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The co-ordination of the replies of the participating governments proved a harder job than had apparently been anticipated. To take one example. Proceeding on the basis laid down by the Co-operation Committee - that is to say, adequacy of supply and absence of payment difficulties - the participating governments returned grain requirements amounting for the current year to something over 30 million tons. Availabilities are known to be no more than 15 or 16 million. Unless the final report were to be entirely divorced from practical realities, some scaling down of total requirements of grain for the current year was obviously necessary; but when this came to be done, it was realised that governments had based their balance of payments estimates, not only for the current but for succeeding years, on the supposition that the grain requirements stated in their replies to the Food and Agriculture questionnaire would be forthcoming, so that any reduction of the grain requirements figure would involve hopelessly difficult and complicated revisions of the balance of payments returns. It is hoped to solve this difficulty by means of an appropriate explanatory paragraph in the report.

A great flood of documentation, including the first drafts of the technical reports, is now coming forward to the Co-operation Committee. We are examining them as they become available and will seek instructions from time to time on such points as seem to us to touch on our interests. In the meantime, the political background of the Conference is gradually crystallizing itself and I want, if possible, in this report to indicate what seem to me likely to be the main issues of a political character with which the Co-operation Committee will have to deal when it comes to drawing up the final report to be presented to the American Government.

I should say first that Sir Oliver Franks, the British delegate, told me on Tuesday evening that the problem of the level of Western German steel production has been satisfactorily solved. On the afternoon of that day Monsieur Bidault accepted a figure of 10 million tons, instead of the 5.8 million fixed at Potsdam and the 7 million which had previously been the limit to which the French were willing to go. Franks told me that the 10 million is to be expressed as 'possible' production, but the essential point was that this was the figure of steel production which was to be included in W. Germany's balance of payments and it would enable an equilibrium to be established in Germany's foreign payments within the four years to be covered by the final report. There was obviously a good deal of hard bargaining behind the scenes. Britain has given up her proposed nationalisation of the Ruhr coal mines to please the Americans and the British and Americans have agreed to give France increased shipments of Ruhr coke so as to enable her to keep French steel production in line with the proposed increase of steel production in Germany. The smaller countries here are pleased at the result, both on account of the prospect it holds out of an improvement in economic conditions in Germany and the likelihood which it creates of larger, cheaper and earlier supplies of steel becoming available in Europe.

With the German difficulty temporarily out of the way, another one has emerged. William Clayton, the American Secretary of State, has been active behind the scenes here trying to get people to accept the view that if Congress and public opinion in America are to be got to agree to an extension of credit sufficient to rescue Europe from its economic difficulties, Europe itself will have to do something dramatic - to take some kind of bold and radical measures - to capture the public imagination in America and to impress on people in that country the feeling that Europe on its side is prepared to take all possible steps to overcome its difficulties and regain its former prosperity. Mr. Clayton has apparently being saying that a mere inventory of European needs and availabilities will not be enough and that what is wanted to secure the end he has in view is a collective statement by the countries at the Conference that they are prepared to establish, more or less at once, a Customs Union covering the whole of Western Europe.

With the encouragement of Mr. Clayton's well-known views, France and Italy informed the Executive Committee last week that they were prepared to conclude a Customs Union with one another. Sir Oliver Franks invited the Danish delegate and myself to dinner on Tuesday night for the obvious purpose of telling us this. He said that France and Italy proposed to make statements at the Co-operation Committee declaring their willingness to conclude a Customs Union with one another and inviting the other states represented at the Conference to make similar declarations. The attitude of Benelux was that they were quite prepared to enter a Customs Union with France and Italy, but only on condition that Britain also was a member of the Union! The attitude of the Scandinavian states, Franks told me, was the same as that of Benelux.

Franks said that it was really in connection with this point - not the question of German steel production - that he had gone to London to consult his government last week. The British Cabinet had definitely decided not to have anything to do with the proposed Customs Union. Even if the difficulty of the lack of internal economic stability in France, Italy and other European countries were out of the way, there would remain the argument that Britain's membership of a European Customs Union would mean the end of the Commonwealth preferential system. It would entirely disrupt the present economic relations between Britain and the other members of the Commonwealth. According to Franks, this is an absolutely final and decisive consideration with the British Government and there is no possibility whatever of that Government having anything to do with such an organisation of Western European economic relations as that now being canvassed so strongly by Mr. Clayton and the French and Italian governments.

Franks went on to make it clear that his government were very worried about the position in which this development placed them. The tactical attitude of Benelux and the Scandinavian countries involved the risk that Britain would have to bear the onus of blocking an idea on which not only Mr. Clayton, but a considerable section of American congressional and public opinion, has already set its heart. He referred caustically to the article in last Sunday's 'Observer' and to what he described as a rather silly memorandum circulated by Geoffrey Crowther in the 'Economist' private subscription series based on a conversation with Paul Porter of the American Embassy in London. Britain's attitude would probably come in for a certain amount of criticism even in the English press. For that reason, Franks told me, his government had decided not to go flat out against the Customs Union idea but to take the line that, whereas they were not prepared to enter into any commitment or to make any immediate declaration such as the French and Italian governments were advocating, they were prepared to agree to a collective study of the whole question by the 16 countries represented at the Conference! The article by the Diplomatic correspondent on page 4 of the 'Times' of the 14th August is, therefore, quite accurate - with this addendum, that it may be taken as quite definite, I think, that whatever the result of any collective consideration of the question, Britain is not prepared to enter anything like a Western European Customs Union.

Franks asked me what was likely to be our attitude on the whole question. I said I had no instructions but that I would report my conversation with him and ask for directions. I thought that my government would be quite opposed to any idea of jumping into a Western European Customs Union but for reasons rather different to those which seemed to have influenced the British Government. Our industrial development, which was an essential element in the expansion of our national productivity, was of recent growth and though the aim was to bring our industrial production to the point of being able to withstand normal foreign competition, it was too young to be able to do so yet. Apart from that, I thought that the Franco-Italian idea would strike my authorities as rather too chimerical, if not actually dangerous from the point of view of the aims we all had in view. Having regard to the wide differences between European countries in economic conditions, living and labour standards, financial and fiscal systems and so on, a Western European Customs Union, even if it were practical at all, would take years to realise and in the meantime, the knowledge that something of the kind was on the way would create a general state of doubt and uncertainty inimical to effort, enterprise and investment. However, I said, I would have to put the whole question before my government and await their decision.

I am reporting this conversation at length at this stage so that the fact that the point is likely to be raised may be known to Ministers. It may not be necessary for us to take any definite stand on it at all. But in case it should be, I propose to submit in a report which I hope to despatch by the Aer Lingus plane on Sunday, my suggestions, in the shape of a draft text, as to the kind of statement which we should make if it is necessary to declare ourselves openly on the Franco-Italian proposal. I feel I should say at this stage that, though he himself did not say so expressly, I formed the definite impression that Franks' object in speaking to me as he did on Tuesday was to canvass Irish support for Britain if the issue should come to open discussion at the Conference. The importance of Irish support from the point of view of possible American reactions will be obvious.

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