, subject to consultation, use of part or all of their 18 percent local currency subscriptions.

IV.

INTERNATIONAL FINANCIAL

RESOURCES

Switzerland is not a member of the Bank, and to raise additional Swiss francs, the Bank in March 1950 sold the equivalent of $6.6 million of Swiss franc bonds to a group of Swiss banks, repeating a similar operation amounting to the equivalent of $4 million in 1948. This was the only issue of new bonds by the Bank during the year, but it demonstrated that its dollar credit was still good in the United States by refunding in February, at a saving in interest, $100 million of its 2¾ percent bonds sold in 1949. At the TABLE 20 Disbursements by the International Bank, 1947-1950 (millions of dollars or equivalents) Currency Disbursed

1947

1948

1949

1950

Total

U.S. Dollars Belgian Francs Swiss Francs Canadian Dollars Povuids Sterling FrencJi Francs

299.9 0.3 0 0 0 0 300.2

193.2 1.7 4.0 0 0 0 198.9

61.8 0 0 5.1 1.0 0 67.9

67.4 0 1.9 4.7 .8 .1 74.9

622.3 2.0 5.9 9.8 1.8 .1 641.9

Source: International Monetary Fund, International Financial Statistics, Washing­ ton, D.C., January 1951, p. xv.

end of the year the Bank was considering marketing additional amounts of its bonds in Canada, United States, and Switzerland. The Bank gave increasing attention in 1950 to developing markets for its own bonds outside the United States in anticipation of future borrowing and in an effort to mobilize some of the dollars being hoarded in many foreign countries. Its outstanding dollar bonds were introduced into the Netherlands through the listing on the Amsterdam Stock Exchange of some Netherlands Trustee Certificates which were issued against Bank bonds owned by Dutch nationals. Cuba and Chile also allowed purchase of the Bank's dollar bonds by banks of their countries, and Mexico listed the Bank's outstanding dollar obligations on the Mexico City Stock Exchange and ruled them eligible for investment by banks, insurance companies, and other credit institutions. In

IV. INTERNATIONAL

FINANCIAL

RESOURCES

September the Bank's outstanding 3 percent bonds were listed on the Paris Bourse. 9 In efforts to reopen private channels of capital movement, the Bank during 1950 sold some paper from its own portfolio but, for the first time, without its guarantee. Bonds of France, Luxembourg, and the Netherlands in an amount of $150,000 were sold to an American purchaser; and $617,000 of Netherlands bonds, payable in Swiss francs, were sold to a European purchaser. The Bank did not borrow during the year by selling from its portfolio with its guarantee although the framers of the Bank had anticipated that these operations would be a primary function of the Bank in reestablishing the international private capital markets. The Bank had made two such sales, one in 1948 and one in 1949, but they were not regarded as highly successful operations, and it appeared that the Bank had adopted a policy of not using this technique to tap private capital sources.1 B. INTERNATIONAL MONETARY FUND

During recent years the International Monetary Fund has been widely criticized on the grounds that it has failed to coordinate effectively the international monetary policies of its members— especially in exchange rate matters—and that it was following too niggardly a policy respecting use of its resources. The U.S. Government has not joined in these attacks, arguing that ". . . present conditions and the conditions of the immediate past have not given adequate opportunity to test the effectiveness of the Fund as a stabilizing mechanism and as a means of maintaining orderly exchange arrangements in a world of freer trade and greater stability."2 The NAC considered that no amendments were necessary to the Fund's Articles of Agreement, even though the problems faced were different from those originally contemplated, because they permitted considerable flexibility. During 1950 the United β This listing was intended to serve as a deterrent to the holding or purchasing of gold by Frenchmen against possible future devaluations of the franc. For de­ tails, see The Statist, September 23, 1950, p. 395. 1 In January 1951, the Bank did sell, with its unconditional guarantee, $549,000 of Chilean dollar bonds to the National City Bank of New York. This was regarded by the IBRD as a special operation. It was designed to facilitate an increase in the capital of the Santiago branch of the National City Bank. 2National Advisory Council, Second Special Report . . . , op.cit., p. 25.

IV.

INTERNATIONAL FINANCIAL

RESOURCES

States, concerned over the tendency of the Fund's currency sales to become long-term loans, urged a most careful husbanding of its resources. Lending Policy In its Second Special Report on the Fund and Bank, issued in May 1950, NAC pointed out that the Fund was not created to finance reconstruction or to make long-term loans. NAC reported that it had in the past tried to steer a middle course between "acquiescing in the virtually automatic use of the Fund's resources" and "insisting" on such strict standards that no lending would have been done. But, "As it became apparent that Fund drawings would merely be one additional source of dollars in a situation of fundamental disequilibrium which would not be remedied within a few years, the Covincil has favored a policy of conservation of the Fund's resources to the future date at which their use might be more efficacious in bringing about the realization of the Fund's basic objectives as stated in the Articles of Agreement."8 With respect to future requests for withdrawals, NAC stated that the Fimd should make a careful examination of the international payments position of the applicants to determine whether the drawings requested were to be temporary. The resources of the Fund should not be loaned if a "fundamental disequilibrium" were found to exist, NAC wrote, and ". . . prima facie evidence of fundamental disequilibrium," was any ". . . retention of exchange restrictions on current account transactions or quantitative import controls by a member of the Fund. . . NAC anticipated that for many countries these conditions would continue for some time and observed that "It is clear that the time when the Fimd can be most effective in stabilization operations is in the future when greater progress has been made toward reaching the conditions originally predicated for the Fund's most successful operation. It is in accordance with this belief that the National Advisory Council favors only moderate and prudent use of the Fund's resources to assist member countries in meeting genuinely temporary deficits." Nevertheless, it felt that in the interim the Fund could perform an important function as an ". . . international con8 ibid., p. 13. 4 ibid,., p. 22.

IV. INTEKNATIONAI4 FINANCIAL RESOURCES

sultative body and as a forum for dealing with important questions relating to foreign exchange. In the long-run this may prove to be the Fund's greatest contribution to the solution of the international economic problems of our times."5 . The NAC not only favored a more stringent lending policy in the future but also urged the Ftmd to take such measures as it could to get debtor members to repurchase their currencies so as to maintain the revolving character of the Fund's resources. Table 21 reflects the extent to which most of its currency sales had become long-term loans. The Fund during 1950, for the first year since its inception, made no sales to members. Its repurchases were greater than in previous years but still totalled only $29.4 million of U.S. dollars and gold in exchange for Belgian francs, Egyptian pounds, and Ethiopian dollars.6 However, it was reported that repurchases from several other non-European countries would probably be made in 1951 as their international reserve positions improved. The course of policy discussions among the Fund's members on future currency sales was not public information, but there were some signs that the long extant differences, between those holding that members have a more or less automatic right to use of the Fund's resources and those favoring a close scrutiny by the Executive Directors of each application, were being narrowed in the search for practical operating criteria. Foreign Exchange Rate Policy a. EXCHANGE RESTRICTIONS At the inception of the Fund's operations, all but five countrymembers (El Salvador, Guatemala, Mexico, Panama, and the United States) availed themselves of the transitional provisions allowing exchange restrictions.7 In mid-1950 Honduras became the first country to cease availing itself of those transitional arrangements. On March 1, 1950, the Fund published its First An5 ibid., p. 24.

8 It is to be noted that operating expenditures exceeded income during the year by about $1.5 million, raising the total deficit since the Fund was established to approximately $5 million. 7 Several other countries have since reduced their restrictions to such. a mild state as to make their currencies practically convertible.

IV.

INTERNATIONAL

FINANCIAL

RESOURCES

TABLE 21 International

Monetary

Fund Exchange

Transactions,

1947-1950

(millions of U.S. dollar equivalents) 1947*

1948

1949

1950

Total

Currency Sold U.S. dollars British pounds Belgian francs

467.7 461.7 6.0 0

214.2 202.8 0 11.4

101.5 101.S 0 0

0 0 0 0

783.4 766.0 6.0 11.4

Currency Bought Australian pounds Belgian francs Brazilian cruzeiros British pounds Chilean pesos Costa Bican colones Czechoslovakian korunas Danish kroner Egyptian pounds Ethiopian dollars French francs Indian rupees Mexican pesos Netherlands guilders Nicaraguan cordobas Norwegian kroner Turkish liras Union of South Africa pounds Yugoslav dinars Gold b

467.7 0 11.0 0 240.0 8.8 0 0 3.4 0 0 125.0 0 22.5 52.0 0 0 5.0 0 0 0

214.2 0 22.0 0 60.0 0 1.3 6.0 6.8 0 0.3 0 68.3 0 23.3 0.5 9.6 0 10.0 0 6.1

101.5 20.0 0 37.5 0 0 0 0 0 3.0 0.3 0 31.7 0 0 0 0 0 0 9.0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

783.4 20.0 33.0 37.5 300.0 8.8 1.3 6.0 10.2 3.0 0.6 125.0 100.0 22.5 75.3 0.5 9.6 5.0 10.0 9.0 6.1

Currency Repurchased U.S. dollars Gold

0 0 0

0 0 0

3.6 2.6 1.0

29.4 20.1 9.3

33.0 22.7 10.3

Currency Resold Belgian francs Costa Bican colones Egyptian pounds Ethiopian dollars Nicaraguan cordobas

0 0 0 0 0 0

0 0 0 0 0 0

3.6 0.9 2.2 0 0 0.5

29.4 20.6 0 8.5 0.3 0

33.0 21.5 2.2 8.5 0.3 0.5

a ) The I M F began operations in March 1947. b ) Sold by Norway in 1948 in exchange for U.S. dollars. Article V, Section 6a of the Agreement of the International Monetary Fund provides: "Any member desiring to obtain, directly or indirectly, the currency of another member for gold shall, provided that it can do so with equal advantage, acquire it by sale of gold to the Fund." Source: International Monetary Fund, International Financial Statistics, Washington, D.C., January 1951, p. x.

152

IV. INTERNATIONAL

FINANCIAL

RESOURCES

ntud Report on Exchange Restrictions.8 It described in some detail the various systems employed and expressed particular concern over the use of exchange controls for protective rather than balance-of-payments reasons and over the tendency on the part of many countries to relax restrictions with reference to selected currencies rather than types of transactions. In general, however, only mild disapproval of most controls was recorded, and it was stated that the Fund recognized that elimination of exchange restrictions was fraught with difficulties. Nevertheless, the Fund stated that it considered their early removal in order and that "the risks can be minimized . . . if exchange restrictions are gradually relaxed," 8 and if action were concerted. In their Annual Report, released in September but dated in April, the Executive Directors of the Fund stated that, while they did not feel they could press all members to remove all exchange restrictions forthwith, members could not ". . . afford to wait until all the risks or difficulties involved in relaxing or removing their restrictions have been completely or satisfactorily resolved or eliminated." 1 The Directors also stated that ". . . the Fund intends to press forward its continuing examination of the need for and the effects of existing exchange restrictions in order to make sure that no reasonable opportunity for their removal is lost."2 At the Paris meeting of the Board of Governors in September, the United States representative stated that, for many countries the recent increase in international reserves permitted a relaxation of restrictions, but most delegates felt that this improvement might be of a temporary nature —especially since the impact of rearmament had not yet been felt—and did not justify any changes. The major concern of the meeting was with the threat of inflation throughout the world. Many delegates expressed the opinion that, since inflation was a major factor in the imposition of restrictions, the most constructive way of eliminating restrictions was for members to adopt appropriate internal fiscal and financial policies. They considered that the Fund could play only an insignificant role in this problem. β Washington, D.C., 1950. β ibid., p. 85. ι International Monetary Fund, Annual Report, April 30,1950, Washington, D.C., 1950, pp. 61-62. 2 ibid., p. 62.

IV. INTERNATIONAL

FINANCIAL RESOURCES

During the Fifth Session of the Contracting Parties to the GATT,8 held at Torquay, England, in November and December, the United States (supported by Belgium, Canada, and Cuba) argued that the time had come when certain members of the sterling area might relax their restrictions on imports from hardcurrency areas. In keeping with the terms of the GATT, the Fund was consulted, and it expressed a formal opinion that relaxations were "feasible" by Australia, Ceylon, New Zealand, Southern Rhodesia, and the United Kingdom, "but should be undertaken with due caution having regard to present circumstances."4 It considered that no further relaxations were "feasible" at that time by India and Pakistan. The British representative resented the intervention of the Fund, maintaining that it should have limited its report to statements of fact and should not have presented an opinion.5 The representatives of the governments whose restrictions were under discussion said they would "take note" of the views expressed but that insufficient attention had been given to the adverse factors growing out of the rearmament programs, factors which would not be felt seriously until 1951. However, the threat of higher prices and shortages of many commodities following the outbreak of fighting in Korea resulted in many countries relaxing—not necessarily formally—their import restrictions. b. PAR VALUES AND FLUCTUATING RATES

Seven countries had not proposed par values for their currencies at the end of 1949, and three others had abandoned their par values without proposing new ones to the Fund. None of these countries declared par values during 1950. NAC, in its Second Special Report, acknowledged that, "Where conditions are manifestly unstable, little is to be gained by a merely formal declaration 3 The Fund participated in the work of drafting special exchange agreements under the GATT which contracting parties not members of the Fund had to adopt. The provisions of such agreements follow closely the obligations expressed in the Fund Agreement with reference to exchange rates and restrictions. The first such special agreement was signed by Ceylon, coming into force on April 2, 1950; it was abrogated by Ceylon's acceptance to Fund membership later in the year. * International Monetary Fund5 Press Release, Washington, D.C., December 13, 1950. The case of Chile was also considered but the Funa did not recommend any further relaxations in their restrictions on imports from the dollar area. 5 See The Economist, November 18, 1950, p. 832.

IV.

INTERNATIONAL FINANCIAL

RESOURCES

of par values, if the country concerned cannot in practice maintain die degree of stability which would make the par value effective."8 It did not, however, embrace a system of floating or freely fluctuating rates but thought that a system of par values such as envisaged under the Articles of Agreement was "fundamentally sound," that the Fund provided a satisfactory mechanism for facilitating needed changes, and that in the interest of all members par values should be declared as soon as possible for all currencies. With respect to changes in rates, the NAC stated that, "In the period ahead, as world trade adjusts to a declining volume of extraordinary United States financial assistance, it will be important that the exchange pattern of the world be kept under review and that adjustments in individual exchange rates be made from time to time if developing conditions so require."7 In January the Fund agreed with the United Kingdom on a change in the par value of the British Hondinras dollar, to be effective as of December 31,1949, and in March it accepted a proposed devaluation of the Icelandic krona by 42.6 percent of the rate set in September 1949, making a total devaluation from the initial par of 60.2 percent. More important from a policy point of view, however, was the Fund's acceptance of the decision of the Government of Canada (taken in the light of a large inflow of capital from, and the threat of serious inflation in, the United States) to abandon its fixed par value and to allow the foreign exchange value of the Canadian dollar to fluctuate. The Fund, in accepting the decision, stated that it". . . recognizes the exigencies of the situation which have led Canada to the proposed plan and takes note of the intention of the Canadian Government to remain in consultation with the Fund and to reestablish an effective par value as soon as circumstances warrant."8 While this was perhaps somewhat grudging acquiescence, it was another recognition by the Fund (as with Peru and Mexico earlier) that there were cases where a fixed rate was inappropriate.8 * op.dt., p. 18. 7 loc.cit. 8 International Monetary Fund, Press Release No. 145, September SO, 1950. 9 During 1950, Chile, Costa Rica, and Colombia permitted a large number of transactions to take place at fluctuating rates in the "free market." Presumably the Fund acquiesced in these developments.

IV. INTERNATIONAL FINANCIAL RESOURCES C. MULTIPLE RATES

As to multiple currency arrangements, the Fund during 1950 found nothing that required a change in its previously expressed policy of viewing them as temporary devices and of supporting as rapid a unification as possible of exchange rate structures. It recognized that the process would be gradual, however, and stated that in dealing with proposals for changes in multiple currency practices, it gave its approval only if they represented steps toward simplification and gradual unification of the exchange systems or at least were ". . . part of a broader program for the creation of an economic environment consistent with eventual unification on stable foundations."1 The Fvind was not successful in its attempts to get Chile to rid itself of five different exchange rates; a preliminary statement promising a unification of the various rates was not carried out in practice and only a juggling of the various transactions permitted under each rate took place. On the other hand, a revision and simplification of the Bolivian exchange rate structure was completed with the Fund's blessing and help. In October, with the support of the Fund, Austria consolidated its premium and basic rates on commercial transactions into a single rate, but the premium rate remained on certain invisibles (mostly tourism), and it agreed in principle to the abolition of private barter and compensation arrangements.2 In November a start was made, with Fund approval, toward unifying Iran's three rates, and Colombia and Ecuador simplified their multiplerate structures by removing certain exchange taxes. On the other hand, Nicaragua, Costa Rica, Paraguay, Israel, and Greece imposed or increased exchange taxes leading to additional multiple rates.

EPU and the Fund The establishment of the European Payments Union raised some serious jurisdictional problems for the Fund as well as the fundamental question of whether it involved an abandonment of the policy of a world-wide approach to the problem of currency convertibility and multilateral trade. In January, NAC was reported 1 Annual

Report, op.cit., p. 42. Nicaragua, and Paraguay (as well as Japan) eliminated the use of com­ pensation or barter transactions in 1950. 2Chile,

IV.

INTERNATIONAL

FINANCIAL

RESOURCES

in the press as stating it could approve the EPU only if it did not conflict with the responsibilities and objectives of the Fund. Administration officials later testified before Congressional Committees that they believed that EPU was a step toward world convertibility of currencies;8 they did not, however, present any careful analysis to support this conclusion. At its request, the Fund did participate in the discussions in Paris on establishing the EPU. In preparation for these meetings, the Fund approved the following policy guides for its representatives: "1. The Fimd should give its assistance in the formulation of a satisfactory payments arrangement compatible with the purposes of the Fund. "2. Regional payments arrangements should be so formulated as to facilitate the attainment of convertibility of currencies. Any features which may be likely to foster tendencies toward a closed monetary area should be avoided. "3. While inflation remains a threat, the element of credit, particularly of long- and medium-term credit, in the settlement of intra-European current balances should be moderate. Settlement in gold or dollars should be increased now and become the rule whenever possible. "4. The Fund mission should stress that the conditions generally regarded as necessary for convertibility, including the reduction of inflation, progress on the problem of sterling and ways of increasing monetary reserves, are also necessary for the most effective functioning of a satisfactory payments agreement. The Fund mission should explore and assist in the formulation of programs designed to achieve these conditions."4 There was some discussion at Paris of having the Fund perform the administrative functions and carry out certain of the EPU operations, but the European members preferred that these be done by the Bank for International Settlements. The informal EPU document, approved on July 7 by the OEEC Council, stated that members would be concerned to insure that their obligations under the EPU were consistent with those under the Fund, that close cooperation and consultation between the EPU and the 8 See,

for example, "To Amend the Economic Cooperation Act of 1948, as Amended," Hearings on HJR.. 7378, Pt. I, House of Rep., Committee on Foreign Affairs, 81st Cong., 2d Sess., p. 59. * Annual Report, op.ctt., p. 66.

IV.

INTERNATIONAL

FINANCIAL RESOURCES

Fund was desirable, and that the Managing Board of the EPU would report to the OEEC Council as to the appropriate relationships. However, in the final EPU "Agreement" convention no mention was made of the Fund. It should be noted that the Managing Board of the EPU was given little authority, thus removing the threat that it might supersede the Fund. During 1950 no EPU member purchased currencies from the Fund to settle its obligations to the Union, but this would appear to be one important possible relationship between the two organizations. Gold Policy The gold policy of the Ftind and the U.S. Government was thoroughly aired during 1949 following the request of South Africa for permission to sell gold at premium prices.5 In 1950 the Executive Directors made a formal report to the Fund's Governors recommending the rejection of South Africa's request that the Ftmd permit any member to sell up to 50 percent of its newly-mined gold at premium prices.® The report considered that ". . . any change in the Fund's gold policy that might divert additional amounts of gold from monetary reserves into private hoards wotdd be undesirable."7 In addition, study of the question of whether there should be a uniform change in the par values of all member country currencies (with reference to gold) brought the conclusion that ". . . there was no economic justification for recommending such a change. . . ."8 The Executive Directors' report was not unanimously approved, however, and on May 5 South African officials stated that they reserved the right to sell gold at the highest price in free markets despite the Fund's policy, asserting the latter had "no economic justification.''9 During the Fifth Meeting of the Board of Governors in September, the policy was again discussed. Mr. Havenga of South Africa reasserted his claim that, under the Fund's gold polSurvey—1949, pp. 122-125. should note that although there are special considerations in the South African position, the premium on gold is due in large part to the limited sales on non-official markets. If there were unlimited sales even at present, the price would probably fall to that offered by the residual buyer—Ae United States—of $35 per ounce. 7 Anmud Report, op.cit., pp. 71 and 90-95. 8 ibid., p. 71. 9 New York Times, May 6,1950. 5 See

eOne

IV.

INTERNATIONAL

FINANCIAL

RESOURCES

icy, "the gold producing countries are paying the price for such exchange stability as exists."1 He added that this statement had not been denied by the Fund, that the large trading nations benefited by the Fund policy, and that the Fund was "honour bound to correct a serious disequilibrium between the fixed prices of gold and the inflated prices of commodities. . . ."2 Some of the other Governors also stated their disagreement with the report, arguing that the text of the Fund Agreement did not prohibit premium sales, that such prohibitions usually resulted in increased free market premiums and a consequent decrease in public confi­ dence in the stability of currencies, and that on equity grounds the Fund should not ignore the worsening of gold-producing coun­ tries' terms of trade. Although no vote was taken, the consensus of opinion of most of the Fund's Governors, including the United States, was that there were no adequate reasons for a change in policy.8 For the first year since the end of the war the official gold holdings of the United States declined during 1950 as net sales abroad totalled $1.7 billion (see Table 22) and reached an annual rate of $3 billion during the last half of the year. This large outflow was causing some uneasiness in certain non-official financial circles, but at the end of 1950 the United States still held $22.8 billion of gold (about two-thirds of the gold reserves of the entire world, 1 Gold sales at premium prices did not show great profit to South Africa, however, since during the year ended September 1950 it realized only an average premium of 7 percent over the official gold price (i.e., about $37 per fine ounce). Sales at premium prices were about one-fifth of total sales, bringing in some £2.1 million over what would have been obtained if sales were made at the official price. (See The Statist, January 13, 1951, p. 31.) Conditions after Korea changed the demand picture, however, showing a willingness of the market to ^aBsorb considerable offerings at quite high prices. (The Economist, January 13, 1951, p. 96.) 2 International Monetary Fund, Summary Proceedings, Fifth Annual Meeting of the Board of Governors, Paris, September 1950, pp. 93-98. 8 With respect to subsidies to gold producers, the position of the Fund has been that "a subsidy in the form of a payment by a member of a uniform amount per ounce for all or part of the gold produced would constitute an increase in the price of gold [and so undermine exchange stability] and is therefore not permissible." (International Monetary Fund, Annual Report, Aprtl 30, 1949, Washington, D.C., 1949, p. 36.) Any proposal for a subsidy in any other form has been examined by the Fund on its own merits. It has given permission when (he subsidies vary with the costs of individual producers and are restricted to subsidizing marginal output. Li line with this policy, the Fund has approved of subsidies granted by Australia, Canada, and Southern Rhodesia.

IV.

INTERNATIONAL FINANCIAL RESOURCES

TABLE 22 Foreign Gold Transactions by the United States, 1950 (net purchases ( + ); net sales ( —) ) (millions of dollars) ERP Countries (other than United Kingdom) United Kingdom Other Europe Union of South Africa Canada Latin America Asia Egypt Bank for International Settlements

—313 —1020 +11 +13 —100 —172 —39 —45 —65 -1730

Source: Federal Reserve Bulletin, Washington, D.C., March 1951, p. 254.

excluding Russia), and there were no indications that the Government was contemplating any change in its policy of paying a fixed price for gold and of a willingness to buy and sell (to foreign central monetary authorities) whatever quantities were offered or demanded at that price. Since 1934 there have been many who have ridiculed the gold policy of the United States on the grounds that its chief effect has been the digging of gold out of the ground in many areas and putting it back into the ground at Fort Knox. Nonetheless, and apart from other justifications of the policy, the large holdings did allow the United States to determine its international economic policies without taking into consideration their effect on the nation's international reserves. Such freedom was enjoyed by no other major country, and if the gold outflow continued at rates such as were recorded in the latter part of 1950, the time was foreseeable when the United States would have to take this factor into account, possibly resulting in quite different policies in both the domestic and international fields. The chief objection by the Administration in recent years to an increase in the gold price has been that its sole important consequence would be to facilitate an increase in its exports in exchange for additions to its already large gold stocks, whereas, to the extent that the United States wished to maintain an export surplus, it could do this more satisfactorily through foreign aid

IV.

INTERNATIONAL FINANCIAL RESOURCES

programs. But as the United. States became a net seller of gold on a large scale this argument lost much of its cogency, and there was some unofficial speculation that, if the outflow continued, the Administration might regard more favorably proposals for an increase in the official price. Technical Assistance In line with the UN Expanded Program of Technical Assistance and with the Point Four Program, the Fund has been steadily extending its own work in rendering technical assistance to member governments. The Fund's advice has usually related to a country's external financial problems, such as the balance of payments, exchange rates and restrictions, and to the closely related internal problems of credit and fiscal policy. It has also assisted in the establishment of institutional machinery to carry out. the recommended policies. The Fund's work is financed from its own budget and not out of the UN program. However, as a coordinating activity, the Fund sits as an observer on the UN Technical Assistance Board. C. ECOSOC RESOLUTION ON INTERNATIONAL FULL EMPLOYMENT The UN Economic and Social Council, pursuant to resolutions of the General Assembly, in 1949 engaged a group of experts to study both domestic and international means "to promote and maintain full and productive employment."5 Their report, entitled "National and International Measures for Full Employment,"® devoted much of its attention to domestic measures, but these are considered outside the scope of this survey.7 On the international level three major recommendations were made: (1) The 5 This problem had long been shunted to one side in international multilateral agreements; for example, Sie Bretton Woods Agreements and the Havana Charter merely recognized the importance of adequate measures for national and interna­ tional full employment. 8 UN Doc.E/1584, December 1949, UN Publications. Sales No.: 1949.H.A.3. 7 For an adversely critical examination of the experts' entire report, see Viner, J., "Full Employment at Whatever Cost," Quarterly Journal of Economicsi August 1950, pp. 885-407, and compare with more favorable reviews of Halm, G. N., "In­ ternational Measures for FoJl Employment," Review of Economic Statistics, Au­ gust 1950, and Rostow, W. W., "The United Nations Report on Full Employment," Economic Journal, June 1950, pp. S23-S50.

IV.

INTERNATIONAL

FINANCIAL RESOURCES

UN should convene a meeting of member governments to develop a joint program for a "new structural equilibrium in world trading relationships" via an exchange and reconciliation of national foreign trade "targets." (2) To stabilize the flow of international investment, governments of lending countries should "program" a fixed total of international capital flows over five-year periods. If this total were not provided by public and private lending, the government should automatically make the difference available to a special department of the International Bank constituted to lend to governments for overall economic development. (3) To stabilize the flow of international trade, countries suffering a recession which was resulting in a decline in the value of imports greater than that of exports should be required to deposit in a special account in the Fund amounts of their own currency equal to this sum, which would be available for purchase by other countries to the extent they suffered a fall in exports to, in excess of the fall in imports from, the depositing country. The UN Economic and Employment Commission considered the report briefly in January and referred it to ECOSOC for full discussion and action. At its IOth Session in February, ECOSOC merely took note of the report and deferred discussion on it until the next session.8 The United States representative at that time requested the UN to ask for the comments of non-governmental organizations on the experts' report. This was done, and several representatives of independent organizations submitted their observations before and during die Ilth Session of ECOSOC, when full discussion was undertaken. At the Ilth Session, Mr. Isador Lubin, the United States representative, stated that the people of the United States were determined "never again to tolerate the frustration and waste which resulted from depressions."9 He agreed with the report that 8 Because of criticism by underdeveloped countries that the report was directed almost wholly to the problems of employment in industrialized areas, in which statistics were available to provide indicators, a United States recommendation was accepted, and later passed by the General Assembly, to the effect that a spe­ cial study of un- and under-employment in backward areas be made. A crucial problem with reference to these areas was the possibility that cyclical unemploy­ ment might be overshadowed by disguised unemployment. For a brief official sum­ mary of action and debate on full employment during 1950, see Report of the Economic and Social Council, General Assembly Official Records: Fifth Session (A/1345), Lake Success, N.Y., 1950, pp. 80-36. eEconomic and Social Council, Official Records, Ilth Session, 390th Meeting,

IV.

INTERNATIONAL

FINANCIAL

RESOURCES

domestic measures must form the principal means for maintaining high levels of employment, but he entered many reservations upon the "automatic compensatory scheme" and other domestic measures suggested by the experts. The U.S. Government was also unable to agree with many of the experts' proposals on international measures. Instead of the ad hoc intergovernmental meeting proposed by the experts "to develop a joint programme designed to establish at a reasonably early date a new structural equilibrium in world trading relationships," the United States suggested continuing the study and consideration of the question within the UN framework, and specifically by ECOSOC. The United States also opposed the specific proposal for stabilizing the flow of international investment by offsetting declines in private foreign investment with public loans through the Bank. Mr. Lubin argued that public capital export could have only a slight effect on United States employment and that counter-cyclical export of public capital "would subordinate economic development to other considerations." Nor was the United States prepared to enter into an agreement committing the "government automatically to provide indefinite amounts of public funds over longer periods." He added that this "refusal did not mean that in cases of recession public funds should not be available for foreign economic development"; but, rather, that for this purpose the existing resources of the International Bank could be further employed, especially when private foreign investment dropped. Finally, the United States objected to the experts' proposal for stabilizing the flow of international trade by amending the Articles of Agreement of the FimH. Its specific objections were: "First, there was no simple method of determining to what extent the reduction of imports in any one country was the result of depression, or of other factors, such as changes in technology, inappropriate exchange rates, and restric­ tive policies originating abroad. Secondly, the introduction of such a plan in circumstances where a 'fundamental disequilibrium' still obtained in the balance-of-payments position of many countries would probably serve merely to aggravate the existing disequilibrium, by enabling deficit countries working with inconvertible currencies under trade and exchange restrictions to July 17, 1950, p. 118. A summary of Mr. Lubin's statement may be found in the Department of State Bulletin, August 21, 1950, pp. 307-311.

163

IV, INTERNATIONAL FINANCIAL RESOURCES

continue to import goods without making such readjustments as were necessary for balancing their economy and trade."1 Mr. Lubin implied throughout his statement that the proposed reforms would require greater control by the U.S. Government over the American economy than was desirable. Officials of the International Bank and Fxmd made the same general criticisms and proposals as the United States representative. During the subsequent deliberations of the Economic Committee of ECOSOC, which had the responsibility for drafting a resolution, the U.S. representative also stressed that insuring the availability of foreign currencies during a depression could not be considered in isolation and that any conference such as proposed would have to include in its agenda all aspects of international equilibrium. In any event, he said again, there was no need for a special conference, for in case of a depression the problem of availability of currencies could be handled by ECOSOC.2 The final resolution of ECOSOC on the report was passed unanimously on August 15, 1950 and to a large extent reflected United States policy.8 "With the object of encouraging effective international full employment policies,"4 it, among other things: "9. Recommends that each Government intensify its efforts, while pursuing its employment and other domestic goals, to achieve and maintain equilibrium in its balance of payments; such equilibrium should be at the highest possible level of mutually beneficial trade and should be characterized inter alia by: (a) Conditions of trade involving, along the lines envisaged in the relevant international agreements, (i) the absence of quantitative restrictions on international trade imposed for balance of payments reasons and of exchange restrictions on current account transactions (as defined in the Articles of Agreement of the International Monetary Fund) (ii) a reduced level of other trade barriers and (iii) a minimum of discrimination in die application of such trade, monetary or investment restrictions as ibid., p. 124.

2 UN Doc. E/AC.6/SR 89, p. 15. Doc.E/1840, August 17, 1950. full employment, it recommended inter alia, that each government publish annually a statement of its quantitative goals as to employment, production, consumption and investment; define the meaning of full employment which it would use as the standard for a continuing objective of policy; and formulate and announce the policies, programs and techniques to be used in attaining that objective. 1

8 ECOSOC, Resolution 290, Ilth Session, UN 4 With reference to domestic policies towards

IV. INTERNATIONAL FINANCIAL RESOURCES

xnay still exist;5 (b) A level of reserves of convertible currencies and gold which would be sufficient to enable a country to meet normal fluctuations in its receipts of foreign exchange; and (c) An increased and stable flow of international investment funds;" "11. Recommends that each Government furnish the SecretaryGeneral . . . with quantitative estimates of the main elements of the balance of international payments that it hopes to attain by 1954... ;e" "15. Recommends that Governments: (a) Achieve and maintain, to the extent feasible, a high level and regular rate of flow of international investment capital for development purposes; (b) Strive to prevent lapses in the flow of international investment resulting from or associated with economic recessions; and (c) Continue to co-operate in efforts to achieve these results by both national and international measures; "16. Recommends that Governments: (a) Seek to avoid, in their economic policies and programmes, measures which would be likely to have seriously adverse effects on the balance of payments or employment levels of other countries; (b) In the event of a domestic recession adopt, to the extent feasible, measures to offset the adverse effects of such recession on the balance of payments or employment levels of other countries; and (c) Continue to co-operate in investigating ways and means for preventing domestic recession from spreading to other countries;7 "17. Urges the International Bank for Reconstruction and Development, while achieving and maintaining in ordinary times a high level and steady rate of flow of international investments for economic development, to utilize in case of recession, all practicable opportunities of increasing its resources, in order to expand The United States draft of this section was accepted by the drafting committee. It should be noted that the requirements for forecasts on domestic and interna­ tional activities constitute a decided departure from the U.S. Government's previ­ ous position on making nothing quantitative beyond a year in the future. In this case, however, the United States representative supported the recommendations on the ground that some value could be gained from a "regular comparison of estimates, even on the basis of inadequate information. . . ." (UN Doc. E/AC.6/SR 95, September 5, 1950, pp. 5-6.) 7 In the Economic Committee discussions, the United States representative pointed out "that it was the duty of all countries to do their utmost to offset the adverse effects of domestic recession, regardless of their origin"; thus, if a depres­ sion did spread from A to B, the latter also had an obligation to take all measures "to the extent feasible" to stop its spread. (See UN Doc. E/AC.6/SR 95, p. 20.) 8

6

IV.

INTERNATIONAL

FINANCIAL

RESOURCES

the volume of its lending, inter alia by making fullest use of its borrowing capacity;8 "18. Urges the International Monetary Fund to make its re­ sources available to its members to meet needs arising from eco­ nomic recessions as fully and readily as its Articles of Agreement permit."9 After the unanimous passage of this resolution, the United States representative stated that the "Economic and Social Council had held an historic session which might well prove to be a land­ mark in the history of the world. Indeed, it heralded the possibility of a new era in which mankind, under guarantees of individual economic freedom, might live free from the scourge of unemploy­ ment."10 The UN General Assembly approved the resolution on Decem­ ber 12,1950. 8 Original

drafts of this section urged the Bank "to endeavor, in the event of economic recession to adapt its lending policies and practices to the need for maintaining the international flow of capital," and "to maintain a large and steady flow of investment regardless of economic fluctuations." The United States obtained consent on the final wording and the addition of the phrase beginning "inter alia . . ." so that no fundamental change from existing policy is involved. 8 For general statements of the Council's debate and actions, see: Camegie Endowment for International Peace, "Issues Before the Fifth General Assembly," International Conciliation, New York, N.Y., September 1950, pp. 400-402; United Nations Bulletin, September 1, 1950, pp. 208-209; and Lorwin, L. L., "The United Nations and Full Employment," Department- of Commerce, Foreign Commerce Weekly, Washington, D.C., October 23, 1950, pp. 8-5ff. 10Economic and Social Council, Official Records, Ilth Session, 412th Meeting, August 15, 1950, pp. 324-325.

V · COMMERCIAL POLICY INTRODUCTION FOH THE United States, 1950 was a year of many changes and some conflicts in its international commercial policies. During the first part of the year, the nation appeared at long last to be coming to grips with the problem of whether vigorously to foster larger imports as the major method of maintaining a balance in its international accounts, rather than to reduce exports or to continue large-scale foreign aid. But the invasion of South Korea changed many of the immediate objectives and brought about an extension of export restrictions, a scramble for imports, and the fostering of machinery for the international allocation of many commodities. The broad issue of larger imports versus smaller exports and/or continued Government aid to foreign areas was faced, though not resolved, in the hearings and debate on extending ECA for another year. Administration spokesmen stated that foreign economic aid should be greatly reduced and that, as a result, they anticipated some immediate decline in exports. They argued, however, that, for domestic and international economic and political reasons, major emphasis should be on increasing imports. In reply to those who argued that such a policy would seriously injure many domestic producers, ECA Administrator HofBtnan stated that this problem had been "greatly exaggerated," and that a large share of tie nation's imports were and would be "non-competitive,"1 and that in terms of the entire economy those which were competitive represented such a small percentage of total production that they would not have any seriously adverse effects, especially if one considered the increased exports thereby permitted. Mr. Hoffman later amplified his views by agreeing that larger imports would create serious problems in certain localities, but he stated that 1 For a detailed ECA calculation of which imports were "non-competitive," see 'Toreign Aid Appropriation for 1951," Hearings, House of Rep., Subcommittee of the Cknnniittee on Appropriations, 81st Cong., 2d Sess., pp. 625ff.

V.

COMMERCIAL POLICY

any worthwhile management could adjust to this competition and that the Government could not protect those who were not capable of making adjustments. As for the workers adversely affected, he believed some relief should be provided, perhaps in the form of job training or extended periods of unemployment compensation. Secretary of State Acheson also argued for a policy of larger imports but expressed more worry than did Mr. Hoffinan over the domestic hardships which would result from expanded imports. He stated that the Government must seriously concern itself with such adverse effects and that means must be found to ease the adjustments required of management and investors, as well as of the workers. He offered no specific recommendations, saying only that the problem must be carefully studied. The press interpreted his proposal to involve direct Government subsidies to "injured" producers and reported that the Treasury Department was opposed, in part at least, because of the difficulties of determining whether a depressed producer was suffering from mismanagement, domestic competition, or foreign competition.2 There were no other public indications during the year that the State Department was prepared to embrace such a "compensation" policy. However, it could be a policy which would find many supporters if and when there is again serious unemployment, or threats of it, in import-competing industries in the United States. The Congressional discussions on extending ECA-all before the North Koreans marched south—also brought forth strong statements in favor of a general policy of expanded imports from such politically and economically powerful groups as the Congress for Industrial Organizations, the American Farm Bureau, and the National Association of Manufacturers. But they also brought into sharp focus the conflict between export and import-competing, industries. The opposing views were most articulately stated by Senator Lodge of Massachusetts, who was very much aware of the effect of large imports on some of his manufacturing con2 Apart from questions as to the effectiveness of the suggestion in reducing Con­ gressional and business objections to the lowering of import restrictions (presum­ ably the major reason for launching it) and the economic justification for special relief to those who suffer from a particular form of competition, it would appear that the difficulties of administering such a program on other than an extremely arbitrary basis would be so imposing as to make the whole policy unwise. (See especially Wilcox, C., "Relief for Victims of Tariff Cuts," American Economic Re­ view, December 1950, pp. 884-889.)

V.

