. ,v’ H.“ l ‘ THE ROLE AND EFFECT OF ma momma; coopeamou Aowwsmmoa COUNTERPART FUNDS Thesis far flw Dam“ of 'M.‘ A. _ MICHIGAN _ STATE COLLEGE Bernard} F; Sliger 1950 winks _lg_—L—l— “ ' Wm WM ; 31_2930080 ___ 008098539_r.— This is to certify that the thesis entitled The Role and Effect of the Economic Cooperation Administration Counterpart Funds presented by Bernard F. Sliger has been accepted towards fulfillment of the requirements for M.A. Economics degree in ajor professor Date August 25z 1950 0 I _' .—‘— s .'_ , . a .. -. rsrfv' ' . _~" ' . .1 U“ u‘g‘;‘:,. .; fi1 ’fi‘ 3.. ‘ ' In. --C.—.m ‘-. p.--- mm as D o..—.-'-' PLACE IN RETURN BOX to remove this checkout from your record. TO AVOID FINES return on or before date due. ‘ DATE DUE DATE DUE DATE DUE‘} J [:I: “:1 :j i _._.___. f1 —-—-——— "Pr—J —————- [——-—-—— \\—-———~ MSU Is An Affirmative Action/Equal Opportunity lnditution c:\clmW.pm}ps 1 W H... THS ROLS AND EFFECT 0* Ti: ECOEOLIC COOPERATION ADJIHIJT'aTION COUHTERPART FUNDS BY Bernard F. Sliger A THESIS Submitted to the School of Graduate Studies of Michigan State College of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of MASTER OF ARTS Department of Economics 7- 1950 11 ACKNOJLLDdSXfiN The writer wishes to express his sincere appreciation to Dr. Harry G. Breinurd for his interest, supervision,end helpful suggestions in the preparation of this study. 2.37537 CHAPTfiR I. HI II. Til r'Vm D .L FUT 111 TssLs or confines P333 RICAL biCKkROUND 0? TH: COUNTDRPART IDS O O O O O O O O O O O 0 O O O O 0 O 0 1 Passaée of Foreign Assistance Act, 1948. Counterpsrt fund idea conceived during discussions of lend-lease, 1940. Status of counterpart funds under United Nations Relief and Rehabilitation Administration, 1943-47. Role of counterpsrt funds under Joint Resolution of Key 31, 1947. Foreign Aid Act, December 1947. Significance of counterpart funds under Forei5n Assistance Act. Attempts to revise counterpart sec- tion of Foreign Assistance Act. uscssxlcs 0? rss 0 UNTERPART FUND . . . . 17 When are countries required to deposit local currency into counterpart funds? What determines whether a pLPtiCipatlné country receives firant or loan? Procedure for putting local currency into counter- part fund. Counterpsrt funds divided into two portions——ninety-five per cent portion ——five per cent portion. Status and use of C.~L‘.P‘I‘ a III. five per cent portion. Status and use of ninety-five per cent portion. Possible methods of employing count- erpart funds. Purposes local cur- rency counterpart funds used for. COUZ:TRY SEUDIES o o c o o o o o o o o o o o o 1+1 Economic characteristics common to more than one participating country. Four countries chosen for study. Pre-war condition of French economy. Proolens confrontin; France since liberution, 1944. Use of French counterpart funds, 1948-49. Use of French counterpart funds, 1949-50. Prepram in France durind EurOpean Recovery Prodram, 1948-50. Analysis of France's use of funds. United Kinddom's pre-war economy. Balance of payments problem. How British counterpart fund used during first year of European Recovery Program. Use of British counterpart funds dur- ins second year of European Recovery C HAP TIER Pu d3 part funds blocked, .5 Program. Counter October, 31, 1949. Critical analysis of United Kingdom's use of counterpart funds. Status of derman economy before World Har II. Potsdam, 1945. Formation of Bizone 1946, of Federal Republic of Germany, 1949. Problems confronting Western Germany. Comparison of counter- part fund use, 1948-49 and 1949-50. Analysis of Hestern dernany's use of funds. Economic conditions peculiar to Italy. Interwar economy. First year use of funds, 1948-59. Second year use of funds, 1949-50. Analysis of use of Italian counterpart funds. IV. INTRA-EUROPEAN PaIdLNIJ PLAN . . . . . . . . . 103 Western EurOpean trade prior to World War II. Trade and payments agreements, 1945-47. Intra-EurOpean Trade Agree- ment, 1948. Illustration of how plan works. Success of Plan. ‘Vk CHCLUJIOW . . . . . . . . . . . . . . . . . . 109 BIBLIOGTRAPHI 0 O O o o o o o c o o o o o o o o o o o 115 vi LIST OF Tanbs‘d asst? P111 1. SI1IUs or UN 110 52:113 ( 5 P11 CENT) PORTION or 1oaor111 c utu111} RT :UIDS uxosa THE Foa1IIN 1151.11;.1 131 c? 1948, 15 0? APRIL 30,1950 . . . . . . . . . . . . . . . . . . 28 II. rusro.1. FOR H1135 1111ov1L cs suaor111 occursariar Furs; 11v1 3113 31:1 113 131- T UAL WII’.’ u.L.u.u...) od.:Ul..--iI.V.. TriROUJr‘. APRIL 30, 1950 o o o o o o o o o o o o c o o o o 0 35-36 III. 1.30-0. .IC 3 COPIEL-QLIQLT .71.)...1171 S'I‘RAIION AEERO'V'AL FOR r'I'I’EE‘iDLI-IXAL A25.) Z'V'I’IHDKIWALS OF COUNT" 1:031):sz E‘UIIL'-) DI COVI‘IERIILS o c o o o o o o o 46 IV. USE OF COUICTL‘JRI’AR‘L‘ FUEL); DY FRI-:31; FROM APRIL 3, 1948 TO liPRIIJ l, 1950 o o o o o o o o o 0 56-57 V. U313 01'? COUNTERRIRI‘ . UITJS 5i 1:11;; L'I'IIDD P. I'T}DOI.. Fae; APIID 3, 1945 T0 APRIL 1, 1950 . . . . 79 VI. U155 O? COUDII‘JRPAI‘LP FUZED‘.‘ 152C “EQTALIH ar...-1.¥.1‘Y FROIJ APRIL 3, 194—8 TO APRIL 1 88-89 [.1 \0 U1 0 . o 0 . a 20 S? E. p’ b VII. U53 OF COU'. 1531’“. 1 FLTJj 13X I'llfiLY 3, 1948 TO ESPRIL 1, 1950 o o o o o o o o o o 98 CHAPTER I HISTORICAL bACKiROUKD OF Thfi COUNTERPART FUNDS Upon the termination of hostilities in EurOpe on May 8, 1945 it was readily agreed by statesmen in the United States that some sort of aid was going to be needed by Western Europe to enable her to reéain anythind resembling her former self. After practising short term, stOp gap, emergency meas- ures without any 5reat amount of success, the United States decided that an over—all plan or project was needed that would make Europe self-supportin5 and independent within a limited period of time. With this self-supporting and independency role for Europe in mind Secretary of state George C. marshall, at a commeneement address at harvard University on June 5, 1947, trouoht forth the orisinal idea of the fiarshall Plan or Eur- opean Recovery Program. In his Speeeh at Harvard, Secretary Marshall said: It is the business of surope jointly and on their I initiative to draw up a probran designed to place Id Europe on its feet eeonomieally. The role of this country should eonsist of friendly aid in the draft- ing of a European program and of later support of sueh program so far as it may be raetieal for us to do so. A A.1New York Times, June 6, 1947, p.2. ‘4--. . . _-..—) . . 2 ‘his suésestion of Jarsiall's was taken up immediately by France and England, and they quickly drew up plans for a conference to be held in Paris. The Soviet Government con- sidered the prOposal in the lidht that it would lead to in- terference in the affairs of European countries, thus they rejected the plan.2 En5land and France sent out invitations to all the remainin5 EurOpean countries except Spain and Germany to participate in a conference to be held in Paris for the pur- pose of preparing é comprehensive statement of European re- sources, immediate needs, and methods of reachino the future goal of self sufficiency. Seventeen countries accepted the invitation and were on hand when the conference convened.3 The Paris Conference outlined a broad recovery prodram for the hurOpean nations and prepared a report indicatind a need of twenty-nine billion dollars in American aid from 1948-1952.4 This figure was thought to be quite hi5h by .Eb21948 Brittanica Book of the Year, Chicaoo, 1946, p.463. . a nut; . “"'""'-n.|.n-.- .pqz-r-d'V-N .. .am» A , , r... I.“‘ .. 1.... ”(a . A fi~w " - “gun- ~— \.‘ -- K . zechoslovakia withdrew after it had accepted the invi- tation and none of the other satellite powers of Russia sent “1 ‘Qrepresentatives. The sixteen participating nations at the ’ 'vbconference were England, France, Italy, Belgium, Ireland, Ice- land, Luxembourg, Austria, Denmark, Greece, fiorway, the Neth- erlands, Portugal, Sweden, Switzerland and Turkey. Ibid., {99.257’58. I €74'Buildin3 the Peace," Department of State Publication 29§4, Auéust, 1947, p.3. 3 American Observers, and thus a new report was prepared and presented by the Conference. This new report called for a total of $19,300,QU0,0UO of American aid and it was even- tually agreed upon.) With the Paris Conference report in mind President Barry S. Truman in his annual nessabe to Congress on Jan- } ‘uary 7, 1948, recommended that the United States underwrite a four-and-a-quarter year program of EurOpean Recovery, “backed by a commitment to furnish seventeen billion dollars in United States aid."6 After meetiné a considerable amount of opposition and hostility in the houses of Conéress, the Foreién Assistance Act or Economic COOperation Act passed and on April 4, 1945, . 'Presiden Truman siéned it into law.7_17 With the fiarshall Plan idea n6; formally encompassed into law the next bis step was to find reSponsible men who could operate it. For the 300 of Administrator of the "plan" ar. Truman selected Paul a. Hoffman, head of the Studebaker _ corporation, and for the special agent to Europe, who was to head the Economic COOperation Administration mission abroad \‘ 455mm. , p.44, 6’ ~ 1 I 32:1949 Brittanica Book f the Year, p.2763) Y \yijhe official title of the act is the Foreign Assistance fist of 1948 (Public Law 472, Eightieth CODdPBSS). hexcnose N. Averill Harriman, until then Secretary of Com- merce.5 In addition to these two tOp appointments there was established the central machinery in ‘washin5ton D. 0.; the settin5 up of the EurOpean headquarters in Paris; and the establishment of the Econ omic COOperation Administration miSsion in each country. the United States was able to start the pr05ram of attempted recovery for u’estern Europe Amon5' the numerous measures of the Forei5n Assistance act that the United States is usin5 to as3ist in the recov- ery of Jestern EurOpe one of the most far- -reachin5 is the so called "Counterpart Fund:\g\ To mOSL Americans these words }) fiith.the establishment of the above mentioned machinery 8The act called for a EurOpean COOpe ration Administra- tion headed by an independent twenty-thousand dollar a year administrator who was to have broad authority to rule on the //, (Drequirements of the sixteen participatin5 nations, and to <§ outline the United States assistance pr05rams. The act also provides for a special a5ent in EurOpe with the rank of am— bassador, and actin5 as the Chief United States representa- tive to any or5anization of the participatin5 nations. 9The principal provisions of the EurOpean Recovery Pro— 5ram in addition to those mentioned elsewhere in the paper are: (1) requires each participatin5 country to si5n an a5ree- ment with the United States on aid terms and a pled5e on the part of each nation to make an all out effort to accomplish a Joint recovery pr05ram based on self help and mutual cOOper- ation; (2) authorizes a four-and-a-quarter year pr05ram of economic assistance but does not make any funds promises be- yond one year; (3) declares that no assistance is planned wnich would upset the economic stability of the United States; (4) states that continuin5 United States aid depends on the continued cOOperation amon5 the participatin5 nations. not only have a dull sound, out in addition have very little meaning. However, since the counterpart fund is one of the most important and widely used methOds employed by the Econ- omic COOperation Administration in ts attempt to restore a sound world economy, it merits 5eneral attention. The question of who conceived the device, whereby "each country participatin5 in the EurOpean Recovery Pr05ram and receivin5 assistance in the form of 5rants from the Economic COOperation Administration has a5reed to deposit its own lo- cal currency in a Sp cial account in an amount commensurate 10 and known as the with dollar cost of the 5rant received," Counterpart Fund is impossible to answer with any de5ree of finality. There is evidence, n wever, showin5 that the De- partment of State of the United States 5overnment and the economists of the Lend-Lease Administration had a hand in its conception.11 The first known mention 0: the counterpart fund idea 5oes sack to the initial discussions of lend-lease in 1940. When the discussions that lead to the Lend-Lease Act of 1941 were in pr05ress, the su55estion was made that this country snould require the lend-lease recipients to deposit in .J9 10Economic COOperation administration, Local Currency Counterpart Funds, June 29, 1946, p.l. (>11New York Times, November 9, 1940, p.26. special accounts local currencies equal to the value of civilian 5oods received from the United States.12.This counterpart su55estion did not survive due to the fact that ooth Britain and Russia, the two principal recipients of lend-lease aid, were en5a5ed in an all out war at that time and it was not possible to discern between military supplies a.nd ciVilian 500ds.13 Thus, the counterpart idea was to lie dormant until revived by the United Nations Relief and Re- naoilitation Administration two years later. The United Nations Relief and Rehabilitation Adminis- tration, established on November 9, 1943 was an international or5anization comprisin5 forty-ei5ht United Nations. It was created for the purpose of providin5 aid to the victims of 12The “Lend-Lease Act" was passed on Mirch 11,1941, and was entitled, "an Act Further to Promote the Defense of the United States." This act entitled the President of the the United States to lend I'defense articles" to 5overnments “whose defense he deems vital ts the defense of the United States.“ In most cases the allied countrie that received lend- lease 5oods, and used them in t1: pro. se utii5 of the war, received them as outri5ht 51fts. Before World War II was over the United States had sup- plied allied countries with fifty billion dollars worth of goods and services under lend-lease. For most purposes lend-lease expired on June 30, 1946, however, we did have a few commitments which were not taken care of until the latter part of 1946. see 1947 Brittanica Book of the Year, pp. 455- ~57; the portion in quotes is te.l :en from 5.8. Jones and D. P. Myers, eds.. Documents gn.American Forei5n Relations. Boston, 1941, III, 712. 3New York Times, November 9, 1948, p.26. World War II in the liberated areas. The United Nations Relief and Rehabilitation Adminis- tration concentrated on aidin5 those nations which had the 5reatest need and in addition lacked the forei5n exchan5e resources necessary to finance the relief imports they re- quired. The greatest portion of aid consisted of the ut- most necessities of life such as food, clothin5, fuel and medicine. In addition to these relief supplies there were numerous rehabilitation 500ds extended such as fertilizers, insecticides and basic farm tools. A third lar5e portion of United Nations Relief and Rehabilitation Administration funds was spent for the care and repatriation of innumerable dis- placed persons.l4 But the question remains to be answered as to how the ’United Nations Relief and Rehabilitation Administration re- vived the counterpart fund idea. The answer is that under the United Nations Relief and Rehabilitation Administration a5reements it was stipulated that: Governments not in a position to pay in suitable means of forei5n exchan5e for necessary relief and rehabilitation supplies or services make available to the administration in Whole or in part the local currency proceeds from the sale of supplies fur- nished by the administration. Further stipulations were that these funds or proceeds could 14 1948 Brittanica Book of the Year, pp.752-53. only be spent to assist relief and rehabilitation and that the United Nations Relief and Rehabilitation Administration be kept informed of their use.15 The idea behind the use of the counterpart fund under the United Nations Relief and Rehabilitation Administration was that it should serve as an anti-inflationary device. Due to the fact, however, that the local currency funds were expended immediately in the relief receiving country, and be- cause of the lack of control over relief expenditures, the anti-inflationary results were not realized.16 With the United Nations Relief and Rehabilitation Ad- ministration, and with it the counterpart fund idea, coming to an end in 1947, it was clearly rec05nized that some sort of stop gap aid would be needed to carry the EurOpean nations throu5h the 5reater part of 1947 and even into the sprin5 of 1948 when it was hoped that an effective lon5 ran5e recovery pr05ram would be implemented.17 The first form of stOp 5ap emer5ency aid implemented to take over where the United Nations Relief and Rehabilitation ;5Le1and M. Goodrich, and Marie J. Carroll, eds., Docu- ments an American Forei5n Relations, Boston, 1945, VI, 275. 1 , 6New York Times, November 9, 1948, p.26. 1 7The United Nations Relief and Rehabilitation Adminis- tration completed its pr05ram of post war aid in 1947. 1948 Brittanica Book 2: the Year, pp.752-53. Administration left off was the Greek-Turkish aid bill passed 18 This as- by Congress and signed by Truman on May 22, 1948. sistance to Greece and Turkey, however, had no counterpart fund stipulation in it. There was an emergency relief bill soon to appear on the congressional horizon, however, that did contain the count- erpart fund clause. Within twelve days after President Tru- man's signing of the Greek-Turkish aid bill Congress passed a joint resolution providin5 for relief assistance to the people of countries devastated by war. In this joint reso- lution it was resolved that the sum not to exceed $350 mil— lion be allocated to the President in order that he might provide relief assistance to the peeple of countries devas- tated by war. The assistance received by the needy countries was to be limited to such items as food, medicinal supplies, clothing, fuel, fertilizer, pesticides, and seed.19 A further provision of this joint resolution was that there was to be set up in each of the countries receivins aid under this bill a relief distribution mission. This relief J 18The Greek-Turkish aid bill provided for a grant of $350 million to Greece, and one of $100 million to Turkey. The apprOpriated money was to be Spent for military aid and essential rehabilitation projects. 1945 Brittanica Book of in: Year. pp.7, 354. 741. "" 1 9United States Statutes at Large, Eightieth Congress, Second Session, Vol: 62, Part I, p.125. 10 distribution mission was to be operated solely by loyal Am- erican citizens. It was in conjunction with this relief distribution provision that the counterpart fund idea was revived.20 Section 6 of this Joint Resolution provided that countries receiving relief supplies as an outright gift, with no obliéation to repay in dollars, should, upon sale of those relief 500GB, put the local currency which they received from the transaction into a Special account to be used only for purposes stipulated by the United States. The United States stipulated in Section 6 (b) that the special account mentioned above could only be used "for relief and work re- lief purposes, including local currency expenses of the United States incident to the furnishing of relief." A second con- trol the United States had over the special account was that the funds could only be used by the recipient country upon approval by the duly authorized representative of the United States.21 Although the counterpart section of this Joint Resolu- tion of May 31, 1947 was more realistic than its predecessor in the United Nations Relief and Rehabilitation Administration, it was still not too successful. The big drawback of Section 2OIbid. 211bid., p.128 11 6 (b) in the Joint Resolution bill was that it was found almost impossible to discover how much of the relief sup- plies were sold and now much were given away. If the United States did not know whether a particular allotment was sold or given away then it would be very difficult to determine now much local currency should be put into the counterpart fund. A second criticism of the counterpart idea as a part cf the Relief Assistance resolution of 1947 was that very few of the recipient countries made any attempt to determine what a fund commensurate with the value of the aid provided should be. Thus, it was difficult to determine whether the re- lief supplies were having an inflationary effect or whether they were tending to curb inflation. With the sands of time running out on the Foreign As- sistance Resolution pressure was put on Congress to pass a new emergency aid measure.22 In fact 00th President Truman and Secretary of State marshall made speeches during the fall months of 1947 asking Congress to implement stOp gap assist— ance to the European nations so as to enable them to strug- gle through the winter months until the much needed major recovery program could be launched, sometime in the spring 22The Joint Resolution of may jl, 1947, provided that no aid or credit could be alloted after June 30, 1945. United States Statutes at Larg , Eightieth Congress, Second Session, Vol. 52, Part 1, p.125. 