Foreign Relations of the United States, 1950, Central and Eastern Europe; The Soviet Union, Volume IV

611.6122/5–550: Instruction

The Secretary of State to the Embassy in the Soviet Union

top secret
No. 41

Washington , May 5, 1950.

The Secretary of State refers to the Embassy’s despatch No. 558 of October 1, 1949 and its enclosures.¹ The contents of this despatch and its enclosures have been considered with interest by the Department, and a memorandum of comment, transmitted herewith, has accordingly been prepared for the Embassy’s consideration.

[Dean Acheson]

[Enclosure]

Memorandum Prepared in the Department of State ²

top secret

[ Washington , undated.]

Comments on Moscow’s Despatch No. 558, October 1, 1949

The Embassy recommends that the United States Government take the initiative in developing a coordinated long-range policy for the western world that will result in increasing restrictions upon western trade with Soviet areas. The Embassy concludes that such a program will have an effect on basic Soviet political objectives, by lessening and destroying Soviet aggressive economic potential.

In implementing this program, the Embassy also recommends at least the following specific lines of action:

(1) improved intelligence reporting and analysis;

(2) strengthening United States controls over Soviet dollar earnings;

(3) limiting United States imports of non-essential Soviet goods;

(4) East-West European “bloc” trading;

(5) strengthening United States controls over publication and transmission of technological data.

The Embassy’s recommendation for a more active program of economic pressure appears to be based on two major premises in the economic field.

(1) that the Soviet Union and its satellites are seriously vulnerable to a tightened and improved trade restriction program and

(2) that the western world has at its disposal the means for making its economic power “effective” in a long-range program for the ultimate destruction of the Soviet war potential.

In the first place, the assertion of absolute vulnerability of the Soviet Union is contrary to the conclusions reached in recent Departmental reports, based upon considerable research and analysis. The Soviet Union is scarcely a trading nation at all, as compared with the United States or Western Europe. It is dependent upon trade in a qualitative sense, with respect to some few products and materials but particularly with respect to the acquisition of technology. The Soviet Union is not, however, lacking in scientific or technical talent; it possesses a wide variety of resources over its enormous land-mass, and it has available extensive manpower for further training and further development of these resources. Its population has long been accustomed to a low standard of living. It also has an autocratic government that can see to it that low living standards are maintained and human, as well as natural, resources are utilized in the interests of state planning objectives. Thus, a conclusion to the effect that the Soviet Union is vulnerable, in an absolute sense, to economic warfare measures, does not appear consistent with the known facts of its substantial self-sufficiency at approximately its present stage of development.

It is true, however, that by a system of controls the western world can retard the rate at which the Soviet Union continues industrial development and thereby augments its aggressive war potential. This is precisely the policy that is now being followed by the United States. It must be recognized, however, that no western action can suffice absolutely to prevent Soviet industrial development, or to produce any fundamental effect upon Soviet ability to make war at some time in the future. Western trade controls must be recognized for what they are, a delaying tactic that may or may not succeed in effecting an alteration of Soviet tactics. In and of themselves they cannot do sufficient damage to effect a reversal of basic Soviet policies and objectives. The plain fact is that the Soviet Union is not particularly vulnerable to any of the economic measures thus far proposed.

The vulnerability of Soviet satellite economies to western restrictions on trade is, however, a separate question. Trade as a whole is more important to certain Soviet satellites than to the Soviet Union, in comparison with total national product, and these smaller countries naturally have within their own borders only a limited variety of essential resources. They would appear, therefore, to be more vulnerable than the Soviet Union to economic pressure from the west, and the possibilities for adding to the economic difficulties of their existing Communist regimes therefore should be carefully explored. Even in the case of the satellites, however, there seems to be little basis for assuming that a reversal of their policies could be achieved by blockade. It must be recognized that drastic measures of western economic warfare against the satellites may, under present conditions, result not in Titoism but only in accelerating the present rate of their integration into a Soviet bloc economy. In any event the matter warrants careful study before any conclusion can be reached concerning the use of economic measures to wean satellites away from the Soviet Union.

