REVIEW OF THE WORLD SITUATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP67-00059A000500070007-2
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 19
• Document Creation Date: November 11, 2016
• Document Release Date: August 20, 1999
• Sequence Number: 7
• Publication Date: July 14, 1948
• Content Type: REPORT

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REVIEW OF THE WORLD
SITUATION
CIA 7-48
Published 14 July 1948
CENTRAL INTELLIGENCE AGENCY
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This document contains information affecting the na-
tional defense of the United States within the meaning
of the Espionage Act, 50 U.S.C., 31 and 32. as amended.
Its transmission or the revelation of its contents in any
manner to an unauthorized person is prohibited by law.
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REVIEW OF THE WORLD SITUATION AS IT RELATES TO THE SECURITY
OF THE UNITED STATES
1. The primary purpose of the Soviet blockade of Berlin is to compel the Western
Powers to reopen quadripartite negotiation with respect to Germany as a whole (infra.,
para. 1).
2. The breach between Tito and the Kremlin brings into the open the latent
conflict between international Communist discipline and national interest which has
been inherent in the situation since the expansion of Communist control beyond the
historical frontiers of Russia and puts in question the ability of Russian-controlled
Communism to retain power indefinitely beyond those frontiers. For the short term,
at least, it seems probable that Tito will succeed in making good his assertion of Yugo-
slav independence (infra., paras. 2 and 3).
3. Tito's contumacy will probably cause a widespread and disruptive purge of
Communist ranks which will complete the elimination of Communism as a formidable
political movement in Western Europe, but perfect the remnant of the faithful as a
disciplined fifth column (infra., para. 3).
4. The favorable general trend toward world economic recovery continued during
the second quarter (Appendix).
5. Unless the Arabs can force political concessions from the Jews during the next
two months, logistical difficulties may compel them to withdraw their armies from
Palestine. Under continuing guerrilla attack, however, and in political and economic
isolation from neighboring states, Israel would remain dependent on the support of an
outside Power or Powers (infra., para. 11).
6. Prevailing conditions throughout the Far East continue to be adverse to US
strategic interests and favorable to the extension of Soviet influence (infra., paras.
13-17).
7. Latin America is approaching a political and institutional crisis which may
seriously affect its ability to afford valuable cooperation to the United States (infra.,
para. 18).
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REVIEW OF THE WORLD SITUATION AS IT RELATES TO THE SECURITY
OF THE UNITED STATES
The Soviet blockade of Berlin is consistent with the desire to negotiate indicated
in CIA 6-48. The Soviet purpose in any negotiations, however, would be offensive rather
than defensive or conciliatory.
The blockade of Berlin is designed, in the first instance, to compel the Western
Powers to reopen quadripartite negotiations with respect to Germany as a whole and
to render them acquiescent to Soviet terms. At no more cost than the relaxation of
this pressure for the time being and perhaps minor concessions on such matters as
reparations, the USSR would hope to gain an effective voice in the control of Western
Germany and especially of the Ruhr. By this means it could prevent the consolidation
of a West German state aligned with the West and could gain an opportunity to bring
about an eventual eastward orientation of Germany as a whole. The corresponding
broader consequences would be to reduce the contribution of the Ruhr to the recovery
of Western Europe, to gain a share in Ruhr production for the USSR and its satellites,
and to prevent or retard the consolidation of a Western European community antagon-
istic toward the USSR.
If the Western Powers refuse to negotiate, however, or to accept in negotiation the
USSR's terms, the current blockade of Berlin will have so weakened the Western po-
sition there as to hasten the day when the USSR would expect it to become untenable.
Denied quadripartite agreement on Germany as a whole, in all probability the USSR
would intensify its presently coercive blockade into a decisive effort, by all means short
of armed force, to compel the Western Powers to withdraw from Berlin, would estabilsh
there a "national" German government, and would employ every means of political
warfare and subversion to prevent the consolidation of a West German state and to
bring about an eventual unification of Germany by accession of the West to the Soviet-
controlled East.