12 of 1948.23 The pressure that was put on Congress duriné the fall of 1947 beéan to bear fruit, for in December Congress passed the Foreign Aid Act of 1947, popularly known as the Interim Aid Act. This act provided for $52: million worth of re- lief assistance to Austria, France and Italy.24 In addition to other provisions, one of the big feat- ures of this Interim Aid Act was the role that the counter- part fund was to play. With the lessons learned from both the United Nations Relief and Rehabilitation Administration and the Joint Resolution pPOVidlné for relief assistance, Conéress 5ave the counterpart funds an even larger role in this Act. It was still felt, however, that tne Counterpart Fund portion of the Act was not specific enoubh. Thus, when the Interim Aid Act ended narch 3i, i940 and the ions awaited major recovery effort known as the Foreign Assistance Act of 1948 came into being some further additions to the Counter- 25 part fund idea were made. -.23Raymond Bennett, and Robert K. Turner, eds., Documents on American Foreign Relations, Princeton University Press, I949‘TX‘T. . 97. 24China was also to get $18,000,000 under this Act. 25In order to compare and contrast the relevant sect- ions of the two acts —— the Foreign Aid Act of 1947 and the Foreign Assistance Act of 1948 __ the sections dealins with the counterpart funds are quoted in their entirety. Foreign Aid Act of 1947 (Public Law 389, Eightieth COHéPéSS). Sec. 5 (b) [For each recipient country7 “to make, when any commodiw' 13 One of the additional provisions of the counterpart section of the Foreign Assistance Act provided that not less than-five per cent of each country's special local currency which is not furnished on terms of repayment in dollars is made available under this act, a commensurate deposit in the currency of such country in a special account under such general terms and conditions as may, in such agreement, be agreed to between such country and the Government of the United States, and to hold or use such special account for, and only for, such purpose as may be agreed to between such country and the Government of the United States, and under agreement by the government of the receiving country that any unencumbered balance remaining in such account on June 30, 1948, will be disposed of within such country for such pur- poses as may, subject to approval by Act or joint resolution of the Congress, be agreed between such country and the Gov- ernment of the United States." Foreign Assistance Act of 1948 (Public Law 472 Eight- ieth Congress). Sec. 115 (b) (6) "Placing in a special ac- count a deposit in the currency of such country, in commen- surate amounts and under such terms and conditions as may be agreed to between such country and the Government of the United States, when any commodity or service is made avail- able through any means authorized under this title, and is furnished to the participating country on a grant basis. Such special account, together with the unencumbered port- ions of any deposits which may have been made by such country pursuant to section six of the joint resolution providing for relief assistance to the peOple of countries devastated by war (Public Law 84, Eightieth Congress), and section 5(b) of the Foreign Aid Act of 1947 (Public Law 389, Eightieth Congress), shall be held or used within such country for such purposes as may be agreed to between such country and the Administrator in consultation with the National Advisory Council on International Monetary and Financial Problems, and the Public Advisory Board provided for in section 107 (a) for purposes of internal monetary and financial stabil- ization, for the stimulation of productive activity and the exploration for and development of new sources of wealth, or for such other eXpenditures as may be consistent with the purposes of the title, including local,currency administra- tive expenditures of the United States incident to Operation under this title, and under such a5reement that any unencum- bered balance remaining in such account on June 30, 1952, shall be disposed of within such country for such purposes 14 funds should be made available to the United States for ex- penditures on strategic materials where they were available or for other local currency requirements of the United states.26 Contrasting the overall tenor of the counterpart sec- tions of the two acts, the Foreign Aid Act of 1947 and the Foreign Assistance Act of 1948, it is easy to see that the big difference lies in the fact that the latter attempts to spell out the purposes for which the deposits might be used, while the former spoke in more general terms. Since the passage of the Foreign Assistance Act in April of 1948, there have been several attempts to amend cer— tain portions of the counterpart sections of the Act. Among them were two proposals made in April 1949 by Senator Allen J. Ellender of Louisiana. His first suggestion was to in- crease totwenty—five per cent the amount of counterpart funds abroad that would be made available for strategic materials as may subject to approval by Act or joint resolution of the Congress, be agreed to between such country and the Govern- ment of the United States." For the Foreign Aid Act of 1947, see United States Statutes at Large, Eightieth Congress, First Session, Vol. 61, Part I, p.93 . For the Foreign Assistance Act of 1948, see United States Statutes at Large, Eightieth Congress, Second Session, Vol. 62, Part I, pp. 51-52. 6 Ibid 0 , p01055. 15 purchased by this country. The original law stipulated that five per cent of the funds should be available for that pur- pose. A second suggestion advanced by the same Senator would have prohibited the use of such counterpart funds by recip- ient governments for the purpose of public debt retirement.27 Both prOposals were defeated in the Senate by comfortable margins.28 The next attempt at revision was made by Senator Fulbright of Arkansas and would have required recipient count- ries to set aside fifty per cent of their counterpart funds for the removal of trade and payments restrictions within Europe. The idea suffered the same fate as its two predec- essors in that it was rejected by a decisive vote in the Sen- ate. The objection that the Senate and the Economic COOper- ation Administration had to Fulbright's preposal was that they did not think that some of the participating countries could wisely devote as much as half of their counterpart funds to trade liberalization projects.29 A fourth attempt to alter the counterpart fund provis- ion was made in may 1950, by Senator Wherry of Nebraska. The gist of Wherry's proposal was that the counterpart funds of 27New York Times, April 3, 1949, p.10. 281b1do, April 6, 1949, p.260 29 m Ibid., march 16, 1950, p.11. 16 countries discriminatiné against American business would be impounded.30 As in the first three attempts at amendment this idea was also turned back.31 It is easy to see that the counterpart fund idea as set up in the Economic COOperation Administration Act of 1948 was neither original to that act nor altobether new. As one of our greatest historians once said, the story of history is an unbroken narrative, and everything that hap- pens is the outcome or outgrowth of incidents that preceded it.32 With this background of incidents leading up to and the final evolution of the counterpart fund in its present form the next problem to be posed is what are the mechanics of the counterpart fund device. This is the subject of the next chapter. 30Senator Kenneth Wherry, the Republican floor leader, instigated this prOposal with the idea that if it passed the United States could invoke sanctions aoainst recipient count- ries who were usin5 import licenses and other restrictive measures "to discriminate asainst American exporters or pro- ducts, as such." See New York Times, May 6, 1950, p.2; Ibid., may 12, 1950, p.9. 1 3 Ibid., may 6, 1950, p.2. 32Edward P. Cheney, Law in History and Essays, New York, 1927. cameras II THE JLCHAEICS OF THE COUNTERPART FUND These questions often arise when the subject of mech- anics of the counterpart funds is approached: (a) Under what conditions are countries, receivins aid under the Mar- shall Plan Act, required to put local currency into the so called "counterpart fund," and (b) Are there conditions under which countries are not required to put local cur- rency into the special account?33 The answer to the first question is that every country participatiné in the huropean Recovery Pr05ram and receiving aid in the form of 5rants must for every penny's worth of goods received in this manner put into a special account an equivalent amount of their own local currency. This Spec- ial account of local currency commensurate to the value of grant-aid received is known as the "counterpart fund." To use the words of Senator Arthur Vandenberg: Local currencies must be deposited by each bene- ficiary country to offset the value of any aid not furnished on terms of z—re;7 payment. The bene- ficiary country and the United States will a5ree on the local expenditure of these local currency accumulations in behalf of the purposes of this act [TForeign Assistance Act of 1948;7. Thus our grants will not become a budgetary windfall in the 33"local currencies," as used in this paper, are deter- mined by using a conversion rate set up by the International Monetary Fund, and the rate is either the par value adreed to by the Fund or else a rate agreed to by the economic Co- Operation Administration and the recipient country. 18 beneficiary country but will virtually become a revolving fund to do double duty in behalf of the act's objectives.3 Under the Foreign Assistance Act of 1948 countries also receive aid from the United States in the form of loans or conditional aid. When this is the case no deposit into the counterpart fund is required. In other words the deposit of local currency in the Special account known as the counterpart fund is necessary only in the case of dir- ect grants, but not in the case of repayable loans or for conditional aid. In the case of loans the qualifying factor is the guarantee to repay the United States in dollars at some later date. As for conditional aid the country that receives the goods must in turn make aid of an equal amount available to a third country in the form of drawing rights; thus the country receiving conditional aid is not required to put any currency into the special account. However, the particular third country that receives the privilege to use these drawing rights must agree to deposit a commensurate amount of local currency into her own counterpart funds. Therefore, we find two cases in which the deposit of local currency in counterpart funds is mandatory for the country receiving aid, first under direct grants and secondly for drawing right utilized under the intra-muropean 34 Congressional Record, Lightieth Congress, Second session, p. 1920 (March 1, 1948). 19 payments plan.35 What determines whether a ”participating' country should receive a grant or a loan? In determing whether a country should receive a grant or loan it was decided that the decision should be based on the ability of the recip- ient country to repay and the effect the additional exter- nal debt would have on the borrowing country's economy. To quote from a statement made by Paul G. hoffman, when he was Chairman of the Committee for Economic Development and just Lrior to his appointment as Adainistrator for the economic Cooperation Administration: Insofar as possible, loans should be truly loans; currency transactions should be currency trans- actions; and gifts should be gifts. Some European countries can pay for all their inport requirements; others can meet their requirements through eXports plus loans that can ultimately be repaid. But oth- er countries have needs so great, or debt burdens already so heavy, that they will be unable to re- pay loans. In such cases the goods should be sup- plied as gifts. We reCOgnize that they would ord- inarily be sold by the governments in question to their own nations and paid for in local currencies. It is our proposal that the proceeds of these sales should be segregated and used for the benefit of the country involved upon mutual agggeaent between that country and the United States. In other words, would the debt hurt the recipient count- ries chances of recovery? It is not desirous that countries 35The intra-European payments plan, signed by the par- ticipating countries on October 16, 1946, was designed with the idea of bringing about mutual aid anong the participating countries and by so doing enable them to acquire equilibrium in their balance of payments. (For a more complete discussion of the Intra-European Payments Agreement see ch,4). 36Statement by Paul G. hoffaan, Hearings before the figm- mittee 9n Foreign Relations, United States Senate, Eightieth Congress, Second session, p.849 (Tcsuary 27- 1948). ’- 2O contract additional dollar debts which will absorb so much of their dollar earnin5s as to Operate to the disadvanta5e of their future trade and private investment. If the United States demanded that all the aid that murOpe received was to be on a loan oasis, it would be impossible for them to meet the principal and interest chur5es on the loans even after trude and investment had returned to normal. In practice it was felt that: Where need is cle irly demonstrated and where re- payment cannot be reasonably expected, imports of supplies which are quickly consumed, such as food, fertilizer and fuel, or indispensable items of capital equipment for immediate replacement and repair and of essential raw materials should be financed by means of 5rants. However, the exact determination in every case, as to whether a participatin5 country's aid should be provided in the form of a loan or in the form of an outri5ht 5rant, is decided by the Economic Cooperation Administration in consultation with the National Advisory Council.38 Questions as to exactly how soon the recipient country should deposit local currency in its special account for 5rant aid received are very difficult to answer. Accordin5 37Statement by Geor5e C. marshall, Hearin5s before the Committee on Forei5n Affairs House of Representatives Ei5ht- ieth Con5ress, First session, p. 5, TKovember IO,19473. 38 Statement by Geor5e C. Marshall, Hearinvs before the Committee on Forei5n Relations Ur _ited States Senate, ai5ht- ieth Con5ress, second Session, p. b (Eanuary o, 1946). 21 to the Bilateral A5reement839 recipient countries have a5reed to deposit commensurate amounts of local currency "promptly after notification by the Economic Cooperation Administration of the amounts of dollar aid disbursed."4O In actual pract- ice, however, the deposit in the local counterpart fund takes place sometime after the United State 3 authorizes the 5rants due to the fact that the countries wait until the aconomic Cooperation Administration has actually spent dollars. This may be at a considerably later date than the announcement that an authorization has been amide}+1 'fihat is the procedure whereby local currency is put into the counterpart fund? The first thin5 that should be under- stood is that the Economic Cooperation Administration does not do any procurin5 itself, it is priaarily a financin5 a5ency. 39The Economic COOperation Act required besides continuous mutual cOOperation on the part of the participatin5 countries certain other stipulations on the part of each country. These stipulations are contained in the form of bilateral a5reements between the participatin5 country and the United States. By the end.of October, 1948, ei5hteen different areas had con- cluded their bilateral a5reements. The areas with which a5ree— ments have been made are: Austria, 5el5iUm, Bizone of Germany, Denmark, France, French Zone of Eermany, areece, Iceland, Ire- land, Italy, Luxembour5, Netzierlands, Norway, Portu5al, Sweden, Trieste (United States-United Lin5; dom Zone), Turkey and the United Kin5dom (for a more complete discussion of Bilateral .A5reements see suropean COQperation Administration, A Report on Recovery Pr05 ress and United States Aid, washin5tcn D. 0., February 1949, pp.154- ~57)- 4OEconomic COOperation Administration, Local Currency counterpart Funds: Lidpoint Review, April 1950, p.111. 41New York Tides, October 24, 1948, IV, p.4. 22 The Economic Cooperation Administration, four months before the be5innin5 of a calendar quarter, reviews all the material relatin5 to the current status of the Office of EurOpean Economic Cooperation's Annual pr05rams and also the latest material put out by the Economic Cooperation Adminis- tration in Washin5ton, the Office of the Special Representa- tive in Paris, and the respective Economic COOperation Ad- ministration Country Missions. On the basis of this mater- ial the Economic Cooperation Administration establishes for each participatin5 country a dollar allotment to cover the fi- nancin5 of 5oods and services to be delivered in the quarter concerned. "These quarterly allotments are installments on the annual allotments for the fiscal year as recommended by the OEEC and approved by the ECA."42 After the dollar allotments have been made to each country, within one month each participatin5 country sub- mits to the Economic COQperation Administration mission in their country and to the Economic Cooperation Administration in Washin5ton an application for "procurement authorization to cover the commodities and services which it desires to have financed with its dollar allotments."43 425 Re ort 92_Recovery §r05ress and United States Aid, February 1929, p.107. Ibid. 23 Sixty days before the be5innin5 of each quarter, and after they have received the procurement application recom- mendations from the Economic COOperation Administration country missions the Economic Cooperation Administration commodity branches in Washin5ton, in consultation with the Pr05ram Coordination Division, determines the dollar amount of the various commodities and issues procurement author- izations. This authorization specifies "a dollar amount authorized for the purchase of commodities or services . . . durin5 a Specified quarter from a specified area of source.“44 When the participatin5 country receives the procure- ment authorization it then makes sub-authorizations to its importers. After the sub-authorizations are made, the trans- actions for the most part move throu5h the normal commercial trade channels, however, in some instances an a5ency within the participatin5 country may do the procurin5 rather than a private impbrter. It should be understood, however, that the makin5 of a quarterly allotment to a participatin5 country by the Economic COOperation Administration does not "constitute a commitment of ECA funds." Nevertheless it does have a 44Ibid., p.105. 24 5reat deal of importance "in the proéramminé work of the aéency and of the participatind countries,' and it is "the sum of money which governs the value of he procurement auth- orization Which will be issued to a participatin5 country each quarter." In other words it is upon these authorizations that the Economic COOperation Administration‘s financial com- mitments are based.)