COMMERCIAL POLICY

stituents, and Senator Connally of Texas, who was not unmindful of the importance of export markets to the oil industry. Congress was not yet prepared to resolve the issue in any clean-cut fashion, however, and the legislation extending ECA for a third year in­ cluded two somewhat conflicting clauses. One, introduced by Senator Connally and directed toward larger exports, declared it the "sense of Congress" that foreign countries receiving United States aid should not discriminate against American exporters.® The other, introduced by Senator Lodge, was directed toward reducing the pressure for larger imports into the United States by calling upon ERP recipients to reduce their dollar purchases "to the greatest extent possible" in order to "minimize the burden on the American taxpayer."4 During the early part of the year many private groups worked to prepare public opinion for a policy of expanded imports. The National Association of Manufacturers sponsored a series of meet­ ings throughout the country aimed at increasing imports, many local Chambers of Commerce passed resolutions supporting cus­ toms simplification, and the United States Chamber of Com­ merce, at its annual national convention, adopted a resolution calling for expanded imports. The importance attached in official circles to the policy of expanded imports was pointed up during 8 This was qualified so as to permit restrictions ". , . reasonably required to meet balance of payments conditions, or requirements of national security . . ." or authorized under international agreements to which the United States was a party. * The oil Mdustry itself was sharply divided on this question and during the first half of the year the so-called "independent" producers, supported by some of the coal operators and the United Mine Workers, as well as some coal-carrying railroads and their unions, pressed for increasing restrictions on imports. For excellent discussions of the whole petroleum problem in our recent international economic policy, see Mendershausen, H., "Dollar Shortage and Oil Surplus in 1949*1950," Essays in International Finance No. 11, November 1950, International Finance Section, Princeton University; and Hoskins, H. L., "Middle: East Oil. in United States Foreign Policy," Ptdilic Affairs Bulletvn .No. 89, Legislative Reference Service, the Library of Congress, December 1950; Washington; D.C. Perhaps the most useful 1950 official documents giving detailed attention to the general conflict between export-and import-competing industries are "Extension of European Recovery—1950," Hearings on S. 3101, U.S. Senate, Cominittee on Foreign Relations, 81st Cong., 2d Sess.; "Effects of Foreign Oil Imports on Independent Domestic Producers," House Report No. 2344, 81st Cong., 2d Sess., June 27, 1950,- "Petroleum Study," Hearings, House of Rep., Subcommittee of Cjnmmittee on Interstate and Foreign Commerce, 81st Cong., 2d Sess.; and.'Oatises of Unemployment in the Coal and other Specified Industries," Hearings on S.Bes. 274, U.S. Senate, Subcommittee of the Committee on Labor and Public Welfare, 81st Cong., 2d Sess.

V.

COMMERCIAL POLICY

the first half of the year by preparations for the Torquay tariff negotiations, Congressional liberalization of the foreign trade zones law, an expansion of ECA efforts to increase Europe's dollar exports, efforts of the Administration to obtain Congressional approval of the ITO Charter and customs simplification legislation, and the Presidential appointment in March of Mr. Gray to draw up recommendations as to future foreign economic policiesit was assumed at the time that he would be chiefly concerned with ways and means of expanding imports. Inconsistently, as pointed out below, the Administration encouraged continuing protection of United States agriculture from foreign competition. But both public and official interest in expanding imports as a method of maintaining exports while reducing foreign aid waned during the last half of the year. The rearmament program, which served to increase the domestic demand for both imports and goods previously exported, accelerated the already changing nature of the United States balance of payments problem to the extent that the current account export surplus in 1950 was only $2.2 billion, as compared with over $6 billion in 1949. The shift in the short-term objectives of the policy of encouraging larger imports was clearly stated by the Council of Economic Advisers, which in early 1951 expressed grave concern over the mounting inflationary pressures in the United States growing out of the rearmament program and concluded, with respect to international commercial policies, that to ease these pressures ". . . we must use all methods of increasing our available supplies which do not prevent friendly countries from satisfying their own needs."5 To this end, they recommended that the fullest possible advantage be taken of the recent limited Congressional authorization to disregard the "Buy American" legislation, that customs procedure be simplified, that the Trade Agreements Act be extended, and that a policy be adopted of not tying United States foreign aid to purchases of American goods. They also urged that temporary legislation be enacted authorizing the President to reduce unilaterally, or to suspend, import restrictions on both raw materials and manufactured goods in short supply as long as die emergency conditions continued. Council of Economic Advisers, The Annual Economic Review, Washington, D.C., January 1951, p. 123. 6

V.

COMMERCIAL POLICY

Hie Presidentially-appointed Gray group reported in November that, despite the present domestic and international strains and dislocations, the United States must continue to work toward its long-term goal of an expanding world economy and stated that it was ". . . still possible and necessary to make progress in die direction of a system of multilateral and nondiscriminatory trade."® It recommended that this country should continue to seek tariff reductions, should renew the oft-amended Trade Agreements Act for a period of four years instead of the usual three, and, as an emergency measure, should grant unilateral reductions in tariff rates on goods which were scarce and when inflationary conditions existed. It also recommended that the customs simplification bill be passed, that the "Buy American" legislation be repealed, and that serious study be given to the feasibility and desirability of a general tariff reclassification. The Gray Report attacked some of the United States agricultural policies as being inconsistent with its foreign relations and specifically urged that the agricultural price-support system be modified and that most of the embargoes on imports of agricultural products be removed. It also urged that subsidies to the shipping industry be restricted and that cargo preferences be removed following negotiation and agreement with other governments. In his Economic Report to the Congress in early January 1951, however, the President restricted his suggestions on international commercial policy to the extension of the export-control authority and the Trade Agreements Act, to passage of the customs simplification bill, to the waiving of the import tax on copper, and to working with other free nations to increase the supply of strategic raw materials and to distribute them fairly with the objective of strengthening the common defense. He implied that he might later have additional suggestions. Sharp differences on long-term commercial policy at least still existed between the Administration and Congress. These were most forcefully reflected in the former s decision to abandon the ITO and in the House approval in early February 1951 of a threeyear extension of the Trade Agreements Act, but only after reinstating the controversial "peril points" clause7 and adding amend*v

ν

β Report to the President on Foreign Ecotwtnic Policy, Washington, D.C., No­ vember 10, 1950, p. 15. 7 For a brief statement on this issue in 194¾ see Survey—1949, pp. 154-155.

V.

COMMERCIAL POLICY

ments (1) to suspend any concessions granted under the Act on imports of agricultural commodities being price-supported by the Department of Agriculture whenever the "sales price" of such imports in the United States is less than the price-support level, ( 2 ) t o b a r t h e extension of a n y concessions t o R u s s i a o r any Soviet-dominated countries in any future trade agreements, and ( 3 ) t o m a k e . i t easier f o r d o m e s t i c p r o d u c e r s t o o b t a i n relief u n d e r the escape clause.8 A. INTERNATIONAL TRAJDE ORGANIZATION For nearly a decade the Executive Branch of the U.S. Government has assumed international leadership in sponsoring an international trade organization with the broad objective of promoting an expanded non-discriminatory multilateral trading system throughout the world. After much publicity, many drafts, and several preliminary meetings, representatives from fifty-four nations completed, on March 24, 1948 at Havana, Cuba, a Charter for an International Trade Organization which was designed to establish a code of principles for conducting foreign trade, to create an international agency under the UN to assist in implementing this code, and to obligate members to consult with each other prior to changing their international trade policies. Legislation to ratify the Charter was riot submitted by the President to Congress until April 1949. Despite repeated prodding from the Administration, Congress took no action in 1949, but on April 19,1950 the House Committee on Foreign Affairs began hearings. In the meantime, only Liberia had unconditionally ratified the Charter, while the Australian and Swedish Parliaments had ratified it conditional on the United States (and in Australia's case, the United Kingdom) taking similar action. Most of the other signatories were reported waiting on the United States before proceeding to Parliamentary debate. Before the House Committee on Foreign Affairs, Administration spokesmen stressed repeatedly that the Charter was designed to promote competition and free private enterprise in foreign trade and to restore to private individuals the privilege of trading freely with one another with a minimum of State-imposed restrictions. 8 See

Congressional Record, Febraaiy 7, 1951, pp. 1077-1121.

V.

COMMERCIAL POLICY

Secretary of State Acheson said that the Charter was ". . . essentially a limitation upon the exercise by governments of their power to restrict and control trade."9 He argued that, although the Charter was not a panacea for all trade problems, its purpose was to ". · · help expand international trade and thus to contribute to higher standards of living, to greater production and wider distribution and consumption of goods and services, and to economic and political stability throughout the world."1 The desirability of larger export markets—especially for American agricultural products—was repeatedly emphasized as a reason for ratification. In anticipation of the arguments from those who opposed the Charter, Administration spokesmen (it was perhaps significant that the State Department assumed the major presentation responsibilities) stated that there were many exceptions and escape clauses in the Charter which they would have preferred not to, be there, but they stressed that several others were inserted at American insistence. They argued, however, that all were carefully circumscribed, that they reflected the document's realism, that they made possible the putting into immediate operation of many of the provisions, and that without them no Charter or general principles to guide trade could have been agreed upon. They maintained further that ratification was needed while trade patterns and policies were still in the making and that there were no grounds for hope that future economic conditions might permit the obtaining of a "better" agreement. State Department witnesses pointed out that ratification of the Charter would require few changes in present United States commercial policies other than those already contemplated in the area of customs simplification.8 They asserted that there would be no Charter unless the United States accepted membership and that membership would closely support the other economic, political, financial, and military for9 "Membership and Participation by the United States in the International Trade Organization," Hearings on H-JjRes. 236, Home of Rep., Committee on Foreign Affairs, 81st Cong., 2d Sess., p. 16. Literature and documentation on the Interna­ tional Trade Organization are very extensive. The most important document pub­ lished in 1950 is the Hearings cited above which contain the full text of several of the analyses prepared by the groups opposing the Charter. The Department of State Bulletin during the Brst half of the year also carried a series of articles on the Charter. 1 Hearings on HJ.Res. 236, op.cit., p. 11. 8 The American copyright law and the legislation restricting the export of tobacco seeds were also specifically mentioned as being inconsistent with the Charter.

V.

COMMERCIAL POLICY

eign policies of the Government.® In addition to these more sophisticated arguments, the State Department resorted to the seemingly desperate expedient of presenting a series of highly oversimplified pictorials on such subjects as "ITO is Based on Traditional U.S. Policies," highlighting a clause taken from George Washington's farewell address, and "ITO Assists Private Enterprise in Competing with State Trading," depicting the claws of state trading getting 90 percent of the world trade if there were no ITO and equal opportunities for all for a trade four times as large under the ITO. Except for two members of the Committee previously committed to supporting the Charter, Administration spokesmen were faced by a critical audience. Many non-Government witnesses also testified in favor of ratification, giving, by and large, the same arguments, with no one showing unqualified enthusiasm but all stressing that it was better than nothing. Important among these supporters, in addition to many from civic groups, were representatives of the Congress of Industrial Organizations, the American Farm Bureau, the National Coxmcil of American Importers, the Committee for Economic Development (if Articles XI and XII dealing with international investment were eliminated), the United States Junior Chamber of Commerce, the American Veterans' Committee, and the American Cotton Shippers Association. There were many who testified against ratification. Among the more important were representatives of the National Foreign Trade Council, United States Chamber of Commerce, National Association of Manufacturers, American Tariff League, American Bar Association, National Milk Producers Federation, and the New York Board of Trade. A few based their objections simply on the fear that membership would commit the United States to larger imports which would be detrimental to the particular industry they represented, but many others levelled detailed criticisms on other aspects of the Charter. The main thesis of the latter group was that they approved the objectives and general principles of an international trade organization—several stated they had supported the early draft of the Charter—but opposed the particular Havana Charter. 8 The previously stressed role of the ITO as completing the trilogy of interna­ tional economic cooperation begun by the International Fund and Bank was not emphasized.

V. C O M M E R C I A L P O L I C Y

Important among the reasons advanced were that it was drafted so that the United States was bound, morally if not legally, by the general provisions, while the many escape clauses and exceptions permitted most, if not all, other countries to control, restrict, and discriminate at will, thereby effectively invalidating the basic principles; that it was so complex as to be unworkable; and that it was certain to be a cause of continuing distrust and dispute among the members. In addition, some argued that the exceptions, combined with the full employment, commodity agreement, and economic development sections, even if temporarily justified, should not be formally sanctioned by the United States since this would at least appear to be an actual espousing by it of restrictive trade practices, international cartels, planned economies, and intensive political control over production, trade, and monetary exchange throughout the world. All of which, they stated, would seriously jeopardize the future of privately-conducted trade. There was also some feeling that the United States delegation had been outmaneuvered in the negotiations. Several persons objected strongly to the one-nation-one-vote principle and warned that, in the organization, it would often be the United States against all the rest of the world, united on the common front of being dollarshort and in a debtor status. Most of those arguing against ratification proposed no alternatives, but the U.S. Council of the International Chamber of Commerce in May publicly recommended the establishment of a commission on commercial policy under the UN ECOSOC (which, it was argued, would provide the forum without the liabilities of the ITO) and urged the United States to develop a "bold" program of bilateral negotiations aimed at a return to multilateral trade through "the constitution of an expanding nucleus of countries willing and able to eliminate quantitative restrictions on trade and payments."4 The Congressional hearings were suspended in mid-May before many who had asked to appear were heard. In August the chairman of the Committee wrote the President, who had again urged action, that the pressure of other business made it impossible for that session of Congress to act upon the bill, and the Committee therefore did not want to report on it. He suggested that it be reserved for early consideration at the next session. The President * New York Times, May 10, 1950.

V.

COMMERCIAL

POLICY

accepted this with regret and wrote on August 14, ". . . we should keep on working at it and obtain its approval as soon as we can," 5 Even as late as November 10 the Gray Report urged that the United States join the ITO. But, on December 6, the State Department announced that the Charter would not be resubmitted to Congress. Presumably this decision was taken in the belief either that the new Congress, in which the anti-Administration forces had been strengthened, would not approve it under any conditions or that the price in terms of other legislation the Administration wished would be too high.® The official statement was: "The declining interest in the International Trade Organization since 1948 is partly due to the fact that other organizations have gone forward with many of the programs which the International Trade Organization was expected to carry out. The General Agreement on Tariffs and Trade is in provisional operation in the field of commercial policy. International aspects of employment are being dealt with by the Economic and Social Cotincil of the United Nations. Steps toward economic betterment of underdeveloped countries are being undertaken through the International Bank for Reconstruction and Development, the Economic and Social Council, and the United States Point Four Program. Commitments for the protection of foreign investments are being sought through bilateral treaties. Many of the basic ideas of the charter with respect to international agreements regarding the marketing of specific commodities have been accepted in international trade practices. Such ideas relate to the need for equal representation of producing and consuming countries in commodity agreements and to the desirability of confining the agreements to commodities which are in burdensome surplus. The International Wheat Agreement, the first of its kind, has been negotiated and put into operation. International groups are studying the possibilities for agreements dealing with rubber, tin, and sugar. 8 These letters may be found in Survey of Actioities of the Committee on Foreign Affairs, 81st Cong., House of Rep., 81st Cong., 2d Sess., pp. 21-22. β The latter was suggested by a State Department announcement that "The many serious problems now facing our Congress and the legislatures of other countries, require that we concentrate on the trade programs [GATT, the Reciprocal Trade Agreements Act, and the customs simplification bill] that are most urgently needed and will most quickly produce concrete results." (Department of State Press Re­ lease No. 1221, December 6, 1950.)

V.

COMMERCIAL POLICY

"For all these reasons it has been decided that, in the light of the present world situation, the charter will not be resubmitted to the 82d Congress."7 Thus was the ITO abandoned.

B. RECIPROCAL TRADE AGREEMENTS PROGRAM The core of American international commercial policy since 1934 has been the Reciprocal Trade Agreements Program carried out under the provisions of the Trade Agreements Act of 1934 as periodically amended. During 1950 this program was continued and expanded through participation in two sessions of die Contracting Parties to the General Agreement on Tariffs and Trade (GATT) and a third round of multilateralized bilateral tariff negotiations beginning at Torquay, England, in September. The United States also introduced the escape clause into the trade agreement with Switzerland, cancelled the agreement with Mexico, withdrew certain concessions previously granted to China, and made minor changes in certain other agreements.

General Agreement on Tariffs and Trade The GATT is an international trade agreement which was concluded at Geneva in 1947 by twenty-three countries, including the United States, and which embodied the results of a sevenmonth round of tariff (and other trade restrictions) negotiations. These took place at the same time that the UN Preparatory Committee was drafting an ITO Charter, and the GATT contained not only the results of the tariff concessions but also a set of commercial policies, rules, and provisions which are very similar to those in the final Chapter IV of the ill-fated ITO Charter. a. FOURTH AND FIFTH SESSIONS OF THE CONTRACTING PARTIES

In addition to the negotiation of tariff reductions, the Contracting Parties to the GATT also meet from time to time to discuss policy questions, to prepare for the tariff negotiation conferences, and to consider problems which may have arisen from the opera7 "Expanding World Trade: United States Policy and Program," Department of State Publication 4032, Commercial Policy Series 138, January 1951. Also in De­ partment of State Bulletin, February 5, 1951, pp. 213ff.

V.

COMMERCIAL POLICY

tion of the Agreement. The first such session was held at Havana in 1947, the second at Geneva in 1948, and the third at Annecy in 1949. Dtxring 1950 the fourth session was held at Geneva from February 23 through April 4 and the fifth at Torquay from November 2 through December 16, the latter concurrently with the third round of tariff negotiations. At the fourth session, members spent much time making preparations for the planned September tariff negotiations. In this connection, some of the countries were worried lest others take advantage of their technical right at the forthcoming meeting to withdraw concessions previously granted at Geneva and Annecy. A resolution was passed favoring the extension until January 1, 1954 of the date after which the contracting parties could withdraw concessions. More formal approval was withheld because some low-tariff European members reported that their acceptance of the extension would depend on others substantially reducing tariffs at the Torquay negotiations. (At the fifth session arrangements were made to extend the life of the earlier concessions as recommended, subject to renegotiations to be completed at Torquay. ) To maintain some equality in bargaining power between high-tariff and low-tariff countries, the members also reaffirmed at Geneva that, as before, the binding of a low tariff at Torquay would in principle be regarded as equal to a reduction of a high rate. On United States initiative, much, time was given at the fourth session to the study of the extensive use of quantitative restrictions on trade, which often effectively nullified tariff concessions,8 and to the possibility of relaxing or eliminating them, or at least reducing their harmful effects. The group formally recommended that when such restrictions were permitted by the GATT for balance-of-payments reasons, steps should be taken by the national authorities to minimize the protective effect by discouraging new investment in the protected industries, by emphasizing to local producers that the protection was temporary, and by administering the controls on a flexible basis.® The United States delega8 Conversely, a problem also discussed was that among the ERP countries re­ sulting from the relaxation of intra-European quantitative restrictions which then threw into issue the great differences in their tariff levels. 9 See the officially approved report: The Contracting Parties to the General Agreement on Tariffs and Trade, The Use of Quantttative Restrictions for Protec­ tive and other Commercial Purposes, Geneva, July 1950.

V,

COMMERCIAL

POLICY

tion and others also expressed concern over the continued extensive discrimination against dollar-area imports, and several countries, including those in the sterling area, were invited to consult further, at the fifth session to be called in November, on the possibility of reducing this discrimination.1 Many specific problems, including a United States request to increase its restrictions on imports of Canadian potatoes,2 were considered, and some uneasiness was evidenced by many delegates over the failure of the U.S. Congress to ratify the ITO Charter. The United States delegation made a recommendation, later postponed and finally dropped, that Japan be granted mostfavored-nation treatment by the Contracting Parties.3 At the fifth session, in November and December, over thirty items were on the agenda. The controversial issue of the discriminatory application of import restrictions—especially the 25 percent administrative cut in dollar imports by the sterling area imposed in the summer of 1949—was discussed at length. The United States, along with Belgium, Canada, and Cuba, argued that the time had come when certain members of the sterling area might relax their restrictions on imports from hard-currency areas. The International Monetary Fund was consulted,, in accordance with the Agreement, and it expressed the opinion that progressive relaxations were then "feasible" for Australia, Ceylon, New Zealand, Southern Rhodesia, and the United Kingdom, but not yet for 1 See,

The Contractliig Parties to the General Agreement on TarifEs and Trade, First Report on the Discriminatory Application of Import Restrictions, Geneva, March 1950. 2 Large imports of potatoes from Canada, while the CCC's huge stocks (accumu­ lated under the price-support program) were deteriorating in quality, raised serious domestic political and economic issues during early 1950. Li March, the Govern­ ment applied to the Contracting Parties to me GATT for a temporary waiver of the tariff obligations undertaken in 1947 with respect to potatoes. The request was granted, and a September β Presidential proclamation provided that for the cropyear beginning September 15, 1950 the special rate of 37% cents per 100 pounds would apply (in addition to the so-called normal tariff quota of 1 million bushels) to imports equal to the number of bushels of potatoes by which the officially-esti­ mated United States domestic production was less than 835 million bushels, rather than 350 million provided in the original concession. The official estimate made in September was in excess of the 335 million bushels so the concession was ef­ fectively withdrawn. 8 For further details of this session, see Interim Commission for the Interna­ tional Trade Organization, Liberating World Trade, Geneva, June 1950; Sinn, N. E., "Fourth Session of the Contracting Parties to the General Agreement on Tariffs and Trade," Department of State BtMetin, July 24,1950, pp. 150ff.; The Economist, March 4, 1950, p. 505; March 18, p. 582; and April 22, pp. 875-876.

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COMMERCIAL POLICY

India or Pakistan (or Chile).* This conclusion aroused strong feelings. Representatives from the United Kingdom and certain other members of the sterling area not only questioned the right of title Fund to give an "opinion" but stated that not enough attention had been given to the many factors, especially the rearmament burden, which would tend in 1951 to reduce their dollar earnings. They agreed in the end to "take note" of the observations and views expressed and to pass them back to their Governments for consideration.5 The issue was at least temporarily solved by the end of 1950, when the problem of the sterling area was becoming increasingly one of physical availability of imports rather than of monetary reserves and the 1949 twenty-five percent cut in dollar imports had for all practical purposes been rescinded. Also on the agenda was the question of the discrimination inherent in the proposed Schuman Plan, but discussions were postponed because agreement on the Plan had not been reached.® During this session the Contracting Parties—recognizing that the transitionally-permitted use of direct restrictions and exchange controls were still regarded as necessary by many countries and were being continued—approved a sort of code of practices for the administration of such controls. This code had been proposed by the United States and was designed to reduce some of the hardships and uncertainties faced by private importers and exporters. These were recommendations and not formal obligations and were submitted to the member governments only as guides. Included, among others, were recommendations that newcomers as well as established firms should receive import licenses, that the granting of an import license should imply that foreign exchange would be made available within a reasonable time, and that, if and when restrictions were tightened, goods ordered but not yet shipped should receive special consideration.7 4 See International Monetary Fund, Press Release, Washington, D.C., Decem­ ber 13, 1950. 6 Some saw in this action, whereby various members of the sterling area were treated differently, a serious threat to the cohesion of the sterling area since' it violated one of the primary rules of that monetary mechanism, i.e., that reserves be pooled and shared. eThere was no public evidence in 1Θ50 that United States officials regarded the discrimination inherent in the Schuman Plan with any great concern. 7 For details see Department of Commerce, Foreign Commerce "Weekly, Wash­ ington, D.C., January 15, 1951, p. 3.

V. C O M M E R C I A L P O L I C Y

A third major group of items on this session s agenda was concerned with the question of the future administration of the GATT. It had been operating under interim and provisional machinery pending the establishment of the ITO and had no adequate administrative facilities for handling the many problems requiring continuing consultation, for interpreting and applying the Agreement between sessions of the Contracting Parties, or for making arrangements for tariff conferences. Action on this question became imperative when, on December 6, the State Department announced that it would not resubmit the ITO Charter to Congress.8 This meant that GATT meetings were the only international forum available for detailed discussions of commercial policy problems. It was therefore agreed to establish a working party, to study the problem of creating a standing committee and a permanent secretariat, and to consider its report at the sixth session of the Contracting Parties scheduled for September 1951 at Geneva. On the same day that the State Department announced it was abandoning the ITO it stated that Congress would be asked "... to consider legislation which would make American participation in the General Agreement more effective." In particular, this meant not only that it would ask Congress to extend the Reciprocal Trade Agreements Act, the legal basis for American tariff negotiations, but also that it would suggest to other governments that there be created the "necessary administrative machinery including a small permanent staff" to permit the GATT to operate efficiently, and that it would ask Congress to approve this agency and to provide funds for American participation. The Department also planned to ask Congress again to approve the proposed customs simplification bill, the passage of which was necessary before certain provisions of the GATT could be definitively applied so far as the United States was concerned. The press reported that Congress would probably be more friendly to these proposals than it had been to the ITO since, through the periodic extension of the Trade Agreements Act, it would have more effective control over United States action in these matters.8 8 The members rejected a proposal that the GATT be amended to include some of die articles of the ITO Charter not related strictly to commercial policy. 9Further details on the fifth session of the Contracting Parties to the GATT may be found in the Department of State Bulletin, December 18, 1950, p. 977,

V.

COMMERCIAL POLICY

b. TORQUAY TARIFF NEGOTIATIONS

The first round of tariff negotiations under the GATT took place in Geneva in 1947 among twenty-three countries, including the United States. A second round between the original contracting parties and eleven new countries, and among the eleven new countries, took place at Annecy, France, in 1949, but there were no further negotiations among the original parties. 1 The third round began at Torquay, England, on September 28, 1950 and ended seven months later. United States officials believed that this would be the last such large-scale tariff negotiation for several years. Details of the results are not yet available as this document goes to press. Participating at Torquay were not only twenty-two of the original parties (China and Lebanon had withdrawn in the meantime and Indonesia became a party in her own right), but also the nine who had acceded at Annecy, 2 and six new countries. 8 All together, the participants accounted for some 80 percent of total international trade. Bargaining under the GATT proceeds between pairs of coun tries on a commodity-by-commodity basis. The most important of these bilateral discussions deal with products in which one country is the "principal" supplier to the other. Simultaneously, however, negotiations on concessions are also held by each of these countries with each of the other participants whose trade in that particular commodity is important but "secondary." When all these two-country negotiations have been completed (it was anticipated at the outset that there would be over 300 bilateral negotiations at Torquay), all. the concessions resulting from the separate discussions are examined and integrated into one agreement which each participant signs—or not. The most-favorednation clause is a part of the Agreement so that all members automatically receive any concessions granted. and March 12, 1951, pp. 415-418; The Economist, November 18, 1950, p. 832, December 16, p. 1073, December 23, p. 1163, and December 30, p. 1219; The Statist, November 11, 1950, p. 613; .and International Monetary Fund, Interna­ tional Financial News Survey, Washington, D.C., December 22, 1950, p. 197. 1 See Survey—1949, pp. 156-159, for a review of the Annecy conference. 2 Colombia withdrew during the course of the Annecy negotiations and Uruguay did not sign the Annecy Protocol but participated again at Torquay. β Austria, Federal Republic of Germany, Korea, Peru, the Philippines, and Tur­ key. Guatemala was scheduled to participate but did not do so.

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In preparation for the Torquay negotiations, and in keeping with tihe established practice under the Reciprocal Trade Agreements procedures, the U.S. Interdepartmental Committee on Trade 'Agreements published formal notices, on April 11, May 15, and August 17, of intentions by the Government to undertake negotiations with twenty-four specified foreign countries looking toward reciprocal concessions on tariffs and other trade barriers.4 The lists of commodities—some 2,900-^on the importation of which concessions might be considered were also published. At the same time, the Committee on Reciprocity Information announced the dates at which public hearings would commence on all phases of the anticipated negotiations. After these hearings were completed, the Trade Agreements Committee digested the information and views received and then made recommendations to the President as to the items on which negotiations should take place. The subsequent decision of the President constituted instructions to the United States negotiators.5 In general, the United States did not undertake further negotiations at Torquay for items on which it had made concessions at Airnecy in 1949. After the invasion of Korea, proposals were made in the United States by certain Congressmen, industrial groups, and some labor unions to postpone the Torquay meeting on the grounds that the times were uncertain and that the threat of war made it unwise to take action which might injure domestic industries. The State Department announced on September 1 that it had carefully reviewed these proposals and had concluded that it was best to go ahead, maintaining that reciprocally-reduced tariffs would constitute no serious threat to domestic industries, would help to counter the rearmament-induced inflatioiiary pressures throughout the free world, would increase the dollar-earning capacity of friendly countries and thus help to correct the imbalance in United States trade, and would help to increase intra-European 4 In addition to countries with whom negotiations had been held either at Geneva in 1947 or Annecy in 1949, the United States negotiated with the following new countries: Austria, Federal Republic of Germany, Korea, Peru, Turkey, and In­ donesia. In 1947 the Netiierlands negotiated for the Netherlands East Indies, but in 1950 the Republic of Indonesia for the first time negotiated for itself. 5 For further details on "How a Trade Agreement is Made," see House Report No. 14, House of Rep., 82d Cong., 1st Sess., January 29, 1951, Appendix A. The Committee on Reciprocity Information and the Trade Agreements Committee at present have almost identical membership but not the same chairman.

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trade and so facilitate military production there. It further argued that cancellation of the conference would be interpreted as a repudiation by the United States of the principles of international trade liberalization and that, if the period of rearmament were to continue for several years, as seemed likely, it was most important that trade be expanded. The conference opened on schedule. Many observers anticipated that there would be fewer reductions than in the previous confer ences because for some countries most of the relatively non-painful concessions had already been made and because tinder the Reciprocal Trade Agreements Act the United States, which was expected again to set the pace at Torquay, could only reduce its rates on a reciprocal basis and to one-half those in effect in June 1945; for many items this had already been done. Further, many of the European countries had lowered quantitative restrictions under pressure from OEEC and ECA, with the result that they could no longer grant tariff concessions and offset their effects by direct controls. On the other hand, West Germany was participating and many industrial products of which in the past she had been the principal supplier were under consideration for the first time. During the first few months die talks went very slowly, in large part because the French delegation, despite its eloquently expressed strong support for trade Hberalization in principle—as witnessed by the Schuman Plan and support of the EPU, at the very beginning of lie conference announced its intention of withdrawing as of January 1951 many of France's 1947 and 1949 concessions. Some observers interpreted this as an effort to strengthen the French bargaining position vis-k-vis Germany, but it had the effect not only of making it exceedingly difficult for negotiations to go on between other countries on goods in which there was an important French secondary interest (others felt the need for maintaining bargaining weapons against the French) but also of opening the danger of direct retaliatory measures in the form of increased barriers.® This protectionist behavior of the β A more complete account of tie preliminary stages of these negotiations may be found in the Department of State BiitteHn, May 15, 1950, pp. 762-764; August 28, p. 343; September 18, pp. 474-475, and October 2, pp. 553-555; The Economist, September 30, 1950, pp. 560-561, November 11, p. 768, and November 18, pp. 799-800 and 832-833; The Statist, September 30, 1950, p. 432, October 7, pp. 457458; and The Banker, London, November 1950, pp. 278-283. The full texts of

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French was particularly resented by the Eiaropean low-tariff countries and resulted in important qualifications being introduced into the intra-European trade liberalization measures which ECA was so actively encouraging.7 More serious, from the point of view of the immediate and long-term commercial policy objectives of the United States, were the later press reports that little if any progress was being made in the negotiations between the United States on the one hand and the United Kingdom, Australia, and New Zealand on the other. It was unofficially reported that the United States was prepared to offer extensive tariff concessions in return for large reductions in the margins of imperial preferences but that the British and Commonwealth negotiators were unwilling to "make any appreciable withdrawal on the preference front." The American interest in these negotiations was reported to be particularly keen, not only because of the benefits to trade but also because a sizable reduction in the imperial preferences would constitute an especially impressive "trophy" to lay before Congress as it considered extending the Trade Agreements Act. [The Torquay negotiations ended on April 21, and in early May, after this document had gone to press, the results were made public. Only 147 pairs of negotiations were completed involving thirty-four countries. The six "new" countries, Austria, West Germany, Korea, Peru, the Philippines, and Turkey, all completed negotiations, but Burma and Syria (who had acceded at Geneva) and Liberia and Nicaragua (who had acceded at Annecy) did not. The United States did not undertake negotiations with eleven of the participants at Torquay and successfully completed negotiations with only seventeen countries, the most important from the point of view of the volume of trade affected being those with Germany and Canada. Negotiations were engaged in with the United Kingdom, Australia, and New Zealand, but these foundered on the issue of imperial preferences and no agreements with these countries were concluded. In certain of the completed negotiations, however, duty reductions were accompanied by a narrowing of preference margins. Negotiations with lndki and Cuba were also unsuccessful. New direct concessions, either lower tariffs or binding of present treatment, were obtained by the United States on exports to the seventhe various announcements by the Interdepartmental Committee on Trade Agree­ ments and Committee on Heciprocily Information may be found in the relevant issues of the Department of Commerce's Foreign Commerce Weekly. 7 See Chapter VI, Section B, infra.

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teen countries valued at slightly over $1 billion in 1949. In addition, through the most-favored-nation clause, the United States also received concessions on another $100 million of exports as a result of concessions exchanged by other participants. The United States granted concessions on items which were imported from all countries to a value of approximately one half billion dollars in 1949. The bulk of the concessions granted were duty reductions but there were some new bindings. It was formally agreed at Torquay—after certain adjustments—to extend until January 1, 1954 all of the concessions which had been negotiated at Geneva, Annecy, and Torquay. Several countries did make modifications or withdrawals of previous concessions before agreeing to the time extension, but they were all relatively minor except those made by France, South Africa, and Cuba. In most cases, compensatory concessions were granted for those withdrawn or modified and no retaliatory withdrawals were made, with the result that in the aggregate the Geneva and Aimecy concessions were maintained. The United States made no withdrawals or modifications as a condition for agreeing to the extension, but it did make three modifications through the regular process of negotiation. The Torquay Protocol remains open for signature until October 1951. (Preliminary details of the results of the Torquay negotiations may be found in Department of State, Analysis of Torquay Protocol of Accession, Schedules and Related Documents, Publication 4209, Washington, D.C., May 1951.)] Escape Clause

Since 1943 it has been "an integral part of United States foreign economic policy"8 that all new trade agreements include the socalled "escape clause," permitting any party to the agreement to modify or withdraw a concession which it finds has caused or threatens to cause serious injury to domestic producers. A cor­ responding provision is included in Article XIX of the GATT, which specifically provides that the country from whom a con­ cession is withdrawn may suspend equivalent concessions. In the United States, the escape clause is administered by the Tariff Commission, an independent bipartisan agency directly responsi­ ble to Congress, which hears complaints from domestic producers and makes recommendations directly to the President without 8 Department of State Bulletin, August 28, 1950, p. 346. For more official de­ tails than- are given below on recent action regarding the escape clause, see De­ partment of State Bulletin, June 12, 1950, p. 979, and October 30, p. 710. For some unofficial British views, see The Statist, August 26, 1950, pp. 279-281; September 30, pp. 424-425; and October 21, pp. 515-516.

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going through the State Department or any part of the trade agreements machinery. Through 1950, nearly 5,000 separate items were subject to this clause in various trade agreements, but the Tariff Commission had received only twenty applications for relief, covering seventeen products.9 Of these, thirteen had been dismissed on the grounds that the evidence submitted by the complainant did not justify a formal investigation; three were pending; one had been postponed. Three investigations had been ordered. One investigation, dealing with spring clothespins, disclosed no justification for invoking the clause, and another, relating to hatter's fur, was in progress at year's end. Hte other dealt with certain women's fur felt hats and hat bodies on which concessions had been granted at Geneva in 1947. This investigation was ordered in April 1950 and resulted in the first recommendation by the Tariff Commission that a concession be withdrawn under the escape clause. This was formally accomplished by Presidential proclamation as of December 1, 1950 and restored the 1930 rates, which ranged from 25 to 40 percent higher that those provided in the GATT. Czechoslovakia protested this action at the fifth session of GATT, and the question was referred to an intersessional working party. Although this withdrawal created relatively little reaction abroad, strong objections were raised in Switzerland to the August 10 State Department notification to the Swiss Government that unless it agreed before October 15 to the insertion of the escape clause, the 1936 trade agreement would be terminated on February 1, 1951. The press reported that an important consideration in this action was the fear that unless the clause were inserted, Congressional extension in 1951 of the Reciprocal Trade Agreements Act would be imperiled. Greatly exercised over the possibility of this opening the way for a rise in the United States tariff on watches,1 the Swiss press referred to it as an ultimatum and reported that they regarded the clause as "the most serious impediment" to the success of all plans for liberalizing world trade. (The State Department notice was sent in the midst of details, see House Report No. 14, op.cit., Appendix B. might be noted here mat the British Government has supported its watch industry for strategic reasons. See Stuart, A. H., "Watch and Clock Making Re­ vives in United Kingdom," Department of Commerce, Foreign Commerce Weekly, Washington, D.C., January 16, 1950, pp. 3ff. 8 For

1 It

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arrangements for signing the United States-encouraged European Payments Union which was designed to liberalize mtra-European trade.) They recognized, however, that they were facing "inexorable pressure"; if they refused, the agreement would lapse with the old high rates going into effect, in most cases 30-40 percent above the current ones, and any new agreement would contain the clause.2 On October 13, two days before the deadline, Switzerland agreed but was most fearful, especially in the light of Korean developments, that for strategic reasons the United States would quickly invoke the clause as a means of expanding the domestic watch industry.® This was not done in 1950, but early in 1951 an application for relief under the clause was submitted to the Tariff Commission. There was no escape clause in twelve other United States trade agreements—those with Peru, Turkey, Uruguay, Argentina, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Iceland, Iran, and Venezuela. The first three countries were, however, expected to accede to the GATT at Torquay, and the Administration was reportedly not anxious to include die clause in most, if not all, of the others since the major concessions granted had been the binding of free-list items—especially coffee and cocoa—in return for duty reductions by the other countries.4 Miscellaneous In addition to the tariff negotiations at Torquay and action supplementing the 1949 Annecy negotiations," the United States during the year made several changes in existing trade agreements. The most important was the termination as of December 31,1950 of the 1943 agreement with Mexico. In 1947, Mexico, with a large deficit vis-a-vis the United States and strong internal pressures for higher import restrictions to protect domestic industries and to foster economic development, placed embargoes on the imSee Swiss Bank Corporation, Bulletin, New York, October 1950, Supplement. This is but one example of the serious problems inherent in the whole coneept of mutual defense as being developed by die United States. {See Chapter I, Sec­ tion B, supra.) 4 See Congressiorud Record, January 31, 1951, p. 884. sFor a brief statement concerning the latter, see Survey—1949, pp. 156-158. Uruguay was the only country which participated throughout the Annecy Con­ ference and did not sign the Annecy Protocol in 1950. She was, however, taking part in the Torquay negotiations. 8

8

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POLICY

portation of some goods and raised the duties on others covered by the trade agreement. The United States, reluctant to denounce lie agreement, consented to certain provisional increases in restrictions, and the two Governments agreed, in April 1948, to negotiate to see if compensatory concessions could be made by Mexico on items not included in the original 1943 agreement. After many months of discussions, the Mexican authorities still were unprepared to meet the United States requests, and the two Governments concluded in June 1950 that the agreement would be terminated as of the end of the year.® Among the more important consequences of this action was that the tariff quotas on many petroleum products provided in the 1939 trade agreement with Venezuela came back into effect, and that the United States excise tax was doubled on imports of crude, topped crude, and fuel oil—no matter what their source—in excess of 5 percent of domestic refinery consumption during the preceding year. Also, the duty on cattle and sheep imports from Canada was nearly doubled, as was the duty on lead imports. On May 6, China withdrew from the GATT. The press reported this to be primarily an economic warfare action by the Nationalist Government to deprive Communist China of the favorable American tariff on Chinese dried eggs for which professional bakers in this country provide a large market. President Truman officially terminated as of December 11 most of the tariff concessions negotiated with China at Geneva in 1947. Some of the concessions granted there were not cancelled, however, because of the strong interest of other countries in them via the most-favored-nation clause. Action on these items was postponed until after consultation with the interested countries, as provided in Article XXVII of the GATT.7 Negotiations with Cuba were held early in the year, at the latter's request, on a few relatively minor items initially negotiated at Geneva in 1947. The negotiations were amicable, with the rates being increased on some items and lowered on others. No changes were made in United States rates.8 Public hearings were ® Department of State Bulletin, September 25, 1950, p. 501. ι Department of State Bulletin, October 2, 1950, p. 551, and October 23, p. 659. See also The Economist, December 2, 1950, p. 949. 8 The Cuban Government, In an effort to stop a large speculative inflow of items covered by the increased rates, did, however, put the new rates into effect without

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also held by the Interdepartmental Trade Agreements Committee on the possibility of holding supplementary trade agreement negotiations with Chile, looking toward further United States tariff concessions on dried beans, but it concluded that no action should be taken at that time. In April the U.S. Government agreed to a one-year's waiver of certain provisions in the existing trade agreement with Costa Rica so as to permit the latter to apply multiple exchange surcharges on certain imports from this country. The State Department made it clear that it regarded this as a temporary expedient to be used only until Costa Rica found a solution to certain of its financial difficulties. Calendar of Trade Agreements Table 23 lists those countries with which the United States had reciprocal trade agreements as of the end of 1950. All of these agreements were entered into by the United States under the authority of the Trade Agreements Act of 1934 as amended. Countries designated with a (G) are those which became contracting parties to the General Agreement at Geneva in 1947 and those with (A) joined at Annecy in 1949. Countries which are now members of GATT and previously had bilateral agreements with the United States are designated by an asterisk. These prior agreements are now either terminated, superseded, or inoperative. Those without symbols are countries which are not parties to the GATT and with which the United States concluded bilateral agreements before the General Agreement was concluded. Since 1947, the United States has carried out no new tariff discussions except through the machinery of the General Agreement. C. TARIFF ADMINISTRATION AND CUSTOMS SIMPLIFICATION American customs procedures have long been characterized by traders as unnecessarily complex, out-of-date, time-consuming, and often inequitable. Under provisions of the GATT-and the the usual thirty days' notice and drew ineffective protests from American export­ ers and the State Department. For details on these negotiations, see Department of State Bulletin, February 20, 1950, p. 297; June 12, p. 980; June 19, p. 1011; and August 7, pp. 216-217. Later in the summer renegotiations were held with Cuba on the latter's rates for a few minor products on which there had been disagree­ ment as to whether the 1947 GATT schedules applied.