The breach between Tito and the Kremlin is the most significant development in
international Communism in twenty years. It brings into the open the latent con-
flict between international Communist discipline and national sentiment which has
been inherent in the situation since the expansion of Communist control beyond the
historical frontiers of Russia and puts in question the ability of Russian-controlled
Communism to retain power indefinitely beyond those frontiers.
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The essential complaint against Tito is that he pursued his own political interest
and the national interest of Yugoslavia rather than the objectives of the Kremlin and
that he remained defiantly impenitent when called upon to confess his error and mend
his ways. The principal issue was probably his persistent advocacy of a Balkan federa-
tion, which could cloak Yugoslav imperialism and could result in the creation of a
power capable of asserting its independence of the USSR in the international balance
of power. An incidental aspect of this tendency was his disposition to exploit the
situation in Greece to Yugoslav advantage and Communist disadvantage.
The Kremlin's decision to call Tito to account appears to have been taken in
February, when he failed to practice self-criticism and abasement with respect to
Balkan federation, as did Dimitrov of Bulgaria. Tito's formal indictment occurred in
March and was generally known throughout the higher echelons of the Communist
Party in Eastern Europe. The conflict became public, however, only on Tito's refusal
to leave the safety of his own country to attend the June meeting of the Cominform.
The open scandal has been most untimely from the point of view of Molotov and
his diplomatic interests, suggesting a conflict of purposes, if not of personalities, be-
tween him and Zhdanov, the guardian of ideological purity and party discipline. The
Kremlin may have been so ill informed as to suppose that Tito would not dare to refuse
the awful summons to Canossa. In any case, it was compelled to invoke open sanctions
against his contumacy, lest that demoralize the remaining satellites in Eastern Europe.
The event is evidence that excommunication and interdict were the only sanctions
available to the Kremlin in this case.
The Yugoslav Communist Party is unique (except for the Chinese) in that it is
of local development and self-contained. It is rooted in the Yugoslav Partisan move-
ment, which was genuinely patriotic in its appeal, for all its Communist leadership.
Such outside support as the Partisans had came not from the USSR, but from the West.
The Partisans could readily be led again to defend Yugoslavia from foreign domination.
The Kremlin cannot brook Tito's recalcitrance, but neither can it immediately
overcome him, in view of the loyalty of the Yugoslav Party, Police, and Army to him
personally. Even if Tito were to be assassinated, that act would make him a martyr
to Yugoslav independence and would stimulate rather than subdue Yugoslav resistance
to Soviet domination. Economic sanctions would have only indirect effect, and might
force Yugoslavia into closer economic and political relations with the West. Armed
invasion would provoke a frenzy of patriotic resistance, would afford greater op-
portunities to the Western Powers, and would involve unacceptable risk of a general
war. Only by long term penetration and subversion can the Kremlin get at Tito, yet
each passing day of his impunity damages its prestige in Eastern Europe.
Tito, for his part, cannot immediately turn to the West without rendering his
position vulnerable. He must demonstrate his loyalty to Communism and protest
his innocence of heresy. Inexorably, however, the logic of his position will force him
into association with the West as a factor in the balance of power, however Com-
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munistic his domestic policy. The greater the pressure exerted on him by the Kremlin,
the more rapid this transition will be.
3. INTERNATIONAL COMMUNIST DISCIPLINE.
The Kremlin is quite capable of exploiting the sentiment of nationalism for its
own purposes, as currently in Southeast Asia (para. 16). In both theory and practice,
however, it cannot permit either individualism or nationalism to impair the absolute
obedience of local Party leaders to its own dictates. A conflict between such rigid
discipline and local judgment is implicit in the character of international Communism.
Apart from any latent patriotism, it may appear in a national leader's presumption
of better understanding of the national temperament or of the local situation. This
disciplinary problem is currently rendered the more acute by the fact Communists now
man the governments of half a dozen supposedly sovereign national states.