+5 Now for those Economic Gosperation Administration fi- nancial commitments that are issued to a participating country in the form of a dollar drant, the United States re- quires them to deposit an equivalent amount of local currency into a special accoun .. Therefore, even in the case of brants the participating countries do not receive the commodities financed by the economic COOperation Administration as out- right gifts. The participatinU countries obtain the local cur- rency that they are required to deposit in the counterpart funds by selling the doods to their own retailers, wholesalers, and importers at the doinQ market price. Thus, the importers and ultimate consumers within a 5rant-aid recipient country pay for the European Recovery Prodram goods in their own money, whether it be lire, francs or shillinbs. This local currency obtained by the government from the importer is retained in the recipient country in the counterpart fund. 25 In some cases the currency obtained from the sale of 500d8 financed by marshall Plan dollars will not fulfill the requirement: that the receivin; country must deposit local currency commensurate with the amount of basic dollar 5rants, In such cases the respective dovernments must maze up the difference from their own coffers. After the participatiné country has deposited the re- quired amount of local currency, the Economic Cooperation Ad- ministration earmarks ninety-five per cent of the Special ac- count for the recipient country's use and five per cent for its own related needs. Thus,the sconomic Cooperation Administration counterpart 4° The smallest portion funds are divided into two portions. which is to consist of not less than five per cent of the Special account funds is p aced in a separate account under the control of the United States disbursin; officers. These funds reserved for the United states are used for the stock- pilind and production of scarce ¢oods for the United States and to defray Economic COOperation Administration administra- tive expenses payable in local currencies. In case a portion of the five per cent fund is not needed by the sconomic Co- Operation Administration it soes to the credit of the United 6 See Ch. Io, pp013'14o 26 States Treasury to be used by other United States Government agencies within the recipient country concerned. From the inception of the Economic COOperation Adnin- istration program in fpril of 1948 through April 30, 1950, the separate account set up for the "five per cent funds" 48 has accumulated the equivalent of $246,700,000. Statistics 47 Economic COOperation Administration, Local Currency Counterpart Funds: First Annual Review, April Q, 1948 - April g, 1942, p.l. 4B'Ibllar equivalents," as used throughout this paper, are only an approxiaate measure of the maénitude involved in counterpart fund transactions. These transactions are always in the form of the local currency of the respective participatind country and never in the form of dollars. The local currency counterpart funds are put into the Special accounts of the participating country at adreed rates in effect at the time the iconomic Cooperation Admin- istration allocated grant aid funds. Due to the fact that agreed deposit rates have fluctuated, portions of the local currency counterpart funds have been released at times when the conversion rate differed from the rate in effect at the time of_deposit. The withdrawal of counterpart funds made before the ef- fective dates of devaluation have been converted into dollar equivalents at the averape rates at which deposits were made. Dollar equivalents of withdiawals made after the application of new conversion~ rates stemming from devaluation have been computed at the conversion rates in effect at the tine of withdrawal. Therefore, since withdrawals occurin; after devaluation have been computed at rates which may not correspond to the ones used when the counterpart funds were deposited, the dollar equivalents of deposits may not pxactly coincide with the dollar equivalents of withdrawals (Dollar equivalents, as used in this report, are the same as used in the Local Cur- rency Counterpart Fund literature put out by the Statistics and Reports Division of the economic COOperation AdminiSLration). 27 also show that approximately one third of the "five per cent" portion of the counterpart fund has been used by the sconomic Gosperation Addinistration or transferred to the United States Treasury for use by other governmental adencies.49 Of the portion of this five per cent share of counter- part funds that has been used for the purchase of stratesic materials the majority has been spent in the United Linédom, with lesser portions being spent in Italy, the Netherlands, France, Denmark and Norway (see Table I). The total amount actually spent for this purpose has been a little over $40 million, with an additional §2l.5 million in the form of R0 ' outstandiné comhitments.’ With the money expended for this purpose, the United States has secured such material as rub- ber, sisal, industrial diamonds, platinum, Sperm oil for high drade lubricants, tantalite for the nanufacture of hléh resist- in; alloys, bauxite, palm oil, quinine, firephite, cryolite, and beryl. In certain areas this country has been hampered in securinJ strateéic material because the natural resources 51 of the participatin5 country will not stand the strain. 49Local Currency Counterpart Funds, épril 30,1950, p.5. Ibid. 51 This is particularly true in Greece and Austria. 28 .OucH .dm HHLod .umc: uphoso+.500 boccssso HmooH "meadow .mLmMumahp «cw mepszmcoQH m_wH mpHmocmm\Q =.mpcmHu>H:om LMHHowz :0 nc.& .cm mmm\s II 2w :1 :1 n: :1 mm wm mCH 6:;HcoH U -u \1\ ).\ 4..\I- -- UUU -- -- -- -- UU UU UUU U UUU UUU UUU ll HJH IJ I! H II FKH WHH WCF TESODLQ%SAIEMHEHmm II mrm CC II H II m: c: UH: H.w Sgpom -r maH ext 1. “a .. HHH amH wwm mmeHUm II mHm II : o It How MHW cro.\ hmMLSM ,. . U3-.. \) \l. \, 41 4. .J \1 :. UPHUs men .. He w mom. mow. mUHUW HeatoH .. cmHUm 000.: u- m: .: HNH H HHmUH mUU.m assess )) .\ EL- . -. J .1.U )..\ \. u u. l. a. 1. u- cvs.s ceaUU was ccV -H U rUU «UsUm m UUUU UHUpmsU wwm. MCNUUH -: H H» U mo Um cos awn.“ _ m.ca meceHUmspmh . U \ \ . r. )3 2. -rl. , a \J .u .1 \ \._ a _\ U\ ) \ M -. In .3 :VV wvu.v CC;.C orC emo r HMU u wow H wow.NH ngqmo KmHopH II Nym.wm II It UCHUH In uoc new m mid UNAHL cam Hm pmdonvmcsesmm 0mm. mesUHw I- -n MHH mmHUmm HNNUH mOUUOM www.mw aoeacHa empHeH \ J\. .\. \)U\ U\ x!) U- x U. \ Jx. . U) mmu. ous.w: OCFUO Hm Ore.H mur ouu.m cudUHH MHm.:m mousse wmw. MNmUNmHt mrr roe sou \4 mzHUw: meme rm os.wdm.m:mqhmc O: m :c< Hmpoa .meH OHmmp mocmem «om Eosh mmmogssm mpommopm mHmH cOHHMpp prca mpHmoomQ hppndou amapm son \9 knewmmss HwHomrm COHpsa :smpwm :mHmHfiwd mo mPQmEPHLsoo .m.b 0p IsomsH oHUmHULpu COprom D - tsdmsmpmpso msm each. :: .u.D \mwshHHom so wmmumsoxe CH UhQthmzo HmooJ exp No HCmHm>Hndm pmHHonv U cmmH cm HH:ma so ma we: eUH UHHmsmu m 0H Bog 0;.90Ho,n :sH . um- .Umzp mmzsh amdgm BZboo zafimompr so< ZOHEmom mezQOmm my mmsdem QmEHZD mo mbzaa H ZOHBH om mmm $.8m aw BHZD I mQZDm mHUae h2MozUm m>Hh DO mDBmem 29 In addition to the forty million spent on stratebic material another §15,897.000 of the five per Cent fund has been spent to def ay the administrative expenses of the office of the special Representative and the sconomic COOperation Ad- ministration missions in Lurope.52 The laréest part of this later amount spent on administrutive expenditures has fione toward paying the salaries of aliens, living all wances of 'American personnel overseas, travel, communication, rents and utilities, and the purchase of equipment and miscellaneous items.53 After the United States has set aside its five per cent portion of the counterpart fund, the remaining ninety-five per cent belon5s to the depositin5 country. In accordance with the requirenents of the Foreian Assistance Act of 1948, and as stipulated in each bilateral agreement, any detiCipdtinQ country which is desirous of usin; a part of its fund must Qet the consent of the Economic COOperation Administration. In uctuul prUctice the way this usually works is that the country which is desirous of obtain- ing a portion of its fund outlines a preposal for the 52For the amount spent on Administrative expenditures within the various drant aid receivin5 countries see Table I. 53ghird Report to Congress 92 the Economic Cooperation Administration, Washindton D.C., 1948, p.70. 3o expenditure of a certain amount of that fund. The proposal is first discussed by the barticipatiné country's sovern- ment with the iconomic COOperation Adainistration mission in that country. The mission nukes recommendations and forwards them to the Office of the Special Representative, in Paris, where the recommendations are reviewed. From here the recommendations go to the Economic COOperation Adminis- tration in Washington where they are thorouéhly aired by that ordanization in consultation with the National Advisory Coun- cil on International Monetary and Financial Problems. The matter is then brought to the attention of the economic Co- Operation Administration Administrator who is responsible for the final approval of the proposalrr’z+ The administrator usually grants approval of the pro- posal only after a careful review of the possible effects the use of the released funds aiéht have on the economy of the participatind nation.55 There is one basic objective that the Loonomic COOperation Administration officials keep in hind when they are attenptin5 to decide on the use to which counterpart funds are to be put by a 5rant-aid recipient country. This factor is the extent to which the funds to be used will affect the internal monetary and financial sit- uation of the country. 54Ibid., p.42. 55Ib1d. 31 It is quite evident to the aconomic COOperation Admin- istration that without internal stability a recipient country would have a very difficult job of repainind her former sta- ture by 1952.56 With this important factor in mind counter- part funds have been, for the most part, aiaed at the pro- motion of those types of activities which will accomplish the 5reatest amount of economic recovery in the participating country. Thus, there are three ways in which the counterpart funds can be used to stabilize the internal monetary and fi- nancial conditions of a participating country. First, they can leave the counterpart currency in the special fund thereby serving to counter inflationary tendencies by keepiny a por- tion of the country's money supply, or purchasind power idle. A second way is to use the special account funds to retire the éovernment debt held by the central bank. The third method is to allow the countries to invest their funds in pro- ductive industries which will allow more 600d3 to be put on the narket, and thus further alleviate the inflationary pres- sures. In reyard to this third method it should be pointed out that this is the most precarious method of the three due to the fact that many investments may work toward neutraliz— in5 the effect of local currency funds rather than advancing recovery. 56Local Currencnyounterpart Fund, april :9, 1950, p.l. 32 For the reasons mentioned above the release of count- erpart funds in areas where inflationary pressures have been strony has only been done in close cooperation with steps taken by the receivinp country to aid in orinéino about monetary and financial stability. However, in the liéht of these overall considerations, the Economic COOperation Ad- ministration Administrator has allowed counterpart funds to be utilized for promotin5 production in key industries, in agriculture, and for the purpose of rehaoilitatin; and modern- izing existiné plants that-would aid in the overall product- ion effort.57 Also in some of the war torn countries where private capital is at a minimum the Administrator has al- lowed those funds to be used in order to increase the stock of capital equipment and thus their productive capacity.58 The next step in the roeedure, assunino the A dainis- trator of the Economic Cooperation Administration has given the participating country permission to use a portion of the funds, is for the partic ipitin country to withdraw the funds from the local currency account and allot it to the various approved projects. By April 30, 1950, participating countries had set aside in their Special accounts the equivalent of a5,9l4 million 57Fourth Report to Coniress of the Economic Cooperation Administration, dashinéton J.C., 1949, p. 60. erort on Recovery Prob ress and United states Aid, February119fi9, p.157. 33 to match 5r1nts furnished by the United States under the Foreién Assistance Act of 1948.59 Along with this there was in addition §610 million deposited in local currency under the ForeiJn Aid Act of 1947 (Public Law 369, Aifihtieth Con- .. .1 . 50 bress) that Was 61131018 for use by tne countries. 0f the A5 914 million deposited in the local currency funds the . . _ 61 . . equivAlent of $3,098 million composes tne ninety-five per cen portion. The Economic Cooperation Administration has approved 13,975 million of this latter amount for withdrawal 1 4" . , , . - 62 of wnich p3,827 million has alreauy been w1tndrawn. As pointed out in the precedin; paragraph the equiva- lent of g3,827 million has already been approved and with- drawn by the particip: tin0 nations from the counterpart funds (as of April 30, 1930). Of this amount 42,203 million or fifty-eight per cent has been used for the promotion of production. The lardest portion of this fifty- eight per cent has been spent on electrical eneréy, transportation and communic ation, utilities, extra ctive industries, agriculture, and manufacturinp. In addition to the fifty-eiéht per cent 59Local" Currency Counterpart Funds, April 30,1930, p.2. 60, Midpoint Review, p.l. 61 62 1 Local Currency Counterp1rt Funds, April 30,1920, pp 3-4 (tabiej. This fiéure is the final adjusted dollar equivAlent. 34 expended for production promotion an additional 41,114 mil- lion or twenty-nine per cent his been used for monetary and financial stabilization. The renaininé @621 million (thir- teen per cent) has been used for such projects as construct- ion of public buildins and housins facilities, special re- lief projects and payments to Eerman enporters.63 Of all the countries participatins in the Aarshall Plan, France has put in and used the larbest amount of counterpart currency. A poor second in the depos1t and utilisation of the funds has been the United Kingdom, followed by sermany (Federated Republic), Italy, Austria, Greece, Ketherlands, Horway, Trieste, Belgium and Denmark, in that order. During the two years that the Larshall Plan has been in effect the counterpart fund has contributed the equivalent of a good many millions of dollars to the participatind countries for production promotion, debt retirement and other purposes. I The largest portion of counterpart funds utilized to pramote production has been used to aid electric power. It has been pointed out, that before the economic Recovery Pro- gram went into effect a preat many plants in Western EurOpe 6 n 3For a more precise analysis 01 the use that the ninety- five per cent portion of the counterpart funus have been put to, see Table 11. Local Currency Counterpart Funds, April 393 1950, p.2 (Chart). Amooq ”condom r\ .dmmw sum Hated .mwmsm pamapmpmzoo Nagospso Wm =.mphch>H5Um pmHHOd= co mm.q .cw mmm\s ~.m ~.m H.:OH m.m0H a .NOn m.0fls empsnitpmfieee m.o :.m m.: m.j H. m N.o mocspwfimmm Hsoahqome II :1 m.w m.m m.~ m.M .6CH 3 smopmfiaoo cu oqsoq I- x a- H.mx H.mm H.mm .mt m twpsm acetaoucwn m.mmw w.mrw m.rnp m.cmm H.mmm.fl m.mmm.fl mtapaflfip: .mOHpsoHCSGnoo ..mcspn s.Hm r.Hm m.wma m.mmfi m.mcm m.mom mefipsposcecua H.sw H.dw .eflw N.mam m.mmm m.mmm mmfinpmeeeH m.>H3 ep:m m.mH m.ww .msm e.mwu e.mem mpepaeougmn QQHuozmopm mo no poCopm 0.:HH.H phofimpfipmm upcm so“ ;-firfies,z OmmH «OM llundv .Cx II 44., O. a H. ur 4 manna eanm . VII __DD 3 )4!” (.1 P FC‘HH 4 00 F. .4 w... E B 4W 0. @444)... 1115. an Darn)..- 5ft... 4.43904 9,3. M Hmut Hence mHmw_:.wuH; mHupupwuwnh. mtmb;camxuflv me; -chpfln. mnHestxxgqu Huempwflwfie pom you how omoapsm CcpohoCd. wobopocd ©m>opnmm mew:se with Ofifinzm we; seq Definem fleece AmchHoc mo mcoaHHfiE ca .mocmgpzo Hm 00H cap mo m :cmH eascm asHHoQV . w om oh so dry mcmefi... mom mdfizommmiq. .«om mH £..v Ghrdnw QmEHS DZ¢ mdc> Qmmmd HH Mdmde 36 1‘ 40mmH «mm HHHQQ .mwcsm pp5gnmpssoo hommLESU H5004 "mops =.mp H5 Hzom L5 H03: 50 00.0 .Qm qmm\5 5.0 5.0 m.54 .H:H H.mm m. .H Empsnfippmflw. m.m 5.5 m.3 .5- 4.”- 3. amfiasfi 4: 1| 0.0mH .omH 0.0mH o. .H mpmp Locum c5 Epmw on o4C5E? m.o H.H m.mn .mHH H.~N :. H mpomHogm 444Ham H4504. o.oH n.0H 4.505 .mom m.mHm o. m mmeHHHoo, mchzo£4 wn5 mmmHUHHdA OHH .45m aoHpoSEpmc. m4mfl Hmm H.0Hm mmmoqusm hmnm 5H5p5EUMPHE mHuEummflpHE mevunmr 5H545EUQPHB :H euprde H5a5pwspHB pom you no“ omomhsm ©w>ohcm¢ @mbohqq¢ ©m>opgm« mmwtzm 555A OHHpsm mus 954 OHHpsm 5poa Ampw HHo3 4o mco HHHE EH .xocmSLSO HmoOH 53p no mpcmH5>H2.§ L5HHonv \.m cmmfl .om gHmm 4m5mmme:poo€ vaHDm .44.) fit. 4H Edna-H4434; madmédamaa LP»? Am :gfipcoov HH mam 4: 444:;4011l—o. .29 4 QESE F4? 5 Qz< qu>ommm< Adbeod 924 .asm ho AflrfiQOBH£_mom qu>ommm4 40m 37 remained idle due to the lack of electrical energy. The Western EurOpean countries have spent close to the equival- ent of @650 million from counterpart funds to increase their output of electrical energy. With this expenditure of 9650 million the participatiné countries have built hydroelectric plants, thermal plants, dams, and transmission lines.65 Next to electrical energy in importance of counterpart funds spent for promotion of production has been that spent cn railroads and lmpPOVln5 transportation. The railroads as well as the other means of transportation were very hard hit by World War II. In an attempt to restore the railroad system to some semblance of its old self the counterpart funds have spent the equivalent of @446 million. sesides this a446 million Spent for railroads there has also been an additional $147 million of special account funds utilized for the re- pair and improvement of roads, highway bridges, waterways and harbors, merchant and fishiné fleets, airports, and other communication facilities.66 A third large recipient of counterpart funds has been various manufacturiné industries such as primary metals, machinery, petroleum and coal products, basic textiles, chem- icals, manufactured food products, fertilizers, pulp, paper 65 Ibido, ppo#-50 66H. midpoint Review, p.4-5. 38 and paper products, dlass products, rubber and rubber prod- ucts, and lumbering products. These industries of Western Europe have received $371 million of counterpart funds. The extractive industries of the participating count- ries have sained from the utilization of the equivalent of $354 million of local currency funds. Of this amount all but §3.l million has been spent on the improvement of mines, and the boosting of production of the coal minind industry.67 The agricultural industry which is always one of the basic factors in any area recovery program, has been the re- cipient of the equivalent of $262 million of local currency counterpart funds.68 It has been distributed in the following prOportions: $93 million for land reclamation and the re- mainin5 d166 nillion for such thinés as controlliné farm pests, introduction of better seed, reconstruction of war damaged facilities, modernization and mechanization of farms, and other adricultural programs. One of the major reasons for the poor recovery of indus— trial production in Western aurOpe immediately following World War II was due to the lack of adequate housing. It is hoped that by the release of the equivalent of $203 million 6 :Local Currency Counterpart Funds - April 29, 1950, p.4 (table 0 This fiéure includes a3.l million spent on Forestry. 39 the housiné shortade will be somewhat alleviated. In addition to the counterpart funds spent on housiné a further amount of $13.5 million has been withdrawn for the construction of public buildings.6 However, in addition to usins counterpart funds for the promotion of production, a considerable portion has been used for debt retirement and financial stabilization.7O A large portion of the war expenses in Western EurOpe was financed by povernment borrowing. This borrowiné did a great deal toward creatind inflationary pressures within a country, due to the fact that, in most cases, it dreatly ex- panded the money supply.71 It was recognized at the time of the larshall Plan's sestation period that any program de- vised to brinD EurOpe out of the doldrums was 50ln5 to have to take anti-inflationary measures. It was felt that as long as the inflationary forces were uppermost, any semblance of economic recovery would be impossible. Added to this was the problem of political instability which is usually the hand-maiden of runaway inflation. The most direct way that counterpart funds can be used to curb inflation and maintain financial stability is through 69141idpoint Review, pp.6-7. 7OSee p.13. 71The source of the borrowed funds plays a larée role in determinind how much the money supply will be expanded. 