TABLE 23 Calendar of United States Reciprocal Trade Agreements, as of December 31, 1950 Country Argentina Australia (G) Belgium (G) ° Brazil (G)e Burma (G) Canada (G)" Ceylon (G) Chile (G) Costa Rica Cuba (G)* Czechoslovakia (G)° Denmark (A) Dominican Republic (A) Ecuador El Salvador Finland (A)* France (G)* Greece (A) Guatemala Haiti (A)* Honduras Iceland India (G) Indonesia (G)1 Iran Italy (A) Lebanon ( G ) Liberia (A) Luxembourg(G)° Netherlands (G) * New Zealand (G) Nicaragua (A)* Norway (G) Pakistan (G) Paraguay Peru Southern Rhodesia (G) Sweden (A)e Switzerland Syria (G) Turkey Union of South Africa (G) United Kingdom ( G)β Uruguay Venezuela

Date Concluded Oct. 14 1941 Oct. 30 1947 Oct. 30 1947 Oct. 30 1947 Oct. 30 1947 Oct. 30 1947 Oct. 30 1947 Oct. 30 1947 Nov. 28 1936 Oct. 30 1947 Oct. 30 1947 Oct. 10 1949 Oct. 10 1949 Aug. 6 1938 Feb. 19 1937 Oct. 10 1949 Oct. 30 1947 Oct. 10 1949 Apr. 24 1936 Oct. 10 1949 Dec. 18 1935 Aug. 27 1943 Oct. 30 1947 Oct. 30 1947 Apr. 8 1943 Oct. 10 1949 Oct. 30 1947 Oct. 10 1949 Oct. 30 1947 Oct. 30 1947 Oct 30 1947 Oct. 10 1949 Oct. 30 1947 Oct. 30 1947 Sept. 12 1946 May 7 1942 Oct. 30 1947 Oct. 10 1949 Jan. 9 1936 Oct 30 1947 Apr. 1 1939 Oct. 30 1947 Oct. 30 1947 July 21 1942 Nov. 6 1939

Date Effectioe Nov. 15, 1941 Jan. 1, 1948 Jan. 1, 1948 July 31, 1948 JulJr 30, 1948 Jan. 1, 1948 Juty 30, 1948 Mar. 16, 1949 Aug. 2, 1937 Jan. 1, 1948 Apr. 21, 1948 May 28, 1950 May 19, 1950 Oct. 23, 1938 May 31, 1937 May 25, 1950 Jan. 1, 1948 Mar. 9, 1950 June 15, 1936 Jan. .1, 1950 Mar. 2, 1936 Nov. 19, 1943 July 9, 1948 Jan. 1, 1948 June 28, 1944 May 30, 1950 July 30, 1948 May 20, 1950 Jan. 1, 1948 Jan. 1, 1948 July 31, 1948 May 28, 1950 July 11, 1948 July 31, 1948 Apr. 9, 1947 July 29, 1942 July 12, 1948 Apr. 30, 1950 Feb. 15, 1936 July 31, 1948 May 5, 1939 June 14, 1948 Jan. 1, 1948 Jan. 1, 1943 Dec. 16, 1939

1 The Netherlands signed the GATT at Geneva in 1947 in behalf of the Nether lands Indies. As the Republic of Indonesia, the latter became a party to the agreement as an independent country on February 24, 1950. Sources: Department of Commerce, Foreign Commerce Weekly, Washington, D.C., January 23, 1950, p. 40, and February 5, 1951, p. 28.

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ITO Charter—the United States is obligated to make certain reforms, and special attention was given this problem during the United States, United Kingdom, Canadian financial discussions in September 1949.9 From funds provided by Congress in 1947, the Treasury Department had hired a private firm , of management engineers to survey United States customs procedures and to recommend improvements. It was found that some reforms could be made without changes in the law, and several have been instituted recently. In late 1949, pre-shipment chemical analysis was permitted in certain cases, and the Secretary of the Treasury instructed the customs inspectors to be more cooperative with importers. In early 1950, the regulations were altered to provide that samples of articles to be imported could be submitted to local customs officials for an opinion on valuation and classification. Previously such an opinion was given only on regular commercial shipments. In November, procedures were established permitting traders to obtain, in advance of importation, formal rulings as to classifications and rates of duties to be applied. During the year, the conditions of entry for commercial traders' samples were greatly liberalized; the customs regulations were also altered so as to eliminate for many imports the necessity of obtaining certified consular invoices, which had often been a very time-consuming requirement. The Treasury Department also issued a handbook, "Customs Information for Exporters to the United States," giving detailed information on how to expedite the clearance of imports through the customs.1 Many of the changes which the Administration and importers desired, however, required legislation, and early in the year the Treasury Department completed the drafting of a customs simplification bill which was sent to the Budget Bureau for clearance prior to its being submitted to Congress. These proposals remained "bottled up" there for several weeks as, according to the press, a behind-the-scenes fight was waged between the Treasury and the Tariff Commission over the provisions regarding computation of duties on coal-tar products. The major chemical companies 8 See Survey—1949, pp. 130 and 159. 1 Notices of administrative changes usually

appear in detail in Ilie Department of Commerce, Foreign Commerce Weekly, Washington, D.C.

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were, reported protesting strongly to the Tariff Commission and the Department of Defense over the newly proposed method of valuing foreign coal-tar products, which would result in substantial declines in the effective rates of duty.2 It was unofficially reported that the Treasury made some concessions on this issue since it did not want this very complicated bill to become controversial in Congress. Finally, on May 1, the revised measure was sent to Congress.® The most important provision of this technical and complex proposal was that which would, generally, substitute "export value" for "foreign value" as the primary basis for valuing imports for ad valorem duty purposes. This change would end the present practice of including foreign internal taxes, applicable to domestic sales only, in the dutiable value and so, in many cases, would result in lower import duties. This change would also expedite customs administration and reduce its cost because determination of "foreign value" is usually much more difficult and time-consuming for the customs officials than determination of "export value." Another important provision would reduce the present harsh and often arbitrary penalties for undervaluation declarations made in good faith. The present provisions for informal entries and administrative exemptions for imports of small value would also be liberalized, as would the procedures for marking imports, for combining of goods, and for drawbacks for duties paid on goods later reexported. Among the remaining provisions was one which would require that material injury to a domestic producer be found before anti-dumping or countervailing duties could be levied.4 Congress, took no action on this measure during 1950, reportedly because of the pressure of other work rather than strong opposition. In his Economic Report to the Congress on January 12,1951, the President again asked for consideration and approval of this bill, and when the State Department announced on December 6, 2 For details of this issue, see especially The WaU Street Journal, April 24, 1950 and The Statist, April 15, 1950, pp. 452-454, and May 13, p. 586. s H.R. 8304, 81st Cong., 2d Sess. iUnder «HsHng laws and regulations a finding of mere injury is sufficient to justify assessment of anti-dumping duties, and no finding of injury is required as a precedent condition for levying countervailing duties. See Ostroff, N., "United States Customs Beform: Chvacter and Purpose of Proposed Legislation," Depart­ ment of Commerce, Foreign Commerce Weekly, Washington, D.C., May 8, 1950, pp. 8ff., for a detailed discussion of all the provisions of the proposed law.

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POLICY

1950 that the ITO Charter would not be resubmitted to Congress, it stated that it would, however, press for favorable action on the proposed eustoms simplification legislation so that, so far as the United States was concerned, the GATT could "be put into effect definitively and in its entirety." D. FOREIGN TRADE ZONES Modern foreign trade zones, or free ports, have been common in Europe for nearly three-quarters of a century, but it was not until 1937 that the first such zone was established in the United States—on Staten Island, in New York City. Five more zones have been created since the war—at the ports of San Francisco, Los Angeles, Seattle, New Orleans, and, in 1950, at the municipal airport of San Antonio.5 The Tariff Commission first officially approved the principle of establishing foreign trade zones in 1918, and bills authorizing their establishment were presented to every Congress between 1918 and 1934. Each time these proposals included provisions for manufacturing and exhibiting in the zones, and because of opposition to these privileges from domestic manufacturers the bills failed to win Congressional approval. Finally, in 1934, these two features were not included, and the Celler Foreign Trade Zone Act of 1934 was approved, authorizing "manipulation' of commodities but specifically prohibiting their "manufacture" and "exhibition." The distinction between manipulation and manufacture was the source of many disputes and led to many substantive as well as administrative difficulties. In June 1950, Congress amended the earlier law so as, among other things, to authorize manufacturing and exhibiting in the zones.® FaciUties are not present at the zones for any large-scale manufacturing, but minor operations can be performed. The new law also facilitates importers' obtaining a determination of both import duties and internal revenue taxes before goods are actually committed to importation and allows exporters to recover drawbacks and avoid certain internal revenue? taxes before goods- are actually shipped.7 6 One deterrent to the use of United States zones is that federal income taxes must be paid on profits earned on transactions conducted in them. β P.L. 566, 81st Cong., 2d Sess. A rider was attached to this law removing the import duty from Christmas trees. 7 For a detailed discussion of the 1950 legislation and the many advantages to

194

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Ε. FIRST UNITED STATES INTERNATIONAL TRADE FAIR Although international trade fairs have been a common device in Europe since the First World War for promoting larger foreign trade, the first such fair in this country was held in Chicago in August 1950.8 An international trade fair, not to be confused with "world fairs" or "expositions," may be described as a shortperiod, large-scale exhibition of samples of foreign and domestic goods shown primarily for the benefit of commercial buyers from all over the world. Admittance to the general public is usually restricted. Since the end of the war, the Department of Commerce has been actively encouraging the holding of such fairs, and in late 1949 a group of Chicago businessmen decided to sponsor one. Although this was a private venture and not under the official auspices of the Government, it received the cooperation and support of officials in Washington, as well as those of Tninnis and Chicago. The International Chamber of Commerce adopted a resolution in support of the venture; the OEEC Council created a special Trade Fair Board to encourage European participation; ECA extended assistance by encouraging foreign producers to exhibit; 9 the State Department requested its diplomatic establishments abroad to support and publicize the undertaking; and the U.S. Congress helped by approving P.L. 517 which facilitated the entry of foreign merchandise to be exhibited. The fair drew some 1,500 exhibitors from a world-record number of forty-seven countries. European exhibitors were apparently not overly impressed with die success of the fair, and events following Korea made it less urgent for them to exhibit their wares, but Chicago was pleased and at the end of the year was making plans for another fair in the spring of 1952. "Expositions," foreign traders of foreign trade zones, see Thompson, M. M., "Role of Foreign Trade Zones in World Trade Significantly Enlarged," Department of Commerce, Foreign Commerce Weekly, Washington, D.C., June 26, 1950, pp. Sff., and Lyons, T. E., "Foreign Trade Zones Will Aid the Business Developed at Trade Fairs," Department of Commerce, Foreign Commerce Weekly, Washington, D.C., Au­ gust 7, 1950, pp. 5ff. See also Senate Report No. 1107, September 26, 1949, U.S. Senate Committee on Finance, 81st Cong., 1st Sess. 8 See Department of Commerce, Foreign Commerce Weekly, Washington, D.C., issues for March 20, June 26, July 81, August 14, October 2 and 16, 1950, and The Statist, September 2, 1950, for fuller accounts of the fair. 9 ECA has also encouraged the holding of such fairs in Europe.

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usually of only one category of commodities, were being planned for 1951 in Houston, New York, Chicago, and Detroit. F. INCREASING EUROPEAN DOLLAR EXPORTS ECA, with the cooperation of other branches of the Government and of private business, intensified during the first half of the year its efforts to expand EKP countries' exports to the United States. This program had received impetus from the 1949 ECACoinmerce Department Mission to investigate possibilities of increasing Western Europe's dollar earnings.1 Early in the year ECA established an Export Promotion Division in its Office of the Special Representative in Paris. Export promotion officers were then appointed in all the ECA country missions. To give this undertaking a more permanent air, representatives of the State, Treasury, and Commerce Departments were assigned to work with the Export Promotion Division, and ECA made efforts to obtain more active help on these problems from the regular commercial sections of the diplomatic establishments, which in the past had devoted most of their attention to expanding American exports. The trade promotion officials, among other things, helped Einropeans determine which articles would have the greatest sales appeal in the United States, analyzed market problems in this country, arranged for technical assistance in marketing (especially through American department stores2), worked with the Bureau of Customs on particular problems of procedures and specifications which were impeding imports from Europe, studied and made recommendations regarding facilities for financing exports, and encouraged Americans to travel in Europe. ECA also actively encouraged the granting by European govern1 See Survey—1949, p. 154. The quarterly Economic Cooperation Administra­ tion, Report to Congress provide additional details on the dollar export activities of the United States. See also Wasserman, M. J., "Modern Techniques in Trade Development," Department of Commerce, Foreign Commerce Weekly, Washington, D.C., January 29, 1951, pp. SfiF. 2 Early in the year a rather remarkable report was produced by the Retail Dry Goods Association and the Association of Buying Officers in which these retailing interests advised foreign producers with great detail as to the sorts of goods they were prepared to buy, the prices they would pay, and the delivery dates they wanted. A summary of this report may be found in Appendix D of Dollar Exports Board, Dollar Sales (1) Consumer Goods, Thames House, London, 1950.

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ments of various special incentives, services, and privileges to dollar exporters.8 The immediate urgency of this task was questioned following the outbreak of war in Korea. But on a reexamination of the problem in November by some fifty representatives of ECA and the Departments of State, Treasury, and Commerce meeting in Paris, it was concluded that, although the specific forms of encouragement might need to be changed, the dollar-trade development program ought to be continued with the aim of maintaining European dollar exports at a high level and minimizing the need for American aid. They concluded also that greater emphasis should be put on a so-called commodity-industry approach to export promotion; that is, efforts would be concentrated on a few particular commodities or industries which appeared to have superior long-term potentialities, which affected a large part of the economy, which required actions by a government as well as the trader, and preferably which Iiad strategic importance. Finally, they considered that more attention should be given to the possibility of Europe's earning dollars in third markets. G. IMPORT TAX ON COPPER The question of continuing the suspension of the import tax on copper was discussed at length in 1950. An excise tax of four cents per pound was levied on copper imports in 1932 and remained in effect up to the entrance of the United States in World War II. During and immediately after the war, the Federal Government was the sole importer of copper, and these purchases were exempt from the tax under the war powers granted the President. Li 1947, with domestic consumption greatly in excess of domestic production, Congress passed a law suspending the tax for two years. In the same year, at the Geneva tariff negotiations, the tax was reduced to two cents a pound—the maximum concession permitted under the law. Witil the expiration of the 1947 act, 8 In November ECA decided not to encourage dollar-retention schemes in the future on the grounds that they not only created a system of multiple exchange rates but also in effect legalized exchange control violations. For a short study of this problem as found in Holland, see The Banker, London, June 1950, pp. 187-190.

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Congress in 1949 extended the suspension of the tax until June 30,1950. In July 1950, Congressional hearings were again held on the measure, and the Administration, as well as manufacturing firms which use large amounts of copper, urged that the suspension be reinstated. They argued that domestic production for some time to come would be equal to only about two-thirds of anticipated requirements and that the price of copper had risen substantially in the previous year, with the result that domestic employment would not be adversely affected by imports. The benefit accruing to consumers of domestic manufactures involving copper was discussed at some length. Attention was drawn to the desirability, especially in the light of the war in Korea, of maintaining and developing sources of copper in friendly countries. State Department officials stressed that the reimposition of the tax would Imve an unfavorable effect on our relations with Chile and might have seriously adverse internal political and economic repercussions there. In the House debate, the need to facilitate copper imports as a result of the outbreak of fighting in Korea was emphasized. Opponents of the measure, including but not limited to representatives from the copper-mining states, argued that it would curtail domestic production and deter new explorations in the United States and that the lesson of Korea was that everything possible should be done to encourage larger home production. The bill was overwhelmingly approved by the House, but the Senate, despite repeated urgings from the President, took no action because of strong opposition from some of the Roclsy Moimtain senators.4 The two-cent import tax came into effect on July 1, shortly after the visit to this country of the President of Chile, who while here had stressed the importance to his country of continuing the suspension. In August the Chilean Ambassador wrote President Truman that the reimposition of the tax was being effectively used as anti-American propaganda by Communists throughout 4 Contrarily, Congress in September passed P.L. 869, which reinstituted to June 30,1951 the suspension of tariff duties on ferrous and nonferrbus metal scrap which had expired on June 30, 1949. The delay of over a year in passage of the act was due in part to an amendment proposed in August 1949 repealing the suspension of the import tax on copper. In the face of opposition to this provision, the bill was recommitted and later reported without the amendment on the copper tax.

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POLICY

Latin America. The President replied that he hoped the Senate would still approve a suspension of the tax, and in his January 12, 1951 Economic Report to Congress once again asked that the tax be waived.6 H. CONFLICTS BETWEEN TRADE AND AGRICULTURAL POLICIES 6 Despite its continuing support of the principle of unrestricted foreign trade (except for tariffs), the United States during 1950 continued and strengthened various quantitative restrictions on imports of several farm commodities7 threatening the agricultural price-support programs and subsidized the export of many surplus β For further details on this issue see the Congressional Record, July 17, 1950, pp. 10588ff.; Department of State Bulletin, September 18, 1950, p. 470; and Hear­ ings on H.J.Res. 502, House of Rep., Committee on Ways and Means, 81st Cong., 2d Sess. 6 For two recent critical studies of the inconsistencies between our foreign trade and agricultural policies and suggested programs for reconciling them, see Johnson, D. G., Trade and Agriculture, John Wiley & Sons, New York, 1950, and Hickman, C. A., Our Farm Program and Foreign Trade, Council on Foreign Relations, New York, 1949. 7 Although direct import controls by the United States were primarily directed against agricultural products, mention should be made of the effective non-tariff restrictions in the copyright law on importation of English-language books and periodicals. In general, an applicant for a United States copyright on an Englishlanguage book or periodical must deposit with the Library of Congress two copies which nave been manufactured in the United States. During the existence of this copyright, importation of any foreign-manufactured copies is prohibited. In 1949 Congress amended this law to the extent of permitting a foreign-manufactured English-language book to obtain copyright protection up to five years only, following the original publication date, but restricting the importations during this period to 1,500 copies. During the 1950 hearings on the ΓΓΟ, both the State Departmait and representa tives of American publishers pointed out that this restriction was inconsistent with the Charter and urged that in any case the law be amended. The publishers stated that the domestic printing and publishing industry no longer needed this protection and that there was a serious threat that its continuation would lead to retaliation by members of tie International Copyright Union—'which the United States could not join because of the above "manufacturing clause" in its copyright law—and result in no copyright protection in many foreign countries for United States-manufactured books, periodicals, music, motion pictures, etc. It was also reported that a few foreign-manufactured English-language books are imported without copyright protection and most American publishers have extended a "moral copyright" to these unprotected books. (For further details on this problem, see Hearings on H.J. Res. 286, House of Rep., Committee .on Foreign Affairs, 81st Cong., 2d Sess., pp. 67-68, 519-520, 715-717, and 774-776. For a recent official study on various aspects of the copyright problem, see Dixon, R. C., and Goldblatt5 S., "Toward a Universal Copyright Convention,'* Department of State Bulletin, February 19, 1951, pp. 288ff.)

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farm goods. As the year ended, the rearmament program was increasing the present and prospective demand for many agricultural products, and some of these restrictions and subsidies were relaxed, but these actions resulted from special circumstances and not from a basic change in policy.

Direct Import Controls The authority of the President to restrict imports of fats and oils (except petroleum) and rice Eind rice products by subjecting them to import Hcenses was scheduled to expire on June 30,1950,® and earlier in the year the Administration asked Congress for a year's extension. The Secretary of Agriculture said Government stocks of these commodities were still large and additional time was needed to liquidate them in an orderly fashion. He stated that the Administration saw these restrictions as only a stopgap measure and that they were not designed to be a long-run solution to the general problem of imports of commodities for which price supports were in effect. He did not, however, offer any concrete proposals for a long-run solution but pointed out that the GATT makes provisions for such direct controls. Although an attempt was made by the Department of Agriculture to show that these surplus stocks of the Commodity Credit Corporation (CCC) were just one of those unfortunate results of the World War II emergency which now must be "worked out of," it also acknowledged that additional stocks were still accumulating in mid-1950 and that import restrictions would be necessary if these were to be satisfactorily disposed of. Representatives of various agricultural organizations urged continuation of the controls on unvarnished protectionist grounds. In the Congressional debate, the measure drew wide support from Congressmen representing the agricultural districts, most of whom saw it as a means of reducing or eliminating foreign competition to American farmers and dairymen, and they expressed only incidental concern over tibe financial problems of the CCC. Indeed, a series of amendments were offered in the House of Representatives to include cheese, 8 See Survey—1949, pp. 160-161, for a statement of tibe diversion daring 1948 and 1949 of most direct import controls from their original purpose of facilitating an equitable worldwide distribution of essential foodstuffs to protecting United States agriculture and, in particular, to facilitating the CCC disposal of stocks accumulated under its price-support programs with a minimum of monetary loss.

V. COMMERCIAL POLICY

potatoes, and hams, as well as petroleum products. These were defeated with the argument that such action would call for reconsideration of the bill in the Senate and this delay would mean a period with no controls at all, as the existing law expired the following day, during which time they feared the country might be flooded with foreign fats and oils and rice. The 1949 law authorized the imposition of quantitative controls if essential to (a) the acquisition or international distribution of products in short world supply, and (b) the orderly liquidation of temporary surplus stocks controlled by the Government.9 In what was stated to be an attempt to mesh this law with Articles XI and XIX of the GATT, the Senate Banking and Currency Committee, at the suggestion of the Department of Agriculture, proposed adding to the 1950 measure three more conditions under which direct restrictions might be imposed: those essential to the enforcement of Governmental measures (1) restricting production or marketing of like goods, (2) removing a temporary surplus of like goods by making such surplus available to certain groups of domestic consumers at prices below current market levels, and (3) those specified in the standard escape clause. It will be noted that these provisions would have permitted even more stringent restrictions on imports. These three new clauses were removed in the Senate debate on the ground that their inclusion introduced the whole question of policy toward the GATT and the ITO which called for extended debate and should not be brought in through this "minor legislation." The Senate Banking and Currency Committee specifically stated in its Report on the legislation that it assumed that the powers granted would be exercised, as both the State and Agriculture Departments said they could be, so as not to breach any international obligations of the United States, especially those under GATT.1 The legislation 9This criterion is also in part II of Article XX of the GATT, and by express terms of that agreement restrictions imposed for this reason were to be removed not later than January 1, ΙΘ51 if they were inconsistent with other provisions of the agreement. The Department of State reported they felt that the objectives of this import-control legidation could be achieved within the framework of the GATT. 1 Fuller details on this issue will be found in "Miscellaneous Hearings," Hearings on H.R. 8787, House of Rep., Committee on Banking and Currency, Slst Cong., 2d Sess., Vol. II, pp. 291-305; Congressional Record, June 8, 1950, pp. 8427-8429, and June 29, 1950, pp. 9627-9640; and Senate Report No. 1538, U.S. Senate, Com­ mittee on Banking and Currency, 81st Cong., 2d Sess., May 5, 1950.

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was approved on Jxme 30 and continued the authority until July 1, 1951.2 Dtiring most of 1950 this authority was used to maintain an embargo on commercial imports of the commodities covered,8 but in late November imports of luxury types of soap, palm oil, oleo oil, beef and mutton tallow, and certain types of fatty acids and lard were removed from control. Olive oil had been freed in February.4 By the end of the year commodity shortages of many kinds were developing throughout the world, and it appeared possible that this legislation might again be used for its original purpose—helping to assure an equitable distribution among nations of scarce and essential food items. Congress also in 1950 made more stringent the provisions of Article 22 of the Agricultural Adjustment Act, which authorizes the President to apply absolute quotas, or import fees of up to 50 percent ad valorem,6 whenever imports of agricultural products are being, or are "practically certain" to be, imported in such quantities as to render ineffective or to materially interfere with the various price-support programs of the Department of Agriculture. The new amendments placed on the Secretary of Agriculture positive responsibility for notifying the President whenever he believed the situation described above was developing. The law was amended so as specifically to provide that future international agreements, or amendments to existing agreements, must be such as to permit the enforcement-by the United States of these provisions to the full extent that the GATT permits. It also specified that the import fees authorized were not to be considered as duties for purposes of granting reciprocal tariff concessions.® In 1950 this authority was used, as in 1949, to set very small quotas 2P.L. 590, 81st Cong., 2d Sess. At the instance of the confectioners, Congress specifically excluded coconuts and coconut products from the restrictions in the 1950 law. 8 Butter, oleomargarine, oleo oil, cottonseed oil, certain fatty acids, flaxseed, lard, linseed oil, olive oil, palm oil, peanuts, peanut oil and butter, certain soaps, soy­ beans and soybean oil, sunflower seed and oil, beef and mutton tallow, and rice and rice products. * In addition, import licenses were granted for limited imports of rice flour and Chinese style peanuts for the Chinese holidays. 8 The law specifies that these restrictions shall not be used to reduce imports by more than 50 percent of their amount in a previous "representative period" as de­ termined by the President. 6 P.L. 579, 81st Cong., 2d Sess., June 28, 1950.

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on imports of wheat, wheat flour, cotton and cotton waste. However, following the imposition of export controls on cotton and the growing concern over shortages, the President in October authorized the importation of an additional 7.5 million pounds of longstaple cotton by January 31, 1951. Tariff quotas, prescribed in the Tariff Act of 1930 as amended, and permitted in the GATT, were applicable during 1950 on milk, cream, butter, certain kinds of fish, potatoes, and walnuts to the same extent as in 1949. (In most cases the tariff is doubled for imports in excess of the quotas.) And there were no changes in the absolute quotas on imports prescribed in the Philippine Trade Act of 1946 on pearl or shell buttons, tobacco and cigars, sugar, rice, cordage, and coconut oil.7 The various sanitary and quarantine regulations—so effective in keeping out meat products—were slightly modified so as to permit importation for consumption of canned meat from Mexico beginning in 1951. As pointed out in the Survey—1949* the Sugar Act of 1948 is effective through 1952 and has resulted in a cartel-like control over sugar by the Government, with the aim of protecting the domestic sugar producers. No change was made in this policy during 1950. In the face of large consumer hoarding immediately after the outbreak of fighting in Korea, the U.S. Government purchased 600,000 tons from Cuba in excess of the previously established import quota, and late in the year offered to sell part of it to foreign buyers. The quotas set in December for the year 1951 were slightly in excess of estimated consumption during 1950. The Gray Report9 stated that these import restrictions to protect the agricultural price-support program had, in some cases at least, cut imports to less than they would have been in the absence of domestic price supports and special import restrictions and that the consequence might be an impairment of the real income of the United States and of foreign countries, the latter result possibly leading to greater foreign aid. The Report concluded that even if there were no basic changes in the United States farm policies, it should be possible to apply these import restrictions in a less 7 Current details on these absolute quotas and tariff quotas may be found in each monthly issue of lie American Import and Export BtMetin, New York. For a fuller official discussion, see Treasury Department, Customs Information for Ex­ porters to the United States, Washington, D.C., 1950, pp. 56-61. 8 pp. 161-162. β op.cit., pp. 84-87.

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restrictive maimer. It recommended specifically that, except for sanitary or similar reasons, the import embargoes should be eliminated "at the earliest possible moment" and that "Import quotas should not be established below the level that would bring in as high a quantity of imports as would enter in the absence of price supports and import controls."1 With specific reference to sugar, the Report stated that ". . . the growth of the domestic industry should not be encouraged, except in limited cases where security reasons may be clearly involved."2 Export Subsidies • From 1933 to the beginning of the war the U.S. Government, under authority primarily of the Agricultural Adjustment Act, as periodically amended,3 subsidized the export of many agricultural products (cotton and wheat were the most important) declared in surplus in the United States under the price-support programs.4 Following World War II, Congress not only continued this program but also provided additional legislative authority for subsidizing the export of such commodities. The Agricultural Act of 1949 specified that with respect to export sales the CCC was not bound by the general rule that it could not sell its stocks at less than 5 percent above the current support prices. Under the terms of the original Economic Cooperation Act, the Secretary of Agriculture was specifically authorized to finance up to 50 percent of the cost or market price of surplus farm goods purchased with ECA funds. This authority 1 op.cit., p. 87. The Report also pointed out that United States agricultural pricesupport programs in some cases raised the prices of vital imports to foreign coun­ tries which tended to reduce their real income and lead them to inefficient expan­ sion of their own production, thus resulting in a decline of United States exports and a wasteful use of resources. Such a reduction in exports, combined with ac­ cumulated Government stocks, they pointed out, also sometimes led to later sub­ sidization of United States exports. 2 loc.cit. 8 The most important authority and source of funds is provided in Section 32 of "An Act to Amend the Agricultural Adjustment Act and for other Purposes," approved August 24, 1935. * Inconsistently, the United States has imposed anti-dumping and countervailing duties on subsidized exports to this country. During 1950, however, countervailing duties were revoked on certain spirits from Britain, almonds from Spain, and some milk products, dried green peas, and meat products from the Netherlands. The only published finding of dumping during 1950 covered wool knitted berets from France, in effect since 1939, and its applicability was under investigation at year's end.

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was restricted by Congress in late 19495 to apply chiefly to perishable commodities, and, since there was but small demand for these products by ERP participants, the subsidy payments in 1950 were small. Of greater importance in recent years in forcing exports of farm goods has been the provision in the Economic Cooperation Act which, with minor exceptions, requires ECA to fill from the United States requests by recipient countries for agricultural products declared in surplus by the Department of Agriculture. During 1950, ECA authorized the procurement of some $900 million of such commodities, but data are not available to indicate how much of these would have been purchased from the United States in any case. Throughout most of 1950, the large surpluses held by the CCC led to several other attempts at subsidized disposal abroad.® A Congressional move in the spring to earmark $1 billion of ECA aid for purchase of surplus farm goods was finally defeated. During die year, however, large quantities of dried milk were sold at below market prices to the UNICEF, and some foods were also offered at below market prices to commercial exporters. In August, the Department of Agriculture offered butter, cheese, Mexican canned meat,7 and dried milk, eggs, beans and peas, to the members of the FAO at prices averaging only 14 percent of cost, on the conditions (1) that the recipients use them in supplemental feeding programs (so as not to supplant foods which would otherwise be bought through regular trade channels) and ( 2) that dollars offered be from sources other than United States aid programs. In its Reporti the Gray group stated that "Export subsidies should not be used to capture a larger share of the world market B P.L. 439, 81st Cong., 1st Sess., Sec. 411. The Agricultural Act of 1949 authorized the Secretary of Agriculture and the CCC to donate—at the storage points—surplus commodities in danger of spoilage or deterioration to private United States welfare organizations for the assistance of needy persons abroad. During 1950, $35 million, at support prices, of commodi­ ties were supplied—largely dried milk, cheese, and butter. The Act also authorized donations of these goods to domestic public and private relief agencies and to school lunch programs. P.L. 471, approved on March 31, 1950, gave similar au­ thorization for the disposal of potatoes, adding non-profit international welfare organizations to those specified in the 1949 law, but attempts to sell these abroad at one cent a bushel were not very successful. 7 Acquired as part of a joint United States-Mexican effort to eliminate hoof and mouth disease in Mexico and not legally saleable in the United States at the time, but, as noted above, the Secretary of Agriculture relaxed this ban in January 19S1. 8

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than was enjoyed in an appropriate base period when no subsidy was granted."8 There was no public evidence in 1950 or early 1951 that either Congress or the Administration was prepared to implement this recommendation. However, as the present and prospective demand for foodstuffs at home and abroad increased following the war in Korea and the resulting rearmament programs, not only were efforts to subsidize exports of many commodities stopped but also in early 1951 the CCG removed from its list of goods available to foreign buyers butter, cheese, flaxseed, dried beans and peas, sorghum, corn, gum rosin, wheat, and starch. With respect to the broad long-term problem of conflicts between agriculture and trade policies, the Gray Report offered the not-very-helpful recommendation that the United States should ". . . attempt to modify our price support system and our methods of surplus disposal and accumulation of stocks, in ways which, while consistent with domestic objectives, will be helpful to our foreign relations."9 Later the Report stated, "We should consider the possibility of adopting a system of accumulating necessary stocks of storable commodities as determined by domestic and international needs and not associated with price supports. We should not throw a disproportionate part of the burden of our agricultural adjustment on the rest of the world."1 I. EXPORT CONTROLS Direct administrative control over exports, instituted for many commodities in Jtily 1940 and later expanded, was one of the few war-imposed direct economic controls which was not dropped shortly after the end of the war. This authority was continued in essentially the same form as during the war years, and the Export Control Act of 1949 extended the authority until June 30, 1951. Whereas for the early postwar years the controls had been used chiefly to prevent stn excessive export of commodities in great demand in this country, the emphasis changed as internal 8 op.cit., p. 87. It did not, however, offer any suggestions as to the very difficult task of administering such a policy. 9 op.cit., p. 17. 1 op.cit., p. 87. For discussion of American policy with respect to the Interna­ tional Wheat Agreement, export controls on cotton, and the stockpiling of wool, see the relevant sections follo-wing.

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inflationary pressures subsided and political difficulties with Russia increased. By the end of 1949 the control machinery was being used almost exclusively to keep out of the hands of Russia and her satellites items that might contribute to their military strength. As a result, the number of commodity classifications requiring export Hcenses had been reduced from over 2,300 in 1948 to 776 on December 31, 1949 and the licensing procedures had been considerably simplified.2 The general policy of removing more and more commodities from control while tightening those on strategic items to potential enemies was continued during the first half of 1950. Over a hundred commodity classifications were removed from the "Positive List," but in March,8 because of the Communist domination of China and increased efforts of Russia and her European satellites to obtain controlled goods from third countries by means of transshipment, those commodities on the list which previously required an export license only if they were being shipped to Europe and a few adjacent areas were made subject to license if they were destined for any country except those in the Western Hemisphere.4 (In early 1951, in a further effort to prevent diversion of shipments, the Department of Commerce issued regulations requiring the foreign consignee of goods on the "Positive List" to submit to the American exporter—who in turn forwarded them to the Department of Commerce—a signed statement as to 2 See Survey—1949, pp. 169-172, for a brief discussion of export controls through 1949. 8 On April 13 a new type of license known as "dollar limit" or "DL" license was established. This was designed to facilitate exports needed for approved foreign construction projects or maintenance programs and authorized the recipient to export, within a period of one year and without further licenses, commodities needed for such approved work. * Beginning in August 1949 commodities on the "Positive List" of controlled com­ modities were subject to two alternative types of geographic control. One group required licenses only for export to Europe and a few adjacent areas (known as the "R" group area), and the others required a license for shipment to any destina­ tion except Canada (known as the "RO" group area). The March 1950 decision redefined lie "R" group to include all destinations except those in the Western Hemisphere. Exports to Canada have never been subject to control. Close coopera­ tion between Canada and the United States on export controls, as well as many other economic activities, was inherent in the 1941 Hyde Park Agreement. During 1950 the two Governments held further discussions on coordinating their economic efforts for the common defense, and on October 26 they formally agreed to a "Statement of Principles for Economic Cooperation." (The text is given in De­ partment of State Publication 4037, Washington, D.C., 1951.)

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the ultimate destination and end use of the goods which he proposed to import from the United States.) The outbreak of war in Korea and the resulting rearmament program intensified the "strategic" aspect of many items and increased the list of goods in "short supply," with the result that by the end of 1950 the export control machinery was once again being used as a major weapon of economic warfare, to implement United States raw-materials policy, and to supplement the domestic antiinflation program. Immediately after South Korea was invaded, a complete embargo was placed on all exports by the United States to North Korea, and beginning Jtme 30 no Hcenses were issued for the shipment of controlled items to the China mainland. Some three weeks later all outstanding validated licenses for China were revoked, and similar action was subsequently taken with respect to Hong Kong and Macao. In early December all shipments to mainland China, Hong Kong, and Macao, whether on the "Positive List" or not, were made subject to license. The two latter areas were included because of their importance as points of transshipment to China. Shortly afterwards the license requirement was extended to in-transit shipments through United States ports and foreign trade zones of "Positive List" commodities destined for Kussia and its satellites in Europe, and of all goods to China, North Korea, Hong Kong, and Macao.® Many members of Congress, however, felt that the restrictions on exports to Communist countries still were not stringent enough and in December questioned why a complete embargo should not be placed on all trade with Kussia and China. Secretary of Commerce Sawyer replied that for some time there had been an embargo on items regarded as strategic but that exports of other goods were still permitted on the grounds that the United States was thus able to obtain imports of goods from them which were urgently needed—particularly manganese from Kussia and tungsten from China. However, a few days after the Secretary appeared before the Congressional Committee, a virtual embargo was ap6 This application of the controls to goods in transit was taken after a Congres­ sional Committee had become incensed at finding that some persons had been evad­ ing United States and foreign export controls by sending cargoes originating abroad (especially in Japan) to American ports and changing their destination to China while in transit or in the New York free-trade zone. (See New York Times, Oc­ tober 81, November 22, November 23, 1950.)

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plied in the form of a regulation issued by the Commerce Department prohibiting ships and aircraft of United States registry from carrying "strategic" goods of any origin to Russia and her European satellites and nearly all commodities to Chinese ports, Hong Kong,® and Macao. This was accompanied by Treasury Department regulations blocking all Communist Chinese and North Korean assets within American jurisdiction.7 The tightening supply conditions in many commodities after mid-year, resulting from stockpiling demands and expanded economic activity in the United States, combined with an accelerated export demand arising in part from the desire of many foreigners to hedge against anticipated shortages and rising prices, brought a further intensification of export controls. The controls were seen as an effective device for protecting the economy from the inflationary consequences of excessive exports, for preserving the supplies needed for the American military program, and for distributing exports so as to "maximize their benefits to the security of the free world." Thus, many additional goods were made subject to licensing, and quantitative export ceilings—or quotas—were established for a long list of goods; the number of commodity classifications tinder control increased from 667 on Jirne 30 to 737 on September 30 and to 775 at year's end. Most of the commodities added were various iron and steel products, nonierrous metals, etc., but certain agricultural products were included. Special mention might be made of the imposition of export controls and quotas on cotton. These were designed to reduce exports in the marketing year beginning August 1, 1950 by some 40 percent, as compared with the previous year, and were deemed necessary because the current crop was far below the previous year's, mainly as a result of the Department of Agricultures acreage restrictions designed to maintain high prices. A matter of much discussion during 1950 was the extent to which countries receiving ECA assistance were permitting the eThe abrupt and unilateral extension of the embargo to Hong Kong created deep resentment there, and following representations made to Washington through London and a tightening of Hong Kong export restrictions to mainland Asia, the United States gave assurances that essential commodities needed for local con­ sumption would not be cut off. 7 Peiping retaliated by "seizing" all United States property and freezing all American bank deposits in Communist China. Actually most such property had been taken over earlier.