Within the Soviet Union the conflicting requirements of particular nationalisms
and monolithic Soviet unity are reconciled by loose federation in the governmental
structure and tight control through the parallel party organization. A similar device
would serve to reconcile the nominal independence of Poland, for example, with the
absolute domination of the Kremlin, so that Poland's "independence" would be no
greater than that of the Ukraine, but the effectiveness of the system would depend
upon absolute party discipline.
The Tito affair has exposed the Cominform as no mere information bureau, but,
as supposed, the successor of the Comintern as the device for Kremlin control of
foreign Communist parties and the governments of "independent" states where Com-
munists are in power. Also made starkly plain is the Kremlin's subordination of every
national interest and consideration to its own absolute power. This revelation should
preclude the further political association of any patriot with international Com-
munism and so reduce the Communist parties of Europe to those militants who have
irrevocably transferred their entire allegiance to the Kremlin.
This tendency had been apparent in the French Communist Party since the estab-
lishment of the Cominform, but the process is as yet by no means completed. The
Italian Communists avoided the forfeiture of national character and as recently as
April could command 8,000,000 votes, but in June they too adopted the strict Comin-
form line, no doubt prepared to accept the logical consequences.
In Eastern Europe considerable latent nationalism persists even among Com-
munists, especially in Poland and Czechoslovakia. Ironically, the vehemence of the
Albanian and Bulgarian denunciations of Tito is attributable as much to individual-
istic and nationalistic fear of Tito's ambition and Yugoslav imperialism as to Com-
munist discipline.
Tito's example could prove infectious in the non-Russian Communist world and
cause a schism comparable only to that between Trotsky and Stalin. In any event,
the apprehensions of the Cominform will probably produce a widespread and disruptive
party purge. This process will probably complete the elimination of Communism as a
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formidable political movement in Western Europe, but at the same time it will render
the faithful remnant more effective as a disciplined fifth column.
The Chinese Communist Party is guilty of most counts in the indictment of Tito,
but nothing is likely to be said about that.
The favorable general trend toward world economic recovery continued during
the second quarter (see Appendix, p. 10).
The most serious postwar crisis has found the British Government resolute in
policy and strongly supported by the British people. Fears that war weariness and
economic weakness might induce a mood of appeasement in the face of Soviet menace
have been disproved.
The United Kingdom's international balance-of-payments position remains critical,
however, despite a marked increase in industrial production, a record volume of exports,
a restriction of imports to approximately four-fifths of the prewar level, and the prospect
of substantial ECA assistance. It seems clear that, even with ECA support, the drain
on dollar and gold reserves will continue through 1948.
The National Assembly, in approving the Six-Power Agreement on Germany by a
narrow margin, "admonished" the Government to seek more extensive international
control of the Ruhr, to avoid the reconstitution of an authoritarian and centralized
Reich, and to endeavor to obtain quadripartite agreement with respect to Germany.
Although the Government's adherence to the existing Agreement is unqualified, it
will presumably heed the Assembly's "admonitions" in its attitude during the further
development of the situation in Germany.
The Assembly's action on the Six-Power Agreement coincided with an outbreak
of violence as security forces broke up a sit-down strike in the rubber plants of Clermont-
Ferrand. The strike, in support of wage demands, was part of a Communist plan to
keep France in a ferment of local economic strikes while avoiding another general
test of strength with the Government until Communist control of labor had been re-
established. Local militants, however, seized the occasion to instigate disorder at
Clermont-Ferrand and to call sympathy strikes throughout France, and the Party was
compelled to support them. This attempt to exploit the situation was defeated, how-
ever, by the aloofness of non-Communist labor and the decisive action of the Govern-
ment's security forces: within a few days the strike wave had subsided. The Com-
munists, reverting to their previous strategy, are unlikely again to challenge the Gov-
ernment until the "social climate" improves.
