Foreign Relations of the United States, 1947, Eastern Europe; The Soviet Union, Volume IV

861.24/2–2647

Memorandum by the Under Secretary of State for Economic Affairs (Clayton)¹

secret

[Washington,] February 26, 1947.

1. No replies have been received from the Soviet Government to our repeated requests for initiation of lend-lease settlement negotiations, the purchase or return of lend-lease merchant vessels, and the return of three lend-lease Navy icebreakers. (See Attachment I)

2. Unless satisfactory replies are received prior to your arrival in Moscow,² it is recommended that you personally press these matters with Soviet officials.

3. The Congress and press have commented strongly on a Soviet breach of faith in not acknowledging our requests and have criticized Soviet retention without payment of lend-lease merchant vessels alleging competition with the United States Maritime industry. (See Attachment II)

4. Satisfactory settlements have been effected with the largest lend-lease recipient, the United Kingdom, and with France. India, Belgium, Australia, New Zealand and Turkey. Settlement negotiations are now in progress with the Netherlands, Norway, and the Union of South Africa. The Chinese and certain smaller accounts remain to be settled.

5. Total lend-lease aid to the U.S.S.R. during the period of hostilities amounted to approximately $11 billion, the second largest amount provided to any nation. Reverse lend-lease aid from the U.S.S.R. was negligible amounting to about $3 million.

6. Lend-lease articles value at $225,000,000 have been transferred to the U.S.S.R. since the cessation of hostilities and articles valued at $9,000,000 are in process of transfer on a long-term credit basis under the U.S.–U.S.S.R. “pipeline” Agreement of October 15, 1945. However, transfer of goods valued at $16 million is being held up pending review by the Congress of a proviso in an appropriation act of July 1946 which has been construed as prohibiting shipment of any lend-lease goods after December 31, 1946 even though committed for delivery under existing agreements made in good faith under the clear authority of Section 3(c) of the Lend-Lease Act.

7. The Soviet Master Lend-Lease Agreement sets no specific date for the beginning of settlement discussions although it implies that discussions will be held at the end of the emergency. The Agreement provides for the return of lend-lease articles desired by the United States upon a declaration by the President of the end of the emergency. Should Soviet officials argue that, in the opinion of their Government, settlement negotiations are not timely or if they should state that the return of lend-lease vessels is not mandatory at the present time, they may be told that notwithstanding the presence of this same technicality other Governments have acted upon our requests without protest.

If Soviet officials persist in such objections, they may be told that a suitable declaration of the end of the emergency will be made at the earliest possible moment. This declaration would provide legal basis for our demands for the return of ships. The return of certain other articles might then be demanded for the purpose of persuading the Soviet Government that its own interests required it to negotiate a settlement.

A general declaration by the President of the end of the emergency may be made in the near future. If it is not, a declaration may be requested of the President for the limited purpose of all Master Lend-Lease Agreements, or for the specific purpose of the Soviet Agreement. It is not proposed immediately to request that a declaration be made for the purposes of the lend-lease agreements or for the purpose of the Soviet Agreement alone, unless further overtures to the Soviet Government regarding lend-lease matters fail to produce satisfactory arrangements. (See Attachment III)

8. The lend-lease settlement proposed for the Soviet Union is based on the general principles already adopted in settlements with the United Kingdom, France and other countries. Under these principles the United States would require long-term payment for, and would transfer title to non-military items remaining in Soviet inventory on V–J Day; “military items” would be left in Soviet custody without payment but with the right of recapture remaining with the United States. “Military items” in the British, settlement included all lend-lease items in the hands of the British armed forces on V–J Day irrespective of their military or civilian character whereas, in the case of the proposed U.S.S.R. settlement, “military items” would be limited by item definition to strictly combat items such as fighter aircraft, armored vehicles, guns and ammunition, irrespective of the military or civilian status of the holding agency. Payment on credit terms would be sought for only the post-war economic value of non-military items. British and French lend-lease settlement discussions were parts of discussions of broader economic topics including long-term loans of new money. Our attempts to reach agreement on an agenda for similar discussions with the Soviet Government failed. In view of this failure and the improbability of U.S. approval of a loan, lend-lease discussions were proposed independently. The Soviet Government, before agreeing to discuss an independent lend-lease settlement, may attempt to revive our previous agenda proposals which required discussion of a lend-lease settlement and other economic questions in conjunction with the discussion of a loan. (See Attachment IV)

9. Although no inventory of goods on hand as of V–J Day has been received in response requests, estimates of such an inventory have been prepared by the Department and are believed to be adequate for settlement purposes. Analysis of these estimates indicate the U.S. cost, depreciated to V–J Day, of non-combat items in the inventory to be about $2.3 billion. The fair post-war economic value of such items, for which payment will be sought, is a matter for negotiation.