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export of strategic materials to Communist-dominated areas. ECA is specifically directed by law to stop providing goods if they are used by the recipient to produce a commodity then sold to a European non-participant if that item would be denied an export license by the United States. Both the Department of State and ECA had, since early 1949 at least, gone beyond this requirement and had been "negotiating" with the various ERP recipients to apply export controls "parallel" to those of the United States. The Executive Branch stated that considerable success had greeted these efforts, but many members of Congress were not satisfied with the results and were particularly upset at news reports during the summer of shipments of machine tools from the United Kingdom to Russia in return for grain. The Senate in September added an extremely broad and rigid amendment to the Supplemental Appropriation Bill for 1951, requiring the United States to cut off economic assistance to any country which in the future exported to Russia or its satellites any article that could be used for the production of miltary materiel. President Truman strongly objected to the provision, arguing that, while he had no quarrel with the purpose of the amendment, it would be self-defeating in that it called for an almost complete embargo on East-West European trade and so would weaken the West more than the East. He expressed a fear that, faced with this alternative, Near and Far Eastern countries would probably decide to forego United States assistance. ECA Administrator Hoffman also vigorously protested the amendment as impairing European recovery and rearmament efforts. It was subsequently changed, with the final law providing that the National Security Councfl was to have discretionary authority to cut off economic, but not military, aid to countries which made shipments to Russia or countries dominated by it which the Council deemed harmful to American security. Following discussions between the United States and Western European officials late in 1950 as to ways of making their export controls comparable with those of the United States, the United Kingdom and France placed additional restrictions on exports of machinery and some nonferrous metals. The press reported that the United States was also urging a prohibition on exports of many raw materials, but that some European officials were resisting this on the grounds that such action would be a most serious threat to continued imports

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from Eastern Europe. Anotixer important unsettled problem, and one being currently discussed, was whether the United Kingdom would follow the American lead in placing an embargo on exports to China.8 At year's end, with American export controls rapidly expanding, many difficult policy questions and administrative problems were beginning to emerge, often related to raw materials and stockpiling policies. Important among them were: On what basis should allocations of scarce commodities be made between domestic and foreign civilian consumers? What should be the priorities as between United States military needs and the military needs of its European allies? To what extent should the United States use exports to assure itself of continuing imports of scarce materials? On what basis were the possibly conflicting demands of South America and Western Europe to be settled? What weight should be given commercial considerations of maintaining markets for United States exports in anticipation of some future more peaceful day? Under terms of the Defense Production Act of 1950, a National Production Administration (NPA) was established on September 11 within the Department of Commerce and charged with determining the commodity requirements for defense, civilian, and foreign needs and with facilitating and executing policies and programs by which the economy could satisfy these needs. The NPA was being assisted by an Advisory Committee on Priorities Administration made up of representatives from the Departments of State, Treasury, Defense, Interior, Agriculture, and Labor, as well as ECA, the Atomic Energy Commission, the Department of Commerce's Office of International Trade (which administers the export-licensing system), and the Housing and Home Finance Agency. Competing claims by the various Government agencies for materials, including exports, were presented to this Committee. An inter-agency Advisory Committee on Export Policy was also established to give advice to the Secretary of Commerce on export policies and programs and included representatives of the Depart8 On the question of United States actions and policies with respect to export controls in other countries, see Senate Document No. 142, 81st Cong., 2d Sess., March 3, 1950; "Second Supplemental Appropriation Bill for 1951, Hearings, House of Rep., Subcommittee of the Committee on Appropriations, 81st Cong., 2d Sess., pp. Seeff.; the Department of State Bulletin, October 9, 1950, p. 599; and The Economist, March 18, 1950, p. 581, September 30, p. 556, December 9, p. 991.

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ments of State, Defense, Agriculture, and Interior, ECA, the Atomic Energy Commission, the National Production Administration, the National Security Resources Board, and the Office of International Trade. It was hoped that through this machinery both the civilian and military needs of foreign countries for American exports could be given adequate consideration. As regards broad general policy determinations, little had been made public other than that the United States wanted its export trade to continue on a substantial scale. Foreign countries could also take heart from an expression that, under conditions as they existed at the end of the year, it was not anticipated that shortages would cause exports to be curtailed more drastically than domestic consumption. The Government warned, however, that equal treatment could not be counted on by exporters indefinitely and, further, that "What we need and can get in return undoubtedly will be considered in deciding what will be allocated to each country."9 Factors in the situation boding ill for foreigners were that domestic claimants were on the scene to press their requests and that export controls were frequently easier to enforce than internal credit and inventory controls. Even so, export controls were presently more difficult to enforce than in wartime since they were then aided by such other programs as extensive foreign funds control, blacklisting, and physical blockades.

J. STOCKPILING The basic postwar stockpiling legislation—the Strategic and Critical Materials Stockpiling Act of 1946—declared that, since domestic supplies of certain items were insufficient to meet industrial and military needs in the event of war, a policy should be followed of acquiring stocks of such goods, and of encouraging the conservation and development of sources of supply within the United States. Through 1950 approximately 80 percent of die purchases had been from abroad, despite the fact that the General Services Administration (GSA) in its stockpiling purchases has respected the "Buy American" laws. This proportion may decline in 8 Brooks, D., "Export Controls Reflect Preparedness Steps," Department of Com­ merce, Foreign Commerce Weekly, Washington, D.C., December 11, 1950, p. 4. Further discussion of many export controls problems mentioned above may be found in the 1950 quarterly reports by the Secretary of Commerce, Export Control, Washington, D.C., and the Hearings cited above.

V. COMMERCIAL POLICY

the future because of recently expanded research and experimentation on domestic resources, reactivation of several war-built plants, and a revision of policy permitting domestic purchases at prices more than 25 percent above foreign prices. Although the national security aspects were always dominant, during 1949 and early 1950, the stockpiling program was often discussed by Administration officials as an aid to bridging the socalled "dollar gap" and by many Congressmen as a threat to domestic producers.1 After the invasion of Korea, the security aspects became almost the sole consideration; the stockpile goals were greatly expanded, and Congressional appropriations were multiplied. Many foreign countries had previously welcomed and urged these purchases by the United States as a means of their earning dollars; they now became much concerned lest their ability to produce, rearm, and fight inflation be most seriously prejudiced by what they were wont to call the "mad scramble" for and "hogging" of strategic raw materials by the United States. Late in the year, the United States and selected foreign countries therefore began to create international machinery for allocating, conserving, and increasing production of many raw materials.

Program In general terms, stockpile objectives are first determined by the Munitions Board of the Defense Department and by the Secretary of Interior, with the help of a series of specialized commodity committees composed of technicians from other divisions of the Government. These goals are then subject to a review by the Interdepartmental Stockpile Committee, formed of representatives from some thirteen Government departments and agencies, including, among others, the National Security Resources Board, the Bureau of the Budget, and the State Department. This Committee makes recommendations—in the light of established Government policy with respect to military strategy, international relations, industrial mobilization, etc.—on all broad policy questions as to commodities and quantities to be stockpiled. Responsibility for operations (i.e., procurement, handling, storage, etc.) is borne primarily by the Emergency Procurement Service (formerly the 1 See Survey—1949, pp. 162-168, for a discussion of the policies and activities through 1949.

V. C O M M E R C I A L P O L I C Y

Federal Supply Service) of the GSA, which also cooperates closely with ECA and CCC in their programs for acquiring strategic ma­ terials.2 Stockpile objectives are under more or less constant review. At the time of the invasion of South Korea an extensive revision be­ gun in 1949 was nearly completed; it raised the estimated cost of the stockpile from $3.8 billion as of late 1949 to $4.0 billion. The total value of the stockpile in inventory in June 1950, at purchase prices, was only $1.6 billion, with another $0.5 billion on order.8 The stockpile was also badly out of balance; then-current objec­ tives were completed for a few items, but several others were only 20 percent fulfilled. In its midyear report, the Munitions Board warned that unless procurement were speeded up, the national goal woTjdd not be met until 1956. The relatively low priority of the stockpile in the eyes of the Administration before Korea4 was evidenced by the fact that in the January Budget Message Congress was asked to provide net new procurement authority of only $500 million for fiscal year Fuller details on the stockpiling organization, as well as on most of the other topics discussed here, may be found in the Munitions Board, StockpUe Report to the Congress, Washington, D.C., July 23, 1950 and January 23, 1951. In addition, we have drawn heavily on, and the reader is referred particularly to, the following Congressional documents: "Independent Offices Appropriations for 1951," Hearings, House of Rep., Subcommittee of the Committee on Appropriations, 81st Cong., 2d Sess., Part V, pp. 1542ff.; House Report No. 1797, House of Rep., 81st Cong., 2d Sess.; Hearings on S. 3101, U.S. Senate, Committee on Foreign Relations, 81st Cong., 2id Sess., pp. 37-38; "Foreign Aid Appropriations for 1951,' Hearings, House of Rep., Subcommittee of the Committee on Appropriations, 81st Cong., 2d Sess., pp. 374ff.; "Independent Offices Appropriation, 1951," Hearings, U.S. Senate, Subcommittee of the Committee on Appropriations, 81st Cong., 2d Sess., pp. 639ff.; "The Supplemental Appropriation Bill for 1951," Hearings, House of Rep., Subcommittee of the Committee on Appropriations, 81st Cong., 2d Sess., pp. 442 ff.; "Supplemental Appropriations for 1951," Hearings, U.S. Senate, Committee on Appropriations, 81st Cong., 2d Sess., pp. 480ff.; "Second Supplemental Appropriation Bill," Hearings, U.S. Senate, Committee on Appropriations, 81st Cong., 2d Sess., pp. 389ff. Data on ECA operations may be found in the quarterly Economic Cooperation Administration, Report to Congress. 8 Up to mid-1950 Congress had appropriated $1,065 million and provided a net of $470 million of unliquidated contract authorizations. The stockpile on hand and under contract exceeded this total because of transfers to it of surplus property held by the War Assets Administration, plus a small pre-war stockpile and ECA procurement (see Survey—1949, pp. 162ff.). 4 It should be noted that, though not specified in the legislation, in the bilateral agreements under the Mutual Defense Assistance Program a provision is inserted whereby the recipients agree to facilitate the production and transfer of materials for stockpiling in the United States, on terms to be agreed upon. Similar provisions are included in the European Recovery Program bilateral agreements. 2

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COMMERCIAL. POLICY

1951,® which was only about two-thirds of the obligations actually incurred during the previous year. ECA Administrator HoflBman testified in February that in recent months there had been very little pressure from anywhere on ECA to procure strategic materials and that the program for 1950 was not to be as large a part of their activities as it had been in previous years.® The mood of Congress early in 1950 was reflected in its favorable action on the Administration's request ( some $10 million were lopped off the administrative portion) and the statement that it regarded the building up of an adequate stockpile as of first priority but that emphasis should be placed on procuring materials, especially minerals, from domestic sources and on developing local sources of supply. In the light of new strategic assumptions developed out of the events in Korea and elsewhere and a reassessment of both the requirements and supply data, the stockpile objectives and specifications were all recalculated during the second half of 1950. As a result, a few items were deleted from the list, several were added, and the quantities to be stockpiled were increased for almost all the items (seventy-one) remaining on the list.7 An estimated average increase in prices of approximately 33 percent also contributed importantly to increasing the dollar value of the overall goal, which at the year's end was set at $8.9 billion. The changes in total objectives since the program began in 1946 are shown in Table 24, calculated in December 31,1950 market prices. As 1951 began, the objectives were once more being reviewed. The recalculation of goals was accompanied by two additional requests to Congress for funds. In late July the Administration asked for a supplemental appropriation of $600 million. Congress did not question the need for these funds and in September ap5 The request was for $640 million in cash plus $100 million in contract authori­ zations but since $240 million of the cash was to be applied to prior contract au­ thorizations, the "new" funds requested totalled only $500 million. β Indeed, a part of the $150 million of the 1949-1950 ECA appropriation which it was anticipated would not be obligated by the end of the fiscal year was rep­ resented by funds which ECA had previously planned to spend for strategic ma­ terial development projects. 7 In addition to these 71 items on the so-called List I, which includes those to be acquired through new purchases, the Munitions Board also has a List II, con­ taining an additional 20 commodities as of December 31, 1950, which represents goods previously acquired and to be retained in the stockpile but for which it is calculated there is no further need for purchase, though additional quantities may be put into the reserve by transfer of Government-owned surpluses.

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COMMERCIAL POLICY

TABLE 24 Total United States Stockpile Objectives, 1946-1950 (billions of dollars at December 31, 1950 prices) End, of Year 1946 1947 1948 1949 1950

Amount 4.8 4.8 4.9 5.1 8.9

Source: The Munitions Board, Stockpile Report to the Congress, Washington, D.C., January 23, 1951, p. 10.

proved the request less some $1.5 million for administrative expenses. It did, however, express serious concern at the present small size of the stockpile and repeatedly insisted that lack of funds had not been responsible.8 The Congressional view with respect to foreign as against American purchases and source development had changed, and many members were exercised over the 'lack of cooperation" the United States was receiving from foreign countries in building up its reserves; at the same time many Europeans were complaining bitterly of the havoc being created in the commodity markets by the intense stockpiling activities of the United States. This discontent in Congress was encouraged by the chairman of the Munitions Board,9 who testified that the State Department had not applied the 'leverage" it could and should have, through the various Government aid programs, to obtain needed materials from abroad. He seemed particularly contemptuous of what he described as the State Department's refusal to obtain any reference to supplying critical materials as a quid pro quo in negotiating Point Foxir aid on the ground that it would "destroy the atmosphere" of that program.1 8 In June, Munitions Board officials had testified that procurement had previ­ ously been limited by availability of items but that in recent months lack of funds had been Ihe limiting factor. 9 The Munitions Board itself was bitterly criticized by a Congressional commit­ tee at the beginning of 1951 for its "complacency," "folly," and "improvident course," with respect to stockpiling certain agricultural products. (See Senate Document No. 3, "Agricultural Products and the Mobilization Program," 82d Cong., 1st Sess., January 8, 1951.) 1 Congress also took this occasion to criticize Government disposal of several plants built by it during World War II. By the end of the year steps were being taken by the Administration to put additional Government-built synthetic rubber, alumi­ num, and magnesium plants back in operation.

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COMMEHCIAjL

POLICY

Late in the year, the President stated that recent international developments called for a still further acceleration in stockpiling and asked Congress for a second supplemental appropriation of $1,8 billion. He said this would not only permit an intensification of immediate procurement but also the signing of long-term contracts. He further pointed out that under the Defense Production Act of 1950 the Executive Branch had been given broad authority to develop production of critical materials and that certain domestic projects for ores and minerals could and should be covered by contracts out of stockpiling funds, so that the resulting commodities would flow into the stockpile. He reported that GSA had already entered into a few such contracts and had many others under consideration which would require an obligation of over $1 billion—most of this apparently was to be for expanded aluminum production. The details of these commitments are not available, but the provisions of the Defense Production Act of 1950 for expediting production and delivery of strategic materials are broad, and authorize purchases, commitments to purchase, advance payments, and loans and loan guarantees. This request for funds was approved on January 6,1951, making a total of $2.9 billion of new purchasing authority granted during the half year following the invasion of Korea. If this is added to net purchasing authority previously granted of $1.5 billion, it will be noted that, even taking account of transfers and ECA and CCC procurement, funds had been provided for only slightly more than half of the new objectives. In his Budget Message to Congress early in January 1951, the President requested $820 million of obligational authority for fiscal year 1951-1952 but warned that this was only a tentative estimate since the stockpiling program was constantly changing in response to new developments in both requirements and supply. Procurement and Supply Development Actual procurement of critical and strategic materials lags far behind the establishment of objectives and the provisicoi of funds by Congress. At the end of 1950, the dollar value of goods physically on hand, calculated in current prices, totalled $2.7 billion, or less than one-third the goal on that date. Another $1.1 billion were under contract. The value of commodities actually received in 1950 was slightly less than in 1949, as is shown in Table 25.

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COMMERCIAL POLICY

TABLE 25 Value of United States Stockpile on Hand, 1946-1950 (billions of dollars at December Si, 1950 prices) End of Year

Value

1946 1947 1948 1949 1950

0.2 0.7 1.2 2.0 2.7

Source: The Munitions Board, Stockpile Report to the Congress, Washington, D.C., January 23, 1951, p. 10. a. GENERAjL· SERVICES AJDJVUONISTRAl. AON"

The great bulk of the procurement for the stockpile is done by the Emergency Procurement Service of GSA out of funds appropriated by Congress. Following the invasion of Korea, GSA commitments from appropriated funds expanded rapidly, with $430 million in contracts being placed during the last half of the year and another $385 million during the first two weeks of January 1951. This can be compared with commitments of $401 million during the first half of 1950 and $330 million during all of 1949. In addition to direct purchases, GSA obtains small amounts of materials which other Government departments own and have declared surplus, and, by terms of P.L. 152 of June 30, 1949, it procures some strategic and critical materials in lieu of cash payments due from interest, principal, or rent of Government surplus property which has been sold or leased. In 1950 some $31 million of commodities were received from the first source and nearly seventy-three million tons of pig aluminum from the second, all the latter coining from United States companies. b. ECONOMIC COOPERATION ADMINISTRATION

The Economic Cooperation Act includes several provisions directed toward providing from foreign sources materials for the stockpile and toward increasing production of such goods abroad, but ECA has never seen this as one of its major tasks and has achieved only indifferent success.2 As noted above, in early 1950 Administrator HofFman indicated this aspect of the European 2 See

Survey—1949, pp. 160-167 for the record through 1949.

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COMMERCIAL POLICY

Recovery Program had been in large measure set aside, but in September ECA announced it was doubling its stockpiling program. ECA activities on these problems are carried on in close cooperation with GSA and were increasingly directed in 1950 to encouraging and financing development projects, rather than actual procurement, since it felt the European countries themselves needed practically all of current production. Direct purchase of materials by ECA is made out of the 5 percent portion of the counterpart funds reserved for American use (plus a few small purchases with GSA dollars), and purchase commitments during the year totalled only the equivalent of $16 million, raising the total since the beginning of ECA to approximately $67 million. GSA normally provides whatever dollars are needed to pay transportation costs, and these commitments, including a small amount for commodity payments financed partly by ECA counterpart funds, totalled about $15 million for the year and $18 million since the beginning of the program. With respect to its program for encouraging the development of new or expanded sources of materials abroad, ECA advances for approved projects a portion of the dollars needed to purchase equipment and services which must be procured in the dollar area and also provides some of the local currency needed out of the 5 percent counterpart fund deposits. These development contracts usually provide that repayment of the ECA advances—both dollars and counterpart funds—are to be made in the form of strategic materials, and frequently purchase options in favor of GSA for additional quantities are also included. During 1950 development contracts were signed calling for the expenditure of $14 million in dollars and the equivalent of $21 million in counterpart funds, raising the total from the beginning of ECA to slightly over $20 million in dollars and $22 million in dollar equivalent of local currencies. No materials had been received in repayment through 1950, but it was anticipated that shipments would commence in early 1951. Half of the funds committed by ECA for both strategic materials purchases and projects concern the United Kingdom, with France, Italy, and the Netherlands (or their overseas territories ) accounting for most of the balance.8 8 Details of these activities may be found in the quarterly Economic Cooperation Administration, Report to Congress.

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COMMERCIAL POLICY

C. COMMODITY CREDIT CORPORATION

The Commodity Credit Corporation charter was amended in June 1949 to authorize the exchange of surplus agricultural products held by the CCC for strategic materials from foreign sources, and in October of that year Congress authorized the CCC to barter stocks threatened with spoilage or deterioration for such materials, "on such terms and conditions as may be deemed in the public interest." At the time it seemed that these transactions might become very substantial, but through November 1950, the latest date for which information is now available, barters totalling just under $10 million had been negotiated involving cotton, corn, and other undisclosed surplus products. Although many proposals for barter had been received, most of the countries expected to obtain the agricultural products at far below market prices and offered materials in exchange which were not on the Mxinitions Board stockpile list. In the light of the depletion during late 1950 of CCC stocks of many commodities in demand abroad, it appeared that transactions under this authority would continue to be very small in 1951.4 d. OTHER

The Abaca Production Act of 1950, designed to expand the production of abaca cordage (hemp) fiber in Latin America, was approved on August 10 and provided that the Government might undertake up to 50,000 acres of abaca production. The RFC was financing these operations, which included improving existing plantations, some of which were developed by the RFC during World War II, and establishing new ones. The Etepartment of Agriculttire was providingsome of the technical services needed for the projects and was carrying out research and experimentation, in the United States and abroad, designed to increase the supply of several other strategic and critical materials. The Department of Interior—more particularly the Bureau of Mines and the Geological Survey—expanded during the latter half of 1950 their researches into ways of increasing the availability within the United States of strategic minerals. The National Production Administration of the Department of Commerce contributed to the program by issuing direc4 At the end of the year CCC held large unobligated stocks of only dried eggs, dried milk, cheese, beans, and potatoes.

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COMMERCIAL POLICY

tives late in the year restricting civilian consumption and private inventories of many materials and by studying the possibility of substituting less critical commodities in civilian products.® The State Department, in addition to participation on several o£ the inter-agency committees mentioned earlier and the collection of information by the foreign service, also represented this country in various international organizations and negotiations concerned with international commodity agreements. These organizations and negotiations were becoming of increasing importance as the year ended. K. INTERNATIONAL COMMODITY AGREEMENTS Before World War II, official United States policy was in general unsympathetic to international commodity agreements. They were considered efforts by producing countries to maintain high prices, through restriction of production and elimination of competition, and were believed to result in a misallocation of resources. During World War II, the U.S. Government did actively engage in international commodity controls, particularly by participating in such Allied organizations as die Combined Raw Materials Board, the Combined Production and Resources Board, the Combined Food Board, and the Inter-American Coffee Board. And in the years just after the war the United States was also a member of the Combined Coal Committee, the International Emergency Food Council, the Combined Rubber Committee, etc. These, however, were seen primarily as temporary organizations to meet -the acute and specif problems of carrying on a war and restoring order immediately afterwards. All of the above either had been terminated or were inactive by the beginning of 1950. Nevertheless, during the war the United States did come to accept the principle that inter-governmental commodity agreements might be desirable in peace time, and provisions were made for them in the original United States-drafted "Proposals for the Expansion of World Trade and Employment" and in the final draft of the ITO Charter. The GATT also permits such agreements. However, these documents specified that, in general, agreements were to be approved only for "primary" products, and then only after a 5 Detaik as to research activities of the above agencies may be found in the semi-annual Munitions Board, Stockpile Report to the Congress.

221

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COMMERCIAL POLICY

finding had been made that there existed or threatened to develop a burdensome surplus and/or widespread unemployment which could not be corrected in a reasonably short time by normal market forces. They also specified that any government with a substantial interest could be represented, that both consuming and producing countries should participate, that full publicity should be given to any agreements, and that their aim should be to expand the consumption or shift resources out of industries with persistent surpluses. Even this qualified acceptance represented a concession with respect to previous United States policy. Reportedly, the shift was due to the conclusion that, since other countries would in any case establish such agreements, they should be under international supervision and so rendered as harmless as possible and to the fact that the Department of Agriculture did not always agree with other branches of the Government as to their ultimate desirability. The United States was, during 1950, a member of six important intergovernmental commodity groups (or committees), though only one—the International Wheat Council—involved authority over prices and allocations. The United States fought against any of the others (except the Sugar Council) having more than research and advisory functions. Late in the year, however, the rearmament efforts of the Atlantic community threatened through competitive bidding to result in a distribution of many raw materials that would be "neither equitable nor consistent with the needs of the common defense of the free world"8 and to so raise prices as to impose internal inflation and balance-of-payments deficits on many friendly countries. In the face of these developments, the United States, Britain, and France in December began to establish machinery, on a commodity-by-commodity basis, for allocating supplies internationally, increasing production, and reducing "non-essential" uses.

Pre-Rearmament OrgantTMtions7 a. WHEAT

The only full-fledged international commodity agreement to which the United States was a party during 1950 was the Interna® Gray Report, op.cit., p. 91. 7 For organizational details, brief statements of origins, purpose, powers, func-

V. C O M M E R C I A L P O L I C Y

tional Wheat Agreement, ratified by the President, on the advice and consent of the Senate, on June 17, 1949. The United States became a member of an International Wheat Council in 1942, and this organization, composed of both import­ ing and exporting countries, served as a forum for negotiations anticipating a postwar international wheat agreement. Under its aegis, international wheat conferences were held in 1947 and 1948, and at the latter an International Wheat Agreement was nego­ tiated. This failed, however, to receive the consent of the U.S. Senate, as well as of certain other governments, and in early 1949 another conference was held in which the proposed agreement was renegotiated. Given these changes and the prospects of a decline in the postwar foreign demand for wheat, the Senate consented to American participation and the agreement went into operation on August 1, 1949. The Department of Agriculture, for one, hoped this convention would pave the way for similar arrangements for dealing with other agricultural surpluses.8 tions, finances, etc., of the various international commodity organizations to which the United States belonged at the beginning of 1950, as well as selected bibliographical references to primary sources, see Department of State, International Organizations in which the United States Participates, 1949, Washington, D.C., 1950, pp. 54-79 and 311-326. For details on many pre-1943 international commodity' agreements, the reader is referred to International Labour Office, InterGovernmental Commodity Control Agreements, Montreal, 1943. For official current statements, see the United Nations Interim Coordinating Committee for International Commodity Arrangements, Review of Internatkmcd Commodity Problems, 1930, United Nations, New York, Januaiy 1951. These documents are the sources of much of the information in this section. 8 An FAO committee, concerned over the problem of surplus food in some countries and under-consumption in others which they felt resulted in important part from the shortage of freely convertible currencies, proposed in November 1950 the establishment of an International Commodify Clearing House. Thfe was to be a public corporation with a $5 billion capital (later reduced to $1 billion) contributed by member countries in their national currencies. Countries needing agricultural commodities, outside the "normal volume of trade," declared in surplus by the producing countries but unable to provide the currency needed, would buy the goods through the ICCH, paying in their own currency, and the ICCH would pay the seller in its own currency to the extent its capital permitted. Beyond this, the organization would sell surpluses for soft currencies, and hold these to the credit of the exporter until they were made convertible. This proposal was rejected by the United States, and several other members of the FAO, who considered individual intergovernmental commodity agreements a preferred device. The more important specific objections were that it would tend to pile up inconvertible currencies which would create additional problems; it was an implied attack on Ihe ITO Charter's provisions for international commodity agreements; it would be most difficult to prevent even "normal volume of trade" from going through the clearing house; and its financial functions would impinge on those of

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COMMERCIAL POLICY

This Agreement is administered by a new International Wheat Council established in 1949 and composed, at the end of 1950, of four wheat-exporting countries (including the United States) and thirty-nine importing countries. It is designed "to overcome the serious hardship caused to producers and consumers by burdensome surpluses and critical shortages of wheat," and "to assure supplies of wheat to importing countries and markets for wheat to exporting countries at equitable and stable prices." Exporting coimtries are obliged, if the Wheat Council requests, to sell a specified amount of wheat to the importing countries at the maximum price specified and, conversely, importing countries agree to buy a specified quantity at the minimum price. Buyers and sellers are not paired and this non-discriminatory, multilateral aspect of the agreement was regarded as very important by the United States. The Agreement goes into operation only when the market price of wheat is at one of the limits, and transactions may be either through private trade channels or otherwise. The agreed maximum price was well below the market price in the United States in 1949 and 1950, and Congress therefore provided funds to the CCC to make up the difference to the private exporters. These export subsidies totalled approximately $90 million during the first year of operation, although exports under the Agreement were only about 68 percent of the amount which the United States could have been asked to sell at the maximum price.9 On the other hand, all the guaranteed sales by Australia and virtually all those of France were taken up, reflecting the desire of importers to buy from soft currency areas. Canada sold 90 percent of its quota. The new International Wheat Council held its second meeting in March 1950. The major issue was the question of admitting Germany and Japan, and opposing views were held by the United States and the United Kingdom. The United States favored their unqualified admission—among other things they would enlarge the existing organizations and governments. (See especially, Department of State Bul­ letin, January 23, 1950, pp. 126-127, and United Nations Bulletin, December 19, 1949, pp. 762ff.) 8 For an excellent critical analysis of this agreement, see Golay, F. H., "The In­ ternational Wheat Agreement of 1949," Quarterly Journal of Economics, August 1950, pp. 442-463; and Johnson, H. G., "The De-Stabilizing EfFect of International Commodity Agreements on the Prices of Primary Products," Economic Journal, September 1950, pp. 626-629.

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POLICY

guaranteed markets of the exporting countries—but United Kingdom representatives were fearful they would constitute competition for the supply of sterling wheat available under the agreement. Germany was finally admitted, but only after it was reported she had unofficially agreed to severely restrict her purchases of wheat payable in sterling. Japan was unwilling to do this, and the British argued she should be admitted only if it were specified that her sterling purchases be limited. The United States delegation felt such action would change the non-discriminatory multilateral aspects of the agreement, and Japan's application was postponed.1 Costa Rica was admitted as an importer. Another meeting of the Council was held in June at which Japan's application was rejected, while those of Indonesia and Spain were approved. A fourth session was held in October at which Iceland was admitted as an importing country. b. TIN

Several attempts had been made during the interwar period by the producing countries to achieve stable tin prices by regulating output and operating buffer stocks. An International Tin Committee administered the schemes, but being a consuming nation the United States did not participate. These programs were inactive during the war, and this committee was dissolved in 1946.2 In the same year, however, a World Tin Conference was held including both producing and consuming countries, and an International Tin Study Group was created which the United States joined. This is not a regulatory organization; its purpose is merely to provide a more or less continuous intergovernmental review of world demand and supply of tin. It also has responsibility for considering possible solutions to problems which the participants feel are not likely to be satisfactorily resolved through the operation of unrestricted market forces, and, in such cases, to formulate and make recommendations to the participating governments, a discussion of this issue, see The Economist, March 11, 1950, p. 556, and March 18, 1950, p. 618. 2During the war the Combined Raw Materials Board carried out an interna­ tional allocation of tin, and, from January 1946 until it was dissolved in November 1949, die Combined Tin Committee made such allocations. During this entire pe­ riod, with a few minor exceptions, the KFC was the sole importer of tin in the United States, but by the beginning of 1950 it was once again traded freely in the markets. In early 1951, however, the BFC was again made the sole importer. 1 For

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COMMEBCIAL POLICY

In 1948 the Study Group discussed the question of an intergovernmental tin agreement, involving production restrictions, export quotas, price controls, and buffer stocks. A working party was subsequently established to examine the question in detail and reported "it would be appropriate and practicable" to conclude such an agreement. Later in the year, the Study Group considered this report and recommended that member governments should be polled to see if they desired an international conference to put such an agreement into final form and to conclude it. The United States, among others, was opposed, and early in 1949 it was finally decided not to summon such a conference. A few months later the Study Group met again and, under strong pressure from the producing countries and those politically affiliated with them, the majority concluded that burdensome surpluses might well arise within the next five years which would justify an international agreement, Once more a working party was appointed to consider the problem. In November 1949 this group submitted another draft proposal for international control over tin. Throughout all these discussions the United States was at most lukewarm to such a scheme but agreed to be guided by the general principles on international commodity agreements in the ITO Charter. The working party's new draft was considered by the Tin Study Group in March 1950.8 Once more the United States opposed the UN's calling of an international conference to discuss the draft. The American delegation stated they were not against the control scheme in principle and were most anxious that there be economic and political stability in the producing areas. But, while agreeing with the producing countries that there might soon be an excess of production over current consumption for commercial purposes, they argued that for a long time there would be no burdensome surpluses because of stockpiling demands, and so no need for restrictive schemes. The producers replied that the stockpiling demands were limited, volatile, and temporary. The United States spokesmen, maintaining that the proposal needed much additional study before it could be assured that a negotiating conference would be productive, requested a delay. In the final vote, however, 8 In the meantime, the U.S. Government had been trying to negotiate a longterm agreement for tin with British, Indonesian, and Belgian officials, but these negotiations broke down in early 1950 over a disagreement as to prices.

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COMMERCIAL POLICY

only the United States opposed the calling of the conference.* The UN called an Intergovernmental Tin. Conference for late October 1950 to discuss a draft agreement including buffer stocks, export quotas, output restriction, and regulated prices. Although opposed to its convocation, the United States attended. The American representatives again stated that, in the face of rearmament, there would be no serious tin surplus in the near future and so no need for an agreement, and they maintained further that a tin agreement at that time would intensify the already disturbed market. The United States view was that all efforts should be directed toward increasing production and lowering prices. The producing countries, with British support, still sought agreement on a control scheme similar to the proposed draft, arguing that the present high demand and prices were temporary. The United States thereupon offered counterproposals involving (1) a very large buffer stock (30,000 tons) which should be accumulated before any curtailment of production was permitted and from which purchases for "strategic" purposes could be freely made, and (2) a minimum and maximum price covering a small range, with the maximum scarcely more than half the current market price. These proposals were unacceptable to the producing countries, and the conference adjourned, instructing the Chairman to keep the problem "under review." c. WOOL

With increasing demands growing out of rearmament—and spurred by accounts that American troops in Korea were suffering from the cold—arrangements for obtaining wool from abroad became a major problem in the United States. Dinring World War II, wool had been under international allocation. By the end of 1945 world stocks of wool were calculated to be equal to two years' consumption, and in March 1946, on United States initiative, an International Wool Conference was convened to consider this problem and the prospective wool situation.® Pres4 See Nichols, C. W., "Problems of Achieving a Stable Tin Industry," Depart­ ment of State Bulletin, January 9, 1950, pp. 47-51, and "Proposed UN Conference on Agreement for Control of Trade in Tin," Department of State Bulletin, May 8, 1950, pp. 729-731. B An International Wool Secretaiiat was established in 1937 by Australia, New Zealand, and South Africa for the purpose of carrying out research and publicity on wool. During the war, the United Kingdom arranged for the bulk purchase of

V.

COMMERCIAL POLICY

ent were representatives of both producing and consuming coun tries and the Wool Study Group was established, along the lines of the International Tin Study Group, to consider solutions to problems which it was thought would not be satisfactorily solved by normal market forces. The surplus stocks had largely disappeared by 1949, but it was agreed the Group should continue as a useful medium for improving wool statistics and to provide a body to which wool problems could be referred, if and when they arose in the future. It was planned during late 1949 to hold another meeting of the Study Group during the last quarter of 1950. When the Group assembled in October 1950, the market was characterized not by surpluses but by an excess of current consumption over production and by rapidly rising prices. This Wool Study Group session was not very exciting; it was not even officially apprised of the impending wool shortage. There was no indication in its final report that it considered present conditions to justify an international allocation system for wool, although it was reported that the United States had made such proposals. The Study Group did, however, endorse the British Commonwealth wool price-support scheme which was virtually the same as that administered by the postwar Commonwealth "Joint Organization." (This was essentially a producers' group and thus contrary to the spirit at least of the Havana Charter.) Before, during, and after this last meeting, the United States discussed with United Kingdom, Australian, New Zealand, and South African officials the great need of the United States military establishment for special types of wool, and it was agreed that the three southern Commonwealth countries would investigate the possibility of taking special measures to insure that American emergency needs were met.® The press reported that the United the entire clip of these three countries. In 1945 the four governments transferred the accumulated stocks to joint ownership, established a "Joint Organization" to administer the stocks, and reestablished wool auctions in each of the southern coun­ tries. The United States was not a party to any of this. β Congress had become much concerned over low wool stocks in the United States, and at hearings before the Senate Committee on Appropriations in early September the Defense Department was urged by some Senators to request ap­ propriations to stockpile foreign wool. This was later done, and authority was granted to procure and store 100 million pounds of raw wool and wool products. An angry Senate Committee was prompted to report later, "While Ilie Munitions Board was obviously doing plenty of 'wool-gathering' none of it was for the stock­ pile." (Senate Document No. 3, op.cit.)

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COMMERCIAL POLICY

States first asked for a bulk purchase agreement, to be entered into prior to the auctions in the producing countries and at fixed prices which would be somewhat less than the current market prices, but later modified this to suggest that its requirements be "set aside," that is, sold outside the wool auctions, but at prices established there. Delegates from the United States, United Kingdom, and the three southern countries met in Australia in November to discuss the problem. Opposition to any preemption scheme was strong among the Australian wool growers, and on investigation the group decided that legal and administrative difficulties in the various countries could not be surmounted in time. They therefore abandoned this particular scheme and decided to obtain the immediate requirements through regular commercial channels.7 But the idea of an allocation scheme in the future was not dropped by the United States, and wool was to be included in the new commodity groups being set up in early 1951. d. COTTON

Again at United States initiative, an International Cotton Advisory Committee was established in 1939. Its functions were to assemble and analyze data on world cotton production, consumption, prices, stocks, etc., and to suggest to member governments from time to time measures for improving international cooperation on cotton problems which were international in scope. The original members, except for the United Kingdom, were cottonexporting countries, but in 1945 several importing countries were invited to join. The ninth plenary session of the Committee was held in Washington during May 1950. Although the question was raised, the Committee took no action on recommending an international cotton agreement other than to ask its Standing Committee to keep the problem under review; the press reported the United States to be prepared to resist any such agreement. The major topics of concern at the meeting were the very large cotton stocks at that time; the fact that the current levels of exports were made possible only by extraordinary financing methods, in particular grants from the United States; and methods of increasing consumption. The Standing Committee and the Secretariat were rSee especially Board of Trade Journal, London, November 4, 1950, p. 677, and Department of State Bulletin, December 11, 1950, p. 953.

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COMMERCIAL POLICY

directed to follow the balance-of-payments developments of the major importing countries as they affect cotton and to report at the next meeting, scheduled for February 1951. As noted in the section on export controls above, the summer was not out before the effects of rearmament had drastically changed the world's demand for cotton and had resulted in the United States imposing export restrictions—reversing a long-standing subsidization of exports. Nevertheless, the agenda for the February 1951 meeting placed particular emphasis on competition from rayon and other manmade fibers and on possible new uses of cotton. In contrast, as noted below, one of the first of the special international commodity committees being sponsored by the United Kingdom, France, and the United States in early 1951 to allocate supplies, increase production, and reduce "non-essential" uses was to deal with cotton. e. SUGAR

The United States joined in signing an International Sugar Agreement in 1937, pursuant to which an International Sugar Coimcil was established. The Council administers the Agreement, which provides for international regulation of production, exports, and stocks with the aim of maintaining "an orderly relationship between the supply and demand for sugar" at prices which will be equitable to both consumers and producers. Although still nominally in effect, most of the substantive provisions have been inoperative since the beginning of World War II, and from 1946 to date most trading in sugar has been within preferential trading systems—for example, by the Sugar Act of 1948 (effective through 1952) most United States imports, beyond amounts reserved for domestic producers, are specifically allocated to Cuba, the Philippines, Hawaii, Puerto Rico, and the Virgin Islands.8 The Sugar Council has been primarily concerned with such trade as there was outside the preferential arrangements and so has been of little interest to the United States. In June and July 1950, the Council met in London and decided to circulate a draft of a new international sugar agreement to member governments to supplant the 1937 agreement. It was agreed that another meeting should be held later in the year on 8 See Survey—1949, pp. 161-162.

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COMMERCIAL POLICY

the question of asking the UN to convene a conference to negotiate such an agreement. The American delegation supported this decision and expressed general approval of the draft (presented by Cuba); it agreed that international regulation of sugar production and exports and the establishment of minimum and maximum prices were necessary. But it stressed that such regulations alone would be inadequate and that stability and prosperity for the sugar-producing countries must come about largely through greater consumption. It therefore also urged efforts to reduce prices, eliminate trade barriers, and place limitations on the expansion of sugar production in protected areas. With respect to the last point, the American delegation said that this country would be prepared to apply some restrictions on domestic production in excess of current levels, provided others would do the same.9 The Sugar Cotincil meeting to decide whether to request a formal negotiating conference was scheduled for November but was postponed until 1951, reportedly to await settlement of a long-term contract being negotiated between Britain and the West Indies. In December, in accord with the terms of the Sugar Act of 1948, the Department of Agriculture announced new allocations for 1951 sugar imports into the United States. These were slightly in excess of those for 1950 but were restricted to the same countries. f. RUBBER

The Rubber Study Group was established in 1944 with United States participation. This group is in sharp contrast to the interwar rubber cartels—of which the United States was not a member—in that both consuming and producing countries belong and it has only advisory and no regulatory authority. Its general purpose is to promote international cooperation, and it is authorized to make studies, consider measures aimed at expanding consumption of rubber, and to submit reports and recommendations to members on how to meet problems calling for joint action. The seventh session of the group was held in April-May 1950, and attention was concentrated on a review of the current situation and to considering measures for expanding consumption and imC. S., "Preparatory Work for United Natiozis Cbnference on Control of Trade in Sugar," Department of State BuUeHn, October 16, 1950, pp. 628ff. eLittle,

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COMMERCIAL POLICY

proving the methods of packing and marketing rubber. International control arrangements were not discussed. The Rubber Study Group was scheduled to meet again in February 1951 to consider possible action to secure an equitable international allocation of both natural and synthetic rubber. Beginning in July, the United States greatly increased its purchases of natural rubber (later in the year it also increased domestic synthetic production and reduced allotments for civilian uses) and prices skyrocketed. As a result, the Administration began in September to discuss, outside the Study Group, with other coimtries the possibility of establishing a system of international allocations. On December 28 the Government, for all practical purposes, prohibited private importation of natural rubber and designated the GSA sole importer. New International Commodity Agreements The inadequacy of the free market and existing international machinery to achieve an "equitable and efficient international division" of certain raw materials, the demand for which had greatly increased as rearmament got under way, was publicly recognized in the Gray Report, which, in addition to internal allocations and restrictions and efforts to expand production, recommended that methods and machinery ". . . for international collaboration should be promptly established for guiding supplies of scarce materials among the free nations in the manner best calculated to contribute to the common defense."1 Informal intergovernmental discussions on this problem took place during the September meetings of the Fund and Bank at Paris. Subsequently, some European countries indicated a desire to negotiate with the United States for establishing international boards and controls over selected raw materials, and American officials also publicly talked of the need for international allocation. During October and November, the OEEC Council,2 with ECA participation, undertook a survey of the problem and sponsored extensive discussion among its members. In early December, the OEEC Council issued a report urging that member countries 1 Op-Ctt.,

p. 15.