4O monetary cancellation. The way this works is for the country with available counterpart funds to use them as they are re- leased for the repayment of debt owed by the 5overnment to the central banks. By the éovernment retiring its central bank debt it cancels a portion of the excess supply of money. It is very i portant from the point of overall recovery, to see that government debts to individual citizens are not paid off, for it they were this would only add to the inflationary pressures. Since the beginniné of the Marshall Plan, local curren- cies equal in amount to $1,100 nillion has been released for the purpose of debt retirement. It should be added, however, that since October 31, 1949, no counterpart funds have been released for this purpose. The reason for the restriction is that there has been some question in the minds of the Economic COOperation Administration as to whether debt retirement is the most effective and beneficial way to use the counterpart funds. Thus, pendin5 a full review of the economic effects of the counterpart fund it was decided that the use of the funds for debt retirement should be halted. With this composite view of how the counterpart fund works and what it has worked for, the next step is to see how various participatin; countries have used their funds, why they have used the funds in the manner they have, and whether it would have been possible to alter the use of the funds in any way in order to facilitate better recovery in the recip- ient areas. CHAPTER III COUNTRY STUDIES The analysis of the counterpart funds, thus far has been devoted lar5ely to a description of the mechanism of the counterpart device and an examination of a composite picture of what the funds have done to aid recovery in West- ern EurOpe. It can be seen that the overall pr05ress has been quite substantial; however, by a blimpse at the utili- sation of the counterpart funds in the individual countries it may be possible to set an even better insight to the re- Sults of recovery progress in Western EurOpe. In order to make a study of the individual countries it is necessary to rec05nize certain conditions and problems about particular areas and countries. One must constantly keep in mind that the various participatind countries are in different staées or phases of recovery; that the inpact of the war was much greater on some countries than on others; and that different areas have different ideas as to how re- covery can best be achieved. Therefore, it can readily be seen that each country has a different set of circumstances in regard to the necessary assistance needed to brinO about recovery. However, it has been pointed out that there are certain patterns which are characteristic and at the same time 42 readily observable in many countries. Therefore, it is possible, to a certain extent, to study the economic situa- tion of each country in terms of these certain patterns that are observable in more than one country. The Economic Cooperation Administration points out that there are four such patterns that may be usefully dis- tinsuished?2 First, there are a number of countries that are in what has been described as the first phases of re- covery. The big job in these countries is to restore trade and production to approximately what it was before 1939-40, at the same time allowins its people at least a minimum standard of liviné, and mainta'nin5 internal financial sta- bility. The problem in these countries is for them to get their production processes in shape and start producin5 as much and as fast as they can. In these areas in their initial phase of recovery it will probably be some time be- fore they can start workind on a self-supportind economy. It is also important that these areas have a stable 5overn- ment or else their Job is rendered that much more difficult. The outstanding examples of this first catedory are the Federal Republic of Jermany and Italy. 2 . 7 §_ReEort 93 Recovery grosses and United States Aid, February 19 9, pp.20-22. 43 A second category is observable in many countries which are somewhat further along in their recovery. This secon pattern occurs in countries which either have reestablished stable dovernments or better yet never had their sovernments impaired. a prime example of this second type is the United Kinédom. In these countries where this second pattern is characteristic it is quite necessary that they make major structural economic chan5es in order that they may become self-supporting. And in order to become self-supporting these countries have permitted and encouraged a very hidh rate of capital formation. It is out of this hish rate of capital formation that this second type arises, due to the fact that anytime a country has heavy investments, unless it has the necessary offsets it is 501n5 to have inflation. The attempt to offset this inflationary pressure, namely throudh high rates of taxation and extensive use of direct controls further characterizes this second catesory. A third type is the country whose economic status has advanced beyond the first phase of settinp its productive processes in somewhat near pre-war shape, and even beyond the creation of new industries sta3e which is characteristic of the second type. The problem of the third category countries is one of the trading position. These countries are near or will be near an overall balance in their inter- national accounts, but the bid problem for them is to 5st goods and dollars from the Western HemiSphere. The fourth type occurs where the basic need of the country is for economic development. The best examples of this catedory are Turkey and dreece. It must be remembered in attemptinb to apply these patterns to an individual country that a sindle pattern will rarely fit all the circums unces of the situation. In dis- cussinb the uses to which counterpart funds have been put to enable recovery progress in the individual countries there will be an attempt to show how these four patterns mentioned above are applicable to the country concerned. The Economic Cooperation Administration, under Con5res- sional direction and in consultation with the National Ad- visory Council, has tried to set forth in the use of the counterpart funds "the principles of economics Z_economic_7 cooperation which are basic to the most productive distri- bution and use of available resources." In addition the government of each participating country receiviné 5rant- aid has been consulted in order to determine (1) how the counterpart money could best be used, and (2) how the "lim- ited amount of counterpart funds could be used as an aid in attaining financial stability, balanced investment pro- .73 grams, and intra-European trade liberalization. 73 Midpoint geview, pp.9-lO. 45 In the following paées an attempt is made to summar- ize the ways in which local currency counterpart funds have been and are beinfi utilized in what are probably the four leadind participatin: countries. The countries that have been chosen for study are France, the United Kingdom, Western Germany, and Italy. There are several reesons why these four countries have been chosen. The first is the siénificant percentaQe of counterpart funds that each of these participating countries 74 that have have used. Of the ten participatiné countries withdrawn the equiValent of $3,827 million in counterpart funds, France, the United Kingdom, dermany (Federal Repuolic), and Italy have withdrawn the equivalent of s3,157 million which is eiéhty-three per cent of the total (see Table III). Secondly, by ObSGPVifié these four countries it is pos- sible to study the various effects different uses of the counterpart funds have on the econonics of the participatins countries. In other words, for the most part, these four countries are representative of all tre different uses to which counterpart funds have been utilized. A third reason is the belief that these four areas are the most important areas in which substantial recovery should be made if Western Europe is to re5ain its lost status. It 7 Turkey, Portuéal, Ireland, Iceland, Beléium and Lux- embourg have not as yet withdrawn any counterpart funds. 46 .dmmfl sdm Hapo¢ .memsm ppemsmpssoo Husmppso Hmooq "mopSnm .ooo.omw seep mmmqn \ =.mpsmam>HSom smHHow= co mm.q .Qw emm\e o.mH m.mH opmmane \m3 5. Manage m :2. \ .MN. hasgoz w.m:a 0.0Hm momenw m.mmH m.mmH mdfidflhmflpmz m.mmm m.mmm sappmse m.mmm o.mcm sflspH ~.mem m.mmm “usfipsgmm Heswemev escapee m.~me m.~me seemeam senses m.~m~.fi m.~m~.a mosses H - w Hence m Hwemhfieflu Q... financed Sp fie no.“ we echoing. hppcsoo mwcsrm no em: N \eAmssHHom no m20fiflafin ca .sosmssso Hwooa one no werefimsfisem neafiomv ommfl .om summe masomme we: ens mmm .sm mean mHnmsm memes mamas amemmmezpoo no mweeammmeHs nee sesmnmpHe mos mqeeompma 40m H; lll‘l HHH mqmfie 47 is believed that if France, the United Kingdom, Jestern Ger- many and Italy regain a self—supportin5 status it will only be a matter of tine before Western hurOpe will re5ain its old position in the economic and political circles of the world. FRaNCE: In order to understand the current situation in France it is necessary to have an understandin; of the pre-war cnnditions of the French economy. Since the beéinnind of the twentieth century, France has been suffering from a slowind down of her economic drowth. The economic crises of the United States and other countries in the world durind the 1930's further asgravated the situation even though France herself was not so hard hit as some of the other nations. The unfortunate thins about the 1930 crisis for France was that when the other industrial nations began to recover, France's production showed no improvement. France's gross national production in 1933 was twelve per cent and industrial production more than twenty-five per cent below 1929.75 From 1929-38 France shows practically no net abareéate investment. This lack of investment meant that there were no new opportunities for employmen . Thus, the French 75A great deal of the material in this section on France is taken from: Economic Cooperation Administration, France Country Study, Washin3ton D.C., February 1949, .- . 48 economy durin5 the third decade of the twentieth century could be characterised as staénant. However, the effect of this cessation of economic drowth on the French standard of living was not as oreat as one might think. In fact French consumption in 1938 (in real terms) was only slidhtly less than in the peak year of 1929. There were several reasons why French consumption was only sliéhtly less in 1938 than in 1929. The most important sinsle reason was the fact that .durin5 this period France had nearly a static pOpulation. In addition to this reason there were other factors, such as a low rate of investment, iuprovement in the terms of trade as compared with the 1920's, and a substantial amount of in- come from invisible itemswhich allowed France to import considerably more than she exported. In 1940 France was overrun by dermany and from then until 1944 when she was lioerated she was largely under the control of the Nazis, thereby making still shahier her al- ready precarious economic and political structures. Of the many problems of an economic nature that have confronted France since her liberation one of the most troublesome has been an ever present inflation which has permeated the entire country. This inflationary condition has been further afigravated by the unstable political situation within the country. The effect of inflation on the economy of France has been that it has drossly distorted the price 49 structure, caused production to be cut back, used up labor and materials that could have Otherwise gone into export products, and in general caused a maldistribution of re- sources. In addition it has caused labor unrest and engen- dered social instability, thus allowiné conmunism to develop. Thouéh economic problems have caused France a deed deal of unrest, it cannot be said that they alone have been the sole cause of her instability. In particular, the feel- iné of military insecurity, so obvious during the 1920's and early 1930's, and which was accentuated and perpetuated durin5 the derman occupation caused a 5reat deal of her in- ternal difficulties especially in redard to political in- stability. The policies of the potent Communist Party in France askin$ its followers to thwart the efforts of the EurOpean Recovery Pr05ram have also been a constant thorn in the side of France's recovery. Thus, it can be said that inflation, political insta- bility, communist inroads, and military insecurity are the ogres that must be conquered if France is to resume her proper place in the world picture. It will be worthwhile to keep these four mentioned adversities in mind when at- tempting to analyze the progress of French recovery and the prospect of France attaininb her former self-supportiné status. The first real pr05ress made by the French dovernment 50 in regard to economic and political stability was not to come until three years after its liberation from Germany in 1944. Late in 1947 the schuman 5overnment put forth a broad constructive pr05ram callin5 for the cessation of inflation- ary financiné by the Jovernnent, a forced loan from the t0p income groups and the aoriculturalists, plus other strin- gent policies callind for fiscal stabilization. However, Schuman's proposals were not enoush and by July 1948 prices again beéan to spiral upward. The new iueuille éovernment came into power in septeaoer 1948 and inauéurated a fiscal prodram that they hOped would COpe with France's economic situation. When ‘ueuille became Premier, part of his fiscal pro- dram was built around the idea of drawing on the counterpart fund to relieve the French financial situation. The United States, which at this time had not released any of the For- eisn Assistance not counterpart funds to France,76said funds miéht be released if France took sound steps toward stabilizing her currency and the United States was quick to 77 add that paper prodrams would not be sufficient. 76The Economic COOperation Adsinistration had author- ized the release of twenty-five billion francs or the equiva- lent of eighty-two-and-one-half million dollars of Interim Aid counterpart funds in April of 1948. 77New York Tines, september 16, 1948, p.3. 51 On September 28, 1948 it was announced by the economic COOperation administration that the first Foreign Assistance Act counterpart funds had been released to France. however, it was only after the Queuille measures callin; for 120 billion francs in new production taxes and-a limitation of bank credit had passed the French Parliament that the Econ- omic COOperation Administration agreed to release the funds. The reason given by the United States for releasin5 the funds was to avoid further inflationary financin; by the French Government.78 This first release of Economic Cooperation Administra- tion funds in September 1948 called for the use of the forty- five billion francs of French counterpart funds, the equiva- lent of slSO million for Specific projects intended to in- crease the productive capacity of France's basic industries. The idea behind the use of this initial release of counter- part funds, as well as about ninety-two per cent of France‘s subsequent releases, was to finance productive investments, thus eventually puttind more soods on the market and in this way workin; adainst inflation. The laréest portions of this second release were earmarked for the electric power, coal minin5 and railroad industries. 8 i 7 Ibid., September lb, 1948, p.13. 52 On November 4, 1948 a third release, this time for twenty-five billion francs of counterpart funds was made, thus brin¢in5 the total of released counterpart funds up to ninety-five billion francs or approxinately the equiva- lent of $310 million. Also in the same month the United states stipulated that future releases of counterpart funds depended upon the French government's procress. The Queuille government then came out with a statement to the effect that they hOped to equilibrate prices and waées at a new level thereby ensuring further recovery. In December of 1948 France came forward with a new prOposal in regard to the release of counterpart funds. This Pt new proposal asked for permission to use the equivalent 0 one billion dollars of local currency counterpart money dur- iné 1949 and that they be allowed to use the funds as the need arose, thus sidetrackiné the process whereby the Econ- onic COOperation Adninistration Administrator released por- tions of it periodically. In answer to this the United States said that the counterpart funds could not be released for an entire year in advance of its 5radual creation by the influx of dollar aid. In addition the United dtgtes said France must take more stringent steps toward attuinins fi- nancial stability, thus, enablind them to increase production and exports. With this idea of maintainin; financial stability. the 53 French bovernnent proceded to formuldte its bud5et for 1949. This idea of drswiné up a budget for the entire 1949 year was d step in the Pifiht direction, because this was the first tine since the war thdt France had attezpted to plan ahead for d whole year retner then piecenesl. The French Jovernnent led by gueuille realized that if it did not Want to fore¢o counterpart fund aid, it hdd better balance its bUQéet and cease infldtiondry financing. Thus, after a considerable snount of discussion dnd debate, the National Assenbly apjroved the 1949 oud5et on January 1, 1949. While the debates were ensuins in the National Assem- bly the Economic Gosperstion Administration released forty- five billion francs fron the French counterpart fund. deny peotle in the United Jtdtes and France have contended that tnese funds were reledsed dt tnet time in order to aid Queuille to Jet his suuset through the Assembly. Of the forty-five billion francs thdt were released during Lecenber 1948, twenty billion francs were for the continudnce of re- construction projects. However, twenty-five billion of it was to be used to fiéht inflation directly. The way that this was to be done nus to reduce the debt the French dovernnent owed to the bunk of France. This mirhed the first time that the counterpirt funds had been used for this purpose in Frdnce. however, not only was the French dovernnent required to 54 reduce its borrowing from the hunk of Frsnce, but it also had to "reduce the ceiling of those borrowings by the anount of the counterpart funds rele sed for this purpose." In other words the ceilino had to fall from the two hundred billion francs it had been to a new ceilin; of 175 billion francs. The remarkable thing about this achievehent is that it was the first time in twenty years that the ceilind had been reduced. It was further stipulated by the economic COOperation Administration that the ceilin; should be down to the 175 billion franc mark by garch 31, 1949.79 Dur1n5 the months of January, February, and narch 1949 there were no additional releases of counterpart funds for France. Therefore, with April 2, 1948 marking the end of the firSt year of the Foreign Assistance Act it is probably Opportune ;0 review the result of the counterpart fund's first year of activity. The most outstanding characteristic in the use of the French counterpart fundsdurinw the first year was that, "according to all available evidence, counterpart Z_money_7 made it possible for the French eovernment to continue its program of essential investment and briné about monetary stabilization at the ane tine." 79New york Times, December 28, 1948, P040 80 . . . K First annual ReView, p.o. 55 as pointed out in the precediné papes, 140 billion francs accruing under Public Law 472 (Foreién Assistance Act of 1948) and Public Law 389 (Foreign Aid Act of 1947) were released to the Prench sovernment from the counterpart funds durin5 the first year of the prosran. Of this 140 billion francs released, 105 billion went for the recon- struction and modernization of productive facilities, 10 billion for the develOpment of scarce materials and the remaininé 25 billion for the retirement of debt.81 Of the 105 billion francs released for the promotion of production a larde portion was allocated to the Ionnet Plan, on which the basis of France's lon; term recovery program is based.82 The main feature of the honnet plan is that it calls for an accelerated investment prosram encompaSsin5 all the i portant fields of economic activity such as electric power production, improvement of the railroads and other transpor- tation industries, modernization of the coal mining industry, rehabilitation of tne merchant marine, promotion of adricul- tural production, and the encouraéenent of private industrial 83 investment. 81See pp.53-54. 82The Monnet Plan (named for Jean Monnet who headed up the Planning Council which devised the plan) for France was adopted on January 7, 1947. The plan does not cover all of France's econ- omy, but it does aim to set production doals for a four year per- iod (1947-50) for six of Francefs key industries. The industries that come under monnet Plan supervision are coal, power, steel, cement, asricultural machinery and transport. The Monnet Plan also calls for France to import large amounts of machinery and raw mater- ials. see The Americana Annual 1948, New York,l948, p.257. 