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These labor troubles, however, point up the wage-price dilemma confronting the
Schuman Government. The non-Communist unions, at the risk of losing members
to the CGT, have withheld wage demands in order to support the Government's
effort to reduce prices. Retail prices, however, are rising again and are already back
at the high reached in February. The non-Communist unions are thus compelled to
demand a return to price control and to consider demands for wage increases. The
Government's position is rendered the more difficult by the fact that DeGaulle, in
an effort to win labor support, has now seized upon this issue and instructed his labor
cells to take the lead in wage demands. Some upward adjustment of wages would
appear to be politically imperative, but satisfaction of the workers' demands would
launch another round of inflation equally dangerous to the Schuman Government.
Like their French comrades, the Italian Communists are seeking to reassert their
leadership of labor by exploiting legitimate economic grievances, with particular
reference to inadequate pay and increasing unemployment. Their latest device, a series
of token general strikes in successive industries, has met with success because of the
inability of non-Communist labor leaders to oppose them on these issues.
The Socialist Party Congress rejected Nenni's leadership, the Popular Front as an
electoral device, and resistance to the European recovery program, but these concessions
to rank-and-file sentiment were offset by lack of progress toward reunion with the
moderate Socialists and a resolution in favor of continued collaboration with the Com-
munists. Although the situation within the Party is fluid, developments probably
depending on factional opportunism, continued indirect Communist control of the
Party apparatus may be suspected.
Meanwhile the Government has taken no constructive action to allay labor dis-
content, and appears unlikely to do so before the impending adjournment of Parlia-
ment. Its inactivity with respect to promised reforms has caused concern among its
Socialist and Republican members. The policy of the Government may be to rely on
ECA allocations to ameliorate economic conditions in Italy, basic reforms being opposed
by powerful industrial and ecclesiastical influences. Such a policy would play into the
hand of the Communists.
The Western German attitude toward the Six-Power Agreement remains unen-
thusiastic (CIA 6-48). Both major parties, the Social Democrats and Christian Demo-
crats, argue that the people are more concerned with economic than with constitutional
problems and hold that nothing more than a basic administrative statute could be
formulated in present circumstances. In keeping with this attitude, the representatives
of the eleven Western laender have agreed to the proposed establishment of a central
administration at Frankfurt, but have requested that the words "constitution" and
"government" not be used with reference to it.
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The initial effects of currency reform in the Western Zones have been generally
good. The ultimate effect will depend largely on increased production of consumers
goods before goods hoarded hitherto have been sold off. In contrast, Soviet currency
reform appears to have been hasty and slipshod. Despite the precariousness of the
situation in Berlin, Western marks are at a premium there over Soviet marks.
The German population in the Western sectors of Berlin continues to be strongly
anti-Soviet in attitude. Its faith in the Western Powers has been strengthened by
their evident determination and the scale on which supplies are being flown in.
These Germans will generally remain steadfast in this attitude unless their will is
sapped by starvation or by conviction that Soviet occupation is inevitable.
The British embargo on shipments into the Soviet Zone has had a damaging effect
on the economy of that area and has correspondingly enhanced the bargaining po-
sition of the Western Powers with respect to the blockade of Berlin.
9. YUGOSLAVIA (see also para. 2).
Even before Tito's break with the Cominform, the Yugoslav economy was in
difficult straits (CIA 6-48), largely because of the inability of the USSR to deliver capital
goods, and Tito had shown anxiety to obtain from the West the economic support
which the East could not provide. In present circumstances, and in view of the
"technical difficulties" which have already arisen with respect to Danubian shipping
and Rumanian oil, Tito will be all the more anxious to develop trade with the West.
His economic need, however, is balanced by political necessity to avoid the charge that
he has sold out to Wall Street, so that great delicacy is required in this matter.
10. GREECE.
The resistance met by the Greek Army in the critical operation of its summer
campaign indicates that the guerrillas are not yet ready to abandon their cause as
hopeless.