~~

~ rganization and the Organization for American

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COMMERCIAL POLICY

increase production of certain commodities by longer hours of operation, creation of new capacity, more efficient utilization of existing capacity, and increased recovery of many scrap items. It also urged that measures be taken, especially in the area of internal monetary and financial policies, to restrict internal demand. An international conference was also recommended and continuing studies were planned, but the anticipated conference was superseded by the United States, United Kingdom, France action noted below. The OEEC Council stressed that solutions were possible only if concerted action was taken, not only by their members but also by the United States and Canada and other non-members who were important producers or consumers.8 In the meantime, an OEEC delegation was invited to Washington to discuss the possibilities of joint action. More important, however, were the discussions between President Truman and Prime Minister Attlee during early December. The press reported that the British delegation at these meetings argued that the United States stockpiling practices had induced shortages of certain essential items which constituted the main obstacle to fuller participation in the rearmament program, that they were creating strong inflationary pressures and unemployment in certain British industries and were contributing to a worsening of her terms of trade, especially with the outer sterling area. The brief official communique issued at the end of the meetings stated: "We have recognized the necessity of international action to assure that basic raw materials are distributed equitably... and consideration of these specific matters will continue."4 These preliminary discussions were, by and large, restricted to representatives of France, England, and the United States, and a joint statement by the three Governments was issued on January 12, 1951, setting forth in broad outline the type of machinery being planned to increase production of scarce materials and to allocate them among nations. Contrary to the expectations of some, no plans were made at that time to return to the World War II system of a Combined Raw Materials Board with a formal allocation authority and extensive direct interference in the commodity markets. Pre8 See The Statist, December 2, 19S0, pp. 702-703, for a more detailed statement of the Council's report. * Tbis communique may be found in the Department of State Bulletin, Decem­ ber 18, 1950, pp. 959-960.

V.

COMMERCIAL POLICY

sumably among the reasons for not reestablishing such an extensive, formal, and compulsory allocation scheme was the recognition that it had worked well in large part because only three countries were involved, they controlled most of the available shipping, the question of funds was not of major importance, and the objectives were agreed upon and overriding. None of these conditions existed at the beginning of 1951. The nations agreed, however, that the problem could not be left to the operation of free market forces, that the raw-material problem must be met on an international and not a regional level, and that continuing international machinery was needed. They therefore proposed that a number of standing international commodity committees be established, with membership in each to include those governments with a "substantial" interest—either as a producer or consumer—in the commodity. Each of the committees was, after study, to recommend to the member governments specific action to expand production, conserve supplies, and assure the most effective distribution and use of the given commodity. The U.S. Government sent out invitations in February to several foreign governments to organize immediately six committees: for cotton, wool, sulphur, copper/zinc, tungsten/molybdenum/manganese, and nickel/cobalt. The press reported that several other groups would be created later. In March, a Central Group of the International Materials Conference was created, composed of the Governments of the United States, United Kingdom, France, Australia, Brazil, India, and Italy, and the OEEC and the OAS.5 The chief function of this body was to "formulate and coordinate international policy relating to the production, allocation, conservation, distribution, and utilization of certain strategic raw materials."® But the individual commodity committees were to have complete autonomy in conducting their work. It is to be noted that, as originally established, the commodity committees were to be loose and informal, have no executive power, and no authority to impose sanctions. Action by member governments on recommendations would be voluntary. The groups 5 A temporary "central group" composed of the United States, United Kingdom, and France had been in operation earlier. 6 Department of State Bulletin, Washington, D.C., April 16, 1951, p. 634.

V.

COMMERCIAL POLICY

would seem to compose a series of international organizations supplanting the various international commodity study groups discussed above, though membership may of course differ from the existing groups. The press reported that the Organization of American States, the British Commonwealth, and die North Atlantic Treaty Organization were to provide the "political associations through which the recommendations of the commodity groups are to be distilled into suitable action."7 Only the broadest framework of a policy of "freely given cooperation" had been created. The problems to be solved loomed very large indeed. As noted above, the conditions which permitted the raw-materials-allocation scheme to work as well as it did during the last war did not exist. If the proposed system were to provide something more than forums in which toughly-bargained and complex barter deals were to be pounded out on an ad hoc basis, it would seem to require the most generous and farsighted cooperation of the participating parties, especially since the countries involved differed greatly in size, level of economic development, long-term economic goals, economic and political structure, and stake in the East-West struggle. Successful cooperation would seem to require as a minimum that the role of each nation in the defense of the non-Soviet-dominated world be quickly clarified and specified, that the United States show more restraint in its stockpiling than it had during the last half of 1950, that export controls of the participants be made comparable and complement the international allocation arrangements (involved here is the difficult issue of preemptive buying to keep goods from potential enemies), that internal allocations and restrictions on domestic uses of the commodities be coordinated among the various countries, that action be taken to regulate both internal and international prices of tie scarce items, and that in financing the immediate expansion of production of scarce materials, especially in the underdeveloped areas, careful attention be given to protecting them against the prospect of greatly overexpanded facilities and distorted economies in the future. 7 The Economist, January 20,1951, pp. 124, 149-150. See also The Banker, Lon­ don, January 1951, pp. 15-19, and The Statist, January 20, 1951, pp. 72-74, for a discussion of the scheme.

VI · EUROPEAN ECONOMIC INTEGRATION INTRODUCTION OFFICIAL United States policy of encouraging economic coopera-

tion within Europe, which was set forth in the original Economic Cooperation Act of 1948, was expanded during late 1949 to the broader objective of European economic "integration" (or "unification" as it is frequently called), defined by ECA Administrator HofiFman as the formation within Western Europe of ". . . a single large market within which quantitative restrictions on the movement of goods, monetary barriers to the flow of payments and, eventually, all tariffs are permanently swept away."1 All through 1950 this policy was pursued with great vigor by ECA and was actively supported by the State Department. It took its most tangible forms in the establishment of the European Payments Union (EPU) and the related measures for infra-European trade liberalization, but it was also reflected in encouragement of the Schuman Plan and keen interest in various other integration schemes suggested by European officials. Although the policy of economic unification was adopted on the assumption that there would be no war, ECA stated that the defense crisis, following the invasion of South Korea, and the resulting need for a more efficient use of resources and for enlarged total production, ". . . makes it more imperative than ever that the Western European countries take much longer, much more rapid steps toward economic integration than have even been discussed thus far if they are to survive as free nations."8 By and large, the American policy of encouraging economic integration applied only to Europe, and it limited United States participation to advice and economic aid. However, in May, Secretary of State Acheson stated that more extensive cooperation between the United States and Europe in international economic 1 For

a review through 1949 of policies and activities looking toward integration, see Survey—1949, Chapter V. 2 Economic Cooperation Administration, Press Release No. 2151, April 8, 1951.

VI. EUROPEAN ECONOMIC INTEGRATION

affairs was called for. Specifically, he agreed to the establishment, on an informal basis, of a continuing working relationship by the United States (and Canada) with the Organization for European Economic Cooperation (OEEC).8 This did not, of course, constitute a policy of an economically integrated Atlantic community, but it was frequently interpreted in Europe as a step in that direction.4 Efforts after the invasion of Korea to develop the ". . . conception of the defense of the North Atlantic area as an integrated, unified, centralized, strong organization . . . which was be centrally directed, centrally organized, and centrally operated"6 raised in more acute form the question of coordinating the administration of production and distribution among the United States and the Western European countries. Several socalled economic coordinating committees and subcommittees were established under the NATO, but there were no indications during 1950—much secrecy surrounded the plans—that the United States was contemplating for the North Atlantic community anything like the economic integration it was urging for Western Europe.® Oifficial United States statements Justified the policy of European economic integration on several grounds. Administration officials stated that it would reintroduce into Europe the invigorating force of competition, thus making for a dynamic and expanding economy. They stressed that it would permit European producers to take advantage of large-scale production—always identified with "low-cost'—with the result that not only would total output expand but productivity would be ro increased as to permit Europe 8 See DepiMrtment of State Bulletin, May 22, 1950, pp; 789-791; May 29, p. 827; June 5, p. 888; and June 12, pp. 931-936. * For a particularly eloquent plea from the British standpoint for a North At­ lantic rather than a European economic integration, see Bobbins, L., "Toward Ae Atlantic Community," Lloyds BarJt Review, July 1950, pp. 1-24. 5sStatranent by Secretaiy Acheson, Department of State Bulletin, October 16, 1950, p. 611. Article 2 of the North Atalntic Treaty states that the members -will ". . . encourage economic collaboration between any or all of them." 8 Considerable publicity during the year was given to Ae efforts by an Atlantic Union Committee to secure Congressional approval of a proposal whereby Ae President would invite NorA Atlantic Treaty signatories to a "federal convention" to discuss the possibility of establishing a federal union. Such a union was to in­ volve one vast free-trade area with, presumably, a common currency, a common defense, and a common foreign policy. Though many members supported the proposal and brief hearings were held by the House Committee on Foreign Affairs, the resolution was not debated on the floor. (See "Atlantic Union," Hearings on H.Con.Res. 107, House of Rep., Committee on Foreign Affairs, 81st Cong., 2d Sess.)

VI. EUROPEAN ECONOMIC INTEGRATION

to compete more effectively in extra-European markets and elimi­ nate the need for outside assistance. They frequently added that an integrated Europe would provide the means for bringing Germany ". . . fully into the western European family of nations, an essential condition for a peaceful and prosperous western Europe."7 Although there undoubtedly was some enthusiasm in Europe for this program, ECA officials testified that it was only pressure from the United States that kept "the thing moving in the right direction." Early in 1950, ECA expressed "disappointment" in Europe's progress toward integration and stated that it planned henceforth to administer ECA aid in such a fashion as to encourage a more aggressive pursuit by the ERP recipients of a program of liberal­ ized trade and payments. In particular, the Administration re­ quested Congress to amend the Economic Cooperation Act so as specifically to permit the Administrator to use up to $600 million of the funds to be appropriated for ECA's third year to assist those taking important steps toward this goal and to transfer free dollars directly to the proposed EPU. Congress needed no con­ vincing. Indeed, several members urged that a provision be written into the law making integration (undefined in the discussions) a prerequisite to obtaining any United States aid. This was suc­ cessfully opposed by ECA and State Department spokesmen, who testified that Europe responded better to persuasion than coercion, that such a provision would give the Commxmists the opportunity to engage in propaganda to the effect that this was American imperialism, and that complete integration would take a long time and Europe needed dollar aid in the meantime. As finally approved, the authorizing legislation provided that $600 million of the funds appropriated to ECA for fiscal year 1951 would be available "solely": (a) for the purpose of "encouraging and facili­ tating the operation of a program of liberalized trade and pay­ ments," (b) for supporting any central institution [notably EPU] designed to facilitate such a program, by transfer of funds directly 7 Statement of ECA Administrator HofFman, "Extension of European Recovery— 1950," Hearings on S. 3101, U.S. Senate, Committee on Foreign Relations, 81st Cong., 2d Sess., p. 8. See also Secretary of State Acheson's statement to this ef­ fect. (tbid., p. 15.)

VI. EUROPEAN ECONOMIC INTEGRATION

to it or to any participating country in connection with the operation of such an institution, and (c) for the "furnishing of assistance to those participating countries taking part in such a program." This authority did not exclude additional amounts being used to encourage integration, but the Act did specify that "not more than" $600 million could be transferred as provided in (b) above. The General Appropriation Act of 1951 reduced the amount which could be so transferred to not more than $500 million. There was also some Congressional sentiment that the United States should urge a political unification of Europe. The State Department reported that while it would look with favor on such a development it did not believe that the United States should try to force it and, in any case, it believed that political unification of a high order was not a prerequisite to economic unification. Nonetheless, the House bill amended the declaration of policy in the Economic Cooperation Act to state that it was the policy of the people of the United States to encourage the "economic unification and federation of Europe," but the words "and federation" were deleted in conference in response to the Administration s objections and the announcement of the Schuman Plan.8 The final Act amended the general policy statement to urge the "further" economic unification of Europe. The members of Congress were most uncritical of this integration policy. There were, however, a few who raised the query of whether the proposed EPU, and integration of Europe in general, might not result in the creation of a protected "soft-currency area," involving discrimination against the rest of the world and thus make more difficult the attainment of the long-term United States objectives of worldwide currency convertibility and nondiscriminatory trade. Spokesmen from ECA and the State Department replied with little more than the categorical statement: No, through facilitating increased productivity in Europe it will pave the way toward general convertibility. Nor did the American press indicate that this possibility was a matter of serious concern, 8 See Conference Report No, 2117, 81st Cong., 2d Sess., May 19, 1950 for a statement of Congressional sentiment that political unification of Europe was desir­ able and necessary if the objectives of ERF were to be realized.

VI.

EUROPEAN ECONOMIC INTEGRATION

but some of the British press commented favorably on the EPU precisely on the grounds that it was the first elaborate postwar plan which was not "dominated by the twin principles of multi­ lateral convertibility and of nondiscrimination" but instead was "based upon discrimination and upon far less than universal con­ vertibility of currencies."8 In any event, with the increase in short­ ages of many commodities in the United States and the movement toward administrative allocation among nations of many raw materials which occurred in late 1950, the question of discrimina­ tion against the United States became a much less pressing prob­ lem. A. EUROPEAN PAYMENTS UNION EPU, together with related trade liberalization measures dis­ cussed in the following section, constituted the major device urged by the United States to attain the economic integration of Western Europe. It had been preceded by the ECA-fostered and less ambitious Intra-Eviropean Payments Scheme (IEPS) of 1948 and 1949.1 Although the IEPS no doubt did result in some increase in 8 The

Economist, July 15, 1950, pp. 108-109. IEPS expired on June 30, 1950 and was replaced by the EPU. A summary of the former and its recognized defects was given in our Survey—1949, pp. 136139. As noted there, the September 1949 devaluations and the partial liberalization of intra-European trade promised to alter significantly the intra-European payments patterns on which the plan had been based. Also, since the planned bilateral deficits and surpluses were expressed in dollars, the devaluation greatly expanded the amounts of European currencies available under the plan (and so the total quantity of trade since European prices on the average rose much less than the devaluations) while the effect of the devaluations on bringing the various European price levels into better balance reduced the need for drawing rights by some participants, although in some cases this was offset by a removal of quantitative restrictions on imports. As a result of all these factors, during the first half of 1950 many revisions and adjustments were made in the bilateral drawing rights originally established. Some $133.5 million were cancelled and $37.4 million of new ones established, leaving a total available for the year, including $78.4 million carried over from the 1948 plan, of $871.8 million. When the 1949 plan ended, all of the bilateral and 71 percent of the multilateral drawing rights had been used, but less than half of the Belgian loans so laboriously negotiated were utilized. The total aid extended under the plan reached $741.9 million as compared with $677 million during the first year. (For details see Economic Cooperation Administration, Eighth and Ninth Report to Congress, Washington, D.C., 1950, pp. 12-13 and 21-26 respectively. ) The aid extended and received under the two IEPS arrangements are shown in the following table. Not included are the operations by the Baiik for International 1 The

VI.

EUROPEAN ECONOMIC INTEGRATION

intra-European trade,2 the defects of this elaborate payments mechanism soon became evident. In December 1949, therefore, ECA submitted to the ERP countries a draft working paper outlining a new mechanism designed to encourage a multilateral settlement of payments within Europe, to apply automatic pressure upon members to bring their trade with each other more nearly into balance, to facilitate liberalization of trade within Europe, and to provide incentives to expand exports to the dollar area.8 The details of the original ECA proposal have not been officially published, but the gist of the plan was that a central clearinghouse should be established in which each country would receive a line of credit (quota) and through which each central bank would settle its cumulative net surpluses or deficits vis-&-vis the central banks of all other members rather than bilaterally with Settlements known as "first category" and "second category" compensations among Ilie participants, which totalled $162 million and $91 million respectively. Operations of Intra-European Payments Plan, 1948-1950 (millions of dollar equivalents)

Country Austria Belgium-Luxembourg Denmark France Germany Greece Italy Netherlands-Indonesia Norway Portugal Sweden Turkey United Kingdom Total

AidReceivedfrom Other Participants 1948-1949 1949-1950 93.3

63.5 8.9 11.1 289.1 46.2 76.2

23.6 69.0 72.3 129.5

—

—

83.0 47.4 —

7.7 14.1 30.0 677.0

—

143.4b 86.7 .18.2 —

74.2 31.7iJ 741.9

AidProvidedto Other Participants 1948-1949 1949-1950 0.9 216.1 3.1 9.5 96.4 —

38.3 11.1 4.0

2.7 278.3a 6.0 51.6 121.2 —

29.8 19.9 248.0

43.4 20.5 6.9 8.3 54.7 14.2 134.2

677.0

741.9

—

Net Aid Received (-{-) Provided (—) 1948-1950 +153.2 —485.5 +25.6 +297.0 —99.1 +205.7 —81.7 +194.8 +123.2 +9.9 —76.8 +54.2 —320.5

a) Includes $39.1 million of loans granted to the United Kingdom and Netherlands. b) Includes $38.0 million of loans from Belgium. c) Includes $1.1 million of loans from Belgium. Sources: 1948-1949 data, Bank for International Settlements, 20th Annual Report, Basle, June 12, 1950, p. 225; 1949-1950 data, Economic Cooperation Administration, Ninth Report to Congress, Washington, B.C., 1950, p. 25. 2 ECA

statements usually describe the increase as "substantial," but this would seem to be overenthusiastic. Clearings through the IEPS were only about 10 per­ cent of total intra-European trade, and it is probable that some of this trade would have taken place anyway. 8 See Mr. Bissell's testimony in "To Amend the Economic Cooperation Act of 1948, as Amended," Hearings on H Ji. 7878, House of Rep., Committee on Foreign Affairs, Slst Cong., 2d Sess., Part 2, pp. 493ff.

VI. E U R O P E A N ECONOMIC INTEGRATION

each other. These multilateral surpluses or deficits would be periodically settled, not by gifts as in the IEPS but in part by gold or dollars and in part by credit from or to the central union. The gold payments were to be automatic and were to operate in a scissors-like fashion; that is, debtors would pay increasing percentages of their deficits in gold (reaching 100 percent when their credit was exhausted), while creditors would receive decreasing percentages of their surpluses in gold (reaching zero percent when their quotas were exhausted). This device, it was hoped, would provide pressure on both debtors and creditors to bring their accounts into balance. The dollar or gold payments, it was argued, would link the area to the rest of the world and help ease the movement toward general convertibility. A supervisory managing board was to be created with some authority4 to force members to take such domestic action as was deemed necessary to bring their international accounts into balance. It was anticipated that for a time ECA dollars would be used to help finance the clearinghouse and to ease the adjustment problems of some members. Μα/or Issues and Provisions5 The general plan of a multilateral intra-European clearing mechanism was accepted "in principle" by all OEEC participants in January 1950, but it required six months of difficult negotia tions to settle the specific terms.® The agreement was finally approved informally by the OEEC CotmcH on July 7. It was then translated into a legal document and, after the U.S. Congress finally appropriated funds for the third year of ECA, was signed by most member governments on September 19, with its provisions made retroactive to July 1, 1950. EPU was set up for an initial period of two years (this period coincided with the then-planned operations of ECA in Etirope), but ECA officials stated that they hoped it would prove to be a permanent institution.7 The preface of the agreement stated that EPU was designed to * In the public accounts this authority was never defined. 5 See The Economist, July 15,1950, pp. 130-137 for an excellent detailed descrip­ tion of the "Mechanics of EPU." β See Survey—1949, pp. 147-151, for a brief statement of the first difficulties in negotiating an EPU agreement, some early disagreements within the United States as to its ultimate desirability, and the establishment, at United States' initiative, of an OEEC political coordinator. 7 See statement by Mr. Bissell in Hearings on H.R. 7378, op.ctt., p. 513.

VI.

EUROPEAN ECONOMIC INTEGRATION

facilitate the maximum amount of non-discriminatory trade liberalization among the members; to assist the members to become independent of extraordinary assistance; to encourage them to maintain stable and high levels of trade and employment; and to assist them in the transition to the post-ERP period by providing them with resources "to substitute tor gold and foreign currencies and also to provide the possibility and incentive" to strengthen their international reserves. It also stated that the system should facilitate a return to full multilateral trade and to the general convertibility of currencies.8 The major disputes in working out the details of the agreement were primarily between the United Kingdom on the one hand (frequently supported by the Scandinavian countries) and the other participants and ECA on the other. Press reports during early 1950 that the United Kingdom was unenthusiastic about the whole scheme led to some strong Congressional criticism of Britain. ECA spokesmen admitted "disappointment" with the British attitude, but they attempted to quiet the Congressional concern by stating that the existence of the sterling area mechanism and accumulated sterling balances did in fact introduce many complexities and that the United Kingdom was not uncooperative but only cautious because of the sobering effects of the 1949 payments crisis and because of the elections scheduled in the spring. Most of the negotiations revolved around the arrangements which should be made so as to permit the sterling area mechanism to function alongside the EPU mechanism, the size of the credit margins (quotas) and the size and timing of the gold and dollar payments, the actions to be permitted countries losing gold, and the role of the management committee.9 8 The text of the "Agreement for the Establishment of a European Payments Union" may be found in the Economic Cooperation Administration, Ninth Report to Congress, Supplement, Washington, D.C., 1950, pp. 6-35. 9 There is not space here to consider in detail the lengthy discussions on these various points, which usually became very technical and complex. The interested reader is referred especially to Hirsdhman, A. O., "The European Paymaats Union —Negotiations and the Issues," The Review of Economics and Statistics, February 1951, pp. 49-55; and The Economist and The Statist for the period Deeember 1949 through July 1950. Also see The Banker, London, June 1950, pp. 157ff., and July 1950, pp. 93-93; and Sargent, J. A., "EPU and the Future Sterling Policy," Bul­ letin of the Oxford University Institute of Statistics, November 1950. These ma­ terials and the text of the EPU Agreement are the sources of most of the informa­ tion in this section.

VI. EUROPEAN

ECONOMIC INTEGRATION

a. MANAGING BOARD It was easily agreed among the European countries that the authority of the Managing Board to impose sanctions and to interfere in the domestic affairs of the members should be severely restricted. As established, not only does the EPU operate automatically in most cases but also the Managing Board (a United States representative was authorized to attend meetings and participate in discussions but not in decisions) was placed under the general supervision of the OEEC Council, where decisions must be unanimous. As has been pointed out,1 this also served to dispose of most of the earlier concern that the authority of the EPU Board might supersede that of the International Monetary Fund. b. ROUE OF STERLING

The role of sterling was an issue on which agreement was much more difficult to obtain. Early in the negotiations the British representative,2 with the aim of preserving the position of sterling as an international currency and protecting the United Kingdom from the severe gold losses which might result from the subjection of previously accumulated sterling balances to the proposed clearing mechanism, suggested that sterling be given a "special position" in EPU. The essence of the proposal was that Britain would extend credit to the EPU but would forego die right to receive credit from it. In return, she asked that the existing structure of her bilateral payments agreements with non-sterling countries, which had overdraft facilities, remain intact. This suggestion was strongly opposed by many of the Continental countries and by ECA on the grounds that it did not constitute a sufficient break with the existing pattern of bilateralism. Britain finally agreed to become a full member, after several provisions were included to take account of the special position of sterling. The agreement provided that sterling balances accumulated before July 1, 1950 by an EPU member could be used, at its request, only to settle op.cit., pp. 52. At the outset Sir Stefford Cripps had stated that his country could not accept an EPU which would replace the existing structure of bilateral agreements and suggested that the proposed EPU be superimposed on these agreements as a "lender of last resort." This extreme position was soon abandoned. 1 Hirschman, 2

VI. EUROPEAN ECONOMIC INTEGRATION

any net deficits it had with EPU. S Further, ECA agreed to reimburse Britain ". . . for any net payment of dollars to the EPU in the event that the United Kingdom becomes a net debtor in intra-European payments because previously accumulated sterling holdings are used by intra-European debtor countries to cover their [EPU] deficits."4 To help maintain the position of sterling as international reserves for many of the European countries, Britain also favored the inclusion of a "sterling option' clause whose gist was that she be permitted to enter into bilateral agreements with other members providing that EPU creditors could hold such part of any EPU credit balance in sterling—rather than EPU units—as had been earned in sterling; Britain agreed that such amounts would be added to holdings of EPU units in calculating gold or dollar receipts due from the Union. In the final agreement the significance of this option provision was severely limited. All members were permitted to enter into bilateral agreements with one another providing that a net credit with the Union could be held in their partner's currency rather than EPU units, but only to whichever was the least of the following amounts: (a) the amount agreed to in the bilateral agreement, (b) the accumulated surplus of the creditor with its partner, or (c) that part of the net overall surplus of the creditor which could be settled by credit—and not by gold or dollars—under the general provisions of the EPU.5 However, and this'is most important, such currencies accumulated during the lifetime of the Union are, when the EPU is liquidated, to be thrown into the common liquidation pool. The status of 8 It also provided that bilateral agreements could be entered into for the funding and amortization of outstanding debts. Any amortizations of a funded debt agreed to were to be included in calculating the position of the two parties in EPU just as though they were current transactions. As a last resort, and only if no agree­ ments could be reached regarding the amortization of an outstanding debt, it was provided that the balances could be amortized through EPU in two years by equal monthly installments. During the EPU negotiations, British representatives stated that they did not intend to negotiate funding agreements of this sort. 4 Economic Cooperation Administration, Ninth Report to Congress, Washington, D.C., 1950, p. SO. Through 1950, the equivalent of nearly $50 million of ac­ cumulated sterling had been used by EPU debtors to settle net deficits, but since Britain did not lose any gold as a consequence, no ECA reimbursement was made. β A provision was also included to the effect that the obligations of a member to make gold payments to EPU could be discharged in the currency of a creditor, if the Managing Board agreed and to the extent Aat it could be used by EPU in lieu of gold to pay that creditor.

VI.

EUROPEAN ECONOMIC INTEGRATION

sterling as an international currency was also to some extent pro­ tected by the general provisions of the EPU whereby sterling, as well as any other member's currency, is freely transferable among member countries in the normal course of trade and whereby only net surpluses or deficits are settled via the EPU mechanism.® C. QUOTAS AND SETTLEMENT OF BALANCES

Another major controversy in the negotiations was the size of the quotas and the size and timing of gold payments. This issue was important, for it involved the question of whether strong pressure would be applied on members by the Union's operations to create conditions making for general convertibility or whether a protected soft-currency bloc was being established.7 Details of these discussions have not been officially published. From the press reports it appears that the United Kingdom plus the Scan­ dinavian coimtries favored, and succeeded in having established, both larger quotas and smaller and more delayed gold or dollar payments—that is, more liberal credit lines—than ECA had origi­ nally contemplated and than some of the other European coun­ tries, especially Belgium and Italy, desired. As finally agreed, each country was assigned a "quota" or line of credit for a two-year period equivalent to 15 percent of its total intra-European payments and receipts on current account in 1949.8 For several countries these quotas were effectively in8 Following the signing of the EPU agreement, all countries began to renegotiate their previous bilateral agreements to make them consistent with the EPU agreement. Britain also in September invited all EPU members to join its transferableaccount group. This latter action was interpreted by the British press as an effort to encourage a more extensive use of sterling within Europe (both for current payment purposes and for inclusion in reserves, rather th^n EPU units) by giving it a wider use outside Europe than most other European currencies. Sweden, Norway, Holland, and Italy were already members of the transferable-account group, but through January 1951 only Denmark, Austria, and Greece accepted lids invitation. Tliis poor record of acceptance was explained unofficially as due in part to the difficulties of reconciling such membership with other bilateral agreements and an unwillingness to undertake obligations to accept sterling freely in currentaccount transactions with other transferable-account countries outside Europe, which in turn was a reflection of concern as to the long-run strength of sterling plus uncertainties as to the future membership of the transferable-account group. 7 See Hirschman, op.cit., for a brief discussion of this question. 8 Two exceptions to the 15 percent rule were made. Belgium, at her request, was assigned a smaller quota than this on the ground that otherwise intolerable internal inflationary pressures would result since she was a large creditor on European account and exports constituted an exceptionally large proportion of her total national income. To further ease Belgium's position, EGA agreed to grant her

VI. EUROPEAN ECONOMIC INTEGRATION

creased as a result of the recognition that the production and trade structures of some nations were such as to make them persistent debtors in intra-European trade and others persistent creditors. The final agreement specified that ECA should determine which nations were likely to be persistent debtors or creditors and that "special temporary arrangements" should be made to meet their problems. This took the form of establishing "initial credit posi­ tions and initial debit Positaons" for these countries for the first year of operations. These initial balances, calling for no gold or dollar payments to or from EPU, were to be exhausted before the members' quotas were utilized. ECA agreed to provide "condi­ tional aid" in dollars, as under the IEPS, to those countries saddled with initial debit balances in an amount equal to the amount of such balances utilized by the debtors.8 These quotas and initial positions, expressed in a unit of account equal to one United States dollar, are shown in Table 26; they set the maximum cumu­ lative deficits and surpluses which can be financed through the EPU mechanism for each country.1 Under the agreement, the central bank of each country each month calculates the balances owed or due on current account with the central banks of each of the other members and com­ municates this information to the Bank for International Settle­ ments (BIS), which was chosen by the members as EPU's agent.2 The BIS then clears these balances (i.e., performs an offsetting operation) and calculates the cumulative (from July 1,1950) net deficit or credit position of each country vis-&-vis all the others in terms of the common unit of account. Thus, the various European some direct non-conditional aid. Switzerland's quota was greater than the 15 per­ cent, at her request, primarily in order to protect her export markets. • Of the initial credit balances, $10 million of that to Norway and the $25 mil­ lion to Turkey were on a loan basis to be repaid to EPU. The rest were extended on a grant basis and required the recipient to deposit counterpart funds in the same manner as if it were receiving direct ECA aid. 1 It was provided that EPU would pay interest to creditors on their balances at a rate of 2 percent per year while debtors would pay the Union 2 percent per year on all debts outstanding for a year or less, 2% percent for those outstanding from one to two years and 2¾ percent for those outstanding more than two years. sECA officials reported Aat some consideration had been given to having the International Monetary Fund perform the administrative functions and to carry out the other EPU operations but that the European countries preferred that this be done by the BIS. It was agreed, however, that a representative of the Fund should be invited to attend OEEC meetings concerned with its negotiation. See Chapter IV, Section B, supra, for a brief account of the Fund's position on EPU.

VI.

EUROPEAN ECONOMIC INTEGRATION

TABLE 26 Quotas and Initial Positions in the European Payments Union (millions of units of account) Quotas Austria Belgium-Luxembourg Denmark France Germany Greece Iceland Italy Netlierlands Norway Portugal Sweden Switzerland Turkey United Kingdom® Total

70 360 195 520 320 45 15 205 330 200 70 260 250 50 1060 3950

Initial Positions Debit Credit 0 44 0 0 0 0 0 0 0 0 0 21 0 0 150 215

80 0 0 0 0 115 4 0 30 60 0 0 0 25 0 314

a) It is to be noted that, except for Iceland, the United Kingdom is the only sterling area country which is a member of EPU. However, transactions of the rest of the sterling area with the OEEC countries are cleared and settled through EPU, with Britain serving as the banker. Sources: "Agreement for the Establishment of a European Payments Union," reprinted in the Economic Cooperation Administration, Ninth Report to Con­ gress, Supplement, Washington, D.C., 1950, p. 13. The amounts of initial positions were not all settled in the agreement but were determined later by ECA, and the above data on initial positions have been taken from Economic Cooperation Administration, Tenth Report to Congress, Washington, D.C., 19S1, p. 30.

ciirrencies are completely transferable among themselves at the central bank level.8 These net cumulative debit or credit balances are then set off first against the initial position, if any, and, after these are exhausted, against the country's quota. The cumulative deficits and surpluses applied against the quotas are to be settled through extensions of credit by or to the Union and through gold payments to or by the Union, on the scale shown in Table 27. Agreement on the size and timing of the gold settlements was reached only after prolonged discussions and represented a com8 EPU does not abolish the exchange control systems of the member countries, and the transferability of currencies does not apply to the transactions of individual traders.

VI.

EUROPEAN ECONOMIC INTEGRATION

27 Settlement of Members' Credit and Debit Balances with EPU (percent of total quota) Percent of Quota 1st 2nd 3rd 4th 5th

Debtors of EPU Creditors of EPU Settlement Effected by Settlement Effected by Extension of Gold Payment ExtensionofCred- GoldPaymentby Credit by EPU by Debtor to EPU it by Creditor EPU to Creditor

20 20 20 20 20 Total

20 16 12 8 4 60

0 4 8 12 16 40

20 10 10 10 10 60

0 10 10 10 10 40

Source: Federal Reserve Bank of New York, "The European Payments Union," Monthly Review of Credit and Business Conditions, Septranber 1950.

promise, with ECA reported as favoring larger and earlier gold settlements. It is to be noted that, contrary to the original ECA proposals, creditors do not receive a decreasing proportion of gold as their surplus increases and that less pressure (though more than under most recent international monetary mechanisms) is put on the creditor than on the debtor for maintaining a balance in its international accounts. Since the initial credit positions exceeded initial debit positions (that is, EPU started out with more obligations than claims) and the schedules for gold payments and receipts are not parallel, it was possible for the Union to suffer a net outflow of gold, espe cially during its early operations. To meet this contingency, ECA agreed to set aside $350 million of its 1950-1951 appropriation and to make tin's available to EPU if and when the latter needed the funds to carry out its operations. ECA also notified OEEC that it was setting aside another $100 million, to be used at ECAs discretion, to provide special assistance to countries facing especially serious difficulties because of their trade liberalization policies.4 4 See September 18, 1950 letter from ECA to OEEC, reprinted in Economic Cooperation Administration, Ninth Report to Congress, Supplement, op.cit., p. 8. No mention was made in this letter of the uses to which the remaining $50 million provided by Congress would be put, but it should be remembered, as noted above, that ECA had »TnWa.l«»ri responsibilities, under certain conditions, to reimburse Britain should she lose dollars to EPU because of the introduction of accumulated sterling balances into the EPU.

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EUROPEAN ECONOMIC

INTEGRATION

d. TREATMENT OF EXTREME DEBTORS AND CREDITORS

In addition to the establishment of "initial positions" mentioned above, several other provisions were included with respect to ex­ treme debtors and creditors in the July 7 OEEC Resolution ap­ proving the establishment of EPU. This Resolution stated in general that OEEC would keep the economic and financial situa­ tion of all members under review and would make such recom­ mendations as it saw fit to enable the members "to play their full part" in meeting the EPU objectives. It was stated that if a creditor accumulated a surplus in excess of 75 percent of its quota, its position would be examined by OEEC and remedial measures recommended; if the member's surplus approached 100 percent of its quota, OEEC would consider what arrangements could be made to enable the creditor "to remain an effective Member of the Union." It was also specified that in its recommendations to creditors, and in order to protect the Union's reserves, OEEC could waive the rules that the members were to liberalize their trade on a nondiscriminatory basis. (See following section for de­ tails on the trade Hberalization proposals.) With respect to ex­ treme debtors, the July 7 document stated that if a member deemed its deficits "serious in view of the state of its reserves" it could temporarily suspend the measures it had taken to liberal­ ize trade but that OEEC was to examine any such action and, if it disapproved, the member was to restore the suspended measures. It was also provided that if OEEC were "satisfied" that an extreme debtor needed special assistance, OEEC would recommend to ECA that the latter make dollars available to that member out of the special assistance fund to be set aside by ECA. These particular clauses were not included in the final EPU convention which was signed on September 19, but it appears they were nonetheless accepted as policy to be followed. The formal "Agreement" authorized the OEEC Council "to take such de­ cisions as may be necessary" for the execution of the agreement. It was specifically provided that if a creditor exhausted its quota the surplus would be settled "in accordance with the decisions" of OEEC. That is, there was no assurance that such a creditor would be paid in full in gold. On the other hand, debtors who exhausted their quotas were required to settle the excess wholly by a pay-

VI. EUROPEAN ECONOMIC INTEGRATION

ment of gold, unless OEEC specifically decided otherwise. Finally, any member was authorized to withdraw from EPU is its cumu­ lative surplus or deficit reached the amount of its quota. The effectiveness of EPU in increasing European productivity, and thereby facilitating a solution to her "dollar problem," was yet to be demonstrated and was the subject of some non-official dispute, as was the question of whether EPU was a step in the direction of general convertibility and worldwide non-discriminatory multilateral trade.5 There is no question, however, that it was an improvement over the previous infra-European payments plan. EPU, as contrasted with the previous scheme, provides for a multilateral, rather than bilateral, settlement of payments within the area; it is free of some of the rigidities and inflexibilities in­ herent in the earlier system's advance calculations of bilateral trade balances; the fact that the surpluses and deficits are to be settled, iy>t by gifts,® but, by gold or dollar payments and credit provides greater incentives for creditors to increase imports and debtors to increase exports; and it does not rest squarely on United States dollar assistance, as had the earlier plans, and so is capable of functioning after ECA aid ceases. β See especially TrifRn, R., "La Multilateralisation Progressive des Devises en Europe," Economia Intemazionale, May 1950, for a discussion supporting the view that EPU is a step toward general convertibility. Hinshaw, R., in "The European Payments Union —Consideration of Some Criticisms," The Review of Economics and Statistics, February 1951, concludes that EPU is probably a step toward worldwide nondiscrimination and may operate to hasten a return to general convertibility. For a carefully qualified thesis that unification can contribute to solving Europe's dollar problem, see Smithies, A., "European Unification and die Dollar Problem," Quarterly Journal of Economics, May 1950» A very critical assessment of the virtues of unification is given by Haberler, G., "European Unification and the Dollar Problem: a Comment," Quarterly Journal of Economics, May 1950. The subject is pursued further by Professors Balogh, Smithies, and Haberler in the Quarterly Jour­ nal of Economics, February 1951, pp. 110-130. For a critical appraisal of the EPU on the grounds that it is too big a step toward general convertibility, see Kahn, R. F., "Hie European Payments Union,' Economica, August 1950. For an extensive and excellent critical discussion of the whole integration problem, see Ellis, H. S. (ed.}, The Economics of Freedom, 1950, Chapter IX. See also D'Anna, F. C., "The Economic Integration of Western Europe," Banca Naziorude del Lavoro Quartedy Review, Rome, April-June 1950, pp. 109-122; and Frei, Rudolf, "Einige Aspekte der Europaischen Zahlungsunion," Schweizerische Zeitschrift fur Volks•wirtschaft und Statistik, February 1951, pp. 29-47. 4 Under the Intra-European Payments Scheme, intra-European creditors extended grants ("drawing rights") to their European debtors in return for dollar grants ( conditional aid") from ECA.

VI.