8 or h ,_ -11- =' ' , Table g§ ongpeS ggunt a coated for each of these purposes see 56 o PO®P¢® Cd momma maple coflmmm>cOo pamthefip cog; mmafip pm cofipomm 0p so poem .oaw amppmwmnwpp mews macaw Hwasepws oatcpmpum exp pmflp pomg mLp mp psoow pzwsopp was more empomfid manH\o .. .mm. m Co=.mp:mam>HSOm pmHHou= mpocpoow mom \d . .0me .AM gopmm .mwcsm pxmmMmPCSOU chmpnso Hmooq ”mopzom\o .mpcsoew new» pmpr mmma Hepop gem» OBB\D .mmmw M Hflnod .mmch paw epmeSOU Hanmspso Addoq "meadow \w . H.mm 0.0H \oA~.HV: o. o m. mm o.oa maeatmpae adampespm H.m m.H m.e m.H m. 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Amcoaflaa p was HHHHHM idw ppmaw>fisem amocwpm do pnmam>fi50m Amonepm Mo pumawbfizom Amended we own pwHHom mCOfiHHHmV hmHHom chfiHHHmv anHom mQOHHHHmV mocmLpSO Hwooa mocmspso Hwooq \6 hocmLpSO amoon I mowed a; 05 Eommwmaéa .. mamawméaeflmfidéa .. mjmaimdfi Alll H‘ wok/2mm, mm maze Bm¢nHEBZDOU .mo mmD >H mdmde Ill Ill 57 E .pomemw :a meme mmpwh soampm>coo pcmhmmmad none meHp pm coapomm 0p coapomm E099 nephew Imcwpp ohms mwcsm Hwfipmpwe Ofiacpmhpm 03p pmzp poem esp an psopw psmsohfi was mommgohomac many .mm.d uo=.mpcmae>fi3em nwaaow= mponpoow mom .omVH .Afi Momma .mwcsm ppwmwwpnsoo momentum .mpnsoam new» pmsfiw mama Hmooq HmpOp new» 039 .mde .M_HHLQ¢ .mccsm phwenwpnzoo hocmhaso "mopsom \m . \e \o \n Hmoom “mopsom\e a4wmmfl qumm mammofi mumom mammm ,m.mmw maaeesespee aspen H.H m.o H.H m.o 1: It EmHASOB H.H M.o H.H v.0 II I: mwmwxoem Mmfia - now go :ofipprOanth H.m H.w H.w H.H :. :: maefieaasm ceased 0.x: H.NH 0.x: H.MH In an mnamsom Mdmm m.;H Mdmfl defl HHI HHI wwmdeflMlMmem ~.m m.o ~.m m.o 'u 0.0 emphanpmaesh ~.o m.o N.o m.o 1: 0.0 mp0:©0hm pmnpsm a pmnpsm o.H m.o o.H m.c s- 0.0 . mposeosm modem a .amdmm .QHSm ~.m :.H ~.m s.H u- 0.0 .mm: mposeotm eooa mcm.$ a o.m HM» o.m I: 0.0 mmHHpame camam A H HHS. inmSOHrthU GQOHHHHVHV pmmHm>HDUm Amocmam mo pcwfiapH5cm amocwpm mo pcofiapfiSUM. amended mo om: paHHoQ chfiHHHmV pwHHoQ mCOdHHHmv awHHoQ mnoaaaamv mesonsSo Hwooq hommnnso Hwooq \U hommAASO Hmooa w 0 Hmm CE W 1 JAHQ I 1W fi % QI ._ fi . .1 31 [I w o 1K0H p .H. H .H. \Wmoa. H .q 0:2“ m p .4. \W‘Lmfl m 90¢ til. m «HA5. g. mozmmb Mm mQZDm Bm¢mEMBZDOU ho mmb Aemscfipcoov >H mamas 58 One of the host important features of the recovery program in France for which counterpart funds have been re- leased is the series of dams that are being constructed on many of the major rivers in France in order that electrical eneréy may be provided for French homes and factories. The BOO foot wide Genissait dam in the Rhone Valley, the lardest in Western nurope, is only one of the many dams that has been built with the aid of counterpart funds.r Others are bein5 built on the Rhine and Dardodne, as well as alons many of the smaller rivers in the Pyrenees and Alps mountains. The modernization of the coal mines was another 1 por- tant use for which counterpart funds were Spent during the first year of the Foreign Assistance Act. It was hoped that by the use of the funds much of the machinery in the mines would be replaced and repaired. It has been pointed out by the Economic Cooperation Administration in its midpoint Re- view that the average aye of the mining machinery now in use is estimated at twenty-seven years while the Optimum limit for this machinery has been set at fifteen years. Thus, it is easy to see why the average French coal miner produces only about one-fourth as much coal as does the averase United 84 This dam now completed provides wo billion kilowatt hours of electricity per year. see R.P. Schwarz, "The First Half of the Monnet Plan." The Fortniéhtly, 172:222, October 1949. States coal miner.85 As pointed out earlier, in addition to the 125 billions of francs that were released to France during the first year of the Forei5n Assistance Act for production promotion and debt retirement respectively, there was an additional ten billion francs released to France for the develOpment of strategic and scarce materials. The laréest part of this 10 billion francs was to be spent on the eXploration and develOpment of scarce materials in the French Union, with a great deal of emphasis on the overseas territories. , With the above brief review of the use of the French counterpart funds durind the first year of the EurOpean Recovery Program it is possible to move aloné to the second year of the pr05ram, which in many respects was even more important than the first. Durins the second year that the Foreién Assistance Act was in effect, the economic COOperation Administration re- leased 303.3 billion local currency counterpart francs to be used by the French bovernment. Of the amount released 20 billion francs were used for debt retirement, 268.5 billion francs for promotion of proJ duction and 14.8 billion fraics for what was classified by 87 the Economic Gosperation Administration as other purposes. 85 First Annual Review, p.6. Ibid. "Other purposes" include housins, public buildinos, tranSportation of relief 9&0k3583 and tourism. 60 The release of £0 billion francs for debt retirement was made in June 1949, and broupht to 45 billion francs the total amount allocated for this purpose. The first release of funds for debt retirement back in December 1948 had lowered the legal ceiling for the Bank of France advances to the French Treasury at 175 billion francs, however, this new re- lease of 20 billion francs was not to reduce the ceiling, but instead was an attempt to relieve some of the pressures against the ceilind. This was to be done by allowiné the “Treasury to cash its short-term bills held by foreidn Cen- tral banks now demandinp increased franc resources to pay for increased French exports."88 As in the first year of the European Recovery Pr05ram the lardest percentaée of the total amount of counterpart funds released was for production promotion. Durinp the second year eidhty-nine per cent of the funds were spent for this purpose. also as in the first year the lar5est indus- trial benefactor of the local currency counterpart funds was the electrical energy industry. howeVer, they received 106.5 billion francs durin; the second year, as compared to 51.4 billions of francs durind the first year. The coal minins industry maintained the same rank dur- in5 the second year that it had held in the first, that of Local Currency Counterpart Fund, £E§§ 3Q, 1949, p.2. 61 the second largest recipient of counterpart funds. The amount spent on coal mininé durinb the second year was three 89 times as dreat as the anount spent durins the first year. {ortion of The industry receiviné the third larsest funds durind the first year, tre railroad industry, drOpped to fourth place during the second year. This industry re- ceived 20 billion francs for improvenent and reconstruction durind the first year and 21 billion francs durin5 the sec- ond year. However, preportionately the railroad received a much smaller share durind the second year. The aéricultural industry which had received only two billion francs from April 3, 1948 - April 2, 1949, received 37.2 billion francs durin; the second year of the pro¢ram. Quch of the agricultural allotments durinQ the second year were land reclamation projects which had not yet gotten un- der way durind the surOpean Recovery Prodram's first year. Industries such as stone, clay and glass products, and miscellaneous machinery received approximately the same amount of local currency funds durin¢ the second year as they had during the first. While such industries as primary setals, fertilizers, chemicals and allied products, miscellaneous manufactures, waterways and harbors, merchant and fishing fleet, roads and miscellaneous transportation facilities had 1 9see Table IV on pp.56-57. 62 large proportionate or relative chandes even thouph the ab- solute chanées in some eases did not amount to too dreat a fiéure. In addition there were a number of new recipients of counterpart funds durins the second year of the program such as the basic textile industry, the manufacturers of food prod- ucts, the manufacturers of pulp, paper and paper products, and the rubber and rubber products industries. however, all the first year recipients of funds did not show an increase in the amount of funds allocated as is evidenced by the petroleum and coal products industry and again with the strate5ic material allotment. Duriné the first year of the prosram, petroleum and coal products re- ceived 2.4 billion francs from the fund, whereas, in the second year they received only 500 million francs. Likewise the amount allocated for stratesic materials duriné the first year was 10 billion francs while in the second year there were no new funds released for this purpose. Of the 14.8 billion francs classified as for other pur- poses and therefore not categorized by the economic Cooper- ation Administration as production promotion funds or debt retirement, the larsest recipient has been housin5 with an allotment of 13.1 billion. Others in this category are public buildin5s, transportation of relief packages and tourism. All of these "other purpose" items received no allotments whatso- ever durind the aurOpean Recovery Prodram's first year. O. ’1 — 0.. V». “c I u“ I...- Thus, during the second year of the aconomic Recovery Pr05ram over twice as many local currency counterpart fund francs were released as during the first year of the pr05ram. While 140 billion francs were released during the first year (April 3, 1948 - April 2, 1949), 303 billion francs were released duriné the second year (April 2, 1949 - April l, 1950).90 At the end of the first two years of the suropean Re- cnvery Program a great deal of pr0¢ress has been made in nearly every sector of the French economy toward attainin5 the goals set by the Foreién Assistance Act. Price inflation, which characterized the economy for four years after France's liberation, was apparently eiecked duriné 1949. at the in- ception of the Foreién Assistance Act in 1948 ruinous infla- tion threatened France. From the end of the war up until the fall of 1948 wholesale prices had jumped fifty per cent or more over what they had been the preceding year, but in 1949 wholesale prices rose only one per cent over 1946. At the besinniné of the Economic Cooperation Adninistration pro- 5ram France was desperately weak and grew even weaker during 1948 up throu§h the time of the coal strike in the fall of that year. In fact there was a time when the black market rate on dollars in France was seventy per cent above the ledal rate. 90 For a comparison as to whit the funds were spent on durind the first year as compared to the second year, see Table IV on pp.56-57. 64 at the present tine the black narketin; for francs is prac-' tically non existent. There was a rapid rise in industrial production duriné 1949, and by April 1950 was runnins thirty per cent ahead of 1933. Adricultural production and livestock output is almost back to pre-war production. The "donnet Plan" des- idned to rehabilitate France's industry and apriculture pro- ceeded approximately on schedule durin5 1949, Qiviné' further encouraéenent to France's chances of becomind self-supporting by 1952. France also increased her eXports to other count- ries by forty per cent in 1949. she sold more 500ds and services to every tradins area in the world than she pur- chased from them except the United States. Thus, it seems as thouéh France's problen fits what has been described earl- ier in the chapter as the third type or ca eéory, that is, a country that has restored its productive processes to the pre-war level and has the products to trade on the market ‘ only to find that the area with which she is most desirous of trading is not willind to ace pt her soods., In other words France's econonic dilemma has chansed from a production prob- len to a tradiné problem.91 Counterpart funds have played a larée role in aidins the recovery of France. To see how important they have been 1 Barry Bingham, "France a Case study in harshall Plan Recovery," Vital épeeches g: the Day, 16:477, May 15, 1950. 65 one neaksonly to look at the fipures showin5 the quantity and allocation of the expenditures. It has been pointed out by the economic COOperation sdninistration that the counter- part fund has provided four-fifths of the total amount used for electric power facilities, three-fourths of the finan- cing for improving coal minin5, one-third of the money for ehabilitatins the railroads, and in addition has made larée outlays to brin; about reconstruction in other sections of the French economy.92 Over 443 billion francs in counterpart funds have been used to aid the French economy since the scon- omic Cooperation Administration program started in April 1948.93 The largest single share of French counterpart funds has been Spent for electric, sas, liéht and power facilities. As a matter of fact 160 billion francs, over one-third of the entire funds, have been used for this purpose. The reason that such a large portion of the entire fund was alloted for this purpose is that French industry had 10nd been hampered by a shortaée of electrical energy, and many plants had to close down for portions of the year when the power was short, thereby fur her afiéravatin; unemployment. Therefore, the use of counterpart funds gave France a chance to tackle the proolem 92Midpoint Review, p.11. 3See Table IV on pp.56-57. on a larbe scale. By the use of the funds France has been able to double her electric power output over the pre—wa limit. This is all the more remarkable because durind the war electrical power output had dropped nearly twenty-five per cent. The funds have helped to finance the building of fifty-eipht hydroelectric plants, nineteen thermal plants, and a number of dams throughout France. It is expected that by 1952 the French electrical enerdy industry will show an increase in output of more than one hundred per cent over the pre-war level.94 Another larbe recipient of French counterpart funds has been the coal mining industry. During the first two years of the recovery pr05ram it had 80.2 billion francs allocated to it. The counterpart funds have been used to modernize the mines and boost production. between 1943-49 productivity per niner increased seventeen per cent and 1949 coal product- - - 95 ion surpassed every previous year's output except 1929. A third industry that benefited imnensely from the counterpart fund aid was the railroad industry. The French railroads were very hard hit by World War II. a large por- tion of their stations, marshalling yards, junction points, and railroad trestles were destroyed either when the dermans 4 . 9 Midpoint geview, p.3. Also see bindham, Vital speecnes of the Day, p.477. 5Midpoint Review, p.6. 67 overrun the country in 1940, or by the allied forces during 1943-44. 5y April 1949, 41 billion francs from the counter- part fund had been used to help restore the railroad system in France, and partly as a result of this eXpenditure the French railroads are once more back to their pre-war stand- ard. Thus, only a small portion of the counterpart funds from now on need be allocated to the railroads.96 A considerable portion of the counterpart funds-—39 billion francs-—has been used for the recovery of aéricul- ture. The French funds have been spent for land reclamation, inprovenent of storaée and distribution, and reconstruction of facilities danaded by war. In the Camar5ue resion, which was once nothin; out wasteland, French farmers are now pro- ducins as much as 10,000 tons of rice per year due to the fact that irrifiation from the Rhone River now makes possible the cultivation of thirty-seven thousand acres of this land. There are also many other irridation projects, financed by counterpart funds that are allowin; what were formerly parched areas now to produce bountiful yields. Another ex- ample is the Bordeaux region which is expected to produce its first bumper crop as a result of large-scale enéineerind proj- ects. also in the Hernandy area drainage and clearance projects have pernitted crOps to be planted for the first time. 96 Ibid., pp.ll-l2. 68 ‘ In France 13 billion francs from the counterpart funds have been released for housin5 projects. French housin5 was in a sad pli5ht at the inception of the Mar s‘hall Elan. As an outcome of Norld War II one buildin5 out of every twenty- two was totally denolished. The 303 of housin5 reconstruction is slow, but the French 5overnnent has allocated approximately 95 billion frwi cs to be sient on housin5 in 1950, 22 per cent of their entire bud5et.97 Some of the worthy housin5 projects taken on since the be 5innin5 of the harshall Plan, many of which were financed by counterpart funds, are the three thousand housin5 units bein5 built in the various coal minin5 areas of the country. Also many homes are bein5 built for steel plant workers and potash miners. It has been estimated by the French hinistry of Production that over 75 thousand housin5 units have been co. aple ted since the Forei5n Assistance Act went into effect. The French counterpart funds have also been used to aid its manufacturing industries. alt05ether 31 billion francs of local currency have been used for this purpose. The recipient of the lar5e5t amount of help has been the steel industry, especially in the vicinity of hayan5e, the "Pittsbur5h of France." Another area that has received a considerable amount of aid has been the Denain area which 97Bin5ham, Vital gpeeches f the Da( P0477- 8 Eidpoint Review, p.8. 69 also has a lar5e iron and steel project. done of the other manufacturin5 industries to which the counterpart funds have rendered assistance ar : electrical machinery, food prod- ucts, stone, clay and 5lass, pulp, paper and paper products, 9 .0 basic textile, and rubber and rubber products.' Of the 433 billion francs of counterpart funds that have been used by France, ten billion of them were used to de— velOp sources of deficiency materials in its overseas area. France has hope that these overseas expenditures will pay dividends in the lon5 run. Another iaportant use to which counterpart funds have been put is for direct financial stabilization. Approx- imately 10 per cent of France's counterpart funds have been used for this purpose. The use of counterpart funds in this way has enabled the French Jovernnent to keep the Bank of France's allowances to it below the le5al ceilin5, which as a result of the first release of counterpart funds for debt retirement in 1946 had been lowered from 200 billion francs to 175 billion francs;loo In analyzin5 the use France has made of the counter- part funds it is necessary to keep in mind both financial and monetary stability and the recovery of French production. 999355., p.5. lOO Ibid., p.9. 70 At the inception of the suropean Recovery Prooram it looked as thou5h France's bi5 chore was to control inflation. It was reco5nized that if they failed to do so there would be little sense in attenptin5 to improve industrial prod- uction and industrial labor productivity. Thus, the first objective of the counterpart funds was to control inflation. There were three ways in which the scononic GOOperation Adninistration used the counterpart funds to control infla- tion durin5 1949-49. First, they released 25 billion count- erpart fund francs to fi5ht inflation directly by reducin5 the debt the French iovernment owed to the sank of France. Secondly, they withheld the 5reater part of the counterpart funds for the first six months of the European Recovery Pro- 5ram, thus cuttin5 down on the amount of money in circulation. The third method by which the sconoaic COOperation adninis- tration used the counterpart funds to curb France's inflation was as a tool or lever to 5et the French dovernment to pass necessary anti-inflationary le5islation. In other words the economic Cooperation Adninistration withheld the releases of French counterpart funds until or conditional upon France's puttin5 throu5h the prOper bud5etary measures. as a partial result of this latter nethod France's 1949 bud5et included new taxes, new credit control and fiscal reform measures and the floatin5 of a 1ar5e internal loan. as a partial result of these three measures it was possible for France to stop inflation durin5 1949 and, hence, put the financin5 of invest- ment on a sounder basis. 71 Thus, with inflation havin; been curbed in France dur- in5 1949 it was possible for the Economic Cooperation admin- istration to release counterpart funds lardely for industrial proaotion. however, it should be remembered that usinQ counterpart funds for promotion of production does not have to be inflationary or even have to haveaneutral effect; in fact if the production industries are selected prOperly this method will also be anti-inflationary. France is a 500d example of releasind counterpart funds for investment purposes without creatiné inflationary tendencies. As pointed out earlier in the chapter the laréest portions of French counterpart funds have been released for such industries as electrical enerby, coal minind, railroads, housin; and agricultural land reclamation. 