Markos, already apprehensive of Yugoslav designs on Greek territory, has no
choice but to adhere to the Cominform in its quarrel with Tito. He will presumably
receive the continued support of the Cominform, Albania, and Bulgaria. Supplies
stockpiled for him in those countries are sufficient to keep him in business for some
time, if he can avoid defeat in the field.
11. PALESTINE.
Since 15 May the Jews and Arabs have experienced four weeks of bitter hostilities
and four weeks of uneasy truce, without any weakening of either Jewish determination
to establish a sovereign state or Arab determination to prevent it. The period of
hostilities led to a military stalemate. The period of truce was advantageous to the
Jews. The Arabs have now refused to accept an extension of the truce unless their
proposals for a political settlement (a unified Palestine with restrictions on Jewish
immigration) are accepted as the only basis for further negotiation.
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In the resumption of hostilities the Jews will probably seek to consolidate their
control of the coastal strip and of Galilee and to gain complete control of Jerusalem.
The Arab main effort will presumably be to reimpose their blockade of Jerusalem.
The success of the Arabs is doubtful in view of their acute shortage of ammunition.
Unless the Arabs can force political concessions from the Jews within the next
two months, logistical difficulties will probably compel them to withdraw their armies
from Palestine. However, they can be expected to support guerrilla operations there
indefinitely. Arab raids, non-recognition, and economic sanctions will isolate and
harrass Israel, impose upon it a heavy burden of defensive precautions, and stifle its
economy. Israel will thus remain entirely dependent on the goodwill and support of
some outside Power or Powers.
The new Hajir Government in Iran gives promise of a resolute policy toward the
USSR and even of some internal reform. Hajir's success will depend largely on the
continued support of Qavam against the bitter opposition of anti-court and radical
elements.
The potentially explosive Kashmir and Hyderabad disputes remain unsolved, but
the danger of armed conflict between India and Pakistan appears not to be immediate.
Prevailing conditions throughout the Far East continue to be adverse to US stra-
tegic interests and favorable to the extension of Soviet influence. Fear and suspicion
of US efforts to bring about the industrial rehabilitation of Japan are widespread.
Uncertainty as to the continuance of US support for the newly elected government in
South Korea and the rapid deterioration of the situation in China are both damaging
to US prestige and influence. Southeast Asia has recently been the scene of intensive
Soviet and Communist activity apparently intended to deny to the Western Powers the
strategic materials produced in that area.
The "National Assembly" in Seoul will probably establish a professedly national
government for Korea on 15 August. The North Korean radio has threatened that,
in this event, a national government, including South Korean representation, will be
established in the North, and that this government will demand the withdrawal of all
foreign troops.
In keeping with previous estimates, the Soviet strategy foreshadowed in this propa-
ganda is to delay until US responsibility for the division of Korea is "proved" by the
inauguration of a separate South Korean regime and then to establish the proposed
Korean People's Republic in the North, with membership from both sections of the
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country, which the government at Seoul would lack. At the request of the People's
Republic, Soviet troops would be withdrawn. At the September session of the UN Gen-
eral Assembly the USSR would then demand that the People's Republic, rather than
the government at Seoul, be recognized as truly national, and that US as well as Soviet
forces be required to withdraw from Korea.
Within the past month the prestige and authority of the National Government
have sunk to a new low marked by the sudden fall of Kaifeng and the spectacular
decline in the value of the Chinese dollar.
The National Government has no program for arresting the continuing deteriora-
tion of the situation. Despite increasing criticism, Chiang Kai-sek continues to rely
on personal adherents, including many of proved incompetence. In default of effec-
tive national leadership, provincial authorities tend increasingly to shift for themselves
on a regional basis. This tendency, involving conservation of local military and eco-
nomic resources, hastens the disintegration of the national effort.
Continuation of the existing trend in China will inevitably result in chaos, from
which will emerge either general Communist domination or a new period of regional
war-lordism.