EUROPEAN

ECONOMIC INTEGRATION

Operations during 1950 The first compensation under EPU covered the period July through September, and the results indicated such a strain on the Union that the Managing Board at first refused to make them public. When they were later released, it was disclosed that Germany had a deficit taking over half her total quota, the French a surplus accounting for over a third of her quota, and the Netherlands a deficit which more than exhausted her initial credit position. The United Kingdom also showed a large credit balance. Since the continuation of these trends, especially Germany's, would threaten the very existence of the Union, the Managing Board appointed a special mission to study Germany's position and to submit recommendations. It concluded that Germany's difficulties were not fundamental but were the result primarily of the stockpiling of imports by industrialists; prepayments for imports and excessive granting of credits to foreign buyers—occasioned in part by rumors of an impending revaluation of sterling; ineffective exchange controls; and a more rapid removal of import restrictions than by oilier EPU members.7 It believed that her payments position could be corrected if appropriate internal measures were taken quickly. She was not requested, however, to suspend any of the trade liberalization measures since the study mission felt that such action would not only be contrary to the spirit of EPU but would create new difficulties for other EPU members, especially Holland, Denmark, and Switzerland, whose export industries were greatly dependent on the German market. The Germem authorities agreed to adopt certain internal deflationary measures, largely through a tighter credit policy and by a reduction in the budgetary deficit, and more actively to encourage exports. OEEC and the EPU Managing Board then agreed, in December, to extend to Germany an additional EPU credit of 120 million units,8 to be redeemable in six equal installments beginning in May 1951. Other EPU members were urged to be especially liberal in importing 7 See Federal Reserve Bank of New York, Monthly Review, April 1951, for an excellent brief account of "Western Germany's International Economic Position" in early 1951. 8 It was specified that two-thirds of any German indebtedness to EPU in excess of its quota was to be financed out of this credit and one-third by payment of dollars from the German reserves.

VI. EUROPEAN ECONOMIC INTEGRATION

from Germany. (Although nothing was done about it, there was some evidence that the German "quota," as compared with the others, was too small. Her total foreign trade in 1949 had been abnormally small and was growing rapidly; also—as a consequence of the 1949 devaluations, a cut in American aid, and increased supplies in Europe—there was in 1950 for Germany an especially large shift of imports from extra-European to intra-European sources.) Some observers took comfort from the fact that EPU had settled, at least temporarily, the sort of payments crisis which might previously have been met by unilateral and very restrictive measures. But, during the last quarter of the year, Germany continued to run a large deficit, as Table 28 indicates, and the possibility was foreseen that in 1951 she might reimpose some of the quantitative import restrictions which had been removed earlier. This would be a severe blow not only to EPU but to the whole integration program.' Further, with the exception of Italy and Sweden, creditors during the first quarter continued—though at a slower rate—during the last three months of the year to report surpluses, and debtors deficits.1 Operations during the first half year of EPU thus appeared to support those who argued that a basic defect in the whole scheme was that it was biased in the direction of assuming (and forcing) each European country to have balanced accounts with the rest of Europe as a whole, whereas the distribution of economic resources was such that some countries were, and—from the point of view of maximizing the gains from trade—should be, European debtors and others European creditors.2 The fact that the sterling area continued to record a substantial surplus led some of the British press to comment that these developments showed how unwise the British negotiators had been in 8 The press reported that OEEC had recomended that ECA should place $30 million at the disposal of Germany from the special assistance fund noted above but that ECA refused to do this. 1 Contrary to expectations when it was established, EPU's receipts of gold and dollars during the first half year of operations exceeded payments, due in large part to die unexpectedly large deficit of Germany which put her into the range of maximum gold payments. In October, ECA paid $42.6 million to EPU, which the latter used to make payments to its creditors. On December 31, 1950 the Union listed as liquid resources $307.4 million promised by ECA, $47.9 million of current account balances, and $48.9 million of U.S. Treasury bills. (See The Statist, March 10, 1951, for a complete balance she$t of the EFU as of December 31, 1950.) 2 See Hirschman, A. O., op.cit., for an argument that minimizes the extent and importance of this "defect."

VI. EUROPEAN ECONOMIC INTEGRATION

TABLE 28 EPU Clearing Operations, July-December 1950 (millions of units of account and percentages)

Country

Cumula­ tive Deficit (-)or Surplus (+)

Austria BelgiumLuxembourg Denmark France Germany Greece Iceland Italy Nemerlands Norway Portugal Sweden Switzerland Tinrkey United Kingdom

Amount of Initial Credit (—) or Debit (+,) Balance Used

-37.4

-37.4

+21.8 -38.4 +212.4 —356.7® -70.8 -3.3 -30.9 -107.9 -51.1 +36.8 0 -12.6 +5.3

+21.8

+433.0

Amount of Quota Used By By Receiv­ Paying ing Credit Gold (—) or (-)or Receiving Granting Gold(+) Credit (+} 0

0

0

0 -38.4 +158.2 -192.0» 0 0 -30.9 -75.5 0 +25.4 0 0 +5.3

0 0 +54.2 -128.0» 0 0 0 -2.4 0 +11.4 0 -12.6i> 0

+150.0

+247.5

+35.5

— — —

-70.8 -3.3 —

-30.0 -51.1 —

0 —

Percent of Initial Balance Used

Percent of Quota Used

47

0

50

0

0 20 41 lOOl 0 0 15 24 0 53 0 5¾ 11

100

27

— — —

61 83 —

100 85 —

0 —

a) 36.7 million units of the total were covered outside the quota under the special credit to Germany. Presumably, 12.2 million units were in the form of a gold payment by Germany to EPU and 24.5 million in the form of a credit received from EPU. b) Switzerland chose to settle in dollars rather than receive credit from the Union. Source: Compiled from data in Organization for European Economic Cooperation9 Press Release, A (51) 3, Paris, January 17, 1951.

urging large credit margins and small gold payments. A large part of the British surplus reflected the export surplus of the outer ster­ ling area to Europe and meant that the United Kingdom was in an important degree (since only a part of her surplus was paid for in gold or dollars) either extending loans to EPU by borrowing from the other sterling area countries or suffering "unrequited" exports. In the light of the growing inflationary pressures in Britain as re­ armament progressed, some saw here a source of possible future dissatisfaction with EPU.8 More serious than this for the immediate future, however, was the question of whether the scheme, based 3 The United Kingdom could presumably reduce this inflationary pressure by further relaxations of restrictions on imports from the Continent.

VI.

EUROPEAN

ECONOMIC INTEGRATION

on. 1949 infra-European trade and payments patterns, could adjust to the influences of rearmament on the composition, direction, and price levels of internationally-traded goods. The provisions in the agreement for review of its operations do provide for some flexibility, and one supporter of the plan has argued that EPU can be adjusted to facilitate the rearmament program by channeling EPU credits toward those countries assuming the heaviest defense costs.4 B. TRADE LIBERALIZATION MEASURES The integration of the Western European economy which ECA urged called not, only for removal of monetary barriers—to which EPU was directed—but also for a "sweeping away" of quantitative trade restrictions and, eventually, of all tariffs. Since most of the OEEC countries were members of the GATT8 and participated in the tariff negotiations at Annecy in 1949 and/or at Torquay in 1950, OEEC and ECA concentrated their trade liberalization efforts on the relaxation of quantitative restrictions on intra-European trade. The Contracting Parties to the GATT, during their fourth and fifth sessions in 1950, also examined in detail the application by their members of quantitative import and export restrictions and made several recommendations for relaxing them and for restricting and minimizing their undesirable effects; these developments are summarized in Chapter V, supra.6 Preliminary steps for relaxing quantitative restrictions on intraEuropean trade had been taken by OEEC in mid-1949,7 and the effort received new impetus from Mr. Hoffman's famous "integration" speech of October 31,1949. Two days later, the OEEC Coun* See Hirsehman, op.cit., p. 55. β Of the OEEC countries, all were contracting parties to the GATT or were expecting to become so at the end of the Torquay negotiations,, except Iceland, Ireland, Portugal, Switzerland, and Trieste. eThe Contracting Parties noted that most of their members who were talcing advantage of the authority in the General Agreement to apply quantitative restric­ tions and to do so discriminatorily belonged to either the sterling area or the OEEC or both, and the secretariat of the Interim Commission for the ITO cautiously concluded that the membership of the United Kingdom in both groups, and the fact that some members of each group had extended their exemptions from quanti­ tative restrictions to the products of some countries outside the group, created the possibility that the group arrangements "may prove to be steps toward the liberali­ zation of world trade." (Interim Commission of the ITO, Liberating World Trade, Geneva, June 1950, p. 26.) 7 See Survey—1949, pp. 14Gff.

VI.

EUROPEAN

ECONOMIC

INTEGRATION

cil requested all members to remove import quotas so that at least 50 percent of each nation's imports on private account from other members as a group should be free of such quantitative restrictions. This percentage, using 1948 as the base year, was to apply separately to each of the three categories, foodstuffs, raw materials, and manufactured goods. These targets were reported as having been "substantially" met by most countries by early 19508 without having an appreciably adverse effect on import-competing industries. (It should be carefully noted that imports on government account are not included in the quota removal calculations although such imports constitute a large part of the total in many countries, and that the liberalization percentages cover some private imports which were never subject to quotas and others which had not been pressing on the previous quotas.) In late January 1950, the OEEC Council agreed that, when EPU was put into operation, the 50 percent figure should be raised to 60 percent and that before the end of 1950 the Council would decide, in the light of conditions then existing, on further steps to raise the percentage to 75. In any event, OEEC stated that any quotas remaining at the end of 1950 "would have to be justified."9 The Council recognized that the existence of high tariffs in some countries could effectively neutralize the removal of import quotas. It was therefore agreed that, if a member was being so denied the benefits of quota removals, that member could request justification of the existing duty in the same way as the maintenance of a quota. The Council at this time also asked all members to abolish all restrictions on current invisible transactions associated with the movement of goods whose importation had been freed from import quotas and to relax restrictions on other current invisible transactions "so long as this can be done without danger to their balances of payments." Later, in early May, the OEEC Cotincil issued detailed recommendations that no new restrictions be introduced on invisible transactions and that many of the existing ones on interest and dividends, on shipping, insurance, and technical assistance 8For exceptions, see Economic Cooperation Administration Eighth Report to 9 Congress, Washington, D.C., 1950, pp. 9-10. 9 For a text of this decision, see Organization for European Economic Coopera­ tion, European Recovery Programme, Second Report of the OEEC, Paris, February 1950, pp. 226-227.

VI.

EUROPEAN ECONOMIC INTEGRATION

earnings, on emigrant remittances, and on salaries and wages of frontier workers be removed. It appears that these recommendations called for only small changes in the policies of the members and had been put into effect by most of the countries by the end of the year. Chapter IV of the informal agreement on the European Payments Union, approved by the OEEe Council on July 7, was entitled "Principles of Commercial Policy to Be Applied By and The major new principle set forth was that Between Members:~l members "shall avoid any discrimination in respect of imports of any products [including invisibles1 as between one Member and another," It was subsequently specified that this rule should apply as from January 1, 1951 in respect to "liberalized" hnports, and as from February 1, 1951 in respect to all hnports from other members. Later in the summer, OEEC codified all of its 1949-1950 deci~ sions and recommendations in this area into a Code of the Liberalization of Trade~ which l?ecame effective with the signing of the formal EPU agreement in September.s This Code included many escape clauses. It was provided that if any trade liberalization measure resulted in a "serious economic disturbance" a country could withdraw the concessions-on a nondiscriminatory basis. A member. which found itself in what it regarded, from the point of view of its reserves, as a "serious" debtor position vis-a.-vis the EPU was authorized to reimpose temporarily non-discriminatory import quotas. The general obligation to avoid discrimination was also qualified. Most importantly, a member was permitted to depart from the principle of non-discrimination if it found that another was ....opposing to thf> export of any of its commodities obstacles of any nature [presumably this referred primarily to high tariffs] which frustrate the general objectives of liberalization." Countries with a very limited range of exports which found that these particular goods were not among those on which other members had decided to reduce import restrictions were released from the obligation to remove quotas andlor to do so 1

Organization for European Economic Cooperation, A European Payments

Umon. l.md the Rules of Commet'cial Policy to be Followed by Memb61' Countries,

Paris, 1950. 1I The text is reprinted in Economic Cooperation Administration. Ninth Report to Congreu. Supplement. op.cit•• pp. 48ft.

257

VI. EUROPEAN ECONOMIC INTEGRATION

non-discriminatorily.8 Provision was made for the OEEC establishing Special Restricted Committees to investigate all cases where the escape provisions were invoked and to report to the OEEC Council, which would then make recommendations or take decisions directed to enabling these countries "to play their full part in the attainment" of the general objectives. Clearly, as ECA recognized, the success of the whole trade liberalization effort will depend importantly on the action of these committees and the willingness of the individual countries to accept their recommendations. The OEEC Council also urged its members, as from January 1, 1951, to follow common liberalization measures on as wide a scale as possible and to this end agreed to draw up a list of agricultural and industrial products which it hoped all members would include in their expanded liberalization provisions. This list was to include products for which it was felt the creation of a single European market would produce the most rapid increases in productivity. The Council later postponed, until the spring of 1951, the date on which the members were to put into effect this common list. By mid-October, most countries were reported as having largely fulfilled their obligation of removing import quotas to the extent that at least 60 percent of their intra-European imports on private account were not subject to such quantitative restrictions. But when the OEEC Council later in that month considered, as it had promised, the problem of proceeding to the 75 percent level, much resistance was encountered from various members; the final action was greatly qualified and was in the nature of a recommendation rather than a decision. The date for attempting to reach the goal was postponed to February 28, 1951, and it was agreed that the additional 15 percent might apply to the total of all imports on private account and not necessarily, as with the 60 percent reduction, to the individual sectors of food, raw materials, and manufactured goods. Holland, Denmark, and Turkey, arguing that since their trade with Germany was so important they would have to 8 Member countries forming part of a special customs or monetary area were not required to extend to other EPU members trade liberalization measures among themselves which were in addition to those set forth by OEEC for all members. Countries were also authorized to discriminate against members who practiced dumping as defined in the ITO Charter.

VI.

EUROPEAN ECONOMIC INTEGRATION

mark time on any further liberalization until it was clear that Germany's EPU deficit could be handled without her reimposing some import quotas, were given until May 1, 1951 before committing themselves to the new percentages. The low-tariff countries, protesting that the very high tariffs of some members—especially those of France—were undermining the whole liberalization program, were in effect given the right to ignore the new liberalization recommendations if the tariff negotiations at Torquay failed to result in a "satisfactory" reduction of tariffs affecting intra-European trade. The OEEC Secretary General was directed to report immediately after the Torquay conference cm whether "such progress had been made."4 Although details are not yet available, it appears that such progress was not made and, toward the end of the Torquay negotiations, the Contracting Parties invited the Governments of Austria, Belgium-Luxembourg, Denmark, France, Germany, Italy, Netherlands, Norway, Sweden, and the United States to submit proposals for reducing the disparities in the tariff levels of the European countries, and an intersessional working party was created to study these proposals and to make recommendations for fitting them into the framework of the GATT. In 1949 and early 1950, ECA expressed much concern over the tendency of international cartels to offset the effects of a country's removing or relaxing import quotas. It reported, however, that there was little it could do directly to abolish the cartels since any effective action would involve it in what was regarded as an improper interference in the internal political affairs of various countries. The practice of dual pricing—setting higher prices for foreign than for domestic buyers—had been singled out by ECA for action by tine OEEC countries. In November 1949 the OEEC Council had agreed to look into ways of eliminating this practice, and, after investigation, an OEEC committee recommended its complete elimination in intra-European trade. Some of the countries did drop the practice on certain commodities and reduced the spread on others, but dual prices were by no means eliminated during the year. All in all, at the year's end it appeared that further liberalization 4 See Organization for European Economic Cooperation, Press Release Al(SO) 68, Paris, October 27,1950; The Economist, November 4,1950, p. 686; and The Statist, November 4, 1950, pp. 579-580, for a more detailed discussion of these October decisions. The quarterly Economic Cooperation Administration, Report to Con­ gress, is also an important source of information on these activities.

VI.

EUROPEAN ECONOMIC INTEGRATION

would be very slow. In addition to the fact that several countries feared that any additional removal of quantitative restrictions would impinge directly on certain domestic industries, many of the members argued that they could take no further steps in this direction until the impact of the r-earmament programs was more clearly discernible. France and Switzerland at least were threaten­ ing to use further liberalization concessions as a bargaining weap­ on for receiving larger allocations of scarce raw materials. It was also reported that the rearmament programs were, in some in­ stances, leading to an expansion in export controls in such a way as to threaten to frustrate some of the previous trade liberalization measures. C. OTHER INTEGRATION PROPOSALS In addition to the above devices for fostering the integration of Europe, in which the United States played an important initiating role, European officials offered various other schemes directed to­ ward breaking down intra-European barriers to trade. In general, the United States "warmly supported" these various plans, but her role was much less influential than in EPU and the related trade liberalization measures. Schuman Plan The most controversial integration proposal during 1950 was that made on May 9 by French Foreign Minister Schuman ". . . to place all French and German steel and coal production under a common high authority in an organization open to the other European countries." ". . . the common high authority will be charged with insuring in the shortest possible time the moderniza­ tion of production and the improvement of its quality; the supply­ ing of coal and steel on the same terms to the markets of France, Germany and other member countries; the increase of joint ex­ ports; the improvement and equalization of the living conditions of the industrial workers in the participating countries." This pooling of coal and steel production, M. Schuman said, would mean ". . . that any war between France and Germany [will] become not only unthinkable, but materially impossible" and, "will lay the real foundations for the economic unification of these countries."5 8 "France Proposes a Franco-German Coal and Steel Pool," Document, Ambassade de France, Service de Presse et d'Information, New York, May 10, 1950.

260

VI. EUROPEAN ECONOMIC

INTEGRATION

This proposal met with instant support from official and many unofficial circles in the United States. Before any details had been worked out, ® President Truman said it was ". . . an act of constructive statesmanship. We welcome it."7 Thomas E. Dewey, titular head of the Republican Party, declared that the United States had a "solemn duty" to use every influence it possessed to hasten the adoption of the plan.8 The President and almost all other officials, when endorsing the scheme, qualified their endorsement by saying that they assumed it would not develop into another huge cartel but would be directed toward reducing prices, expanding production, and restoring competition. In its official reports, ECA saw the Schuman Plan as a major step forward in Western European economic unification and believed that, if the announced objectives were adhered to, it could result in markedly more efficient production, lower prices, and freer trade within Europe.® A Department of Commerce official stated that if the plan did result in lower unit costs of production it might increase the competition faced by American exporters of these products in third markets, but that American objectives included the growth of the total value of world trade and if this resulted it need not cause any decline in the absolute amount of United States exports.1 No official expressed publicly any concern over the possible discriminatory aspects of the scheme. The major reasons for the enthusiastic official approval were political rather than economic. A State Department publication in September said: "The United States Government gave the idea warm approval and support, for it saw great promise in the proposal. The promise was that Germany and her European neighbors might, by merging their major industries, evolve a relationship so close and a community of interest so strong that a war between them would become not only unthinkable, but impossible. The generous and enlightened French proposals might, indeed, mark β For an excellent discussion of the "Imponderables of the Schuman Plan," see DieboLd, W., Jr., in Foreign Affairs, October 1950. 7 Department of State Bulletin, May 29, 1950, p. 828. 8 New York Times, June 12, 1950. ® See, for example, Economic Cooperation Administration, Ninth Report to Con­ gress, op.cit., p. 34. 1 New York Times, July 6, 1950.

VI.

EUROPEAN

ECONOMIC INTEGRATION

the end of an ancient hostility and the beginning of a new era in Western Europe."2 Although ECA spokesmen told Congress in June that they had no plans for helping to finance the scheme, press reports from Europe during the same week said that "authoritative United States sources" there did "not exclude" the use of ECA aid. It was later reported in the press that many in Europe believed that the modernization and expansion of coal and steel production in Europe would depend largely on American capital. The United Kingdom—to the accompaniment of much criticism in Congress and in the American press—refused to participate in the negotiations which were held throughout the rest of the year between officials and experts from the Governments of France, Germany, Belgium, Luxembourg, the Netherlands, and Italy. These negotiations proceeded slowly in the face of the many complex problems involved and disagreements as to the powers to be given to the proposed High Authority. Further difficulties were encountered when the early enthusiasm for the plan by many of the steel and coal producers and some government officials, who had embraced it as a method of enlarging the market for their products, waned following the invasion of Soutii Korea and the resulting rearmament activities which greatly increased the demand for their products.8 An even more serious threat to the consummation of the Plan resulted from the efforts of United States officials during the autumn to get an immediate agreement by the members of the North Atlantic Pact to a limited rearmament of Germany. French officials strongly opposed this and insisted that agreement on the Schuman Plan must come first.4 They argued Aat if Germany could achieve a high degree of equality among the other nations 2 Department of State, Our Foreign Policy, Publication 3972, Washington, D.C., 1950, p. 72. 8 In addition to the New York Times and The Economist, which carried running accounts of the negotiations, the reader is referred to the March 1, 8, and 15, 1951 issues of die Manchester Guardian Weekly, Manchester, England, for an excellent series of articles on the Flan. 4 Some French officials were also reported in the press as being hostile to any German rearmament at that time because of the fear that it would invite Russian aggression and of the hope that a conference between the Western powers and Russia might serve to reduce or eliminate the need for rearmament in all of West­ ern Europe. The French Government also maintained that in any case Germany should not be rearmed until French military strength had been greatly increased.

VI. EUROPEAN ECONOMIC INTEGRATION

via the North Atlantic defense system, she would not agree to the Schuman Plan as a method of achieving that equality and that the result would be a resurgent and powerful Germany without the safeguards of an international organization designed to prevent war between Germany and the other Western European countries. Press reports indicated that American officials at first rejected the French view but during the latter part of 1950 and early 1951 accepted it5 and actively intervened to hasten agreement on the Plan. On November 6, at a time when the negotiations were going very slowly, President Truman went out of his way to endorse the Plan, and it was unofficially reported that as a direct consequence interest in it in Europe became active again. United States backing of the Plan took a more concrete form as American occupation officials in Germany (at the request of the French) agreed to act as a "go-between" when the entire negotiations threatened to break down because the Germans refused to accept French proposals for breaking up the Central German Coal Sales Agency and the extensive ownership of coal mines by die Ruhr steel companies.® The French believed that unless this were done no genuine "single market" in coal and steel could be created. Mr. McCloy, United States High Commissioner for Germany, held several meetings in early 1951 with German Chancellor Adenauer to "induce him to go forward with the Schuman Plan."7 The arguments Mr. McCloy used have not been made public, but he finally offered specific recommendations for the gradual dissolution of the coal board and for limitations on the vertical trusts, which were reported as acceptable to both the French and German authorities.8 In addition, Mr. McCloy talked with Ruhr industrialists, who had vigorously opposed the decartelization proposals, and was reported 8 Ceneial Eisenhower at least temporarily settled this issue when he told Con­ gress that there ". . . has to be a political platform first and an earned equality on the part of that nation [Federal Gexmanyl before we should start to talk about including units of Geimans in any land of an army." (New York Times, Februaiy 10, 1951.) β In any event, of course, United States occupation officials in Germany had a direct Interest in and responsibility for decartelization in Germany. T Statement by Mr. McCloy quoted in the New York Times, March 6, 1951. 8 It was unofficially reported that British authorities were not completely satisfied with the compromise. See New York Times, March 4 and 8, 1951, for the details of Mr. McCloy's recommendations.

VI. EUROPEAN ECONOMIC INTEGRATION

as having convinced them to accept his compromise. Other United States officials held similar talks with various German labor leaders. While no official statement has yet been released as this document goes to press, it appears that the United States also agreed to the German demand that, as a condition for joining the Schuman plan, the International Ruhr Authority would in effect be dissolved once the Plan was in operation and that the occupationimposed limitations on German steel production would be removed or greatly relaxed. The press also reported that the sponsors of the Plan were counting on the United States to help persuade other GATT members to exempt the Schuman Plan countries from the most-favored-nation clause, so far as trade in coal and steel was concerned. There were no official American pronouncements on this during 1950, but, in view of the active official support for the Plan, it must be presumed that the United States would at least itself agree to this. [On March 19,1951 a fifty-year draft treaty was finally agreed upon by delegates from the six nations. This draft did not, of course, settle many of the detailed problems—and it is the details which are especially crucial in such a scheme—and it still had to be ratified by the respective parliaments. The terms of the draft® and later developments will be discussed in a subsequent Survey.] Stikker, Pellai and Petsche Plans In the late spring, delegates of the Netherlands, Italy, and France presented separately to the OEEC Council proposals for further economic integration. Each of the plans accepted the general objective of creating a single European market and approved the action taken to that date. All of them were very much concerned with the procedures for easing the consequent adjustments in production structures by the member countries (ECA recognised that ultimately the success of its unification efforts depended on the ability and willingness of the European countries to carry out structural changes in their economies), but the proposals differed sharply as to the appropriate next steps.1 9 The text of the draft treaty may be found in Department of State, "The Schuman Plan Constituting a European Coal and Steel Community," Department of State Publication 4173, Washington, D.C., April 1951. 1 Short discussions of the proposals are included in the Economic Cooperation

VI. EUROPEAN ECONOMIC INTEGRATION

The Stikker proposal2 suggested that the Schuman Plan approach be extended and that all intra-European trade restrictions be eliminated (that is, "one single market be created") sector by sector, with first attention being given to those industries and branches of agriculture whose products were important in international trade and which offered the best prospects for increased productivity through the creation of larger markets. Recognizing that such a process would involve serious losses for single firms and industries and arguing that the mutual advantages called for a sharing of the burdens, it then proposed that a temporary European Integration Fvind be created. This fund, ECA later reported, was to receive contributions from the governments of countries initially "gaining" from the integration and to make loans to governments of countries initially suffering "losses"—such loans to be used for modernization of the affected industries or for establishing new industries to reabsorb released manpower and resources. The Pella plan8 in essence opposed the industry-by-industry approach on the grounds that it involved too much state control and intervention, and proposed instead that a preferential tariff area for Europe be created. Minister Pella accepted, however, the Dutch proposal for an integration fund to ease and facilitate the resulting adjustments. The Petsche proposal* called for the establishment of a permanent European Investment Bank, which would not only assist the adjustment of firms and industries adversely affected by liberalization measures but would also hasten economic integration by helping to finance any project which it was anticipated could successfully compete in a unified European market and in extra-European markets. As contrasted with the proposed integration fund, Administration, Ninth and Tenth Report to Congress, Washington, D.C., 1950. A critical account of the three schemes may be found in Balogh, T., "Problems of Western Unification,'' BtMetin of the Oxford University Institute of Statistics, October 1950. * Tie Netherlands Government's "Plan for Action for Suropean Integration," Netherlands Information Bureau, New Yoik (mimeographed), June 14, 1950. 8 Organization for European Economic Cooperation, "Proposals and. Branarks Submitted by Mr. Pella on Behalf of the Italian Government concerning Measures to be Adopted in the Organization of the European Market," Document C (50) 183 (mimeographed), Paris, June 28, 1950. * See Economic Cooperation Administration, Ninth and Tenth Report to Con­ gress, opxtt., pp. 33 and 26-27, respectively.

VI. EUROPEAN ECONOMIC INTEGRATION

the bank would lend to private and state enterprises, as well as to governments, and would require that private capital participate in each project. In essence, this proposal was to approach economic unification by integrating European capital investments. All of these proposals were reported under intensive study by OEEC during the latter part of 1950, but no action had been taken at year's end to implement them. Sub-regional Groupings During 1949, ECA had actively encouraged such sub-regional economic integration efforts as the Benelux economic union, Franco-Italian Customs Union, and "Fritalux." After the first quarter of 1950, except for the Schuman Plan, it apparently restricted its efforts to fostering proposals for the whole area, and in its official reports to Congress made no mention of these more geographically-restricted efforts. Little or no progress was recorded by them during the year. The date for the economic union of the Benelux countries was postponed once more in May until January 1, 1951, at which time it was again postponed for an indefinite period. The major difficulties encountered were the continuing Dutch trade deficit with Belgium; the fact that Holland relied heavily on income taxes while the Belgians resorted more to excise taxes, thus making difficult the necessary harmonization of monetary and fiscal policies; and the unwillingness of the Belgians to remove obstacles to a larger importation of Netherlands' subsidized agricultural products. Always underlying the difficulties of achieving the economic union was the fact that Holland relied on a much greater degree of central administrative control of economic activity than did Belgium. American officials in 1949 had blessed the French and Italian efforts to negotiate a customs union, but this proposal was completely overshadowed by EPU and the OEEC trade liberalization proposals. Prospects for any early action on it at the end of 1950 were slight. A special complication for this customs union resulted from the fact that it planned to approach unification by attacking tariffs before quantitative restrictions, while OEEC went about it the other way round. The much-publicized "Fritalux" plan5—at one 8

See Survey—1949, pp. 144-146.

VI.

EUROPEAN ECONOMIC INTEGRATION

time eagerly supported by ECA-was abandoned in 1950. The immediate reason was the inability of the prospective members to agree on German participation, but more important was that it was rendered supererogatory by EPU.® D. EXTENT OF INTEGRATION Available data do not permit a detailed concrete assessment of the extent to which the Western European economy had been "integrated" by the end of 1950, but it is difficult to escape the conclusion that up to that time the integration was still mostly on paper.7 EPU had in fact provided for multilateral transferability within Europe of the various European currencies for purposes of such current transactions as were permitted by the exchange controls and import and export programs of the members. But, as noted above, quantitative restrictions on imports among the members had by no means been eliminated. Most, though not all, countries had achieved the target of eliminating quantitative restrictions from 60 percent of their imports on private account from other members (some had exceeded it), but excluded jxom this calculation were imports on government account, which were a substantial part of the total imports of some countries, and the percentage covers some imports which were never subject to quotas and others which had not been pressing on previous quotas. Thus, the percentage of total imports which had been effectively "freed" from quantitative restrictions was a much smaller fraction than 60 percent. Further, in some cases high tariffs were neutralizing the effects of quota removals, and France announced at Torquay that she was going to renegotiate (i.e., rescind) many of the tariff concessions she had granted at Geneva in 1947. Again, details are not at hand, but it has been stated in both the press and official 6 The "Uniscan" group—United Kingdom, Netherlands, Denmark, and Swedencontinued during the year to meet and discuss mutual problems, but apparently no ECA encouragement was asked or given. While nothing spectacular resulted from these meetings, they did succeed in agreeing on some minor relaxations on trade and payments, including invisibles. TECA itself stated that while EPU (including the related trade liberalization measures) and the Schuman Plan—which was not yet in effect—were "substantial" moves in this direction, they fell "considerably short" of providing a European "mass market," as the goal of integration was frequently called. With particular reference to EPU, ECA stated in early 1951 lhat probably its greatest benefit had been its "psychological effects."

VI. EUROPEAN ECONOMIC INTEGRATION

reports that various cartel agreements and other restrictive busi­ ness practices had in many cases served to offset the effects of quota removals. In attempting to assess the extent of integration, it should be noted that such relaxation of import quota restrictions as had taken place under the directives or recommendations of OEEC had not always been confined to the OEEC countries.8 Thus, the United Kingdom in 1949 announced that it would extend its liberalization measures to imports from all countries whenever it felt it could do this without losing gold or dollars; by mid-1950 this had appar­ ently been done with respect to imports from nearly all countries except some of those in Eastern Europe and those of the so-called dollar area, and during late 1950 many of its quantitative restric­ tions on dollar imports imposed in 1949 were relaxed. Belgium dur­ ing 1950 removed quantitative restrictions on almost all of its trade, and it was reported that by the end of the year overseas imports from non-dollar areas had been largely freed from control by most European countries.® In general terms, one may conclude that, whereas prior to the invasion of Korea such quantitative re­ strictions as were relaxed by the OEEC members were mostly on a regional basis, subsequently there was a strong movement toward a much wider relaxation in the face of improved reserve positions, fear of inflation and more stringent export controls in overseas sup­ plying countries, and acute shortages of many commodities needed in the European rearmament programs. Nonetheless, that the European integration efforts have had some effect is suggested—though not proved—by the data on intraEuropean commodity trade, which show that the value of such trade as a percentage of the members' total foreign trade has sub­ stantially increased since 1948, and in 1950 exceeded slightly the record for 1938 (see Table 29). In assessing the significance of these data, however, it should be kept in mind that die sharp re­ duction in East-West European trade since the war might be ex­ pected to increase the relative importance, as compared with pre­ war, of European trade with all non-Iron-Curtain areas, including Western Europe itself. 8 Presumably the extension of liberalization measures to a wider area meets with the full approval of the U.S. Government. 8 Federal Reserve Bulletin, Washington, D.C., April 1951, p. 370.

VI. EUROPEAN ECONOMIC INTEGRATION TABLE 29

Value of Intro-European Trade as Percentage of Members' Total Trade, 1938, 1948-1950* (monthly averages)

Year

Exports

Imports

1938 1948 1949 1950

48 45 46

37 32 36

50 49 50 49

40 39 41 43

1st quarter

2nd quarter 3rd quarter 4th quarter1»

a) These data refer to trade among the metropolitan countries only. The trade liberalization measures did not apply completely to trade with dependent overseas territories. b) Average for October and November only. Source: Calculated from data given in Economic Cooperation Administration, Re­ covery Guides, Washington, D.C., February 1,1950, pp. 116-117. See footnotes to these tables for possible errors resulting from conversion of trade data into one currency for comparison purposes.

VII · UNITED STATES BALANCE OF INTERNATIONAL PAYMENTS - 1950 THE cixrrent account export surplus of the United States during 1950 was the smallest of any year since 1940, and, at an estimated $2.2 billion, was approximately one-third that of 1949.1 The proximate cause of most of the reduction was an increase of $2.1 billion in merchandise imports and a decline of $1.7 billion in commodity exports. The maintenance of net unilateral transfers and loans by the U.S. Government at high levels and a net outflow of private foreign investment which was the greatest since 1928 allowed the rest of the world in its transactions with the United States to increase its holdings of gold and dollar assets by $3.6 billion, thus recouping, in the aggregate but not necessarily for each country, half the total liquidations during the first four postwar years. By mid-1950 there were indications that a structure of current transactions might be established which could be maintained in peacetime without extraordinary aid, assuming that net private loans and gifts were increased moderately, that there was a modest expansion in net dollar loans by the International Bank, and that the United States continued to purchase most of the rest of the world's current gold production. But by the end of the year it appeared that the long-existing disequilibrium in America's economic transactions was not to be removed in the near future and that something resembling the World War II pattern in the balance of trade could be expected in 1951, as the political and economic developments following the invasion of Korea became more completely reflected in actual transactions. 1 In view of the excellent quality and general availability of the Department of Commerce publications on the United States balance of payments, this chapter merely outlines the major developments during the year. The reader desiring de­ tails is refenred especially to the following documents, which are the source of most of the information presented here: Department of Commerce, Survey of Cur­ rent Business, June 1950, pp. 11-18; September 1950, pp. 18-21; December 1950, pp. 5-10; February 1951, pp. 24-26; and March 1951, pp. 6-11; and the Depart­ ment of Commerce, Foreign Commerce Weekly, April 16, 1951, pp. 3ff.

VII.

BALANCE OF

PAYMENTS

Data on the balance of payments for the period 1946 through 1950 are given in Table 30. A. CURRENT ACCOUNT Merchandise Trade a. EXPORTS

The decline in merchandise exports during 1950—as compared with 1949—was almost entirely due to reduced volume; although prices2 declined slightly for the year as a whole, they were rising sharply during the last quarter. This decrease in exports reflected the curtailment of United States aid, the increased production in much of the rest of the world, increased demand in the United States for exportable goods, and, during the first three quarters of the year, the more rigorous restrictions on dollar purchases imposed by the sterling area, and certain other countries, in an effort to improve their gold and dollar reserve positions. The September 1949 devaluations also contributed to the decline.8 The fall in exports extended to all major commodity groups except crude materials, which category was dominated by raw cotton shipments. The largest reductions, percentagewise, were in crude and manufactured foodstuffs, reflecting the recovery of the wardamaged economies abroad and the continuing trend in official American aid programs from relief to reconstruction. The shifts in the pattern of United States exports and the relative importance of changes in volume and unit values are shown in Table 31. Important shifts occurred during the year in the destination of exports. Total shipments to Canada were slightly greater in 1950 than in 1949, and total shipments to the Latin American Republics declined slightly,4 but total shipments to all other major geographic areas fell by large amounts, as Table 32 shows. 2 As measured by the index of "unit values" computed by the U.S. Department of Commerce. 8 Exports in 1950 were equivalent to only 3.8 percent of gross national product. This ratio was lower than in any year of the 1920's and 1940's but was equal to or greater than that recorded for any year during the decade of the thirties. * The high level of purchases in the United States by Canada and Latin Amer­ ica, together with an increase in their gold and dollar reserves, prevented Eu­ rope's earning dollars in these markets to finance her import surplus with the United States. In fact, for die year Canada and Latin America were net re­ cipients of dollars from third areas other than the United States.

Total Export Surplus

Merchandise Income on investments Transportation Travd Miscellaneous services

Surplus of Exports of Goods and Services

Total Imports

Merchandise, adjusted8 Income on investments Transportation Travel Miscellaneous services

Imports of Goods and Services

Total Exports

Merchandise, adjusted8 Iacome on investments Transportation Travel Miscellaneous services

Exports of Goods and Services

Type of Transaction

TABLE 30

6504 594 821 -205 64 7778

5168 216 599 457 523 6963

11672 810 1420 252 587 14741

1946

9877 897 1027 -206 -88 11507

8100 249 761 548 631 8289

15977 1146 1788 342 543 19796

1947

5594 1091 657 -292 -314 6738

7833 284 727 600 912 10356

13427 1375 1384 308 598 17092

1948

(millions of dollars)

5193 994 521 -325 -142 6241

7144 329 788 688 786 9715

12337 1323 1289 383 844 15956

1949

2209

1392 1148 162 -353 -140

9287 422 848 727 860 12142

10679 1570 1008 374 720 14351

Total

International Transactions of the United States, 1946-1930

487 258 32 -47 -26 704

1981 77 212 114 203 2567

2448 335 244 67 177 3271

First Quar­ ter

610 254 28 -80 —1 811

1994 125 232 181 179 2711

2604 379 260 101 178 3522

-23 344 21 -200 -51 91

2531 97 218 322 232 3400

2508 441 239 122 181 3491

1950P Second Third Quar­ Quar­ ter ter

318 292 81 -26 -62 603

2801 123 184 110 246 3464

3119 415 265 84 184 4067

Fourth Quar­ ter

-179

Errors and Omissions -1012

652 869 7748 -976

515 616 7217

5304 643

99 38

2

0

439 1089 2209

4133 159

-20 37

-3628

+82

113 114 729

109 75 831 -127

1131 39

0 11

-679

1021 76

-12 17

-455

-5

99 668 96

869 36

-8 2

—1570

+50

118 232 553

1112 8

0 7

-924

a) Indudes goods sold or bought from other countries that have not been shipped from or into United States customs areas (e.g., with respect to imports, purchases abroad by U.S. Govenunent agencies for transfer to third countries under various foreign aid programs and purchases abroad for the use of American military establishments overseas; with respect to exports, commodities furnished by the U.S. Govenunent from overseas stocks—such as surplus property—and goods sold from overseas purchases, particularly under the various foreign aid programs). The United States customs areas include continental United States, Alaska, Hawaii, Puerto Rico, the Virgin Islands, the Panama Canal Zone, American Samoa, and certain minor American islands in the Pacific. b) Excludes the increase in short-term balances and gold holdings of the International Bank and Monetary Fund resulting from payment of United States subscriptions, sales of debentures ana notes in the United States, and the reduction in such balances and gold holdings resulting from dollar disbursements to foreign countries. c) Excludes die United States subscriptions to the International Fund and BaiJc in 1946 of $328 million and in 1947 of $3062 million. d) Exdudes net purchases of debentures sold or guaranteed by the International Bank (1947, $243 million; 1948, $7 million; 1949, $20 million; and 1950, $1 million). Sources: Department of Commerce, Survey of Current Business, Washington, D.C., June 19S0, pp. 12-18 and March 1951, pp. 8-11. Note: The above data for 1946-1949 are revisions of previously published data, which were made by the Department of Commerce in mid-1950 on the basis of new information. The principal revisions (compare with Survey—1949, pp. 174-175) were made in the transportation and the Government miscellaneous services accounts. For an explanation of these changes see Department of Commerce, Survey of Current Business, Washington, D.C., June 1950, p. 18.

p. Freliintnary

665 756 12487

679 369 7957 -980

1947 3895

2288 2689

4161 907

203 176

462 300

—

Μ

780

4462

1932

Net Means of Financing Surphs Liquidation of gold and dollar assets by foreign countries' 1 Dollar disbursements by: International Monetaury Fund International Bank U.S. Government sources: Grants and unilateral transfers Long and short-term Ioans c U.S. private sources: Remittances Long and short-term capital 4 Total net financing

VII.