5y putting francs into these industries, France is buildin; up the production of the country and thus, making more doods available for export plus the fact that throth these industries France, herself, is able to have more ooods on its domestic harhet. However, France will have to take further strenuous efforts in the 00min; years if she eXpects her economy to be restored to permanent health. She will have to keep a constant vigil on her public finances to see that they are adequate for her prodran; as in the last two years the count- erpart funds can be used as a lever by the United states to set France to pass the necessary legislation. In regard to 72 the railroads of France very little counterpart funds will be needed as they are Operating at approxiaately their opti- mum rate. housinp, however, is a different story. hore and more counterpart funds are doing to be required for this purpose. Without the necessary housiné France's productivity will remain low. It is also evident that, due to the French rent lav which keeps rents down in comparison with other factors makind up the cost of liViflfi, France if she is ooino' to make any strides in alleviatiné her housind shortape must make use of public funds. Additional counterpart funds could also be released for he purpose of increasins productivity, coal nininé, etc. The boal for French industrial production in 1952-53 is 140 per cent of the 1948 level. If she is to meet this Ooal it means that output per man-hour in industry will have to in- crease by one-third over what it was in 1948. This neans that in 1950-51-52 extensive investments will have to be hade in French industry. Thus, it stands to reason that more counter- part funds are goind to have to be released for such purposes as coal minind and electrical eneréy if this productive Qoal is to be met.101 However, even if France does use its counterpart funds in the most beneficial manner and does get her production up to the 5oal set for 1952-53, her ultimate chances for success still depends on her balance of payments problem. If this balance of payments problem is not ridhted by 1952 or 1953 lOlFrance Country Study, p.5. 73 “*4 France's recover will still be a fi sent 0 the ima ination. 3 0 UNITED LINEDOM: Due to the 5reat amount of ddmdée done to their economy durind World Jar II the United Kinsdom needs a considerable amount of economic aid from the United states. The big job that faces the United Kinédom is for it to “attain a balance in its overseas accounts at an acceptable domestic standard of living.“ The United Kin5dom is confronted with this sit- Lation because of the loss from invisible items and also be- cause she had to liquidate many of her overseas investments. due to the war. The bes way for the United Kinfidom to 50 about "attaininé a balance" is to increase her production, thus sivins her more goods to export. As for increasing production she will have to do it by modernizind her equip- ment for the simple reason that she already has all her eliéible manpower ehployed. Another important problem to which sritain must find a solution if she wants to make herself self-supportin; is the problem of balancing her dollar accounts. By the time the EurOpean Recovery Prosram had started in 1948 the United Kins- dom had sone a lens way toward solvins the overall-balance of trade, but the perplexin5 prooleh remained of how she could increase her exports of 3oods and services to the Western hem- iSphere in order to attain a balance with the dollar area. Thus, it is necessary for the United kinddom, if it is poind to redain anythin; resenbliné its prewuu‘status, to make 74 structural changes in its economy. Britain recosnized this problem and is attemptins to see that the nation's resourceS* are used with the primary idea in mind of expandin5 production to such an extent that exports to the dollar area can be in- creased. In addition the British peOple ere c00peretin5 with "sus- the dovernment by deceptiné the sovernment's so celled terity" program. For a century and a half the United Kinédom was the lesdins industrial country in the world. Its monetary unit, the pound sterlins, was probably the most widely used in the vorld, and many countries found it advantageous to tie their currency to the British unit. In addition most of the impor- tant countries of the world maintsined their financial heed- cperters in London, nakins it the benkind heidquerters of the world. The peOple of he hritish Isles maintained themselves by importin; raw materials and foodstuffs which they paid for by exportind invisible items and menufectured doods. The United Kinédom had the trade of the world pretty much to itself for a period of years early in the nineteenth century. However, as the other nations of the world beéen to industrialize, britain could feel the results of competition. The result of this industrial competition was that many of Britain's exporters lost mnrkets to some of the newer indus- trial ndtions, especially where these newer ndtions were usiné more up to date muchinery. This loss of world trade was further 75 accelerated by World War I when Britain had to concentrate on producind for her wartime needs and in addition had to liquidate many of her forei5n investhents upon which a dreat deal of her hiéh standard of livind depended. After Horld War I britain hOped that her industrial recovery would be very rapid. However, while it did recover to a certain extent it did not do so at the rate britain had hOped for. The next setback to Britain's recovery was the world crisis of the third decade of the twentieth century. It was durin; the 1930's that the United Kinédom's balance of payments showed, for the first time, an actual deficit. The United Kinddom midht have been able to weather the deficit in its balance of payments brotht on durind the 1930's without any outside assistance, but the storm broke when she declar d war on jermany in 1939. As a result of world War II Britain had to liquidate a large portion of her overseas empire. Besides, her merchant marine was hard hit by the German submarines, and her capital plant was 5reatly damaged by the Luftwaffe's bombing. When the war in EurOpe ended on nay 8, 1945 Britain was confronted with a nude def- icit in its balance of payments, even though the peeple of the United Kinsdom had lived on an austerity pPOerm throuéh- out the duration of the conflict. In order for britain to overcome this hu¢e deficit, as mentioned before, she must increase both production and 76 productivity and at the same time continue her prosram of decreasin3 imports. To overcome her deficit by 1952 it is predicted by the Economic Cooperation Administration that Britain will have to increase her yearly exports to fifty per cent over 1958, while maintainind imports below the pre-war level. In addition, the economic Cooperation Administration thinks that manufac- turiné output will have to be stepped up forty per cent over pre-war in order to keep the export goods up and in order for Britain to maintain an acceptable standard of livina. To increase her productivity and her exports the United Idnédom will require a sizeable increase in her capital in- vestments. The Economic COOperation Administration fiéures thatiwenty per cent of the British dross national product will be used for capital formation during the four years the European Recovery Pr05ram is in effect. If this is true the resources remaining for personal consumption will be at a minimum. This lack of resources for personal consumption allied with the fact that all 81151018 workers are employed and thus have larée money incomes poses a serious financial and mone- tary problem for Britain. To put it another way full employ- ment creates relatively large incomes, but due to the fact that the country is exportin; such a large part of its industrial production there remains very little that the British peOple 77 can buy with it. Thus,inflationary pressures are brought about in the United Kingdom which could creatly hamper the recovery program if not handled prOperly. Some of the methods that areixfixngused by the British in their attenpt to suppress inflation include: hisher direct and indirect taxes, government maintained price con- trols and restrictions on nonessential investments, the rationing of certain consumer goods and the allocation of scarce materials to essential industries. In addition it was agreed by the Economic COOperation Administration officials that debt retirement was the most cnnstructive use to which the counterpart funds could be put. It was felt at the inception of the marshall Plan prOQram that if the United Kingdom used the counterpart funds for investment purposes it would only add to the already strong inflationary pressures. It was also asreed by the sovern- ment of the United KianOfl and the economic COOperation ad- ministration that the counterpart funds should be used to reduce the debt held by the bank of anéland but that it should not be used to buy up government securities in the hands of the public. If they used the funds for the latter named pur- pose, it would add to the already preValent inflationary tend- encies. Thus, in the first year of the muropean Recovery Prodram 78 between April 3, 1943 and April 2, 1949, the Economic Coop- eration administration released 107.5 million pounds of counterpart funds for short tern_debt retirement that the british Government owed to the junk of finéland. In addition to the releases for debt retirement durina the first year, the Economic Gosperation Administration also approved the use of 17,000 pounds for technical assistance in the promotion of production and also to the release of 25,000 pounds for the inland transportation costs of United dtates relief supplies. Durins the second year of Marshall Plan aid to the United Kingdom from April 2, 1949 to April 1, 1950, the Economic Cooperation Administration released 92 million pounds for short term debt retirement, 500 thousand pounds for technical assistance and 549 thousand pounds for the transportation of relief supplies. Altooether approximately 93 million pounds were released durin5 the second year of the program.102 Therefore, as of April 1, 1950, the economic Cooper- ation administration has asreed to the release of 199.5 mil- lion pounds of counterpart funds for debt retirement and 1.1 million pounds for other purposes. It should be pointed out, however, that since October 31, 1949 no counterpart funds have 102 . - . For a comparison of the use 0: counterpart funds during the first year of the Burcpcan Recovery Propram as compared to the second year, see Table V on p.79. 79 =.mpCme>HsUm pwHHov= no mm.m .zw mom \@ .dmmfl 5AM Sopwfi .m©::& pammMmpcsoo mwcoghso Hwoom "monsom\o .mpcsocm pmmm pmpaw mmmH HmPOp pwmm OBB\Q .MMMA .M HHAQ¢ .m6C5h pammnmpcsoo mocmgpzo Afloom ”mopsom\w MJMWM .IQAmHM :0 IMJMMMI m : OH meawpwngs proa m.H dwm m.H mjm H.o mm mmmmxomm meHmm Ho COprpLOQmGMpB WA! flail ”3!. gal .31 mm $8.25 .8ng m.H NHm :.H 00m H.o NH moswpmHmm4 HwOHsgowe .4muwll .HHMIIII quII ddMIII Aqmflu. NJWIIII. mmw uposwopm we :OHpoEopm H jm Om:.00H H.Huw ooo.mm o.mm: Om:.NOH pamEthpmm 99mm AHwanHoQ Mo nmwcsom go AmpmHHoQ mo Amvczom Mo AmanHoQ mo Amccsom mo om: mBOHHHHHV mwnwmzoghv wCOHHHHEV mcswmsosav mGOHHHHHV mccwmsonav pcmHa>H50m hozmhpso Hwood pstm>H50m hoswppso HmooA pmmHm>H56m hocmpnso Hwooq anHoQ pwHHoa \@ thHoQ mo proa pmom.oae {\p Qmmfl-‘padlu m mHmm49md mHumdno41: w wH+Mapa4 moowzHM QHBHZD Mm mQZDh BmdmmmEZDoo mo Hm: > mdm¢9 80 been released for debt retirement. The reason for this is that the sconouic Cooperation ndninistrution is asking a study of the effects the use of counterpurt funds for debt retirement hud on a country's inflation, and until they get the results of this study they huV“ blocked the use of count- erpart funds for debt retirement. Revertheless, the 160 million pounds of counterpart funds which have accrued in the q special account since October have servev as an anti-infla- \ tionsry device due to the fuct thit these funds hud to be taken out of circuldtion in order to be put into the fund. In analyzin5 the United Kinydom's use of the counterpirt funds one must keep in mind that the bigéest problem fucing Britain's economy is that of brinsiné its bslunce of payments into ecuilibriun, especially with the hurd currency urea. The only way the United Kinfidom can brinQ its bulunce of puyments into equilibrium is to increase its production of industrial and uéricultursl products. however, due to the fact that Britain's labor force is already at full employ- ment, the only way industrial and séricultursl output can be increused is by increisind productivity. Durind the first year and a half of the Luropedn Recov- ery Pr05ram it was felt by the ficonomic Cooperution Adminis- tration officials that the best use to be made of counterpert funds in sritain Was for debt retirehent, that is government owed debt to the Bank of Endlend. As pointed out earlier it 81 Wus felt that l P?) the United kinydom used the counterpart funds for investment purposes it would only increase infla- tion. ‘hst may hnve been true at that time; however, by the middle of 1949 firituin had her finunciul house in fairly 500d order, and any further use of the funds in this manner would not be usina them to the best possible adventube. With this idea in mind the sconouic COOperution Administrution offi- ciels in October 1949 decided not to allow the United Kinédom to use the counterpart funds for any further debt retirement pendina a review by the sconouic COOperstion Administration. This seems like a loyicsl conclusion on the pert of the Econ- omic COQperution Administration. If firitsin's monetary and finuncial structure is as sound as the Econonic Scoperdtion Administration officials think, and if the biy job for britein is to increuse her productivity und thus alleviate her dollar 53p, it seems very losicel thut Britain should use her counterpart funds in some manner other than debt retirement. In order to facilitute best her recovery it seems as though Britain should use the counterpsrt funds for increas- ing her industrial and adricultursl productivity. This could be done by allowins releases for the inprovenent of coal minins and other extractive industries. Also, with the shortsée of living accommodations a lurée scale housiné program could be purtielly finunced with counterpart funds, thus aidind prod- uctivity. Another 500d use for which counterpart funds could be released would be the ihprovement of m;—=.rketin;5 methods. If 82 the United Kinydom expects to increase her eXports to the destern heuisphere she must improve her packaginé and market- ing techniques. However, as was the case with France, even if the United Kingdom does do as much as is humanly possible and uses the counterpart funds in the most beneficial manner, the results cannot be consolidated unless a solution is found for the balance of payments problea. Irerefore, dnpland's ultiuate recovery will depend a 500d deal upon the United States' econonic policy in repard to tariff reduction. NsJTLRN GJRInHY: Prior to Jorld War II Germany ranked near the top in industrial production. Her industrial rank was due to the skills of her pepulation, however, ratler than to any great potential of natural resources. Nevertheless Germany did rank first in world production of brown coal and second in the production of electric power and steel. With the exception of coal, however, sermany had to import the lardest part of her raw materials and in addition much of her foodstuffs. Even as late as 1939 iermany was prouucinp only eighty-three per cent of her own foodstuffs. In order for Germany to bal- ance her accounts she had to export larée amounts of industrial equipment. Jhen the war ended in hurope on hay 8, 1345 the serhan economy had for all prictical purposes collapsed. Industrial produc ion was practically at a standstill, and at the same time the imports upon which the country was dependent vir- tually ceased. It was apparent that a good deal had to be done before any sort of recovery program could take shape. Following the eerman surrender in hay 1945 it was de- cided in AUéUét 1945 at Potsdam that the territory of serm- any east of the Oder-Feisse River was to be under the juris- diction of the Polish dovernment. The remainin; area of derm- sny was partitioned into four zones of occupation. In the Potsdam a5reement the allies had promised to coordinate the zones, administerind Germany as an economic unit, but due to the inability of the four occupyind powers to work out any sort of an apreement it was not Ions before each zone had become an individual and separate economic entity. germany remained in this quartered position from August 1945 until the middle of 1946. In July 1945 the Commander of the United Forces in surOpe, under orders from Secretary of State James syrnes, formally invited the representatives of France, dreat arit- ain, and the soviet Union to a quadripartite conference to discuss plans of establishin5 the economic unity of eermany. However, éreat Britain was the only one of the three which . - a , 0 would 50 alon; with the United states for this purpose.1 3 103Arnold Brecht, "Re-establishiné derman dovernment," The Annals g: the American Academy of Political and social Science, 267:31, January, 1950. 84 Thus, out of this decision Cate the econonic meréer of the United States and the United Kinsdom zones. Actually it took until the end of 1946 before the meréer was fully completed. Twice duriné 1947 the foreién ministers of the United States, France and Ereat britain met in conference with the representatives from the Russian Qovernnent and aéain tried to work out a solution to derman economic disunity, but to no avail. however, early in 1948 the three western powers were able to reich an agreement anon; themselves for the establish- ment of a German federal bovernment in their combined area, and if Russia wanted to consent to it they would make it a quadripartite government. The Russians were not willin5 to ,9 alon; with this proposal, but after a 5reat deal of dis- cussion, debate, and diCkGPiHé on the part of the three west- ern powers, the New Federal Republic of dermany (Bundesrepub- lic Deutschland) finally emeroed in 1949. Western dermany is confronted with three major prob- lems. First her physical plant has to be rebuilt in order that she may produce the goods so necessary for her existence. Secondly, she must reoréanize her econonic and political institutions, and thirdly, she must find some way to overcome the dichotomy created by the sepanmion of the mastern territory from the Jestern. This separation of sernany into a Jestern and hastern area has virtually stransled the economy of the country, due to the fact that th western sector is laréely industrial and the eastern sector predominantly adricultural. The demOJrugth statistics on Western germany show that the pOpulation of this sector has increased tremendously since the termination of hostilities in 1945. This increase in pOpulation would not be so serious f it were not that the agricultural potential of the Western area is extremely limited and in addition, due to the Potsdam arranéehent, much cf the needed foodstuffs from the Oder-Eeisse area are not :ping into the Allied area.lO4In order for Western 3ermany's pepulation to maintain itself it must ihport nearly half of its basic food diet. To pay for these imcorted doods it must raise the level of its exported products to well above pre-war standards. But how can Hestern dermany raise the level of its man- ufacturing eXports? It was with this question in mind that Marshall Plan counterpart funds were released to western Germany in 1949. Durind the first year of the recovery proyram in Ger- many, very few Deutsche marks were released. Of the 196.1 million Deutsche harks that had accumulated in the counter- part fund for the Bizone's use only 1.7 million were approved and released for utilization within the sizone. The total withdrawal of the first year was spent for the transportation of relief packages. 