U.S. Overtures to the U.S.S.R. on Lend-Lease

[Attachment I]

On September 14, 1946 a note,³ copy of which is enclosed, was forwarded to the Soviet Chargé d’Affaires ad interim, Mr. Fedor T. Orekhov, proposing that discussions be initiated in Washington on or before October 15, 1946 for the purpose of reaching a final settlement of U.S.–U.S.S.R. lend-lease obligations. The proposal limited such discussions to topics covered by the Lend-Lease Agreement of June 11, 1942. This note contained separate reference to our note of March 18, 1946⁴ which requested that purchase or return of all U.S. merchant vessels transferred under lend-lease and reiterated that the purchase of merchant vessels transferred under lend-lease is governed by U.S. statutes and those vessels not purchased must be returned. It also reiterated the United States request of July 26, 1946⁵ for the return of three Navy icebreakers transferred under lend-lease.

Since no reply to our note of September 14 had been received, the Soviet Chargé d’ Affaires ad interim, Mr. Vavilov, was called in on October 31 to see Mr. Clayton and in the course of conversation was handed an aide-mémoire⁶ which reviewed our note of September 14 and asked when a reply might be expected. As no acknowledgement had been received of either our note of September 14, or the aide-mémoire of October 31, Ambassador Smith raised these questions with Soviet Minister of Foreign Affairs Molotov in Moscow on December 30, 1946 and followed his conversations with a formal note dated December 31, 1946.⁷ Ambassador Smith requested consideration of these questions as a “matter of urgency”. On February 18 Ambassador Smith reported that he had brought the matter up again, this time with Deputy Minister Vyshinski pointing out the failure of the Soviet Government to reply to our repeated overtures and stressing the importance of beginning discussions and continuing them however prolonged they might be.

First mention of lend-lease settlement discussions were made by this Government in a note dated February 21, 1946.⁸ This was in the form of a reply to a memorandum of August 28, 1945⁹ from Lieutenant General L. G. Rudenko, Chairman of the Government Purchasing Commission of the Soviet Union in the U.S.A., requesting an Export-Import Bank credit of one billion dollars. Our original proposals coupled the settlement of lend-lease obligations, claims of American nationals, assistance to peoples of liberated areas, freedom of navigation on international waterways, preliminary discussions of a treaty of friendship, commerce and navigation, a copyright convention, civil aviation and other economic matters to the question of the one billion dollar credit. Subsequent correspondence regarding the agenda of credit discussions resulted in a lack of agreement. The note of September 14 represented our first overture to the Soviet Government for initiation of lend-lease settlement discussions independently of other matters.

Lend-Lease Merchant Vessels

[Attachment II]

Merchant vessels, the use and custody of which were transferred to the Soviet Government for the purpose of providing shipping for lend-lease goods through Japanese waters in the Pacific, and which according to best information remain in operation under the Soviet flag, consist of 95 vessels: 48 dry cargo vessels, 1 tanker, and 1 tug built before the war, 36 Liberty dry cargo vessels, 3 Liberty tankers, 4 T–2 tankers and 2 tugs built during the war. None of these ships may be sold except under the Ships Sales Act of 1946 or other relevant statutes of the United States.

Declaration of the End of the Emergency

[Attachment III]

All transfers of lend-lease articles to the U.S.S.R. during the period of hostilities were subject to the terms and conditions of the Soviet Master Lend-Lease Agreement of June 11, 1942. The preamble to this agreement recognized it to be “expedient that the final determination of the terms and conditions upon which the … [U.S.S.R.]¹⁰ receives such aid … should be deferred until the extent of the … aid is known and until the progress of events makes clearer the final terms and conditions and benefits which will be in the mutual interests … of the United States of America and the Union of Soviet Socialist Republics”.

Article V of the agreement reads as follows:

[“]The Government of the Union of Soviet Socialist Republics will return to the United States of America at the end of the present emergency, as determined by the President of the United States of America, such defense articles transferred under this Agreement as shall not have been destroyed, lost or consumed and as shall be determined by the President to be useful in the defense of the United States of America or of the Western Hemisphere or to be otherwise of use to the United States of America.[”]

Article VII states that “at an early convenient date, conversations shall be begun … with a view to determining … the above-stated objectives.…”; Article VIII states that the agreement shall “continue in force until a date agreed upon by the two governments”.

Under the provisions of this agreement the Soviet Government may delay settlement negotiations and, until a declaration of the end of the emergency, is not required by the agreement to return any lend-lease articles including ships. A declaration of the end of the emergency by the President together with a determination of the need of the U.S. for all merchant and naval ships and a reservation as to the needs of the U.S. for other lend-lease articles would provide a legal basis for our requests. After such a declaration, further demands for the return of ships and for initiation of settlement negotiations could be made and strong publicity given to Soviet failure to live up to their agreements. If these steps should meet with no success, we would be in a position to consider initiation of court action to recover ships in U.S. ports and to seek to recover them in the ports of other countries. We could also demand the return of other lend-lease articles in an effort to force a settlement.