BALANCE OF PAYMENTS

An increase in business activity in Canada, together with a relaxation of import restrictions as her reserve position improved, were the principal reasons for the increase in exports to that market. Although Western Europe remained the biggest market for American exports, the total value—and the area's share in the total —declined sharply, reflecting recovery in its production, reductions in ECA aid, extensive restrictions during most of the year on dollar TABLE 31 Changes in Composition and· Value of Exports of United States Merchandise, 1949-1950 As Percentage of Total

Crude materials Crude foodstuffs Manufactured foodstuffs Semimanufactures Finished manufactures Total»

Percentage Change from 19499

1949

1950P

Quan­ tity

15.0 11.3 7.5 11.4 54.8 100.0

18.6 7.5 5.9 11.1 56.9 100.0

+1 -34 -23 -15 -10 -13

Unit Value

Total Value

+5 -14 -12 -2 -2 -3

+6 -43 -32 -17 -12 -15

p. Prelixninary a) Differs from Table 32 in that reexports are not included here. Sources: Department of Commerce, Foreign Commerce Weekly, Washington, D.C., April 16, 1951, p. 4, and Survey of Current Business, Washington, D.C., March 1950, p. S-21, and March 1951, p. S-21.

purchases, and increased imports from third areas, encouraged by the 1949 exchange depreciations. More than two-thirds of the reduction in exports to the group were in shipments to four countries, Germany, United Kingdom, France, and Italy. The fall in exports to non-ERP European countries was attributable primarily to stringent export controls in the United States designed to prevent exports which would strengthen the military potential of the Soviet bloc. The sharp decline in exports to Asia was mainly due to the severe import restrictions imposed in the Philippines, reductions in official aid to Japan and China, increased availabilities in Europe, and the tightening of the United States export controls on shipments to Communist-dominated countries in the area. Almost

VII. BALANCE OF

PAYMENTS

all the decrease to Africa was concentrated in the Union of South Africa, which during the year imposed severe quantitative restrictions on dollar imports, Dtiring the last quarter of 1950, total United States exports rose sharply to an annual rate of nearly $12.5 billion—slightly greater than 1949—and were restrained from being even greater by rising TABLE 32 Destination of United States Merchandise Exports, 1949-1950 1949 Billions of Dollars Canadab Latin America ERP Europe0 Other Europe Asiac Oceania Africa Unallocable® Total

1.9 2.9 4.1 0.2 2.1 0.2 0.6 — __

1950* Percent of Total 16.3 24.1 33.8 1.3 17.7 1.6 5.2 —

100.0

BUlions of Dollars

Percent of Totala

2.0 2.8 2.9 0.1 1.5 0.1 0.4 0.5 10.3

19.6 27.3 28.0 1.4 14.4 1.4 3.5 4.4 100.0

p. Preliminary a) Not included for security reasons in the area breakdown are $445 million of "special category" exports during 1950. These were principally munitions, military vehicles, special machinery and electrical apparatus, and presumably went mostly to ERP Europe. b) Includes Newfoundland. c) Turkey included in ERP Europe. Source: Department of Commerce, Foreign Commerce Weekly, Washington, D-C., April 1Θ, 1951, pp. 30-31. These data include reexports but do not include goods sold to other countries which have been shipped from other man United States customs areas (see footnote a to Table 30) and so are slighuy less than the figures in Table 30.

demand in the United States. The increase was due in part to an expansion in U.S. Government aid, especially under the Mutual Defense Assistance Program, but more importantly it was a reflection of a larger demand for American goods growing out of rearmament programs abroad and the fear of rising prices and more stringent export controls in the United States. Since the impact of the mobilization efforts on foreign countries demand for imports had only begun to be felt, and since American aid programs were

VII. BALANCE OF PAYMENTS

scheduled to increase, it seemed probable that United States exports in 1951 would exceed the 1950 level. b. IMPORTS

In contrast to exports, the value of United States imports during 1950 was over thirty percent greater than the previous year, and approximately one-fourth of the increase was due to the higher prices of raw materials and crude foodstuffs which took place after the Korean invasion. Imports began to expand during the last quarter of 1949 and leveled off during the first half of 1950 at an annual rate of about $8 billion—$1 billion above the 1949 average. The expansion was to be accounted for mainly by the general increase in business activity in the United States and the accompanying need for larger supplies of both primary and semi-processed goods. The 1949 devaluations, accompanied by increased availabilities, stimulated imports of manufactures and semimanufactures from Europe; but the devaluations do not appear to have been a dominant factor in the general expansion in the value of United States imports during 1950.® The value of total imports increased rapidly after the outbreak of war in Korea, reaching an annual rate of over $10 billion during the third quarter and $11 billion during the last three months. Increased imports of coffee and sugar and their sharply rising prices were especially important in accounting for the increase during the third quarter, as the nation reacted to anticipated shortages by hoarding. Imports of these goods declined during the last quarter of the year, but increased imports of most other goods, and especially the accelerated consumption and stockpiling of crude materials, raised the yearly level of imports to an unprecedented high.® Most of the recorded increase during the last quarter over the third quarter was attributable to higher prices rather than greater volume, although many of the imports were under previous s In the first half of 1950 as compared with the first half of 1949, the value of imports from the ERP countries and their dependencies actually declined, those from the sterling area increased less than the average, and those from the Western Hemisphere increased more than the average. It is not, of course, possible to draw any finn conclusions as to the effect of devaluation on United States imports, for there were so many other factors operating and one cannot know what the record would have been had there been no devaluation. eThe ratio of imports to gross national product was the highest of any year since 1937 but was still appreciably below those recorded during the 1920's.

VII. BALANCE OF PAYMENTS

contracts and so did not reflect in full the price rises which occurred since July. The expansion in the value of imports extended to all major commodity categories. Volume and price (unit value) changes differed greatly among the groups, but there were only minnr shifts in the commodity pattern of imports, as Table 33 shows. The inTABLE 33 Changes in Composition and Value of United States Imports for Consumption, 1949-1950 As Percentage

of Total

Crude materials Crude foodstuffs Manufactured foodstuffs Semimanufactures Finished manufactures Total®

Percentage Change from 1949P

1949

1950»

Quan­ tity

Unit Value

Total Value

28.1 20.2 11.2 21.6 18.Θ 100.0

28.2 20.0 10.3 24.3 17.2 100.0

+22 -5 +21 +54 +24 +22

+9 +38

+33 +31 +21 +50 +21 +32

—2 -2 +8

p. Preliminary a) Imports Ior consumption comprise goods entering consumption channels im­ mediately upon arrival in United States customs areas plus withdrawals from bonded warehouses. Not included are goods purchased abroad by U.S. Govern­ ment agencies for transfer to third countries under the various foreign aid pro­ grams and procurement abroad for the use of American overseas military es­ tablishments. Sources: Department of Commerce, Foreign Commerce Weekly, Washington, D.C., April 16, 1951, p. 4, and Survey of Current Business, March 1950, p. S-ZZ and March 1951, p. S-22.

crease in imports extended to all major areas of supply. While the percentage of the total that was provided by the Western Hemisphere declined slightly and that by Europe, Africa, and Oceania increased, the shifts in the geographic pattern of import sources, as shown in Table 34, were not large. Developments during late 1950 in United States foreign trade suggested that a pattern might be developing which would resemble that of World War II. The expanding rearmament program in the United States and the military threat to many sources of supply seemed likely to increase still further the imports from raw

VII.

BALANCE OF PAYMENTS

material producing countries, while exports to them seemed likely to face growing competition from domestic demand and from pro­ vision of supplies to strengthen the defenses of the North Atlantic Pact countries and to support the war in Korea. On the other hand, it seemed probable that not only would exports to Western Europe TABLE 34 Sources of United States General Imports, 1949-1950 1949 Billions of Dollars Canadaa Latin America ERP Europe1» Other Europe Asia Oceania Africa Totalc

1.6 2.4 0.9 0.1 1.2 0.1 0.3 6.6

1950» Percent of Total 23.4 36.9 12.7 2.0 18.0 1.9 5.1 100.0

Billions of Dollars 2.0 3.0 1.3 0.1 1.7 0.2 0.5 8.8

Percent of Total 22.1 35.1 14.2 1.6 19.0 2.4 5.6 100.0

p. Preliminary a) Includes Newfoundland. b) Includes Turkey. c) General imports comprise goods entering consumption channels immediately upon arrival in United States customs areas plus entries into bonded warehouses. Not included are goods purchased abroad by U.S. Government agencies for transfer to third countries under the various foreign aid programs and procurement abroad for the use of American overseas mifitary establishments; thus these totals are less than those given in Table SO. Source: Department of Commerce, Foreign Commerce Weekly, Washington, D.C., April 16, 1951, pp. 30 and 31.

increase but at the same time their rearmament programs would probably reduce the value of United States imports from that area. Invisibles a. INCOME ON INVESTMENTS Net income on investments also reached an all-time high during 1950 and, at $1.1 billion, accounted for half of the current account surplus. Both receipts and payments of income on investment in­ creased during the year, primarily as a result of larger earnings in

VII. BALANCE OF PAYMENTS

extractive and manufacturing industries. Especially important in the net increase was the rise in remittance of earnings by American oil companies from their large and expanding foreign investments. With higher prices for many of the commodities produced by American interests abroad and the relaxation by many foreign countries of restrictions on transfer of earnings, the Department of Commerce anticipated that net income on investment might increase still more during 1951. Further, interest payments on past loans by the U.S. Government to foreign countries were also scheduled to increase in 1951. b. TRANSPORTATION

The restoration of foreign merchant fleets and the decline in United States exports and increase in imports resulted in a sharp reduction in net receipts from transportation. The downward trend was reversed, however, in the fourth quarter when United States exports again rose, and still further increases could perhaps be anticipated as shipments under the various official aid programs were enlarged. Rising freight rates were not yet reflected in the transportation account, but the net balance would probably not be greatly affected,. c. TRAVEL AND MISCELLANEOUS SERVICES

Net payments for travel increased during the year by about $30 million, with most of the rise being accounted for by travel in Europe. For undetermined reasons, but possibly because of the war in Korea, tourist expenditures in non-European areas declined more than seasonally in the last quarter. It was expected that unsettled political conditions would reduce payments to European countries for this item in 1951. Net payments for miscellaneous services by the United States were almost exactly the same as 1949, with both payments and receipts rising moderately/ With increasing numbers of American troops stationed abroad and larger payments for the maintenance and operation of military facilities and installations, it seemed 7 For extensive revisions in the data presented in Table XXX in the Survey—1949, p. 188, see Department of Commerce, Survey of Current Business, Washington, D.C., June 1950, pp. 12-15.

VII.

BALANCE OF

PAYMENTS

probable at the end of the year that net payments for miscellaneous services would increase during 1951. Export Surplus

The decline in the United States current account export surplus, from $6.2 billion in 1949 to $2.2 billion in 1950, also extended to all major areas, as Table 35 shows. During the third quarter there was a deficit with all the large areas except the Marshall Plan counTABLE 35 United States Current Account Surplus, by Area, 1949-1950 (millions of dollars) 1950»

Canada and Newfoundland Latin America ERP Countries ERP Dependencies Other Europe All Other Countries International Institutions Total

1949

'First Half

549 657 3136 199 30 1638 32 6241

188 121 956 -144 -17 365 46 1515

Third Quarter -32 -19 268 -70 -6 -38 -12 91

Fourth Quarter

Total

115 169 518 -130 -10 -62 3 603

271 271 1742 -344 -33 265 37 2209

p. Preliminary Source: Department of Commerce, Survey of Current Business, Washington, D.C., June 1950, pp. 11-18 and March 1951, pp. 6-11.

tries, and the total surplus was at an annual rate of less than $400 million. During the last quarter, the export surplus with Europe nearly doubled, reflecting increased military aid and a decline in American tourist expenditures. The previous quarter's import surplus with the Western Hemisphere was replaced by a large export surplus as imports of coffee and sugar dropped from their abnormally high stimmer levels, as expenditures by American tourists declined, and as Canada and many Latin American countries greatly increased their purchases in the United States. The import surplus with the rest of the world, however, continued to increase, largely in response to accelerated purchases by the United States of strategic raw materials at rapidly rising prices. For the year as a

VII.

BALANCE OF PAYMENTS

whole, import surpluses were recorded only for the ERP dependencies and for non-ERP Europe. The Department of Commerce reported that, during the last quarter of 1950, the ERP countries as a group, for the first time since the end of the war, recorded net receipts of U.S. dollars from the rest of the world (other than the United States). But this was almost entirely due to transfers of dollars to the United Kingdom by the outer sterling area. Apparently, the continental ERP countries as a whole did receive some dollars on balance from nonsterling countries in Asia, but they continued to have a dollar deficit with other areas which was financed with U.S. Government aid. Important here were purchases authorized by ECA in the Western Hemisphere. There was not yet established a pattern of dollar flows which would serve as the foundation for an equilibrated multilateral trading system.

B. CAPITAL ACCOUNT8 Foreign Gold and Dollar Assets In strildng contrast with the first four postwar years, during 1950 the other nations of the world—in their transactions with the United States—increased their gold and dollar assets by $3.6 billion, thus restoring half of their liquidations of the previous four years. This development, which had begun during the last quarter of 1949, was the result of the sharp decline in the United States export surplus while official foreign grants and loans continued at high levels, though lower than in any other postwar year, and of net private foreign investments which were the largest of any year since 1928. It was, in important respects, a reflection of the recovery of both production and trade in most countries and, after Korea, of the sharp increase in United States demand for, and prices of, many raw materials produced abroad. The accumulation of gold and dollar assets in transactions with the United States which occurred throughout the year was shared by many foreign countries. Detafls of the area distributions are not 8 Most of the information in this section was taken from "The IhtemationaI Movement of Gold and Dollars in 1950," Federal Reserve ButteHn, Washington, D.C., March 1951, pp. 253-262, and the Survey of Current Business, Washington, D.C., March 1951, pp. 6-11. The reader is referred to these documents for more details.

VII.

BALANCE OF PAYMENTS

available, but it has been officially estimated that $1.9 billion were by the ERP countries and $1.7 billion by the rest of the world.8 The total transfer from the United States was distributed between net gold sales of $1.7 billion, an increase in foreign-held shortterm dollar balances (bank balances and short maturity—up to twenty months—U.S. Government securities) of over $1.6 billion, and an increase in long-term dollar assets of about $250,000. While for the year as a whole, and in the aggregate, foreign countries used only about half of their dollar accumulations to buy gold, during the last quarter of the year the percentage rose to nearly nine-tenths, and gold purchases by the United Kingdom, the Netherlands, and Canada exceeded their net dollar receipts. Still, the proportion of gold to total gold and dollars held by foreign countries was less than the ratio at the end of the war. As a consequence of these gold sales, the holdings of the United States at the end of 1950 totalled $22.8 billion, as compared with $20.1 billion at the end of 1945 and the high of $24.8 billion in August 1949. Taking newly-mined gold into account, as well as their transactions with the United States (but excluding long-term dollar holdings), the gold and dollar reserves of the rest of the world increased by nearly $3.8 billion10 during the year to a total of $19.1 billion. This was still below the 1945 level but was nearly 25 percent above the prewar holdings. (In making comparisons with prewar, it must be remembered that the prices of United States exports had doubled and the dollar value of world trade had more than doubled.) This spectacular increase in reserves, combined with fear of rising prices and rearmament-induced shortages in the United States, did result during the year in some relaxations on transactions with the United States, but there was still no general movement toward making foreign currencies freely convertible into dollars.

Other

The various means of financing the United States export surplus —official Government grants and loans, private gifts and loans, and 9 Because of inter-area transfers and domestic gold production, these figures do not represent the net changes in each of the above area's holdings of gold and dollar assets. 10 Distributed as follows: sterling area, $1.7 billion; continental ERP countries, $0.6; Canada, $0.6; Latin America, $0.4; and other, $0.4.

282

VII. BALANCE ΟΓ

PAYMENTS

disbursements by international institutions —have been discussed in some detail earlier in this survey and need not be reviewed here. C. ERRORS AND OMISSIONS The errors and omissions figure in the United States balance of payments ran at approximately $1 billion for each of the previous three years, but for 1950 it was preliminarily recorded as zero. In the past, this item has been especially large in times of financial and political crisis and has thus been attributed in large part to unrecorded capital movements, although undervaluation of exports in the official statistics and overestimation of payments for imports have at times also been important. The improvement in foreign economies, the increased price of the dollar, and the rise in confidence in foreign currencies, reflected in the reduction of the gap between free and official exchange rates in many countries, may have substantially reduced the amount of unrecorded capital movements and so have eliminated many of the previous "omissions," but the zero "errors and omissions" figure resulted from a series of compensating errors rather than from perfect accuracy in recording the various balance of payments items.

S U M M A R Y

DURING the first half of 1950, the international economic and financial policies and activities of the United States were, by and large, a continuation of those already established. They were primarily directed toward (a) "containing" Communism, by raising standards of Hving and helping other nations—especially European—to adjust and reorient their economies to postwar conditions, and (b) fostering policies and patterns of production and trade abroad which would encourage and permit the adoption throughout the world of general currency convertibility; the progressive reduction of discrimination, trade barriers, and government control over international transactions; and the cessation of extraordinary assistance from the United States. Following the outbreak of fighting in Korea and the realization that Russia was prepared, when it thought conditions favorable, to resort to direct military aggression, the overriding objectives of United States international economic policies became those of quickly strengthening, and then maintaining over an extended period, lie military defenses of the entire non-Communist world and of creating economic and political conditions abroad which would· prevent internal subversion. Adaptation of specific policies and activities to the new objectives had only begun at the end of the year, and many new and difficult problems were being faced.1 Among the basic assumptions underlying the Administration's foreign economic policies, after—as well as before—Korea, was that if a general war should break out, it was likely to be centered in Western Europe and that, of all foreign areas, its domination by Russia would be most disastrous for United States security. The Administration, in early 1950, planned that the flow of military aid to Europe under the Mutual Defense Assistance Program (MDAP) during the year was not to be increased above that authorized during 1949, and would be tapered off in following 1 Not the least o£ these, but one which has not been dealt with in this survey, was that of defining and coordinating responsibility for the administration of foreign economic policies.

SUMMARY

years. It stated that ERP aid was to be terminated in fiscal 1952, but it anticipated that some $2 billion of such aid would be needed in the final year. These plans were extensively altered after Korea was invaded. The Government concluded that, if the European nations were, within a period of approximately three years,2 to be prepared to defend themselves from an attack by the Soviet-dominated countries for a long enough time to be able to mobilize their full strength and repulse it, the United States must provide them with larger total assistance, and for a longer period, than had previously been planned. It also decided that most of the aid to Europe should directly support the military buildup there, rather than promote further general economic expansion, and should be extended entirely on a grant basis. To this end, the $1 billion of MDAP aid to Europe scheduled for fiscal year 1951 was hastily increased to $5 billion during the late summer. Further, in a frank attempt to buy more allies, the Government launched new aid programs to Yugoslavia and Spain. Implementation of the military aid program for Europe was slow in getting under way, and, by the end of 1950, only $450 million of goods and services had been supplied, but the volume was increasing rapidly as the year ended. Most of the military aid was being supplied in kind and in the form of end-use military items. In 1949, Congress, for fear of being accused of initiating an armaments race, had specifically provided that,- except' for machine tools, United States assistance was not directly to foster increased armament production in Europe. This concern was dissipated during 1950, and the new legblation authorized the granting of substantial amounts of aid designed directly to expand and modernize Europe's factories producing military items. Although the emphasis of its aid programs was shifted from general economic recovery to rearmament, the United States recognized that security and rearmament were not synonymous and that, if the European nations were to achieve the degree of military strength and political orientation and stability the United States desired for them, the level of civilian consumption could not be drastically reduced. Therefore, the European Recoveiy Program was continued, but the amount of aid was curtailed— 2 It

appears that this period was considered the maximum time available.

SUMMARY

shipments totalled $2.7 billion, one billion dollars less than in 1949 and at a rate below that appropriated by Congress—and efforts were being made to coordinate it with the military aid program.3 The amount of ECA aid was reduced to each of the European countries, but the cuts were not proportional, and in December all ECA aid to the United Kingdom was suspended. The latter decision was taken not only in the light of Britain's internal economic recovery and the general policy of reducing "economic aid" but also because of the large increase in her gold and dollar reserves. Although no general policy had been proclaimed, there was some evidence that the United States was adopting a practice of stopping aid—at least "economic"—when recipient countries' reserves reached or exceeded certain levels. A major policy problem facing the United States after Korea— and apparently not resolved by the end of 1950—was whether the volume of Etiropean aid (both economic and military) should be limited to amounts which would permit an equal or greater reduction in the amount of resources which the United States would otherwise have to devote currently to domestic mobilization, or whether some assistance should be provided during the rearmament period which would contribute little to the current mobilization programs but which might reduce, or even possibly eliminate, the amount of extraordinary assistance which the United States might be called upon, and feel obliged, to provide later—either in a period of war or in the post-crisis period. In particular, the problem had been raised of whether the United States should provide aid in such amounts and such form as to permit Europe to maintain a large volume of exports and thus make easier any post-crisis adjustment.4 Even before Korea, the United States had adopted the general Thus, greater attention was given to technical assistance to- help increase production and to the development of sources of strategic materials in the overseas territories of ERP countries. ECA allotment and authorization facilities were being used in the supplying of goods under MDAP to expand military production abroad, and present and proposed defense efforts of the various countries were being given special consideration in determining both the amounts and types of ERP aid extended. ECA personnel devoted an increasing amount of their time to analyzing, and making recommendations on, the economic problems of the various European countries arising out of their rearmament programs; in many cases, they represented the United States on the various NATO committees concerned with economic, financial, and production problems. * See Gray Report, op.cit., p. 40. 8

SUMMARY

policy that the defense of the North Atlantic Pact countries could be most effectively achieved through the development of "balanced collective forces," and throughout the year much time and energy was devoted to this objective. Officials announced repeatedly that plans for die integration of the forces had been agreed upon, but, though details were necessarily confidential, at year's end many of the minor and some of the major problems— especially the role of Germany, the distribution among the members of military production, and the division of the "sacrifices" for the common defense5—were still awaiting agreement. The process of developing such an integrated defense force was resulting in new and closer administrative coordination of production and distribution among the United States and the various North Atlantic Pact countries, but the United States had given no indication that it was encouraging an economically "integrated" North Atlantic community. It did, however, continue to press, but with limited success, for the "economic unification" of Europe. This policy of creating within Europe a "single mass market" had been inaugurated before the Korean war, but ECA stated that the defense crisis, bringing with it even greater need for increased production and productivity, made it more imperative than ever that Europe hasten this process. Although there had not yet been sufficient time to demonstrate it, the effectiveness of European economic integration in increasing productivity and production, reducing the need for extraordinary assistance from the United States, and intensifying the willingness and ability of the area to resist Russian aggression was, with few exceptions, unquestioned in both official and non-official circles in the United States.® With the help of dollars, advice, and pressure from ECA, the Etiropean Payments Union was established, but only after long sThe U.S. Congress had put forward the idea that rearmament of the West should be on the basis of "equality of sacrifice." This concept, however, could be the source of many frictions and disputes. It is perhaps not unreasonable to assume that relatively rich nations will interpret "equality" as meaning the same absolute per capita contribution, while the poorer nations may think of it as per capita equality in real income after Ae contribution to defense. In any case, Uie whole notion of being able to compare "burdens" or- "sacrifices" as among nations is of doubtful validity and certainly defies any precise calculation. β Many in Congress favored applying various kinds of conditions to, its aid in order to "encourage" a political federation of Europe, but the Admnnstration successfully argued against such a policy.

SUMMARY

and difficult negotiations, particularly as to ways of permitting the sterling area mechanism to function alongside the EPU mechanism and as to the size and timing of gold payments. The final agreement provided for larger credit margins and smaller and more delayed gold payments than ECA had apparently originally proposed (or than the International Monetary Fund seemed to approve). At year end, the United States was faced with the problem of whether to urge a progressive tightening of the settlement provisions and/or of whether to press for use of the EPU mechanism, by a reallocation of quotas, to distribute more evenly the rearmament burdens of the member countries. The United States also urged a rapid reduction of quantitative import restrictions and discrimination in intra-European trade, and some progress was recorded, but in late 1950 many obstaclessome of them growing out of the rearmament programs—were being encountered, and it appeared that further liberalization would be slow. While ECA was pressing for a reduction of quantitative restrictions and monetary barriers to trade within Europe, other branches of the U.S. Government, especially at the various meetings of the GATT and via the Fund, urged a reduction of trade barriers and a progressive removal of exchange restrictions and discrimination among a much larger number of countries. The United States also gave enthusiastic and effective support, but no financial aid, to the Schuman Plan, although at one stage it seriously (but unwittingly?) threatened to prevent its adoption by a policy of urging the immediate participation of Germany in the military defense arrangements. Many believed that the Plan would result in more efficient production, lower prices, and freer trade within Europe, but the chief reason for official American approval was the promise that it would serve to make war between Germany and the other Western European countries "impossible" and would thus permit agreement to be reached on Germany's actively participating in the joint defense of the West. Although the policy pursued since World War II, and throughout 1950, was that the bulk of United States assistance should go to Western Europe, the Administration began in 1949 to give increasing attention to other areas. Exemplary of this was the initiation of the Point Four Program and the passage, in 1950, of the "Act for International Development." As approved, this pro-

SUMMARY

gram authorized only the granting of relatively small amounts of technical assistance and did not authorize the provision of capital assistance. Nevertheless, it did represent an important departure from the previous preoccupation with the problems of Europe vis-a-vis the United States and was, among other things, a specific recognition that the international disequilibrium was a worldwide, and not a regional, problem. Following the invasion of Korea, and the growing conviction that the spread of Commimism any place was a threat to United States security, interest in non-European areas increased still further. Official aid programs for the Far East were quickly changed in scope, purposes, and amount.7 Increased economic and military aid to the Middle East, Africa, and Latin America were apparently being planned also, but during 1950 no major changes were recorded in the amounts or purposes of aid actually extended. In general, as compared with the postKorean programs for Europe, the plans for die rest of the world placed greater emphasis upon building security through helping these peoples to solve pressing economic problems than upon Strengtiaening their military forces. Further, by and large, the aid programs for the non-European areas were on a country-bycountry, rather than regional, basis, and little attention was being given to the sort of "mutual help" encouraged in Europe. The United States three-year program of economic rehabilitation of Korea was abandoned following the outbreak of fighting there, and the problem of reconstructing that economy after the war was turned over to the UN (the United States committed itself to bear a large share of the expenses), but the United States continued to supply that country with large amounts of relief supplies and military equipment. In January 1950, President Truman stated that no further military aid or advice would be given the Chinese Nationalist forces on Formosa, and, during the first part of the year, economic assistance to that island was largely restricted to relief supplies. After Korea these policies were reconsidered; more attention was given to long-range economic projects, and the amount of military aid was being expanded. More important were the new programs of military and economic 7 The long-running conflict between lie Administration and Congress over the relative importance of Europe vis-a-vis the rest of the world (and Ae Far East in particular) was not resolved, however, by this increased aid.

SUMMARY

assistance to the nations of Southeast Asia, which were launched following recommendations by United States economic and military survey missions sent to them in the spring. The economic assistance proposed—administered by ECA-was similar to that under the Point Four Program, rather than that under ERP. Actual shipments of goods and services were negligible during the year, but they were scheduled to increase rapidly in 1951. Military supplies were sent in a larger amount, but details were not disclosed. Quantitatively, the most important aid program in Asia was still that to Japan under GARIOA, but assistance was declining; data are not available on how much military assistance, if any, was supplied to Japan. The program for rehabilitation of the Philippines, begun in 1946, was virtually ended in 1950, but, in March, the Philippine Government requested the United States to extend additional help. On the basis of an extensive examination of that economy by another special economic survey mission, the Administration was making plans late in the year for a new five-year program of economic assistance. The rearmament programs of the United States and her allies brought to the fore the problem of allocating many scarce commodities—especially raw materials. During the first half of 1950, these problems received comparatively little attention in the United States: export controls were rapidly being removed on all shipments except those of highly strategic items destined for the various Commimist nations; the stockpile program was being allowed, both by the Administration and Congress, to fall far behind schedule, and most of the discussion about it, in Administration circles, was in terms of its effects in helping to close the "dollar gap" and, in Congress, of its threat to domestic producers; and the United States discouraged the establishment of intergovernmental commodity groups, except for wheat and sugar, with other than research or advisory functions. The Korean crisis resulted in drastic shifts in all of these policies and raised many new problems for which answers had not been found at year's end. With increasing domestic demand for exportable goods, supplemented by rapidly growing foreign demands, the disquiet early in the year over maintaining the level of United States exports was, after Korea, replaced by concern over the inflation and physical shortages which might result from unrestricted exports and by the

SUMMARY

problem of distributing them so as to "maximize their benefit to the security of the free world." As a consequence, controls over shipments to present and potential enemies were tightened, and shipments of a rapidly growing number of commodities to friendly nations were being made subject to license. This latter action placed upon Administration officials the direct responsibility for allocating many domestically produced goods between competing domestic and foreign consumers and among the various friendly foreign nations. It appeared at year's end that, while the general policy of administering the controls so as to maximize the contribution of United States exports to the common security had been agreed upon, specific criteria and priorities had not been developed, and decisions were being taken on a more or less ad hoc basis. Among the more difficult problems being faced were those of establishing priorities between strengthening United States military forces and the forces of its allies;8 finding some basis for allocating goods between domestic and foreign civilians, that is, giving precise meaning to the generally accepted broad criterion of "equality of sacrifice"; determining the extent to which export licenses should be used as "rewards" or "incentives" to those coimtries increasing production of scarce materials needed by the United States (and its allies); deciding whether to apply pressure or leverage on other nations, through granting or withholding export licenses, to adopt policies which the United States deemed desirable—such as stopping exports to Soviet-bloc countries or devoting a larger share of domestic output to rearmament; establishing priorities among competing nations;9 and determining the importance of keeping established trade channels open in anticipation of the post-crisis period. The invasion of Korea also brought about important changes 8 If these priorities were to be established on other than an ad hoc basis, and without accompanying frictions and delays and interruptions in the rearmament programs, it appeared necessary that the NATO (as well as the other joint defense groups) must first prepare and agree upon very minute details as to the particular role of each participant in the joint defense and the schedule and exact nature of mobilization in each country. 9 Particularly acute problems here appeared likely to arise between the claims of those nations—especially in Europe—which were actively building up large /WongA forces and the demands of the Latin American coimtries, in which the United States has strong political and economic interests entirely apart from their immediate contribution to the common defense.

SUMMARY

in the stockpiling policies of the United States. The security as­ pects became almost the sole consideration; the "goals" were in­ creased by nearly seventy-five percent; Congress eagerly appro­ priated twice the amount of funds it had provided over the previous four years; and the United States engaged in what many were prone to call a "mad scramble" for strategic and critical materials abroad. As a result, prices of many items soared and several European countries—which had previously welcomed American stockpile purchases as a method of helping to close the "dollar gap"—complained bitterly that the purchases by the United States were impairing their ability to rearm and to maintain em­ ployment, and were resulting in a serious deterioration in their terms of trade. The United States was also concerned over the rising prices of many of the items and the apparent failure of the free market to achieve an "equitable and efficient international division" of the materials. Therefore, during the last quarter of the year, the Administration abandoned, for many commodities, its previous general opposition to the establishment of intergov­ ernmental commodity groups and actively encouraged the crea­ tion of a series of new intergovernmental commodity committees. These were to be composed of representatives of the major pro­ ducing and consuming countries, who were to be charged with recommending specific action to their respective governments designed to expand output, conserve supplies, and assure a more effective distribution and use of the given commodity. The first of these committees were established in early 1951, on a loose and informal basis, with no executive authority and no power to impose sanctions. This was a new and untried approach to lhe problem of allocating scarce materials, but most observers agreed that the conditions which permitted the various World War II compulsory commodity allocation schemes to work as well as they did were not present. Some anticipated that, if these arrange­ ments were to function effectively and be something more than forums in which hard-bargained barter deals were hammered out on a case-by-case basis, the role of each participant in the defense of the non-Soviet dominated world would have to be clarified and specified and that all participants would have to adopt at least roughly comparable policies with respect to: (a) export controls—otherwise the international allocations would have little

SUMMARY

significance, (b) restrictions on domestic consumption —agreement on international allocations would be most difficult if one country permitted what the others regarded as a more generous use of materials for civilian purposes, and (c) internal price controls—supplying nations would not likely agree to sales at any mutually agreed prices if the goods once inside the foreign country commanded much higher prices. Any such coordination of national policies obviously presented exceedingly difficult problems, especially since the countries concerned varied greatly in economic structure, governmental efficiency, long-term and immediate goals, and apparent stake in the East-West struggle. The rearmament programs of the United States and her allies forced consideration not only of allocating strategic and critical materials but also of increasing their production. For many of these commodities, the underdeveloped areas were the chief sources of supply, and, late in the year, the Administration decided —subject to Congressional approval—to greatly expand the Point Four Program and shift its emphasis from broad economic development to encouraging production of strategic materials. Before the Korean conflict, the Administration had planned that the capital assistance, as distinct from technical assistance, needed to implement the Point Four Program would be supplied from private sources. But Congress did not approve the investment guarantee proposals of the Administration, and only moderate success was achieved in the efforts of the Executive Branch to "improve the climate" for foreign investment. These developments, plus the deterring effect of the increased threat of war after mid,year, led the Administration to conclude that private investment wotdd not flow in the amounts, to the areas, or for the purposes envisaged in either the original or the enlarged programs for the economic development of backward areas. Plans were therefore being developed under which most of the foreign capital needed would come from public sources. Throughout the year, the United States, while opposing any lowering of the Internaticmal Bank's lending standards or its assumption of new responsibilities, had fully supported the Bank's concentration on loans to these areas. The United States hoped—and planned—that the Bank would continue to help finance the expanded Point Four Program,1 ι The United States believed that the International Monetary Ftmd, on the other

293

SUMMARY but it anticipated that most of the capital assistance required would have to come from the U.S. Government. The Administration made it clear that, this being the case, most of such aid would be furnished on a bilateral basis and not through international institutions. To this end, a one billion dollar increase in the lending authority of the EIB was requested by the President in his January 1951 Budget Message, and he stated that additional amounts of aid in the form of grants would be asked from Congress. While the desirability of concentrating the aid to underdeveloped countries in projects for expanding production of strategic materials was generally agreed to, this shift in emphasis of the program was seen in some official circles as creating several difficult problems. The backward areas had expected the assistance to be for the development of basic services; most of them planned to diversify their economies; and they were, in any case, reluctant to concentrate on the production of raw materials, the future market for which they viewed with misgivings. As a result, the United States faced the problems of whether, for such projects, the recipient could be induced to accept the aid on a loan basis; of whether, as an inducement, it should give these nations great freedom in purchasing consumer and other types of capital goods in the United States market during the rearmament period; and, of what long-run responsibility it should assume for possible distortions in the economies of these areas. Some officials also feared that United States insistence on the development of projects closely related to the rearmament program would make more effective the Communist propaganda that this was simply another example of American "imperialism." In order to circumvent some of these difficulties, the Administration planned to provide some aid for general economic development, but here too, difficult problems were foreseen: ,Should aid be given which would tend to make the underdeveloped nations self-sufficient, as many of them seemed to desire, even though the consequence be a loss of United States markets and greater barriers to trade? Should the United States exercise detailed supervision and control over its aid, at the price of raising in acute form hand, should conserve its resources for a future day when conditions more nearly resembled those under which the Fund was originally intended to operate.

SUMMARY

the issue of "interference" and "imperialism"?2 Should aid be concentrated on projects which would immediately raise consumption (including health) levels—thus "capturing the hopes and arousing the imaginations" of these peoples—or on those which would encourage greater capital formation?8 Should production of goods be encouraged for which there might be a continuing market in Europe or other third areas—and so perhaps contribute to a sustainable pattern of multilateral trade in the post-crisis period—even though these markets have been supplied in the past by the United States? What attitude should the United States take toward assisting a foreign government which exercises extensive controls over domestic and/or foreign economic activities? The persistent disequilibrium in the United States balance of international payments was given close attention early in the year, especially in view of the anticipated decline in foreign aid. The Administration, with the support of many others, believed that the "dollar gap" should be closed in large part by increasing imports rather than reducing exports. To this end, die Administration, among other things, prepared for a third round of tariff negotiations under the GATT, intensified its efforts to encourage the EHP countries to expand their exports to the United States, and urged Congress to ratify the ITO Charter and to simplify customs administration. Congress, although sharing the Administration's concern over the prospect of declining exports, was not yet prepared to endorse wholeheartedly a policy of encouraging imports.4 The debate on, and interest in, methods of achieving the balance in the international accounts waned rapidly after the invasion of Many of those who have studied the problem report that major obstacles to CMTinmii' development in underdeveloped areas are the frequent concentration of and political power in the hands of a small group (who are often pri­ marily concerned with preserving their own wealth and privileges), inefficiency and corruption in local governments, and social structures which are incompatible with other than existing economic processes. Thus, it may be. that one of the most difficult problems of all for the United States will be to discover ways of bringing about the required fundamental changes in social and political patterns, while maintaining strengthening the political and economic ties of these countries with the United States. 8 Involved here is the serious demographic problem in many areas, to which relatively little attention has been given in the various official statements on the Point Foiur Program. * Neither the Administration nor Congress was prepared to urge that the special protection given to American agriculture be reduced. 2

SUMMAHY

Korea. Even before that event, the long-standing United States current account surplus was being sharply reduced (both by greater imports and smaller exports) without, apparently, having seriously adverse effects on the American economy. The rearmament-induced purchasing for stockpiles, at rapidly rising prices, combined with increased demand for imports in general as the mobilization program got under way, resulted in the value of imports reaching record high levels during the last half of the year. At the same time, the general attitude toward exports shifted from a fear of their decline to a desire to curtail and allocate them. Nevertheless, in keeping with its long-run objectives, the United States did press, under the GATT and via the International Monetary Fund, with limited success, for relaxations in trade and exchange controls and in the discriminatory application of import restrictions by other countries. The Torquay tariff negotiations were held, but the results were disappointing to many, particularly the failure to agree on any new concessions with the United Kingdom, Australia, and New Zealand. The State Department stated, however, that it did not plan any further negotiations under the GATT during the next several years, and, in December, it abandoned its attempts to obtain Congressional ratification of the ITO Charter.® The current account surplus in 1950 was one-third that of 1949, and foreign countries accumulated some $3.6 billion of gold and dollars through their transactions, including foreign aid, with the United States. Many believed that these phenomena were only temporary—the export surplus was increasing as the year ended—and therefore did not justify any slackening in the efforts to remove import barriers. They argued, rather, that, in the light of internal inflationary pressures, physical shortages, and alterna' It should be noted that most of the opposition to the ITO Charter was not directed primarily to those parts of it which dealt with the core of United States long-term commercial policy—reciprocal reduction of trade barriers via multilateral bargaining, general prohibition of discrimination and elimination of bilateralism, and elimination of quantitative restrictions—but rather to the exceptions and escape clauses and the sections dealing with investment, employment, commodity agree­ ments, etc. The long-term problem remained for the United States of whether it should attempt, during the mobilization period, to negotiate a new charter, should concentrate on strengthening and perhaps broadening the GATT, or should return to strictly bilateral bargaining. The Administration appeared to have chosen the second course, but Congress had not yet indicated its position.

SUHMABY

tive employment possibilities for any who would "suffer" from import competition, the present time was particularly appropriate for moving energetically toward the long-term goals. But, in his various economic messages to Congress at the beginning of 1951, the President limited his recommendations to the passage of the customs simplification bill, the suspension of the import tax on copper, and the extension of the Trade Agreements Actwithout amendments. Congress indicated that it had littie interest in customs simplification, that it probably would temporarily extend the import tax suspension on copper, but that it would approve the extension of the Trade Agreements Act only after inserting several new restrictions. In sum, the record of 1950 shows that increasing attention was being given to non-European areas and that the most important specific international economic policies being pursued by the United States to meet the problem of national security were taking the form of continued large-scale foreign aid, Government assumption of much international investment, and central administrative allocation of many goods. The use of these measures meant that adoption of some of its long-run international economic objectives, by either the United States or foreign nations, was being indefinitely postponed. The record also shows that, since security is a relative matter—depending on the strength and intentions of possible enemies and on the shifting relative importance, both in the United States and in her allied countries, of armed might and internal political, social, and economic stability— the policies followed were, of necessity, frequently changed. The difficulties of quickly establishing effective and consistent policies, even for the short run, were greatly increased, by the apparent suspicion of and hostility to the State Department in Congress and the sharp differences between the Administration and Congress with respect to the advisability of attaching conditions and requiring concessions as a price for American assistance, the agencies to be charged with administering such aid, the importance of "good will" abroad, the emphasis placed on long-term versus short-term objectives, the geographic areas of greatest importance to United States security, and the willingness and ability of the people of the United. States and foreign countries to make sacrifices for the common defense.