The extent of Soviet penetration in Southeast Asia (CIA 6-48) has been rendered
more apparent by the outbreak of violence in Malaya, where local Communists (pre-
dominantly Chinese) are conducting a campaign of destruction and terrorism against
the operation of rubber estates and tin mines. A major British effort will be required
to safeguard the continued production of these strategic materials.
At the same time, the endurance of Vietnam as the principal stronghold of Com-
munist influence in Southeast Asia is underscored by the ineffectualness of the French-
sponsored Xuan regime and the ambiguity of French policy toward it.
By supporting native nationalism throughout Southeast Asia the USSR is not
only undermining Western political domination of that area and spreading Communist
influence there, but is gaining a capability to deny the strategic resources of the region
to the Western Powers.
The grant of a general amnesty to the Hukbalahap and the seating of its Com-
munist leader, Luis Taruc, in Congress may result in solving the Philippine Govern-
ment's most vexatious internal problem, if the Huks actually surrender their arms,
as required, and the Government actually carries out promised agrarian reforms. This
reversal of the policy of the late President, however, is a further manifestation of an
increasingly nationalistic (anti-US) trend in Philippine politics. Taruc, as a Com-
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munist, opposes US influence under color of ardent nationalism and in effect has imposed
his own terms on the Government as a precondition of his acceptance of amnesty.
It is becoming increasingly evident that Latin America is approaching a political
and institutional crises which may seriously affect its ability to afford valuable coopera-
tion to the United States. Stability in the region has been shaken by the impact of
rising import prices on raw material economies, by the disappearance of many of the
former bases of political power, and by the ability of the extreme right and the extreme
left to exploit the growing power of labor. Merely palliative measures, such as repres-
sion of Communist parties, are unlikely to cure the underlying unrest, or to create a
new broad basis of political power, or noticeably to diminish the capabilities of sub-
versive elements to exploit the disturbed situation. Continuing tension between inter-
national alignments in the Caribbean, internal struggles for power in Panama, Ecuador,
and Peru, instability in Bolivia, and the long-continued inability of the President of
Chile to govern without extraordinary powers are symptoms of the general condition
of affairs. Even Argentina, a few months ago seemingly stable and prosperous because
of advantages seized in a sellers' market, must now, with the disappearance of these
temporary advantages, consider increasingly authoritarian measures to augment pro-
duction and may, failing substantial US aid through ECA purchases or otherwise, yield
to nationalistic pressure for non-cooperation with the United States. Generally
increasing pressure for US aid is merely additional evidence that Latin American lead-
ers cannot find within themselves or their countries the means to restore stability and
achieve real authority for their governments.
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APPENDIX
DEVELOPMENT OF THE WORLD ECONOMIC SITUATION DURING THE
SECOND QUARTER OF 1948
World economic recovery, as measured by industrial output and international trade,
continued its upward trend during the second quarter. Increase in the availability of
consumer goods, however, is still restricted in many industrial countries by the impera-
tive need for reconstruction of war-damaged facilities and modernization of industry.
Prices of most internationally traded primary commodities remained firm; the price of
wheat, however, declined about 5 percent, while prices of several metals, notably tin
and lead, increased. Work stoppages attributable to strikes and labor unrest were
comparatively few during the quarter, but Communist-instigated labor disturbances
remain a serious threat to production in parts of Western Europe and Southeast Asia.
Steel production expanded at an accelerated rate in several of the major industrial
countries. The United Kingdom, still lacking hoped-for quantities of scrap from Ger-
many as well as high-grade imported iron ores, reached a rate, at least temporarily, of
15.5 million metric tons per year. France was producing steel at a rate of 7.7 million
metric tons annually, which rate was above expectations. In the Bizone of Germany
steel was being produced at an annual rate of about 4.25 million metric tons, some-
what below previous estimates of probable productive capacity. This short-fall may be
corrected yet this year if more high-grade iron ore is obtained from foreign sources and
an adequate share of domestic scrap and coal are allocated for this purpose. In the
United States, steel output was set back temporarily in the spring owing to the coal
strike; at that time production declined to about 70 percent of capacity, but by mid-
year it had reached an annual rate of 82 million metric tons, equal to the wartime maxi-
mum. World-wide requirements for steel, however, continue to exceed availabilities.