In the second place, the Embassy probably has overestimated the degree to which the west can take effective aggressive action in the economic field, especially in so far as this would require unanimity of action by the western world vis-à-vis the Soviet Union and its satellites. The United States desires a free and democratic world, in which trade develops on the basis of comparative economic advantage, and in which controls, coercion, and government trading are at a minimum. Within the framework of existing United States policies, it would not be desirable to construct a well-organized restrictive system unless there were in sight results more clear-cut and more significant than appear attainable. Even within a framework of world trade that has not thus far realized United States trade objectives, it is practically impossible to enforce such a system of restrictions under conditions short of war. The control measures required to cope with even the present limited volume of East-West trade in this manner would be very extensive and would call for complicated arrangements between western countries which have varying degrees of government economic control and varying philosophies.

Further, it now serves the economic interests of a number of the western countries to trade with the Soviet area, because they can buy essentials there, and because the area is a market for their goods. This trade is not very large in terms of total western trade but it is nevertheless important to the western countries under present circumstances, and it may become more important in the future. If the United States were to seek a blockade of this trade, the United States would also have to replace the goods which Eastern Europe offers, to provide the means of payment for such goods or to provide an alternative market for western goods that are now sold in the east. The United States should, of course, be prepared to provide emergency assistance to Western Europe in the event that Eastern Europe, by its own aggressive action, were to shut off essential East-West trade on a long-term basis. The United States cannot, however, plan a substitute for East-West trade on a long-term basis, without assuming that it will be willing and able to make substantial additional expenditures for the purpose of subsidizing Western Europe over an indefinite period of time. This assumption realistically cannot be made. The ability of the United States to produce the concerted western economic action suggested by the Embassy is, in the last analysis, directly proportionate to United States ability to pay the cost of resulting economic dislocations in the west. On the whole, therefore, the facts indicate that a program of considerably more extensive restrictions on East-West trade, while psychologically and economically upsetting to Western Europe, and extremely expensive for the United States, would nevertheless fail to have any really decisive effects on Soviet economic interests and policies.

Although it appears that the efficacy of more aggressive economic warfare measures must be heavily discounted, by no means does it follow that the western world lacks effective means for lessening the threat of Soviet military potential or postponing indefinitely the development of conditions under which an East-West armed conflict is likely to occur. Soviet military-economic potential now is at a level considerably below that of the west. The United States can see to it that this situation continues to prevail and it can extend this relative advantage of the west by taking positive steps to improve the economic and political health of the free world. The latter program is of course now a major part of United States foreign economic policy. The United States is assisting Western Europe economically, psychologically and militarily. The United States proposes to extend even greater assistance than heretofore to underdeveloped areas of the world.

For the United States, ultimate security against an existing and developing Soviet world lies in fact in its own strength and in the strength of other like-minded nations. If the Soviet sphere develops its industrial power, as it will, the western world must develop faster and further. If Soviet policy makers assume the western economic system will break down, the United States and other western countries must take steps to insure that it does not. We must devise means of preventing economic crises, of disposing of surpluses in an orderly manner so that they benefit people somewhere, and of proving thereby that the Soviet analysis of what Soviet thinking defines as capitalism is wrong. If Soviet policy makers expect to seize power when war or protracted depression has created political instability in the non-Communist world, then the west must do everything possible to prevent these disasters from taking place. Current Soviet policies are derived with some logical consistency from Soviet basic assumptions. In order to effect any substantial alteration of these policies, it must be proved over the course of time that they, and the underlying assumptions, are mistaken.

Without undue emphasis on negative and restrictive measures, which could result in disservice to ourselves rather than to our potential enemies, the United States should of course continue its present program of controls over items selected because of their real importance to Soviet military potential. As a corollary, the United States should continue to press vigorously for the adoption of similar controls by other countries. These controls are expected to result in retarding the rate at which the Soviet military potential can be developed, but they are not so severe as to involve genuine economic sacrifices for our friends. If intelligence work is intensified, especially with respect to determining the bottlenecks in Soviet war potential industry, a careful selection of controls can increase their genuine nuisance value for the Soviet economy. If the United States program in this field is unreasonable, however, for any of the reasons cited, we shall not obtain the necessary parallel action by other countries. If such parallel action is not forthcoming, unilateral United States controls merely would penalize our own commercial interests but would not wreak any substantial damage on the Soviet Union. The United States also should recognize that its objectives of retarding the rate of Soviet development, or detaching the satellites from the orbit, to some extent can be accomplished by positive economic measures of an imaginative and resourceful character. (The status of negotiations for parallel action in export controls has been outlined in Departmental circular instruction of April 26, 1950.³)

The Department concurs with the Embassy’s recommendation that intelligence work should be improved in every way possible. It is clear that the Government can never be too well informed about the economic conditions and the military potential of a possible enemy. It is also clear that the United States intelligence program should be carefully formulated and carefully implemented both in Washington and in the field.