INDEX

Abaca, 125t; Abaca Production Act of 1950, 220 Acheson, D. (Secretary of State): on extending ECA, 6; on dollar gap, 45; on North Atlantic defense, 41, 46n, 47, 236; on French Indochina, 62; on technical assistance, 97; on Colombo Plan, 12In; on import policy, 168; on ITO, 173; on Atlantic union, 237n; see also State Department Act for International Development, 13n, 88, 94-97, 99, 111, 114, 288 Adenauer, Chancellor, 263 Advisory Committee on Export Policy, 211

Advisory Committee on Priorities Administration, 211 Afghanistan, 99 Africa, 49n, 275t, 275, 278t, 289 Agricultural Act of 1949, 204, 205n Agricultural Adjustment Act, 202, 204 Agricultural production, Europe, 18 Agricultural products: and ECA, 11, 12, 24, 24t, 205; and Palestine relief, 76; donations of, 79t, 205; and Point Four, 91; Import controls on, 172, 200-204, 205n; export subsidies on, 204-206; export controls on, 209; stockpiling of, 216n; bartered for strategic materials, 220; see also International commodity agreements Alaska, 273t Alien Property Custodian, 78 American Bar Association, 174 American Cotton Shippers Association, 174 American Farm Bureau: on import policy, 168; on ITO, 174 American Mission for Aid to Greece, 25 American Republics, see Latin America and individual countries American Tariff League, 174 American Veterans Committee, 174 Annecy negotiations, 178, 182-188 pas­ sim, 255 Appropriations: ECA, 15-17; military assistance, 43-44, 47; Korean aid, 57;

general area of China, 60-61, 63; occupied areas, 64-66; Philippine rehabilitation, 66-68, 71; children's relief, 72-73; International Behigee Organization, 75; Palestine relief, 7677; International organizations, 80-82; technical assistance, 97; stockpiling, 214-217; EPU, 238-239 Argentina, 115t, 127, 188, 191t Asia, 160t, 275t, 278t; an OEEC for, 9, 61; ECA in, 36; economic aid programs in, 56-72; exports to, 274; and dollar payments to Europe by, 281 Atlantic Union Committee, 237n Atomic Energy Commission, 211 Attlee, C., (British Prime Minister), 233 Australia, 134t, 146t, 152t, 191t; and Pacific alliance, 53, 62n; and displaced persons, 75; and International Bank loan, 147; and import restrictions, 154, 179; and trade agreements, 172, 185, 296; and international commodity agreements, 224, 227n, 228, 234 Austria, 21t, 28t, 115t, 128t, 2411, 248t, 254t; unemployment in, 18; and displaced persons, 75n; ECA aid to, 8; exchange rates of, 156; and Torquay negotiations, 183n, 185; and EPU, 246n Baguio, 62 Balance of payments: deficits as basis for ECA aid, 8; of ERP recipients, 18; of United States, 270-283, 295-296 Balogh, T., 251n, 265n Bangkok Conference, 61 Bank for International Settlements, 157, 160t, 240n-241n, 247 Bank of France, 134 Barter deals, 156, 220 Belgian Congo, 130t Belgium and Belgium-Luxembourg, 21t, 22, 28t, 115t, 118t, 128t, 130t, I46t, 1481, 152t, 191t, 241t, 248t, 254t; unemployment in, 18; counterpart fund deposits by, 30; overseas territories of, 32; and NATO, 38n; on

INDEX

sterling area restrictions, 154,179; and tin negotiations, 226n; and IntraEuropean Payments Scheme, 240n; EPU quotas of, 246; and Schuman Plan, 262; and Benelux, 266; and trade restrictions, 268 Bell, D. W., 69n Bell Mission, 69-72 Benelux, 266 Bennett, Hemy G., 98 Berlin Central Bank, 30n Bissell, R. M., Jr., 19n, 241n, 242n Black, E. R., 9n Bolivia, 115t, 156 Borneo, 115t Bradley, General O. N„ 55 Brannan, C. F. (Secretary of Agriculture); on Point Four, 91; on import controls, 200,202; and donations, 204, 205n; and sanitary restrictions, 205n; see also Agricultural products Brazil, 146t, 152t, 191t; technical assistance agreement with, 99; tax convention with, 117; International Bank loan to, 145; and International Materials Conference, 234 British Commonwealth: Conferences for Aid to Southeast Asia, 60n; and international commodity allocations, 234 Brooks, D., 212n Budget, Bureau of the, 192, 213 Bureau of Mines, 220 Bureau of Public Roads, 68 Burma, 80t, 134t, 191t; military aid to, 53; economic and technical assistance to, 56, 63; membership in International Bank and International Monetary Fund, 140n; and Torquay negotiations, 185 "Buy American" legislation, 170, 171, 212 Cabot, T. D., 52n Canada, 24t, 118t, 128t, 134t, 136t, 138t, 148t, 160t, 191t, 192, 275t, 278t, 280t; and ERP country deficits with, 18; ECA purchases in, 24; service on credits to Britain, 34n; and military production, 5Qn; and continental defense, 52n; Reconstruction Finance Corporation credits to, 132; and American capital flows, 134, 136, 137, 139; and International Bank bond sales, 148; fluctuating exchange rates of, 155; gold subsidies by, 159n; on sterling

area restrictions, 154, 179; imports of potatoes from, 179; and Torquay negotiations, 185; and changing tariff on cattle and lead imports from, 189; and United States export controls, 207n; and International Wheat Agreement, 224; United States exports to, 27In, 274, 280; gold and dollar reserves of, 282n Capital assistance: under Point Four 102-116; UN debates on, 102-107; United States encouragement of, 107117, 293-295 Capital movements, see Loans and investments Carr-Gregg, J, R. E., 121n Cartels, 259, 263-264 Celler Foreign Trade Zone Act of 1934, 194 Central German Coal Sales Agency, 263 Ceylon, 62n, 99, 140n, 154, 154n, 179, 191t Chalmers, H., 180n Children's relief programs, see International Children's Emergency Fund Chile, 146t, 152t, 191t; technical assistance to, 99; and International Bank bond sales, 148, 149n; and exchange rates, 156, 156n; and exchange restrictions, 180; United States trade agreement negotiations with, 190; and copper imports from, 198-199 China, 62n, 115t, 128t, 134t; aid to, 37, 55n, 56, 59-61, 79t; investment treaty with, 114; lend-lease settlement with, 131; surplus property credits to, 131n; and International Monetary Fund, 140n; withdrawal from GATT, 182, 189; and United States export controls, 207-209, 211; exports to, 274; aid to general area of, 13n, 37n, 42n, 43, 47, 59-60 China Aid Act of 1948, 37, 60, 99n China Area Aid Act of 1950, 59, 63 Civilian relief supplies, 58, 59; see also Government and Relief in Occupied Areas Clapp, G. R., 75n, 76 Chhiese students, 59n, 60 Coal-tar products, 192-193 Coconuts and coconut oil, 202n Code of the Liberalization of Trade (OEEC), 257-258

INDEX Colombia, 115t, 117, 146t, 155η, 156, 182n Colombo Plan of the British Common wealth, 60n, 7ln, 101, 121n Commerce, Department of: and trade fairs, 195; and European export promotion, 196-197; and export controls, 206-212; on Schuman Plan, 281; balance of payments data, 270-283 Commercial policy, United States: see ITO, Reciprocal trade agreements program; Customs simplification; Foreign trade zones; Dollar exports; Copper, import tax on; General Agreement on Tariffs and Trade; Import controls; Export subsidies; Export controls; Stockpiling; International com­ modity agreements Committee for Economic Development, 174 Committee on International Security Affairs, 52n Committee on Reciprocity Information, 183 Commodity agreements, see International commodity agreements Commodity Credit Corporation: and import controls, 179n, 200, 204-205; and stockpiling, 214, 217, 220 Conditional ECA aid, 21, 251 Congress of Industrial Organizations: on import policy, 168; on ITO, 174 Connally, Senator T., 6, 90η, 169 Copper: import tax on, 171, 197-199, 297; international commodity committee on, 234 Copyright law, 173n, 199n Cbsta Riea, 99, 115t, 152t, 155n, 156, 188, 190, 191t, 225 Cotton: Defense Department loan to Japan for, 126; shortage of, 203; export controls on, 209; Commodity Credit Corporation barter of, 220; international committee on, 229-230, 234 Council of Economic Advisers, 49a, 123, 127, 170 Counterpart funds, 281, 29-30, 79t; Germany, 7n, SOn; for tourism, 11; for trade liberalization, 15; for military purposes, 41-42; of Yugoslavia, 56; of Formosa, 59n; of Japan, 65n; United States receipts of, 78; for strategic materials, 78n, 219; for overseas territories development, 129

Credits, see Loans and investments Cripps, Sir Stafford, 244n Cuba, 117, 148, 154, 179, 185-186, 189, 190n, 191t, 203, 230-231 Customs simplification, 171, 176n, 190194, 295, 297 Cutler, F., 135n Czechoslovakia, 52, 134t, 140n, 152t, Daniel, R. P., 98n D'Anna, F. C„ 251n Debt, foreign dollar: of ERP countries, 11; to U.S. Government, 124-133 Defense, Department of: aid to Japan, 7n, 64-66, 132, 133t; and military assistance, 36-53; aid to Korea, 57-59; and stockpiling, 212-221 Defense Production Act of 1950, 211, 217 Denmark, 21t, 28t, 32, 115t, 118t, 128t, 130t, 146t, 152t, 191t, 241t, 246n, 248t, 252, 2S4t, 258, 267n Devaluations, 1949: effect on United States trade, 271, 276; effect on IntraEuropean Payments Scheme, 24Qn Dewey, T. E., 261 Dieboli W., Jr., 261n Discrimination: by Morocco, 17; and Fund, 154; and GATT, 179-180; and European integration, 239-240,261 Displaced Persons Act of 1948, IOn Dixon, R. C., 199n Dollar (and gold) assets, foreign, 270, 273t, 281-282, 296 Dollar exports, increasing European, 196-197, 241, 295 ^'Dollar shortage**: effect of military aid on, 45; and stockpiling, 213; and EPU, 251 Dominican Republic, 191t Drawing rights, 21η, 29n, 240n, 251n Dual pricing, 259 Dumping, 193η, 204n, 258n Eastern Europe: trade with Western Europe, 18, 268; restriction on exports to, 206-212 passim Economic. Cooperation Act: of 1950, 6-7,107, 204, 218; of 1949, 107,127129; of 1948,107, 236 Economic Cooperation Administration: legislative issues and changes, 6-17; and investment guarantees, 10, 88, 107-109; loan authorization, 11; pro-

INDEX grams for Europe, 17-32; geographic allocation of aid, 20-22; commodities supplied, 22-23; purchases in the United States, 23-25; technical assistance by, 25-26; industrial projects program, 27-28; counterpart funds, 28-30, 132; and development of overseas territories, 30-32; changing role of, 32-36, 285-286; and NATO, 38; aid to Yugoslavia, 55; and Korea, 5758; Special Technical and Economic Mission to Southeast Asia, 63; ocean freight subsidies by, 83; loans by, 127130, 133t; and European export promotion, 196-197; and surplus agricultural commodities, 204-206; and export controls, 210; and stockpiling, 214-219 passim; and European integration, 236-269 passim; and Schuman Plan, 262 ECOSOC (UN Economic and Social Council); and capital assistance, 102107; and international full employment, 161-166, 176 Ecuador, 156, 188, 191t Egypt, 128t, 134t, 152t, 160t Eisenhower, General D. D., 51n, 263n Ellis, H. S., 17n, 251n El Salvador, 115t, 145n, 146t, 151, 188, 191t Emergency Procurement Service, 213, 218 Emergency relief programs, 72-77 Escape clause, 172, 186-188, 201 Estonia, 115t Ethiopia, 113n, 115t, 128t, 134t, 144, 146t, 152t Europe, 24t, 79t, 128t, 133t, 136t, 138t, 160t, 275t, 278t, 279-280, 280t; see also individual countries and Economic Cooperation Administration, and Mutual Defense Assistance Program European Integration Fund, 266 European Investment Bank, 266 Ewopean Payments Union, 21t, 80t, 238-255, 267-268; appropriation for, 7, 14n, 238; conditional ECA aid through, 22; counterpart deposits under, 29n; and International Monetary Fund, 156-158, 288; and France, 184; major issues and provisions of, 242-251; managing board of, 244, 245n, 252; role of sterling in, 244246, 288; quotas and settlement of

balances under, 246-249; treatment of extreme debtors and creditors, 250251; operations of during 1950, 252255 European Recovery Program, see Economic Cooperation Administration Exchange rates, 151-156 Exchange restrictions: Fund policy on, 151-154; discussion on under the GATT, 177-181 passim; OEEC policy on, 232-269 passim Export controls: by United States, 206212, 290-291; European, 209-211 Export-Import Bank: and investment guarantees, 10, 102, 108, 109-112; loans by, 16, 54, 64, 126-128, 133t; proposed increase in lending authority of, 122, 123, 127, 294 Export Promotion Division, ECA, 196 Export subsidies, 204-206 Export surplus, United States, 270, 280281, 296 "Export value," 193 Exports, United States', 271-275 Far East, 20, 47n, 79t, 128t, 132, 133t, 289; see also individual countries and Southeast Asia Fats and oils, import restrictions on, 200202 Finkelstein, L. S., 61n Finland, 115t, 117, 128t, 134t, 146t, 191t Firestone, H. S., Jr., 98n Food and Agriculture Organization, 101, 223n Foreign Economic Assistance Act of 1950, 13, 57, 59-60, 72, 77, 88, 108 Foreign investments, see Loans and investments Foreign Military Assistance Coordinating Committee, 39 Foreign Military Assistance Steering Committee, 39 Foreign trade zones, 170, 194-195, 208 "Foreign value," 193 Formosa, 56, 59, 60, 80t, 289 Foster, W. C., 45, 60, 72n France, 21t, 28t, 115t, 118t, 128t, 130t, 133t, 146t, 148t, 191t, 241t, 248t, 254t; ECA aid to, 22, 26, 29; aid to overseas territories by, 32; military aid to, 38n; and NATO, 48, 51; and aid to Indochina, 64n; tax convention with, 117; United States private loan

INDEX to, 134; International Bank bond sales in, 149; and tariff agreements, 184186, 260, 267; and export controls, 210; and strategic materials, 219; and commodity agreements, 222, 224, 230, 233-234; and EPU, 252; and the Schuman Plan, 260-263 passim; and Franco-Italian Customs Union, 266; United States exports to, 274 Franco-Italian Customs Union, 266 Frei, Rudolf, 251n French Equatorial Africa, 130t French Guinea, 32 French Indochina, see Indochina French Morocco, 13, 17, 130t French North Africa, 29 "Fritalux," 266-267 Gaston, H., 110 General Agreement on Tariffs and Trade (GATT), 177-186; and exchange rate agreements, 153-154; and United States import policy, 170; and ITO, 176; and Torquay negotiations, 177178, 182-188, 255n, 259, 267, 295296; sessions of Contracting Parties to, 177-182, 255; and escape clause, 187; and United States customs simplification, 190-192, 194; and import controls, 200-203 passim·, and international commodity agreements, 221; trade liberalization efforts, 255, 288; and European tariff levels, 259; and Schuman Plan, 264 General Services Administration, 133t, 212-214, 217, 218-219, 232 Geological Survey, 220 Gerard, J. W., 98n Germany, 21t, 28t, 79t, 115t, 138t, 248t, 254t; and ECA, 7n, 36, 64; unemployment in, 18; counterpart fund deposits by, 7n, 3Qn; military aid to, 43-44; military role of, 46-52 passim, 287, 288; and aid to Yugoslavia, 5556; and GARIOA, 22n, 65; and displaced persons, 74-75; and foreign investment, 113n; and GATT, 182η, 183n, 184, 185; and International Wheat Agreement, 224-225; and EPU, 252-253, 258-259; and Schuman Plan, 260, 262-263; and "Fritalux," 266; United States exports to, 274 Gifts, private, 83 Gold: International Monetary Ftmd and United States policy on, 158-159;

transactions by United States, 159161; foreign assets in, 281-282 Goldberg, S., 113n Goldblatt, S., 199n Golay, F. H., 224n Government and Relief in Occupied Areas (GARIOA), 79t; in Germany, 7n, 22η; counterpart funds under, 30n; in Japan, 64-66, 290 Grants, government, see Table of Con tents Gray, G., 10, 170 Gray Report: on loan to Britain, 34η; on continued aid to Europe, 35, 286; on administration of foreign aid programs, 36; on NATO, 49n; on Japan, 66; on Point Four, 120-122; on Export-Import Bank lending authority, 127; on trade policy, 171; on ITO, 176,- on import controls, 203-204; on export subsidies, 205-206; on international commodity agreements, 232 Greece, 8, 21t, 25, 28t, 35n, 36, 37, 4Qn, 42n, 47, 51n, 79t, 83, 115t, 117, 118t, 1281, 156,191t, 241t, 246n, 248t, 254t Greek-Turkish Aid Act of 1948, 25n, 38n Greenwald, J. Α., 99n Griffin, R. A., 62 GrifiBn mission, 53, 62 Guarantees, informational media, 107, 109; see also Investment guarantees Guatemala, 151, 182n, 188, 191t Haberler, G., 251n Haiti, 140n, 191t Halm, G. N., 161n Hannah, J. Α., 98n Havana Charter, see ITO Charter Havenga, N. C„ 158 Hawaii, 230, 273t Hayes, S. P., 119n Herter, C. A., 87, 88, 89η, 92-93, 111 Hickey, Μ. Α., 98n Hickman, C. Α., 119n High Commissioner's Office for Refugees, 75 Hines, L. G., 98n Hinshaw, R., 251n Hirschman, Α. O., 243η, 246n, 253n,

255n

Hoffman, P. G. (ECA Administrator): on extension of ECA, 6, 7; on investment guarantees, 10,108; on ECA military role, 11; on East-West trade, 17; on aid according to "merit," 34n;

INDKX on administration of foreign aid programs, 36n; on counterpart funds for military purposes, 42; on Korean aggression, 57; on import policy, 167168; on aid and export controls, 210; on stockpiling, 215, 218; on integration, 236, 238n, 255 Holland, see Netherlands Honduras, 115t, 151, 188, 191t Hong-Kong, 9, 208-209 Hoskins, H. L., 169n Hungary, 115t, 134t Hyde Park Agreement, 207n Iceland, 20, 21t, 28t, 130t, 188, 191t, 225, 248t, 255n Imperial preferences, 185 Import controls, direct: by United States, 200-204; relaxation by ERP countries, 255-260 passim, 267-268, 288; see also GATT Import policy of United States, 167-172; see also Commercial policy Imports, United States, 272t, 276-278 Income on private United States foreign investments, 272t, 278-279 India, 80t, 134t, 146t, 152t, 191t; and Pacific pact, 62; ECA loan to, 64; technical assistance agreement with, 99, 99n; and foreign investment restrictions, 113n; International Bank loan to, 145; and exchange restrictions, 154, 179; and Torquay, 185; and International Materials Conference, 234 Indochina, 80t; military agreement with, 53; technical and economic aid to, 56; and Pacific alliance, 62; GrifiQn Report on, 62; ECA aid to, 63 Indonesia, 79t, 128t, 130t, 191t; United States military mission to, 53; economic and technical assistance to, 56, 62, 63; and Pacific pact, 62n; GrifiBn Report on, 62; Export-Import Bank loan to, 64, 126; and membership in International Bank and Fund, 140n; and GATT, 182, 183n; and International Wheat Agreement, 225; and tin agreement, 226n Information and Exchange Act of 1948, 97 Initial credit and debit balances, EPU, 29n, 247, 248, 249 Institute of Inter-Amexican Affairs, 79t, 88, 89, 93, 97, 99

Integration: European economic, 10, 11, 14, 27, 236-269, 287-288; military under North Atlantic Pact, 36-53 pas­ sim, 287-288 Interdepartmental Advisory Council on Technical Cooperation, 98 Interdepartmental Committee on Trade Agreements, 183 Interdepartmental Stockpile Committee, 213 Intergovernmental Tin Conference, 227 Interior, Department of, 213, 220 International Bank for Reconstruction and Development (IBRD): and Yugoslav aid, 54; loans to India and Thailand, 64; and capital assistance to underdeveloped areas, 102, 104-106, 122, 140, 162, 163, 165, 293; United States subscription to, 125t; lending policies and operations of, 141-147; marketing operations and financial resources of, 147-149; and ITO, 174n, 176; and United States balance of payments, 270, 273t International Chamber of Commerce, 175, 195 International Children's Emergency Fund, 13n, 72-73, 79t, 205 International Civil Aviation Organization, 101 International commodity agreements, 221-235, 290-293; pre-rearmament organizations, 222-232; on wheat, 222225; on tin, 225-227; on wool, 227229; on cotton, 229-230; on sugar, 230-231; on rubber, 231-232; postKorean, 232-235 International Commodity Clearing House, 223n International Cotton Advisory Committee, 229 International Development Advisory Board, 98 International Labor Organization, 101 International Materials Conference, 234 International Monetary Fund, 149-161; United States subscription to, 125t, 273t; lending policy of, 150-152,293n; foreign exchange rate policy of, 151156; and EPU, 156-158, 244, 247n, 288; gold policy of, 158-160; technical assistance provided by, 161; and ECOSOC resolution on full employment, 163, 164, 166; and ITO,

INDEX 174n; and exchange restrictions, 151154, 179 International organizations, United States participation in, 80-86 International Refugee Organization, 7475, 79t International Ruhr Authority, 264 International Sugar Agreement, 230 International Tin Committee, 225 International Tin Study Group, 225-226 International Trade Organization ( I T O ) , 172-177, 295-296; and investment climate, 114n; and full employment, 161n; and import policy, 170; and customs simplification, 192, 194; and copyright law, 199n; and import controls, 201; and commodity agreements, 221, 223n, 226 International Wheat Agreement, 15,176, 222-225 International Wheat Council, 222-225 International Wool Conference, 227 Intra-European Payments Scheme, 21t, 22, 29n, 240-241, 247, 251n Intra-European trade, 18, 255, 256, 258, 268-269 Investment guarantees: by ECA, 10, 88, 107-109; by the Export-Import Bank, 101, 109-113 Investment treaties, see Treaties of friendship, commerce and navigation Investment, United States foreign, encouragement of private, 92-94, 107117, 293-295; see also Loans and investments, Investment guarantees, Treaties of friendship, commerce and navigation, Tax conventions Iran, 36, 37, 42n, 47, 47n, 80t, 113n, 126, 128t, 134t, 156, 188, 191t Iraq, 115t, 128t, 134t, 146t, 147 Ireland, 12, 21t, 114, 115t, 118t, ISOt, 254t, 255n Italy, 21t, 281,80t, 115t, 128t, 130t, 133t, 191t, 2411, 248t, 254t; emigrants from, lOn; unemployment in, 18; and ECA, 36, 83; and NATO, 48, 50n; and aid to Yugoslavia, 55, 56; and displaced persons, 74, 75; investment treaty with, 114; tax convention with, 117; and strategic materials, 219; and commodity agreements, 234; and EPU, 245, 246n, 253; and Schuman Plan, 262; and customs union, 266; United States exports to, 274

Israel, 106n, 113n, 117, 126, 128t, 134t, 156 Jamaica; 130t, 134t Japan, 59, 79t, 128t, 134t, 138t; and Occupied areas program, 7n, 64-66, 290; military role of, 46; and Pacific alliance, 53n; and Griffin Mission, 62; cotton credits to, 126, 132; and barter trade, 156n; and United States export controls, 208n; and International Wheat Agreement, 225; United States exports to, 274 Johnson, D. G., 199n Johnson, H. G., 224n Johnson, L . (Secretary of Defense), 41, 47n Joint Economic Development Commission, 99 Jordan, 140n Joseph, B. C., 98n Kahn, R. F., 251n Katz, M., 36n Kee, Representative J., 89n, 91 Korea, 134t; economic aid to, 7n, 5759, 79t, 289; military aid to, 36, 37, 42n, 43, 47, 53, 62n, 289; reconstruction by UN, 56, 289; and GATT, 183n, 185 Latin America, 24t, 79t, 128t, ISSt, 136t, 138t, 160t, 275t, 278t, 280t; ERP countries deficit with, 18; ECA purchases in, 24; and Pacific alliance, 53; American investments In, 135-136, 139; and copper tax, 198-199; and strategic materials, 211, 220; United States export surplus to, 271; gold and dollar holdings of, 282n; aid to, 289; see also individual countries Latvia, 115t Lebanon, 134t, 182, 191t Lend-lease credits, 7 8 , 1 3 1 , 1 3 3 t Levi, W., 61n Liberia, 99, 99n, 115t, 128t, 134t, 140, 172, 185, 191t Libya, 99 Little, C. S., 231n Loans and investments, United States, 124-139, 273t; U.S. Government loans and credits, 124-132; private foreign investment, 132-139; see also Investment, Capital assistance, and Table of Contents

305

INDSX

Lodge, Senator Η. C., Jr., 168 Lorwin, L. L., 166n Lubin, I., 162, 163 Luxembourg, 117,149; see also BelgiumLuxembourg Lyons, Τ. E., 195n

assistance to non-NAP countries, 40; and plant construction, 42-43; progress toward mutual defense, 48-53; and "equality of sacrifice," 49n, 287n, 291; and United States exports, 275; see also NATO

MacArthur, General D., 65 Macao, 208, 209 Malaya, 53, 62, 64n Maritime Administration, 131, 133t Marshall, General G. C., 55 Marshall Plan, see ECA McCarran, Senator P.A., 16 McCloy, J. ( U.S. High Commissioner for Germany), and Schuman Plan, 263264 McGhee, G. C., 62n McKellar, Senator K., 72n, 90n McLeod, A. N., 29n Mendershausen, H., 29n, 169n Mexican stabilization agreement, with United States, 132 Mexico, 80t, 146t, 152t; tax convention with, 117; Export-Import Bank loan to, 126; currency repurchases by, 132; capital movements to, 139; Interna tional Bank loans to, 144, 147; and International Bank bond sales in, 148; exchange restrictions by, 151; fluctuating exchange rates of, 155; and termination of trade agreement with United States, 177, 189; and canned meat imports from, 203, 205 Middle East, 79t, 128t, 133t, 289; American investments in, 136; see also individual countries Migration, and ECA, 10, 14 Military assistance: see Mutual Defense Assistance Program and North Atlantic Treaty Organization Military Survey Mission, 53, 63n Morocco, 115t Most-favored-nation clause, 37η, 116, 185, 189, 264 Munitions Board, and stockpiling, 213, 215n, 216, 220, 228n Muscat, 115t Mutual Defense Assistance Act of 1949, M amended, 37, 46n, 60 Mutual Defense Assistance Program, 3653, 79t; and ECA aid, 33, 285-286; bilateral agreements under, 37, 53, 214n; legislative changes in, 40-48; appropriation requests for, 40; and

Nacional Financiera, 144 National Advisory Council: on ECA loan authority, 11; and loan to Argentina, 127; and ECA loans, 129; on International Bank, 141, 143; on International Monetary Fund, 149-158; on exchange rates, 154-155; on EPU, 156 National Association of Manufacturers, 168, 169, 174 National City Bank, 149n National Council of American Importers, 174 National Foreign Trade Council, 97, 174 National Milk Producers Federation, 174 National Production Administration, 211, 220

National Security Council, 48, 210 National Security Resources Board, 212, 213 Nepal, 99 Netherlands, 22, 28t, 79t, 115t, 118t, 128t, 130t, 146t, 152t, 191t, 248t, 254t; overseas territories development, 32; and NATO, 48; International Bank bond sales in, 148-149; and strategic materials, 219; and EPU, 246n, 252; and trade liberalization efforts, 258259; and the Schuman Plan, 262; and Benelux, 266; and Uniscan, 267n; gold purchases by, 282 Netherlands-Indonesia, 21t, 133t, 218t, 241t; see also Netherlands, and Indonesia Newfoundland, 140n, 275F, 278t, 280t New York Board of Trade, 174 New Zealand, 118t, 134t, 191t; and Pacific defense alliance, 53; and exchange restrictions, 154, 179; and tariff negotiations, 185, 296; and wool, 227n, 228 Nicaragua, 99, 152t, 156, 185, 191t Nichols, C. W., 227n Nickel/cobalt, commodity committee, 234 North Atlantic Council, 38, 49, 50 North Atlantic Defense Committee, 38

INDEX North Atlantic Planning Board for Patent rights: under technical assistOcean Shipping, 50n ance, 98n; under lend-lease, 131 North Atlantic Treaty, 38 Pella Plan, 265 North Atlantic Treaty countries: mili- Peril points clause, 171 tary aid to, 36-38; military produc- Peru, 99, 127, 155, 183n, 185, 188, 191t tion in, 39; and "balanced collective Petroleum: ECA aid to European inforces," 50, 287; and Atlantic union, dustry, 27-29; foreign investment by 237n; and materials allocation, 278; United States in, 135, 136, 139; imsee also Mutual Defense Assistance ports of, 169; changes in duty on Program and North Adantic Treaty imports of, 189 Organization Petsche Plan, 265-266 North Atlantic Treaty Organization, 38- Philippine Council for United States 53 passim; and ECA, 35; Military Aid, 71 Committee of, 48; Production and Philippines, 79-80t, 125t, 128t, 133-134t; Supply Board of, 48; and commodity military aid to, 36, 37, 42, 43, 47, agreements, 232n, 235; and European 53; and Pacific alliance, 53, 62; ecointegration, 237; and Schuman Plan, nomic aid to, 56, 67-72, 290; in262; see also Mutual Defense Asvestment treaties with, 114n; refundsistance Program ing of debt to United States, 125, 126, North Korea, export embargo to, 208 131; and GATT, 185; and sugar, 230; Norway, 21t, 28t, 115t, 118t, 128t, 130t, United States exports to, 274; see 152t, 191t, 24 It, 246n, 247n, 248t, also Philippine War Damage Commission 254t Philippine Trade Act of 1946, 203 Occupied Areas Program, 7n, 64-66,79t; Philippine War Damage Commission, see also Government and Relief in 66-68 Occupied Areas Pizer, S., 135n Poe, C., 98n Oceania, 275t, 277, 278t Office of International Security Affairs, Point Four Program, 87-123, 288-289, 293-295; and investment guarantees, 39 10, 107-112; and Southeast Asia aid Office of International Trade, 211 programs, 64; technical assistance asOrganization for European Economic pects of, 87-101; technical assistance Cooperation (OEEC): for Asia, 9, and UN expanded program, 100-101; 61; technical assistance to, 26; and . capital assistance aspects of, 101-107, NATO, 52n; on private foreign in132; capital assistance and UN exvestment, 112n; and EPU, 158, 242panded program, 102-107; and tax 245 passim.·, and trade liberalization, conventions, 116-117; State Depart184, 255-260, 266; and commodity ment on policy and expansion of, 117agreements, 232-233; United States 120; and strategic and critical macooperation with, 237 terials, 119-120, 127, 216, 293-295; Organization of American States, 96, Gray Report on, 120-123; Council of 100η, 232n, 235 Economic Adviseis on, 123; and InOstroff, N., 193n ternational Bank, 140, 293-294; and Overseas territories development, by ITO, 176 ECA, 26t, 30-32, 129 Poland, 52, 115t, 128t, 134t, 140n Portfolio investments, by United States, Pacific Defense Alliance, 53, 62 134, 135 "Package loans," by International Bank, Portugal, 20, 21t, 28t, 130t, 241t, 248t, 104-105, 143-145 254t, 255n Pakistan, 62n, 99, 140n, 154, 179, 191t Portuguese West Africa, 128t Palestine Refugees, 13n, 75-77, 79t "Positive list," United States export conPanama, 99, 118n, 151 trols, 206-211 passim Panama Canal Zone, 273t Potatoes: import restrictions on, 179n; Paraguay, 99, 115t, 156n, 191t donations of, 205n Parran, T., 98n

INDEX

Potofsky, J. F., 98n Puerto Rico, 230, 273t Quirino, President E., 69, 71 Quotas, EPU, 246-249 "R" and "RO" list, for United States export controls, 207n Rao, V., 104n Reconstruction Finance Corporation, 70, 77, 125t, 133t, 220, 225n Retail Dry Goods Association, 196n Reubens, E. P., 64n Riggs, F. W., 75n Ristelhueber, R., 75n RobbittS^lT., 237n Rockefeller, N., 98 Rostow, W. W., 161n Rubber, 64n, 231-232 Russia, 17, 48, 54, 131, 134t, 160, 172, 206-211, 284, 287 Ryukyu Islands, 64-66, 79t Salter, Sir Α., 102n, 141n Samoa, 235t Sargent, J. Α., 243n Saudi Arabia, 80t, 99, 106n, 126, 128t, 134t Savage, J. L., 98n Sawyer, C. (Secretary of Commerce), 50n, 208 Schaaf, C. H., 61n Schuman, Foreign Minister R., 62, 260 Schuman Plan, 260-264, 267n, 288-289; and military role of Germany, 51; and discrimination, 180 "Servicio," 99 Setser, V. G., 114n Shipping, ocean: restrictive clauses, ECA, 25, and Yugoslav aid, 56; restriction on traffic with Communist nations, 208-209 Sinn, Ν. E., 179n Smidi-Mundt Act, 89, 94 Smithies, Α., 251n Southeast Asia, 79t; U.S. missions to, 53; aid programs to, 61-64, 289; technical assistance to, 99n; see also individual countries Southern Rhodesia, 130t, 154,159n, 179, 191t South Korea, see Korea Spain, H5t; ECA loan to, 13, 16-17, 129, 285; military aid to, 44, 46; and International Wheat Agreement, 225

Speculative capital movements, 134, 139 Standard Oil Company of New Jersey, 109 State, Department of, 133t; and South east Asia policy, 9, 61; and investment treaties, 17, 112, 114-116; and defense program, 38; and Pacific military alliance, 53; and Yugoslav aid, 54-55; and Japan, 64-65; and children's relief, 73; and refugees, 74-75; contributions to international organizations by, 81-86; and Point Four, 88, 93, 97-100, 117-120; and import policy, 168, 186-201 passim·, and ITO, 173-174, 176, 181, 296; and export controls, 210; and stockpiling, 216, 221; and European integration, 236, 239, 261; and Congress, 297 Sterling area: and petroleum, 9; gold and dollar reserves of, 33t, 281, 282n; import restrictions by, 154, 179, 271; and EPU, 243-246, 253-254; United States imports from, 276n "Sterling option" clause, 245 Stikker Plan, 265 Stockpiling, 11, 64η, 211-221, 290-293; see also Strategic and critical materials, and International commodity agreements Strategic and critical materials: and ECA development fund, 32, 129; and Yugoslav aid, 55n; and military agreements with Southeast Asia, 64n; and counterpart funds, 78n; and Point Four Program, 119-120, 127, 216, 294; and Export-Import Bank loans, 126-127; and commercial policy, 171; and export controls on, 2C?7, 290-291; United States purchases of, 280; see also Stockpiling, and International commodity agreements Stuart, A. H., 187 Sugar, 204, 230-231 Sugar Act of 1948, 203, 230 Sulphur, 234 Surplus property credits, 133t Sweden, 20, 21t, 34n, 118t, 128t, 130t, 140η, 172, 191t, 241t, 246n, 248t, 253, 267n Switzerland, 115t, 117, 148, 148t, 177, 187-188, 191t, 246n, 248t, 252, 254t, 255n, 260 Syria, 185, 191t Taft, Senator R. Α., 13n, 43n

INDEX Tariff Act of 1930, 2 0 3 Tariff administration and customs simplification, see Customs simplification Tariff Commission, 187, 188, 192, 194 Tariffs, United States: see GATT, Trade Agreements Program, and International Trade Organization Tax conventions and reforms, 88, 102, 116-117 Technical assistance, 79t; Congressional action on, 89-97; United States bilateral activities, 97-100; UN expanded program of, 100-101; and die International Bank, 142-143; and International Monetary Fund, 161 Technical Cooperation Administration ( U . S . ) , 101 Thailand, 53, 56, 62, 63, 80t, 115t, 134t, 146t, 147 Thompson, M. M., 195n Thorp, W . L . (Assistant Secretary of State), 103, 117-119 Tin, 64n, 225-227 Tobacco seeds, 173n Torquay tariff negotiations, see GATT Trade Agreements Act, 170-172, 181, 183, 185, 187, 297 Trade Agreements, Calendar of, 190, 191 Trade Agreements Program, 179-190 Trade fair, first United States international, 194-195 Trade liberalization measures, OEEC, 255-260, 266; see also GATT Transferable-account, sterling, and EPU, 246n Transportation, 272t, 279 Travel, 272t, 279 Treasury, Department of, 133t; and tax conventions, 117; and customs procedures, 190-192; and ECA export promotion, 196-197; see also National Advisory Council Treaties of friendship, commerce and navigation, 88, 102, 113-116 Trieste, 21t, 8 3 , 2 5 5 n Triffin, R., 251n Truman, H. S. (President), 16n, 33, 37, 38, 39, 40, 44, 46, 48, 51, 55n, 56, 58, 59, 60, 61, 64, 65n, 6 6 , 6 9 , 7 1 , 72, 73, 74, 75, 76, 77, 87, 96, 112, 116,120,123,127,170-171,172,175, 179n, 183, 186, 187, 189, 193, 197, 199, 202, 203, 210, 217, 223, 233, 237n, 261, 263, 289, 297

Tungsten / molybdenum / manganese, commodity committee, 234 Turkish Industrial Development Bank, 144 Turkey, 20, 21t, 26, 28t, 36, 37, 40n, 42n, 47, 79t, 113n, 115t, 128t, 130t, 146t, 147, 152t, 182n, 183n, 185,188, 191t, 241t, 247n, 248t, 254t, 258,275t, 278t Union of South Africa, 117, 118t, 134t, 152t, 158-159, 160t, 186, 191t, 227n, 228, 275 "Uniscan," 267n United Kingdom, 21t, 28t, 115t, 118t, 130t, 133t, 148t, 152t, 160t, 19It, 241t, 2481, 254t; ECA aid to, 12, 2022, 26, 33-34, 286; overseas territories development by, 32; reserves of, 33, 282; and NATO, 48, 50n; Reconstruction Finance Corp. repayments, 132; United States capital flow to, 139; and exchange restrictions, 154155; and ITO, 172; and import restrictions, 179; and imperial preferences, 185, 296; and export controls, 210211; and strategic materials, 219; and international commodity agreements, 222, 224-225, 226n, 227-235 passim; and EPU, 243-246, 249n, 252, 254; and Schuman Plan, 262, 263n; and "Uniscan," 267n; and trade liberalization, 268; see also Sterling area United Mine Workers, 169n United Nations: and Korea, 58-59; and children's relief, 73; and refugees; 757 7 ; United States contributions to, 82; and technical assistance, 88, 100-101; and capital assistance, 102-107, 161166; United States building loam to, 126, 131, 133t, 134t; see also ECOSOC United States Chamber of Commerce, 169, 174 United States Junior Chamber of Commerce, 174 Uruguay, 114, 115t, 117, 145-147, 146t, 182n, 188,188n, 191t Vandepberg, Senator A., 9-10 Venezuela, 117, 188, 189, 191t Viner, J., 161n Virgin Islands, 230, 273t Vorys, Representative J . M., 12, 7 6

309

INDEX W a r Assets Administration, 2 1 4 n Wassernian, M. J., 36n W e b b , J . E . ( U n d e r Secretary of S t a t e ) , llln West Indies, 2 3 1 W h e a t , 11, 1 4 - 1 5 , 25, 2 0 3 , 2 2 2 - 2 2 5 Wheeler, C. L „ 98n Wilcox, C „ 168n Wool, 2 2 7 - 2 2 9 , 2 3 4

W o r l d Health Organization, 1 0 1 World Tin Conference, 2 2 5 Yugoslavia, 80t, 115t, 12St, 134t, 138t, 146t, 152t; Export-Import Bank loan to, 16, 126; aid program to, 5 4 - 5 6 , 285 Zanzibar, 115t

310

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