Supplies of chrome, nickel, and other alloy steels and steel-alloying metals, although
not plentiful, are in general meeting minimum requirements.
Nonferrous metals continued in short world supply as demand was maintained at
a high level. This world shortage may grow more acute during the second half of
1948, although some Western European countries will obtain larger supplies under
European recovery program than were available to them during the first half of the
year. With demand running persistently ahead of production, prices of lead, tin, alumi-
num, and antimony increased during the second quarter. With a continuation of the
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tight supply, nonferrous metal prices may be expected to hold firm throughout the
remainder of the year.
The production of lead and zinc is increasing in Canada, Mexico, Australia, and the
United States, although Mexico had a marked set-back in the early spring owing to
labor strikes which have since been settled. In Australia any increase in the avail-
ability of mine production will depend on improvement in transportation facilities.
Copper production in Canada, Chile, and the United States is increasing, but there
is little change in Northern Rhodesia and the Belgian Congo.
Mine production of tin in Malaya and the Netherlands East Indies is larger as a
consequence of rehabilitation of the mines, but local authority in Malaya is presently
being threatened by terrorist activities which are in large part Communist-inspired and
directed. There is also some improvement in Bolivian tin production whereas the rate
of production in the Belgian Congo and Nigeria has not changed materially.
The antimony shortage is becoming more serious. Bolivian output is increasing,
but production in China is only a fraction of normal. Mexican production was impeded
by labor difficulties in the spring of the year and by the wide discrepancy between the
price paid for ores from small producers and the world price for the metal.
Aluminum production has been hampered by shortages of soda ash and electric
power in Europe and by floods and shortages of electric power in the United States.
There were, however, substantial increases in output in Canada and Norway. Supplies
of secondary aluminum accumulated from war scrap in European countries and the
United States are virtually exhausted. Bauxite production has increased much faster
than aluminum; consequently, there were no shortages of that raw material except
where in a few instances transportation was a temporary bottleneck.
Compared with the same period last year, output of coal was larger in the principal
coal producing countries, except the United States, where about 48 million tons of coal
were lost through strikes. The smaller volume of coal mined in this country did not
appreciably interfere, however, with meeting the requirements of Western Europe,
in view of the rising output of coal in the United Kingdom, Germany, Poland, and
France. Moreover, increased production in Europe reduced the tonnages required from
the United States, thereby releasing dollar exchange for other purposes. Aside from
some shortage of coking coal, European output plus imports was generally sufficient
to meet requirements, although transportation was at times inadequate to move coal
out of Germany and Poland to importing countries.
World production of petroleum, except in a few areas, notably the Satellite States
of Eastern Europe and recently Iraq, has been running well ahead of last year. Pro-
duction was adequate to meet mounting requirements in the United States and else-
where in the world except in some parts of Europe, the Middle East and Far East,
where inadequate refining and transportation facilities have caused shortages of refined
products.
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World production of crude and synthetic rubber is now ample to meet demands
for current consumption. Synthetic rubber production in Canada, the Soviet Zone of
Germany, and the United States has declined in recent months compared with the
corresponding period a year ago and will be substantially less for the year as a whole
than for 1947; synthetic rubber production in Western Germany ended on 1 July. The
large output of the USSR, however, is expected to increase moderately in 1948.
Communist-instigated disturbances in Malaya, which produces about half the
world's supply of crude rubber, may, if continued, seriously curtail rubber production
in that area. In such eventuality United States operating and standby capacity for
synthetic rubber would be ample to offset a substantial decline in receipts of Malayan
rubber.