Recovery of vessels in U.S. and foreign ports would have limited practical effect since a majority of these ships are believed to be operating in Soviet coastal trade and would avoid foreign ports where recovery might be effected. In any event, it appears unlikely that court action either in the U.S. or abroad would prove desirable. Return of other lend-lease articles also would be impractical since they would have little value in the United States except as scrap.

Comparison of British Settlement With That Proposed for the U.S.S.R.

[Attachment IV]

British lend-lease settlement discussions were a part of discussions of a number of economic matters including a long-term credit, the terms of payment for lend-lease “pipeline” deliveries made after V–J Day, the bulk sale of U.S. Army surplus in the U.K., the adjustment of war claims, and agreement on principles of world trade.

Settlement discussions with the U.S.S.R. as now contemplated would be limited to topics covered by the Soviet Master Agreement of June 11, 1942 except for “pipeline” materials already covered by the Agreement of October 15, 1945 and would follow generally the principles already of the settlements that have been concluded with the United Kingdom, France and other countries. It would include (a) transfer to the U.S.S.R. of full title to all lend-lease articles which remained in U.S.S.R. inventory on V–J Day except “military” articles—strictly combat items—, and except ships which must be returned; (b) payment on credit terms by the U.S.S.R. for the fair value of lend-lease articles title to which is transferred as indicated in (a) above; (c) retention by the U.S. of the right to recapture “military” articles title to which is not transferred; (d) agreement by the U.S.S.R. not to retransfer “military” articles without the prior consent of the U.S.; (e) transfer to the U.S. by the U.S.S.R., as part payment of the total obligation, of U.S.S.R. currency and other valuables to be used for the acquisition of buildings for the Embassy and Consulates, and for a student hostel and for the provision of scholarships for U.S. students in U.S.S.R. centers of learning; (f) settlement and waiver of intergovernmental claims arising during the course of hostilities and directly connected with the prosecution of World War II; (g) agreement to continue discussions for the attainment of the economic objectives referred to in Article VII of the Master Lend-Lease Agreement of June 11, 1942 and agreement on such other matters as may be possible in futherance of these objectives; (h) payment by the U.S.S.R. for such small quantities of U.S. surplus materials located abroad as were transferred to the U.S.S.R. without specific arrangements for payment; (i) transfer to the U.S.S.R. with payment as in (b) above of other small quantities of U.S. surplus war materials remaining in the U.S.S.R.

The only notable difference between the lend-lease settlement proposed for the U.S.S.R. and the comparable portions of the British and French settlements is the difference in definition of “military” articles. In settlement agreements with these two governments title was transferred to all lend-lease articles in control on V–J Day of civilian agencies. Recapture rights were retained and U.S. consent was made pre-requisite to retransfer of any lend-lease articles held by the armed forces of the recipient countries. In the case of the state-owned economy of the U.S.S.R. where the lines of demarcation between civilian agencies and establishments of the armed forces are purely nominal, in the absence of an inventory of lend-lease articles in the U.S.S.R. as of V–J Day, indicating the agencies holding these articles, and in view of the improbability of inspection and verification privileges in regard to inventories, it is proposed that transfer of title be executed for all lend-lease articles except a specific list of “military type items” regardless of the agency controlling them on V–J Day. This approach, which has been employed in the case of Australia and certain other countries, would have several special advantages in a settlement with the U.S.S.R. First, it would eliminate dispute as to the proper segregation of items between military and non-military categories. Second, a U.S.S.R. lend-lease item found in the hands of a second country could be identified as subject to the retransfer provisions of the settlement by description alone. Third, a similar advantage would appear in the exercising of recapture rights.

Because of the difference in magnitude of the inventories at the end of the war and because of other factors in the British and other settlements not present in the proposed Soviet settlement, the amounts due under the British and other settlements cannot be used as a guide in determining the amount which should be received from the U.S.S.R.

The Department, mainly for reasons of commercial policy, has not attempted to secure strategic materials in lend-lease settlements made with the United Kingdom, France, and other countries. However, this subject may be introduced into the U.S.S.R. negotiations if later developments should require it.

1. This memorandum concerning the Lend-Lease negotiations with the Soviet Union and the return of ships was drafted by George E. Truesdell, economist in the Division of Lend-Lease and Surplus War Property Affairs, and was directed to the Secretary of State.
2. Secretary of State George C. Marshall attended the Fourth Session of the Council of Foreign Ministers, which met in Moscow March 10–April 24. For documentation on this session, see vol. ii, pp. 139 ff.
3. Foreign Relations, 1946, vol. vi, p. 854.
4. Ibid., p. 830.
5. Ibid., p. 852.
6. Foreign Relations, 1946, vol. vi, p. 855.
7. Ibid., p. 865.
8. Ibid., p. 828.
9. Ibid., 1945, vol. v, p. 1034.
10. Brackets appear in the source text.