fact that nearly 500,000 refugees from the territories subject to Communist incursion constitute a problem that renders any purely economic solution impossible.

(c) The third factor rises from the fact that agricultural production has been subject not only to the inevitable deterioration of soil due to lack of fertilizer and overuse during the war, but, during the last 2 years, to severe drought and in the last year to a devastating winter with subsequent floods. The agricultural production of eastern Europe as well as the food production of some colonial areas of previous importance were also lost in considerable measure. The former was due to the cutting-off of any surplus from export by the trade policies imposed, and the surpluses themselves tended to disappear because of the quartering on these areas of large numbers of Russian soldiers or the building up of so-called local security forces and armies under Soviet control. In addition, the land policy with its division of holdings into very small units tended to reduce the exportable agricultural surpluses.

(d) The fourth factor involves the physical deterioration of a warstrained machinery and the overuse in many cases approximated the destruction of actual war damage. The loss of productive skills was a peculiarly serious factor in mining, as the recruitment of young and strong miners had been seriously affected by the war mobilization and by the subsequent movement of populations.

(e) The fifth factor, the inevitable concomitant of all the above factors, is inflation, the product of political instability and lack of production, as well as the inability to move goods from normal trade channels. The standards of production of western Europe were, next to our own and those of Canada, probably the highest in the world in the prewar period. Under the impact of the factors mentioned above, the 250,000,000 people, in round figures, who are contained in western Europe, produce less than one-half of our own national income. Since Europe was on balance necessarily heavily dependent on imports, the world-wide inflation which had increased the costs of primary products particularly, has borne heavily upon the whole European economy. The result has been an overwhelming demand for the few sound currencies remaining in existence and in particular the dollar, since it represented the productive capacity which all nations needed.

The countries of Europe today are existing on a dietary level below the standard which permits an adequate day's labor. In Germany the level is below that of a bare subsistence diet and in all the countries of Europe inflation has prevented the farmer from being willing to supply the city dweller with the food which was available. Unless and until more goods can be produced, no remedy is possible for blackmarket conditions and for general inflation with its attendant political dangers.

It would be a very one-sided picture, however, to suggest that Europe has not made substantial and steady progress toward putting its own house in order. Italy, under the most difficult conditions and with an industrial production level still only about 75 percent of prewar, has brought inflation under some control and has actually begun to move toward a stable currency. The French position has been improved in spite of the serious strikes and political disorders which parallel the Communist attempts in Italy and were timed mainly at the very outset of the interim-aid program in December.

The Scandinavian countries have made substantial and steady progress toward recovery and the three countries which comprise the Benelux union (Belgium, Netherlands, Luxemburg) have made remarkable progress toward economic recovery and political stability.

England, in spite of the severe difficulties due to the lack of adequate exports, the loss of India and Burma, and the sacrifice of its foreign holdings through the war, together with the creation of a tremendous debt in blocked sterling, has with the help of large-scale American aid, increased its industrial production 20 percent above the prewar level and maintains complete political stability.

The production of western Germany, which has reached only about 35 percent of its prewar level, served to bring down the whole production index of the countries of western Europe which had, in the main, achieved roughly parity with prewar production, although with the increase in population the per capita national income of the participating countries fell considerably below the 1938 level.

Throughout western Europe steady progress was made in the restoration of transportation, including ocean shipping, and in the output of coal and the production of hydroelectric power. Actually hydroelectric power in 1948 was increased on the continent of Europe by nearly 40 percent over 1938. With the development of the colonies of Europe and the restoration of trade with countries with exportable surpluses of food and primary products, particularly with Latin America and the British Dominions, the need for extraordinary outside aid should tend progressively to disappear. If political and economic stability can be achieved in Europe, the Middle and Far East, we can look forward to the resumption of a normal and healthy trade which will permit the maintenance of high levels of production in this country as well as the rest of the world. Serious difficulties will, of course, remain until coal production is increased according to the programs set forth in the CEEC report. Petroleum, too, will furnish peculiar difficulties which are not rendered easier by the existing threats of political chaos in the Middle East, centering on Palestine. The whole European recovery program depends in considerable measure on the development of the exportable oil of the Middle East in the next 3 or 4 years, since, without oil, not only its industrial users but transportation will be seriously crippled.

The important point is that all the problems which Europe faces are capable of solution at least if the western half of Europe acts in cooperation and with an increasing measure of political and economic unity. In order to be able to defend itself against the encroachments of communism it must have the basic conditions of political security and economic health. The recovery of Europe, painfully initiated since the war, is now at a critical turning point. It may go forward with increasing tempo or it may lose ground with appalling rapidity.

F. JOINT MEASURES

The report of the Select Committee on Foreign Aid, What Western Europe Can Do For Itself (preliminary Rept. No. 14), showed a number of examples of steps already taken by European countries to facilitate joint efforts toward recovery. The functioning of the Inland Transport Organization, although beset with difficulties in the return of cars from eastern Europe and by the blocking of much inland water

transport, has nevertheless made substantial progress towaru goal of restoring the operating rail system of Europe as an integrated whole, at least in the CEEC countries. Efforts are also being made with some success to integrate developmental schemes for the transmission of electric power through a grid system organized by western Europe, though with insufficient emphasis on the German participation in such a development.