10 4533 p.830 86 In the first five aonths of the second year of the Marshall Plan there were still no major withdrawals of counterpart funds in the aizone. It was not until septenber 1949 that the sconomic Co- Opeartion Adninistration apreed to the first important with- drawal of Western eernany's counterpart funds. This first major release called for the utilization of 151 million Deutsche harks. Of this amount 50 million Deutsche Jerks were earmarked for capital investnent loans to c0al mine 0p- erators in the Ruhr. as pointed out by the sconoaic COOpera- tion Administration, COa1 output has made rapid strides in western Germany since 1945, but in order for production tar- aets to be met by 1952 even larger expenditures will be re- quired. :esides the 50 nillion Deutsche harks allocated for coal minin5, an additional 44 sillion Deutsche harks were released to provide the capital needed to couplets a n w power station in the western zone of serlin. The completion of this power station will nake the western zone of serlin independent of the Russian sector's power, and it is expected to save 175,060 tons of 00:1 annually for the western sector due to its efficiency of Operation. In addition to the with- rawal for coal mining and electrical energy 40 sillion Deutsche harks were released for railroad construction and improvement. .After the Trench zone was fused with the bisone in Dec- ember 1949 to forn the Federal Reiublic of iermany, the I o A 87 to the with- Q Economic COOperution Adsinistrution assente druwal of large portions of Deutsche harks for in'es ment purposes. At the nidpoint of the feur-yesr European Recovery Pro- Qrum Jestern serminy has withdrawn and allOCuted 1,405 mil- lion Deutsche Lurks from the counterpart funds. When one renemb rs how much was relelsed the first year, this fidure looms very large.105 The purposes for which withdrawals have been made have been citeéorized by the sconouic COOperution Administration into two major proups: (1) promotion of prouuction or invest- aent projects and (a) other purposes. Of the two cutedories the investment projects received the lurder amount of count- erpart funds, 869 million Deutsche Jerks as compured to 536 million Deutsche Jerks for so culled "other purposes. Approximately 220 million Deutsche harks or one-fourth of the western derhuny counterpart funds releused for invest- ment production have been chunneled into projects for rebuild- ing and expandins power plants in order that the industrial production of sermany can recoVer and along with it the 3er- man economy. The coal minin; industry h33 also received a large slice lO . . - . ' 5For a compurison 0L the first and second year with- drawals of local currency counterpart funds in Western dermany, see Tuble VI on pp.88-89. .1 =.mpcmfih>H50m hmaflowz how mm.o oPOCpoom mom \@ .f.‘ . t. 9 .dflflfl .AM maul” .mmcsm pmuhnmphsoo mummsmso Huooq "oohsom \0 Mw .mpcsoew Lech pmpfim wmmfi annoy pooh ope\o M Hfiaom .mwnom pongumumsoo mwgosLSO Hmooq ”moL50m\s m.m w.mH m.m w.mH :: :1 a msmpmsm goose o.HH w.m: o.Hw u.ms I: .: steam tc.mmfid s pssnotte H.Nm v.0Hm H.Nm m.mHm In In mmapfiafionw meson @ .mww .oahpooam m.0 :.M m.0 ¢.m II II mmASposmscsu .omq w.o m.H m.o m.H I: :1 mp05©0hm hmpflsm @ pmhhfim u.o H.m u.o H.m II II mpod©OQm Ammmm pom hmawm .QHSm w.o H.m N.o H.N I: II manpmu memefipm N.H m.m M.H m.m II II mp0: Idohm mwwdm @ .hmfio .mfloum N.H w.w ~.H w.m In :1 mmaapm a cammm m.: n.0H m.: v.0H II II hmmdaa awhmm pdmofim .chOHhoio m.s H. m m.s H.0m u: .s { HMOHtp tomfim pomomm .mponanomm 3.0 o.;: 0.3: II II hmmcfixowm Hmoampooflm w.: n.0w w.)m s: 1: mp0: umopm Hmoo e Edmaonpmm m m.HOH In In wcficfim Hwoo .fldmwm c CH 3| in: cofiposwomm mo ooapoaonm Amsofifimwuq Nun to Amcofiflfluuw fiasco Ascosfififiev Ann to mm: pomfiw>fi50m mQOfiHHHHV pmcfiw>fi20m nwflaom honmppoo Hmooq \ofiwpoe gmmmvose mcoafladfiv pcmfiw>fi5Um mcofiflflfiav thHom hocmppso Hmooq [\cpwaaom monotone Hwoog \pOmmH.H.Lp« : msmfl.m.pm« \mmsmfi.m.tss . msmfl.m.pe< Nadufiuw z Jammy Mm mazmh BmdmmEBZDOU m0 Mmb H> Hdmfie 89 .Oo =.mpmmam>fi:om thHo©= 90% mm owomm Swap mmmq}, .o ounduoo% mmm .AM Mops: .meosm updohaucsoo homophso 3 .4. I .mpcsoew ham. pupae mmmH \e Hwooq "mopsom\o prop pooh oea\n .won .M Hfipod .mc25h phsqgmpcsoo Mucohpso Hdooq ”woh50m\w m4mmmw m 03H m.o Haw: macespenuflu Hsudfl m.o o.H m.o o.H 1: a: a empspfipuwfiecp \Amv H.o \Amv H.o :. :. mmcdeflfism OHHosm H.o m.o H.o m.o In I: smahsoR m.m H.0H o.m s.m m.o ~.H mmmssosm mafia \ tom mo coapmppommosma m.m m.Hi m.w o.Hm a; :: mcfimsom s.~sa p.mme s.r:H M.mms :. '1 maspgommm cashew op mummezwm O :uH w UNU m.N.UH .WHJMWH... m.O “Tm mmWOQ‘MSm hmfiluwm 1.2m m.owm :.:w m.on; In in empsnahpmfiecb m.o O.H m.o o.H u: I: mocmpmfimmd asoacnoma m.o m.m m.o o.m II II myophnm @ mzmshmpuw w.© u.w m.o ,w.m :n In mofipfififiomm soapQOaneuoo H.NH :.fl; H.hH :.Hm II II wwwoaflnd AmmofiMflHuv mum to Atscmrflfiuv mum to amtgnflsfiav “an we om: pumamsfisom muonflfifinv pctfimsfiscm meofifisfiuv pcmawsfisgm msofifiafiuv pmflfiommoccppoc Hhooq \oawpoe pmmw ore pmfiflon nematode Hwooq \ssmmfiqfl.tg« - prwfiaom hemmLhSO Hwoog msmfl.m.tm¢ \mmsmfi.m.pc« u msmaqm.9m¢ «INIIIl le’ H25 aw w zmwemWE Mm mQZDh Bm¢mmMBZDOO mo Mm “emscfipcoov H> mumea 90 of local currency counterpart funds for the modernization and rehabilitation of mines. 5y April 1, 1950, 102 million Deutsche harks had been released for this purpose. Laroe suns of local currency funds have also been aide aVailuble for capital investhent to firms in essential in- dustries. Alt05ether lunufacturin; industries have received 126 million Deutsohe harks with the electricul and other machinery, petroleum and c0ul products, chehicals, basic textiles, and buildinJ materials industries beind the urQest recipients. Another lurée seQaent of counterpart funds has been released to assist aériculturul projects. some of the im- portant projects included in the apricultural program have been the drainase of loeland areas, repatriation of qualified L TBfUJBBS, end loans to needy farmers to help them det back on their feet and re-estaolish their production. Other important recipients of harshull Plan counterpart funds cuteéorized as investment projects were railroads with a print of 41 million ieutsche Marks, merchant and fishind fleet 50 million Deutsche harks and water systems 14 million beutsche harks. Of the 536 million Deutsche Marks released for other pur- poses the lardest portion, 492 million Deutsche harks, was used to provide funds to puy German exporters for poods they sent to other countries under drawin¢ riths extended by der— many under the intrs-surOpean payments plan. The occupied zones of eermany prior to the formation of the eermsn Federal Republic 91 were required to deposit local currency into the special count- erpart acc unts to hitch conditional aid provided by the Mars- hall Plan, as well as for the Qrint ail benefits. However the other participatinp countries (since necenber 1949 this in- cludes Jestern eernany) deposited local currency into the count- erpart fund only for Qrant aid furnished by the economic Coop- eration administration. As stated above these deposits dude in Germany of funds matchin; economic COOperation adhinistration conditional did were used to "make payments to exporters for intra-European trade, and were withdrawn only after Specific 106 Economic Cooperation edginistrition authorization." The only other larée benefactor of counterpart funds under tne "other purposes" category Was housins. The housind pr05ram is to furnish housind for thelow income aroups, who, throuéh their luck of adequate housing, have not been able to produce adequately the goods necessary for eermuny's recovery. In any analysis of how the counterpart funds were and are being used in Western dermany or how they should have been used it is necessary for the student to keep uppermost in his thoughts the fact that dermany's basic problem durin; the first two years of the burOpean Recovery PPO5P3£ was to rebuild her physical plant that she uiqht produce the 5oods necessary to her survival. It should also be noted that the economic COOperation ad- ministration did not releas any counterpart funds until well after the eerman currency reform in June 1945. In other words they were fahiy sure that any funds released for investment purposes would not appravate inflation to any dreat extent. The uses for which counterpart funds have been released 10 6Midpoint Review, p.14. 92 in western dermany have for the most part shown a fireat deal of insiyht on the part of the sconOhic Cooperation adminis- tration. Juch industries as electrical enerdy, coal mininy, asriculture, and railroads, the lereSt recipients, are ex- cellent industries for which to ehploy the counterpart funds. However, there have not been enouyh funds released for hous- iny projects. By the failure to release sore funds for this purpose there has Orown up a serious housiné shortaée. This housiné shortade has affected western eermany detrimentally in two ways: (1) it has made Jestern Eernany's manpower immobile and (2) it has indefinitely postponed the transfer- riné of refugees and other sernan workers to the ridht spot in clearins up the slums. In addition to the release of counterpart funds for housing in Western eermany it has been pointed out by many experts thut there should be a releasing of funds to develOp new processin5 industries, and also for new capital equipment.107 Thus, it can be seen why the economic COOperation admin- istration has aéreed to release counterpart funds in West- ern eerhany laréely for investment purposes. ITALY:108 Looking at Italy's economic development durind the last three quarters of a century, it is possible to observe certain 107“Ger“&ny": silintic gsnthlx, 184:11. July 1949. 108 , This material on Italy's econonic conditionlis taken laréely from Lconomic COOpération hdninistration, Italy Country study, dashington D.C., February 1949. 93 features which pive an insiéht as to why Italy's condition at the present is such as it is, and also what the future prOSpects for the country are. The first of three features obserVable is that the number of eligible workers has Qreatly exceeded the quantity of jobs available to these workers. Secondly, aériculture has remained the chief form of employment and source of incone even thouyh a larée part of Italy is not even conducive to asriculture. a third reason for Italy's plight is that industrial expansion has not kept pace with the labor market. Thus, the pre—war per capita income in Italy was considerably less than in France, eermany, &reat critain, and the United states. horeover, even within the country itself there was a consid- erable disparity of econouic develOpment and industriflization, which is borne out by the fact that the northern part of the country has a per capita income nearly double that of the southern provinces. It was laréely for two reasons that Italy's economic development was retarded especially in comparison with the United States, Germany, and areat Britain. The first reason éiven for Italy's slowness is that she did not have the nat- ural resources necessary to make her a first class industrial leader. The second factor retardind Italy's growth was the fact that she did not unify politically until very late, thus delayin5 the development of industries and the formation of capital. 94 Italy's la k of natural resources coupled Mitl a very dense population and a low per capita income naturally nude her dependent upon foreidn markets and supplies. However, due to her late entrance onto the nodern industrial stabs, Italy's industry arrived on the scene just when ec ononic nat- ionalisa and protectionisn were beqinnin; to play such a dominant role in surOpe's thinkinQ. Thus, Italy's industry was restricted at the very time when it should have been allowed to eXp and. Italy's letharéic rate of industrialisation as compared to the rate of population prowth a d her a Qriculture s in- ability to absorb any more of the labor force has caused a larde segment of Italy' 3 population to be inactive as far as renuuerative work is concerned. This is borne out by the fact that while Italy's pepulation increases by 200,000 a year the averaée number of new jobs available each year amounts to only 50,000. Therefore,it is easy to see why she has so many more workers than jobs. The situation has been further agdravated by the fact that since 1913 the number of peOple emiJratin; from the country has been greatly restricted lard- ely because of the i miJration restrictions iaposed by aany countries. It was in the years between World war I and II th at lar e-scale urb:in une.iloyn nt becane most vexetious. In the latter years of tris period a growing degree of underemploy- ment in Italian aériculture also became noticeable. 95 Thus, it is evident thut Ituly's unesployment problem is "chronic' rether then "cycliccl," and that this problem has come about beesuse joos have not been able to keep u; with the browth of the working boguldtion. DJTiHQ World Wdr II Itdly's economy was shuttered to a considerdble extent. The cause of its shstterin: Wes due not only from physical punishnent,cut also from inflstion, the termination of tridinfi déreements, and the conolete breihdown of Itdlidn UOVegnr-nent and administration. The ostwar reconstruction job in Itdly divides itself 'U into two problems. The first, which is a short run problem is one of detting the existin; industrial plsnt into full production. The second problem is more difficult in the its objective is to overcome somethin3 that has been preva- lent in Italy for years, ndtely thst of correctin5 the dis- pirity between the number of eligible workers and the numoer of industrial and non-sariculturil joos. The durOpesn Re- covery Pr05rsh hOpes that it c;n help to find a solution to these problems. In 1946 and the 'redter part of 1947, Itdly's industrial output increased considerably over widt it had been during the Wer. In fact by October of 1947 production had reached about 90 per cent of whnt it had been in 1935. The supgly of raw materials and coal restricted production somewhat, but this was offset by the stron5 infletionsry pressures, the rapidly rising prices, and the consequent growth of lirde inventories. 96 However, durin; the latter pdrt of 1947 the Italian dovern- ment initiated stronQ anti-inflationary measures, which in turn caused a snarl drOp in prices and consequently product- ion fell off. Nevertheless, since the inception of the EurOpean Recovery PPOQan in the spring of 1948, industrial production in Italy has been increasiné. It was evident to the economic COOperation ndhihistra- tion officials in 1940 that if they wanted to aid Italian recovery, they would have to find some way to restore indus- trial activity and alon; with it the formation of new cap- ital. They saw that it Was all ihportant to Italy that both industrhflization and agricultural development should be accel- erated and tha more adequate transportation f cilities be made available. Under these conditions it was felt by the Economic Co- Operstion Adninistration Administrator and the Rational Ad- visory Board that an investment prodran represented the most prOpitious use to which the counterpart funds could be put. Durin; the first year of the Foreién Assistance Act only 28 billion lire of counterpart funds (equivalent of 48.7 million dollars) was actually used by the Italia: Jovern- ment. The first year's withdrawal was used entirely for fin- q . 109 ancing raierad construction. There were, hOcher, releases 109 _ o The first year Withdrawals were made from counterpart fund accruals under Public Laws 369 and b4 (sightieth Con- rress). Q 97 approved in principle by the economic COOperation administra- tion for national budéet purposes, but they were made subject to further review before the country could actually withdraw the funds. During the second year of the European Recovery Pro- 5ram, the amount of counterpart funds releused and actually used came to a total of 69.5 oillion lire. The largest recipient was the railrodd industry with an allotment of 26.1 billion lire followed by aoriculture with 12.3 billion, housiné 8.5 billion, merchant and fishing fleet 4 billion, health and sanitation 1.2 billion, technical assistance 500 million, and 13.1 billion lire left undistributed.llO Thus, by the end of the Foreign nssistcnce Act's sec- ond year of activity the Italian sovernment has used 97.5 billion lire or the equivalent of 162.5 million dollars for the rehabilitation of its economy. do far 541 billion lire hive been used by the Italian government for the rehdbilitution of the Italian state Rail- ways. Even thOUdh the Itulian railroads have made a great deal of recovery since the war, they still have a lonp Way to to before they reach their pre-war condition. The larsest part of the 54.1 billion lire release has been used for the replacement and repair of rolling stock. 110For a COmpdrison of the first and second-year withdraw- als of local currency counterpart funds in Italy, see Table VII, on p.98. PC Ho >HSQ¢ L.mHH0w= Q0 OW ofl% mmm U \oaspoa .IMMI .IM Sopjug .m©g5& upemrmpmsoo NMdophso Heooq "monsom\o .mpcsoew new» pmmfie mwefi aspen Leah osB\Q .M.Ammmw .mpflSh Ppwmnepcsoo Mdfimppsu Mecca ”monsom\s mqmmw u. OH m w mqmw qum 0 mm mememsenpee espem m.mH m.OH m.ma m.oa n: u: empsnfispmfiecp H.m m.H H.m m.H I: l: coapwpficcm @ Spasom W010... ”WOH We“ mo.” .I' all. EmfinHSOB Now 0.0 Now wow II II 00H>hmm deoom .Omdfi w.rfi m.m m.me u.w a- -' meflmsom dqmn W4mm m4mm. mumm. nulls I: , ppm s gun moi Mom oi Mom II I! Umpfiflfihpmdfiflp m.o u.o m.o u.o I: In momspmfimm¢ Hecacnoma m.m ©.e o.m 0.: I- .. pmmfim mefiemfis e peenopme w.mfi w.mH m.mH N.mH I: nu waspHsofipw¢ :.Hm H.3m N.m: H.mm N.w: o.wm mewohaawm a :w a N fie: .me o.wm :3 uposwopm Mo mafipoaamm ammoafifiamv Amhfiq no amcofififlazv Ampfiq mo AmQOfiHHfizV Ampfiq we mmD pcmaw>fisem mQOfiHHamV pcmaw>H50m mcoaHHHmv pcmfiw>fisgm mcofiaafimv pwHHoQ homegLSO Hwooq nsflaom hocmppSoHeooA \wpmHHOQ hocmLpZO Hmooq \p pommflqy.pce . meefl m.sm¢ \emsmfl m the . msmaqr.sse MA¢BH Mm mOZDh Bm¢mmm HH> MAK¢B 97500 k0 HmD 99 The second lurdest recipient of counterpart funds in Italy hes been the iyriculturcl industry. The total sum released for syriculturul purposes has been 12.3 billion lire. The syriculturel proyrums under the nuropeun Recov- ery PrOJram in Italv have been designed for two purposes, first, to increuse food production, and second, to create jobs which will counteract the serious unehployment prob- lem. Some of the major projects thit hive been taken up in- OJ elude lend reclihition project in the Volturno river velley, the Sele river area, and on the island of 54rdinie. In this process of reclenetion swunps will be drnined thus helping to erudicste nsleria, purched erees will be irrigeted, and in Other areas flood control measures will be curried out. agriculturil projects alreudy underway in Ituly should in- creese production on approximutely 280,000 acres of furm lend and directly aid 70,000 ferns. At the time of this re- porting most of the agricultural aid has taken plsce in south- ern Italy. The other lirée recipient of Italian counterpgrt funds was the housin; industry which received 8.5 billion lire. These housing counterpart funds comprise a portion of the 350 billion lire housing pr05rems that Italy has set up for herself, projects in which she hOpes to construct 900,000 P001115 0 Other inportsnt uses of Italian counterpert funds in- clude: the merchant and fishin; fleet industry, the tourist 100 trade, the purchase of scientific equipment for research purposes, and the promotion of health and sanitation. In addition to the 97.5 billion lire actually released and used by Italy an additional 90.1 billion lire ias been approved for withdrawal, but as of April 1, 1950, had not yet been withdrawn. Of this 90.1 billion lire, 6o.8 billion hes been earmarked for raierads, 9.4 billion for agricul- ture, 1 billion for technical assistance, 1.2 billion for health and sanitation, 300 million for housing, 400 million for miscellaneous social services and the remainino 9 billion classified as uniistributed. The important thinés to reseuber when analyzing the uses of counterpart funds in Italy is that the first problem to be overcome is that of dettin; the existin5 industrial plant into full production. Jith this idea in mind the Economic COOperation Aduin- istration has released counterpart funus for the reconstruct- ion of rail facilities, abricultural rehabilitation, ship reconditionin; and housiné. The counterpart funds that the economic COOperation Ad- ministration released to Italy duriné the first two years of the EurOpean Recovery Proyrum were for worthy projects, but they were not enoth. During the remainder of t;e European Recovery Prcdram more counterpart funds should be release: for approxinately tee same purposes as for the first half of the prosram. 