The Department has for some time been considering ways in which field intelligence work for this purpose could be improved, and it is of the opinion that a more objective approach to the facts, coupled with high standards of historical criticism, is of the utmost importance.

It is recognized that reporting on the Soviet economy is one of the most difficult current intelligence functions and that basic factual material is frequently lacking; nevertheless a frank statement concerning the extent of our ignorance of Soviet developments may be of some use in stimulating efforts to fill the gaps. Neither the Department nor the Missions should under any circumstances fall into the dangerous position of formulating policies on the basis of intelligence reports characterized more by a priori reasoning than by careful factual analysis. The nature of Marxist orthodoxy and observation of Soviet negotiating tactics indicate that such faults are probably among the worst of the Soviet Union’s own intelligence system.

It will be of interest to the Embassy that the economic vulnerabilities of the Soviet bloc are continuously under review by various agencies of Government, while new projects are undertaken as special problems arise. As indicated above, the question of absolute vulnerability of the Soviet bloc to western economic weapons has been given careful treatment in research studies prepared to date. It is believed, however, that detailed analysis of specific Soviet and satellite industries can develop useful information on their vulnerabilities to western controls over particular commodities or with respect to the timing of delivery for goods which are imported from the west. The Embassy and other Missions in Eastern Europe undoubtedly can be of great service in the several stages of this project.

The Embassy has recommended also that limitations be placed on the Soviet Union’s dollar earnings, by restricting Soviet non-essential exports to the United States or by requiring that the Soviet Union accept United States non-essential goods if the United States continues to import non-essential Soviet goods, such as furs and caviar. The latter method in effect would achieve a bilateral balancing of United States-Soviet trade, thus eliminating the current trade surplus which the Soviet Union can now convert into free dollars. It does not appear desirable at this time to introduce these restrictions.

In the first place, the Soviet Union now earns dollars in United States trade because the United States embargoes or restricts Soviet purchases in the United States for security reasons. In the absence of United States export restrictions, the Soviet Union might well have a trade deficit with the United States and it would have no difficulty in financing such a deficit. If the United States were to balance its trade with the Soviet Union so that the latter would not earn convertible trade surpluses, the Soviet Union would not be prevented from obtaining dollars if it so desired. The Soviet Union is a major producer of gold; it is reported that the Soviet Union is now using little gold in its foreign trade, but undoubtedly the Soviet Union could do so and undoubtedly it can increase its gold production if need be. Gold bullion is acceptable in trade anywhere. The Soviet Union can sell gold to a third country and the latter ultimately can obtain dollars with this gold or its equivalent. If a series of transactions is involved, the Soviet identity of the gold would be impossible to maintain.

Under present conditions, most of the world has a deficit in trade with the United States. It is highly probable, therefore, that much Soviet gold sold abroad would eventually find its way to the United States. As a heavy net creditor nation on current account, the United States is not in need of gold to settle its international accounts and current reserves are ample for domestic monetary purposes. In effect, therefore, the United States would be giving away its goods to the Soviet Union or a third country, since the ultimate payment to the United States, for United States goods purchased with dollars that are obtained by the sale of gold, is not in foreign goods but in foreign gold, and for the latter there is no immediate use in the United States.

On the whole, even the non-essential goods, such as furs and caviar, which the United States imports from the Soviet Union, and which presumably are exported by the Soviet Union only because the Soviet Union wants some dollars, are of more benefit to the United States economy than are sterilized gold reserves. It has been noted that Soviet free dollars may serve to finance Communist activities. Communist activities presumably do not cost a great deal, and they could be paid for in gold in any case.