In addition to these practical efforts at integrating the economy in some of its most basic factors, the following steps have been taken:

(a) A study committee on customs union, established first at the CEEC conference, has been set up to examine the possibility of a common customs union among all the countries represented. This effort is in its initial stages and is encountering the natural difficulties, but it has been supplemented by the actual entering into effect of the Benelux customs union on January 1, 1948. Denmark, Iceland, Norway, and Sweden are also projecting a similar customs union, and France and Italy, as well as Greece and Turkey, are undertaking bilateral negotiations to the same effect. In times when the government regulation of imports through the application of quota systems and foreign-exchange controls is so rigid as is almost necessarily the case with strained economies and general dangers of inflation, the mere initiation of a customs union does not accomplish sweeping economic effects. It is, however, a necessary step in the direction of progress toward real economic unity which will provide free movement of manpower, labor, capital, and goods across national frontiers.

It is noteworthy that a recognition of the political corollary has already been recognized in the recent meeting of the five countriesBritain, France, Belgium, Netherlands, Luxembourg-which on March 17, 1948, entered into a 50-year mutual-assistance pact, which included both provisions for mutual defense against aggression in Europe and for increased measures of economic and political cooperation.

(b) The Economic Commission for Europe of the United Nations has taken over the European Coal Organization and the Inland Transport Organization, and has engaged in some measure of studying the possibilities of systematic cooperation between European countries, particularly those of western Europe. Five of the sixteen countries of CEEC are not members of the United Nations, but they have nevertheless been invited to the committee meetings of the Economic Commission for Europe.

It seems unlikely, however, that an organization under the aegis of the United Nations can provide the close cooperation and stronger central organization that is an obvious requisite for western European economic recovery as well as adequate defense against the threat from the east.

Recognition of this fact and of the possible desirability of readmitting Spain to the family of western European nations seems to be growing among the countries of western Europe and is certainly manifesting itself in opinion in the United States.

Any such European union or western union, as it has been called by Mr. Bevin, the British Secretary of State for Foreign Affairs, in a highly significant recent speech, would require for its success the effective mobilization and joint development of colonial resources, including free and equal access to United States private enterprise.

Unless the European colonial countries are able and willing to open up their colonies for such joint development, any western European union will lack the necessary resources. Similarly, the failure to mobilize the full productive capacity of the Ruhr would be a fatal block to recovery.

(c) The clearinghouse which was set up on the recommendation of the Financial Committee of the CEEC conference for intra-European balances has been initiated since January 19, 1948. Although it is so far operating in only a limited way through the Bank for International Settlements, it shows the possibility of a development which will be tremendously facilitated by the European recovery program.

G. SUMMARY

As a result of the study of the foregoing factors, the committee has set forth as the object of the recovery program the purposes stated in the preamble of the bill. It has included the conditions undertaken by the CEEC countries voluntarily in their Paris Conference. It recognizes that the success of the program rests upon the willingness and good faith of these countries in carrying out their pledges both to help themselves and to help each other. It specifically provides that the continuance of the program depends upon the fulfillment of these pledges.

The committee has concluded that the program is necessary to prevent the United States from being confronted with a world so unbalanced and hostile as to present almost insuperable burdens to the people of the United States in the future, if Europe is not once more rendered free and adequately strong, both in its political and economic life. The same consideration has led the committee to include China as a barrier in the Far East against the further encroachments of communism and the domination of the world by Moscow.

The committee is convinced that in cases where civil war and Communist aggression are present, as in China and Greece, and external threats are dangerous, as in Greece and Turkey, militarytype aid is required to insure the effectiveness of economic aid. It has therefore concluded that the prompt enactment of the comprehensive program embodied in the Foreign Assistance Act of 1948, as amended by your committee, is essential to the security and prosperity of the United States and to the establishment and preservation of world peace.

III. ESTIMATES OF PROPOSED AUTHORIZATIONS

A. AUTHORIZATIONS SUMMARIZED

The House bill would provide for authorizations of appropriations amounting to $5,205,000,000 to cover the following:

In addition, the bill provides for an increase of $1,000,000,000 in the borrowing power of the Export-Import Bank, bringing the total number of new dollars to be made available for foreign aid under this legislation to $6,205,000,000.

The bill does not cover tae cost of the "disease and unrest" program in occupied areas, the cost of the present United States military establishment abroad, nor increased lending capacity of the Export-Import Bank for loans to Latin America. The present bill, together with these additional programs, involves a total of $9,316,000,000.

Recapitulation of estimated cost of existing and contemplated foreign financial commitments

1. Proposed "Foreign Assistance Act of 1948":

European recovery program:
Authorization of appropriations..

For loans by Export-Import Bank.

China:

2. Disease and unrest program in occupied areas 1 (included in the

Million

$4,300

1,000

420

150

275

60

$6, 205

$836

487

134

8

16

2

1,483

(Approximately $95,000,000 of this represents adminis-
trative costs; the remainder is for the purchase of relief
supplies.)

3. Present U. S. Military Establishment abroad (included

in the President's budget for fiscal 1949):

Export-Import Bank (increase in lending capacity for
Latin-American loans).

Total_____

Grand total. - -.

$256

36

344

122

150

908

$220

500

720

9, 316

NOTE. While not all of these are 12-month authorizations and expenditures from others are contingencies, the total represents an amount which should be considered as a possible 1-year expenditure for foreign activities.

1 These estimates for the April to April period are based on the assumption that the $150,000,000 remaining of the 1948 authorization is appropriated (now before House Appropriations Committee) and that the 1948-49 authorization ($1,250,000.000) is approved.

The administration requested $570,000,000 for economic aid for China for the next 15 months. The present bill cuts this to $420,000,000, but adds $150,000,000 for military assistance.

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