101 The Italian railroad systen is still a 10nd way from its pre-wur cupucity and thus needs e orest deul of die. The agriculturil industry still needs nuny additional funds es- pecially for lend reclseition. gore funds ure also required ior the housing proorum, for without adequate housiné product- ion will be considerubly lower than it would be with Qood housing. It is eusy to see why Italy has used the lergest port- ion of its counterpert fund releases for production pro- motion ruther then debt retirehent. In the first place Italy took rather drastic measures on her wn eerly in 1948 to halt the impendiné postwar infldtion. she made it evident to the Economic COOperution Administration thst it could 50 sheed end releese counterpart funds for investment purposes without it provoking inflation. A second reason for the release of the funds for production pronotion is that at the end of the war there were over 2,000,000 unemployed men in Ituly and the only possible way to set them any work was to increese industrial production. However, as pointed out before but which bears repeatiné, the sconOhic COOperction Administration releused the funds only to industries which could increase production and thus alleviate any tendency toward infletion by puttins more goods on the market. A third reison for the economic Cooperation Administration's hLViHQ released count- erpart funds to Italy for production purp see is thut Ituly still needs to import lur5e quuntities of doous from the dollar are" end if she is to become self-supertinQ by 195‘ ed, 1953, she will have to build up her own production ities in order to trsde with the dollgr ere; for the she needs. Italy still hes e very Ion; way to so to become supporting, but there have been some signs of sucess which the counterpurt funds csn take pertisl credit. self- of lugns-susoreeu PnIdsfiTs ELnfi In Chapter II brief reference was made to the intra- EurOpean payments plan. This plan is an important and vital part of the Economic COOperation Administration counterpart lll fund device. The Adreenent for Intra-EurOpean Payments and Compen- sation as it is formally known is one of the most siQnifi- cant results of c00perative action on the part of the EurOpean nations to date. Prior to World War II the surOpeen Recovery Probram countries carried on forty to fifty per cent of their total tride between themselves. In fact pre-war imports of the participatiné countries mnnafour times greater from each other than they were from the United States. Startine at the outbreak of World War II the United States fas came to the front as a supplier of goods to the Lurcpean countries and by 1Complete figures on the respective aid Oiven to the individual participating countries under the intra-EurOpean trade were not available. However, as the intra-European payments plan is an integral and important part of the count- erpart fund device it was felt that some eXpiunation, at least as to how the plan works, was germane. The amount of trade actually financed under the intra-EurOpean payments plan was approxiuately $675 million (fourteen per cent of the total Economic COOperation Administration aid) during the fiscal year 1948-49, and approxinately $600 million duriné the fiscal year 1949-50. 104 1947 was supplyiné the participatins countries with nearly as many ;ooas as they were dettin; from each other. However, by 1945 ingorts by the participatinQ countries from each other were over fifty per cent dreater than what they were receiving from the United States. From the above statements it can be seen that trade among the EurOpean countries is still of importance. Some of the main items of tride include coal, potash, and iron ore from France, woodpulp and iron ore from Sweden, fruits and Videthbled from Italy, as well as many other items too numerous to mention. The job that confronted the EurOpean countries in re- dard to reviving mutual trade loomed very lerée at the end of the war. The conditions and mechanism that had been the oasis for most of Europe's trade were destroyed duriné the war. Price systems were extremely out of line, with black markets predominatins in many areas. The currencies of the various countries were for the most part inconvertibie, and exchange rates were largely art ficial. In addition the res- erves in gold and hard currency were held by the country who was fortunate to have them in order to pay for the all im- portant goods from the dollar area. With these conditions it can readily be seen why the fiuropean countries resorted to trade and payments ayreehents. Under the trade and payments aOreehents the muropean countries exchanéed Specified catedories of éoods. Usually 105 these abreements were of a bilateral nature, end called for goods to be shipped from one nation in turn for éoods from another nation. For example if country A, according to the bilateral agreements, shipped a Qreater value of 5oods to country B then it received from country B, then 3 had to mdke up the balance by brentiné A a line of credit for the balance to be urdwn on the centril Dank in country B. These re- ciprocal credits elimindted the ddy-to-dey beluncin5 of accounts, and permitted the aéreenent countries to build up creditor and debtor positions over a period of tine. As crude as the trsde and payments agreements were they did revive intra-fiuropein trade for a short period of tine, however,it was not ion; bezore the system broke down of its own weight (1947). Durins most of 1947 prdcticslly no prosress was made in the expansion of intrd-EurOpean trude. It became more and more difficult for the countries to settle their balances, and at the same time the Western European nations were rindin5 it more difficult to finance their necessary purchases from the Western henisynere. As 1 result of this the debtor countries in Western Europe be- came adamant about trinsferring 501d or dollar balances to settle their accounts with the creditor nations. Thus, the creditor countries would not extend new credits to the debtor nations. es pointed out by the economic Cooperation Adminis- trstion "what had once seemed so desirable to most countries as to be termed a 'fsvorible' balance of tride was now 106 renamed 'unrequited exports' and was considered as the worst of econonic blunders."112 With trude between the countries of destern Europe re- tarded because of an inability to 5st together on a means of payment it became very inportunt thut some sort of en arrundement be nude whereby the European countries could find some basis to trade with such other. With this idea in mind the Office of Eurdpedn economic Cooperation when it met in Paris in October of 1948 drew up a plan which provided the first step toward estublishiné convertibility of currencies and allowing trade to take place between the participating countries. The way this plan works is for the participatins countries to estimete the surpluses and deficits they expect to have with each country durin; a stipuluted period of time. After these estimates are discussed and eéreed upon the creditor country establishes an sccount in its own currency in favor of its debtor to the amount of the anticipited deficit. Under the intra-fiuropedn puyments plan these accounts are called drawing rights and are issued as ordnts ruther than as lines of credit as under the bilaterul trhde und psy- nents agreements. To give a sinple exenple of how this intre-suropeun payments plan works let us take for illustrative purposes two participutiné countries, say Fri es and Italy. Let us say that France eXports to Italy @160 million worth of doods, 112, é Beport in Recovery Progress and United States hid, FGbPUEPV 1§4Q- n-00- 107 but in return Italy exports to France only @100 million worth of doods. Prior to the intre-surOpedn payments plan Italy would prooubly not hive been sole to secure the addit- ionul Q60 million worth of 5oods and services. Under the October 1949 egreenent, however, Frence abrees to arent to Italy drawins rights in French francs up to the equivalent of s60 million. 0 The next step in the probrim is to relate these draw- iné rishts to Economic COOperetion Addinistretion dollar aid. Frince, though a creditor 0f Italy, has a dollar deficit with the Western hemisphere. Therefore,the next play is made by the United States in that it makes $00 million worth of aid availuole to France providin; Frunce grunts Italy the equivalent of $60 million in francs. To put it simply France earns the $60 million by pussind on an equal amount of aid to Italy in the form of soods and services. The out- come of the whole procedure is that France now has 960 mil- lion to finance the purchase of necessary unterisls from dollar dress and thus these slloted dollers "perform a duel 113 N ’V function without siditionul cost to the United states. The next question is how does the counterpart fund device get into this intrd-huropedn payments plan. Accord- ing to the Foreipn Assistance Act of 1948 the country that receives the conditional aid (France in the illustrative example) does not have to put any local currency into the llBIbid. * 108 counterpirt fund, however, the country which receives the so called drawini PithS (Italy, in the above example) is required to deposit lOcal currency commensurate in Value to the amount of drawiné PishLS obtained. Tnus,in the French- Italian exanple Italy would have been required to degosit lire equivalent to $60 million worth of French francs in local currency counterpart fund. These funds are subject to the same stipul tions as those deposited in any other fashion. It should be pointed out that, although in the eyes of many peOple the intra-fiuropean payments plan is a crude sort of an arrangement, nevertheless it has been ve.y influential in ausmentiné the total transfer of soods, and services under the surOpean Recovery Prodram. CHAPTnR V CORGLUJION The idea or device whereby the Various European Re- covery Prosram countries receivin5 comhodities and services financed by Economic COOperation Administration 5rants are required to deposit commensurate amounts of local currency into special accounts appears to be a good one. By means of a device such as this the United States is able to do double duty with the funds it allocates in the form of érants and conditional aid to the participating countries. Not only is the economic CoOperation administra- tion able to dive the participatiné hurOpean areas much outright assistance in tne form of grants-in-aid, but is also able to direct the use of the special account local currency funds in such a manner that it will aid the recov- ery of the respective country, and in turn benefit the United States. The literature discussind how the grant-in-aid portion has contributed to the recovery of EurOpe has been voluminous, but there has been very little written on the achievements of the counterpart funds. It is this counterpart portion which has been very important in promoting industrial and adricultural recovery, and monetary and financial stability throughout the Western European area. In addition the con- ditional aid and net drawiné riJhts utilized under the llO intra-iuropean paysents plan hgve made possible a much larger volume of intra-LurOpean tr de than was ever possible under the old trade and phyments aireecents. nany peeple in this country were afraid that the United states throuéh the use of the counterpart funds was doiné to intrude excessively in the domestic policies of the partici- pating countries. The economic SOOperation Administrition has not refrained entirely from intervention in domestic policies, but there is some justification for the position that the United states should have some say in the affairs of the areas into which she is pouring billions of dollars. All in all, although tiere have been some difficulties and some protests, it appears that the Economic COOperstion Administration missions hive hindled this phase of the European Recovery Prosran quite well. For the most part the countereart fund have been re- leased for domestic investnent; but counterpart funds have also been released for repayment of debt and as a substi- tute for additional borrowiné from the Central Bank. The first conclusion to be reached about the release of counterpart funds to Western Europe is that they have definitely been a factor in aiding the recovery of surOpe duriné the first two years of the Foreiyn Assistance Act. In France the local currency counterpart funds have helped to increase the production of the country in nearly every industry to a level above thdtcu'the pre-war period. 111 In addition France has used the funds when necessary for eff ctive reduction of the public debt. In the United Kingdom counterpart funds have been effectively used for debt retirement, thus curbiné inflationary tendencies. How- ever, in the foreseeable future they will probably also be used in critain for production promotion. In Italy and Western $ermany the counterpart funds have been used almost exclusively for industrial and apricultural promotion due to the fact that the most important objective of these two countries was to produce the goodsnecessary for their survival. During the first two years in which the counterpart funds have been released by the Economic COOperation Admin- istration, they have been used lar5ely to enable Western Burcpe to put its house in order. However, the local cur- rency funds to be released durind the latter half of the European Recovery Prooram will probably be to enable the Western hurOpean area to close its dollar sap. There will be an attespt to promote those industries able to produce goods for eXport, and in addition there will be releases for the purpose of improvins and increasin5 production. There- fore, it is likely that an even smaller proportion of the funds will be aIIOcated for debt retirement durin; the lat- ter half. It is thought by the sconomic Cooperation Adainis- tration that inflation is largely under control in most of 112 the participating areas and that the primary objective now is to 5st production rollind in order thst ¢OOdS can be ex- ported, thus illowin: the plrthlpdtan countries to become lardely self-supportin$ by 1952. The counterpart funds will play at least as larbe a role durin5 the second two years of the Foreisn Assistance Act as during the first years. The reason for this is that during the second half there will probably be a larder proportion of funds alloted to Europe in the form of grants. hany peOple seem to think that it would be a dreat mistake to advocate further loans to Western Europe. However, with the doal of increasing the production of Festern EurOpe to the extent that it caneaport goods and be- come self-sup,ortin5 neariné accomplishment the predominant problem facing these countries is to increase their volume of trade. France, Endland, and some of the less important participatind countries have reached this staoe and soon this same trading problem will be facing nearly all of the psrtic patina nations. In order for these countries to bet the dollars needed, they will have to ship goods to the West- ern HemiSphere, predominantblto the United States. The Job or role of the United States and the rest of the Western HemiSphenacountries is to buy these European goods whenever possible. By this it is not meant that we should buy éOOQS from these countries when we can produce them more cheaply ourselves, but that we should purchase them when they bring ll} about an actual savin5 to us. In other words we should make an honest attempt to reduce our tariffs and break down some of the needless restrictions that now hamper our purchase of foreign ooods. Barry Binéham,chief of the Economic Cooperation Ad- ministration Special mission to France at an address del- ivered before the American Society of Newspaper Editors in Washinston D.C., pointed out that we have three alternatives in France for 1952: (l) "we can support the French with Amer- ican tax money," (2) "we can abandon the French, riskind a communist victory and loss of an important market for our farms and factories" or (3) "we can 1 wer our tariff barriers to a reasonable desree and buy from France, so that she in turn can buy what she wants and desperately needs from us." These statements by dr. Bingham could well be applied to the whole of western Europe.114 If the United States does not tackle and solve this tradiné problem of Western Europe's, the participatind count- -ries will not be able to become self—supportin5 by 1952. Mr. Binéham stated it very well when he said, "The nations of western EurOpe will be forced to discard the harshall Plan crutch without yet beino able to walk by themselves.'115 114Barry Bindham, Vital SQBBChGS 22 222 Da ' p.479. 115 Ibid., p.480 114 Thus, no matter how beneficially the participating countries use their funds, unless the United States breaks down its tariff barriers and stOps protecting industries that should not or need not be protected, Western EurOpean recov- ery will not be achieved. bl BLIOERAPHY 116 A. éfii‘ibfinL ‘.“(02’Ll;S Bailey, Thomas A., nDiplomatic History of the American PeoEle, New York, 19E6'. Cheney, Edward P., Law in History and Essays, New York, 1927. Dennett, Raymond, and Turner, Robert K., eds., Documents on American Forei5n Relations, Bristol, Conneticut, 1949. Goodrich, Leland J., and Carroll, marie J., eds., Documents 23 American Forei5n Relations, Boston, 1945. Harris, Seymour H., The EurOpean Recovery Pr05ram, Cambrid5e, Jones, 5. Shepard, and myers, Denis P., eds., Docuznents on American Forei 5n Relations, Boston, 1941. B. PJRIODICAL ARTICLES Bingham, Barry, "France: A Case Study in Marshall Plan Re- covery," Vital Speeches of the bay, 16:476-80, may 15, 1950. brecht, Arnold, "Re-estaolishin5 derman dovernment, " The Annals of the American academy of Political and social Science, —2o7:23:12, January 1950. , "Britain and the Larshall Plan," Labor and Industry in Britain, 8:24—54, garch 1950. Crowther, Geoffrey, "What Britain must Do," United States News and World Report, 27: 30- 5, September 2,1949. , "Germany," Atlantic Monthly, 184:11-15, July (3 O :3 I Giordano, Antonio, "Problems and Prospects in Italy," temporary Review, 177:14-17, January 1950. Harris, Seymour 3., and Harris, Ruth 3., " h~3A and Intra- EurOpean Trude," Foreign Policy Report, 25: 40, April 15. 1949. Harris, Seymour E., "ERP: Pr05ress and Prospects," Foreign Policy_Re :ort, 25: 30-59, April 15, 1949. 117 Hoffman, Paul &., "RurOpean Recovery: Will you Get Your money's North?" American haQazine, 147:24-5, April 1949.. Hoffman, Paul G., "Toward Inte5ration: France Points the Way,“ New York Times maQazine, pp.9-10, may 21, 1950. Paudover, Saul K., "France: 3ettin5 or Rising Star," For- ei5n Policy Association, Number 81, pp.3-64, may 1950. Jchwarz, R.P., "The First Half of the Nonnet Plan," The Fortni5htly, 172:217-25, October 1949. Ward, Barbara, "Italy is Outwardly Poor but Inwardly Rich," New York Times HaQazine, pp.7, 26, 26, 29, 50, June 5, 1950. White, Stephan, "n. Jolivit sets his Tractor," Readers Diiest, 54:57-60, June 1949. c. JOVLPQE..LLIJT Bowman‘s "Buildin5 the Peace," Department 33 State Publication 2954, Au5ust 1947. Con5ressiona1 Record, Ri5htieth Con5ress, Second Session, Vol. 94, part 2, February 20, 1948 to march 15, 1945. Economic Cooperation Administration, 5 Report gn_Recovery Pr05ress and United States Aid, Washin5ton D.C., Feb- ruary 1949. Economic COOperation Administration, France Country Study, Washin5ton D.C., February 1949. Economic Cooperation Administration, Italy Country Study, February 1949. Economic Cooperation Administration, Local Currency Counter- part Funds: First Annual Review, April 5, 1948-April g, 1949. Economic Cooperation Administration, Local Currency Counter- part Funds: Lidpoint Review, April 1950. sconomic COOperation Administration, LOcal Currency Counter- part Funds (monthly Reviews). 118 Economic Cooperation Administration, United hin5dom Country Study, Hashin5ton 0.0., February 1949. Loonomic COOp erition Ad ministration, Western aermany Country Study, aashin 5ton, D.C., February 1949. Fourth Resort to Con ress RE the Leonoznic Cooperition fig- ministration, washin5ton D.C., Au5ust 1949. Ho arin5s Before the Committee on Forei5n Affairs, House 9: Representatives, Lmi 5htieth Con ress, First Session, Part 1, 1947 Rearin5s Before the Committee 2E Forei5n Relations, United States Senate, Li5ntieth Con5ress, Second Session, Parts 1 and 2, 1948 Third Report to Con2ress of the Loonoszio CDOper tion Ad- ministration, washin5 ton D.C., may 1940. United States Statutes at Lar2e, Li 5htieth Con5ress, First Session, Vol.61, Part 1. United States Statutes at Lar5e, Li5htieth Con5ress, Second Session, Vol. 62, Part 1. D. ENCYCLOPLDIL AND YLARBOOK ARTICLES The Americana Annual, 1948. Srittanica Book 2: the Year, 1947-49. fiéNew York Times, 1947-50. 1"“1 {59? {”3273 ,_. 33 La =15; q 55 ,i v M i . v .-| :l '2 2, '1 - 11 (IgguwnyguusmwgmunH'Imflfifiliifliflti ES 098539