These are practical considerations. Instituting a bilateral arrangement and/or import control system in United States-Soviet trade also would constitute an unusual deviation from our normal commercial policy. In view of the miniscule United States-Soviet trade involved, this deviation scarcely seems worthwhile, especially since the effects on United States objectives vis-à-vis the Soviet Union would not be apparent. The precedent established by such new import controls, which could properly be effected only through new enabling legislation, doubtless would lead to domestic pressure in the United States to obtain similar controls and protective restrictions on United States imports from non-Soviet areas, thus hampering the achievement of one of our major economic objectives.

The formation of an OEEC bloc to centralize Western European trade relations with the Soviet Union and satellite countries is probably not a practical proposal. To date, OEEC countries have not shown a high degree of policy coordination on trade, whether intra-western or East-West trade problems are involved. To date, also, the United States has not been able to obtain a full concert of East-West trade control policy with such important western countries as Sweden and Switzerland. Without the participation of these countries, which are not likely to participate for both economic and political reasons, a Western European bloc for trade with the East would not be very effective.

Western countries are now improving their terms of trade in purely bilateral trade arrangements with countries of Eastern Europe, especially with respect to coal and grain prices and the need to make dollar payments. It might be possible for one or more “weak” western countries to improve terms of trade with an eastern European country by negotiating, together with one of [or] more stronger western partners, a multilateral East-West trade agreement. Trilateral deals have been suggested, but neither the weaker nor the stronger western partners have shown special interest in them.

East-West bloc trading probably would renew eastern efforts to obtain a formal clearing system for East-West payments and a scheme for obtaining long-term funded credits, both of which are now considered undesirable. Bloc trading probably would stimulate eastern countries to achieve better coordination of their own purchases and sales in the west. Bilateral trading is a more anarchic system than bloc trading and, under present conditions, this may not be an unsatisfactory basis for East-West trade. If specific disagreements arise over non-fulfillment of quotas, prices, etc., a western trading bloc might feel obliged to recommend some immediate solution, in order to avoid extending the difficulties of one trade channel into an East-West policy problem. Bilateral trading, however, can relate the solution of such differences to a more specific basis of value-given and value-received. For the relatively free economies of Western Europe, it would be difficult, and perhaps impossible, to coordinate offers on items, quantities and prices in East-West trade negotiations. The controlled economies of the east would have much less difficulty in knowing what was available, for export from their area, what they most desired for import and what compromises could be made in order to obtain something even more desirable.

Although Eastern European economic integration seems to be well under way, East-West bloc trading probably would bring about its acceleration. Under present conditions of East-West trade, it is probably true that important traders like Poland and Czechoslovakia have considerable leeway to negotiate in terms of their own needs, although only after their most important Eastern commitments are taken into account. Bloc trading would tend to affect the degree to which they are now free to conduct their affairs on the basis of their own national interests, rather than in terms of overall Soviet bloc requirements.

The Embassy also suggests that further restrictions be placed on the export of United States industrial technology to Eastern Europe. Program Determination No. 236 of the Department of Commerce, dated October 12, 1949, is a step in that direction. Under that program, devised by an interdepartmental group, organizations and individuals receiving requests for advanced technological data from foreign sources are advised to consult the Office of International Trade as to the desirability of permitting the data to go abroad. The program is voluntary, and controls are to be limited to technical data which involve “advanced developments, technology, information, know-how, including prototypes, and special installations pertinent to the common security and national defense”. It includes technical data which do not now have a security classification but it excludes published materials generally available to the trade and public. The plan covers exports of technical data to all areas except Canada. It is intended, of course, to establish in effect an embargo on the export of such data to the Soviet Bloc, and there is every chance that it will succeed.

The placing of special restrictions on the publication of unclassified technical data, however, would hinder the exchange of useful information within the United States and thus hamper our own rate of technical achievement, which is of far greater security significance to the United States than any restrictive program. It may be noted that the Naval report enclosed with the Embassy’s despatch appears to reach the conclusion that the Soviet Union normally would be able to adopt new industrial processes only through access to concrete objects incorporating such methods, and would not really benefit by access to published data.

1. For text, see Foreign Relations, 1949, vol. v, p. 142.
2. This memorandum, which was drafted in the Office of International Trade Policy on April 4 by Marcia R. Harrison and Willis C. Armstrong, was concurred in by the Offices of Eastern European Affairs and European Regional Affairs of the Bureau of European Affairs and by the Office of Financial and Development Policy.
3. Ante, p. 87.