Increasingly large Soviet purchases of Malayan rubber at premium prices and
with provision for special packaging indicate stockpiling of that commodity by the
USSR.
The world-wide shortage in many chemicals, including nitrogenous fertilizers, con-
tinues. Scarcity of alkalies, coal-tar crudes, nitrogenous fertilizers, and other basic
chemicals will not be alleviated for a year or more, but improvement may be expected
as coal supplies increase and new or rehabilitated production facilities become available.
The alkali shortage has limited production of rayon, glass, aluminum, and many
industrial chemicals. Recent increased production of alkalies in Western Europe has
been due principally to rehabilitation of war-damaged plants and increased supplies
of coal. No new major production facilities are expected to come into operation in that
area for a year or two. Over half of the German production is in the Western Zones,
where several important plants were severely damaged by bombing. In the USSR a
large part of productive capacity of alkalies was destroyed during the war and will not
be fully restored until 1950 or later. Output of the Eastern European Satellites has not
regained the prewar level. In the United States, increased capacity recently completed
is still insufficient to meet both the domestic demand and the export demand, the latter
mainly from Latin America and Southeast Asia.
The shortage of coal-tar crudes, which are used mainly by the plastics, dye, and
synthetic organic chemicals industries, is directly related to the rate of operation of
by-product coke ovens, which in turn are dependent on adequate supplies of coking coal.
In Western Europe the improved coal situation, which had previously limited opera-
tions, made possible an increase in output of these products. Further rehabilitation
of plants and a few new installations, together with adequate supplies of coal, should
materially alleviate the shortage of crudes in that area before the year-end. In the
USSR the large number of by-product coke ovens destroyed during the war are in
process of restoration, but reconstruction work will not be completed until 1950 or
later; consequently the shortage of coal-tar crudes in that country is acute. In the
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United States the second quarter coal strike resulted in a substantial reduction in out-
put of coal-tar crudes, the domestic and export demands for which show little sign of
abating.
Chile, the United States, the United Kingdom, and Belgium continue as the world's
largest postwar exporters of chemical nitrogen, although the United States is on a
net import basis. The more than doubled output of the last three-named countries
since 1937 has not been sufficient to compensate for production losses in other former
major producing countries. Germany, once the largest producer and exporter of syn-
thetic nitrogen, now depends partly on imports because of war-damaged or dismantled
plants and restriction of production by the occupying powers. Japan, formerly the
second largest producer of the synthetic product, now depends on imports to a much
greater degree than formerly. Rehabilitation of plants in the Netherlands, France,
Italy, and Poland, and operation of German plants at greater capacity, together with
more plentiful supplies of coal, will reduce the nitrogen shortage in the current ferti-
lizer year. The USSR, although exporting small quantities of nitrogen to neighboring
states and India, is increasing as rapidly as possible its chemical nitrogen industry, a
large part of which was destroyed during the war.
The per capita supply of staple foods in Europe, Asia, and certain other areas
remained abnormally low. This was especially true of cereals, meat, and fats. The
situation was alleviated somewhat, however, by larger exports of grain from the United
States than had been anticipated and by an exceptionally mild winter and early spring
in Europe, which increased significantly the production of dairy products and vegetables.
The acreage planted to food crops to be harvested in 1948 showed a substantial
increase over plantings in previous postwar years. In general, temperatures and rain-
fall have been favorable to the early growth and development of crops, particularly in
North America and Europe, thus indicating a 1948 food harvest almost equal to prewar
harvests.
World trade continued to increase during the second quarter of the year, although
trade and exchange controls were almost everywhere maintained. Increases in pro-
duction of goods for export, in combination with a ready world market, contributed
largely to the continued world trade expansion.
Trade among the Western European countries, however, is currently impeded by
serious payments problems, which in turn reflect the economic vacuum left by Germany
and the inability of the United Kingdom to assume its prewar role in European trade.
Although European countries have made substantial gains in reviving their export
trade, it is estimated that their current volume of exports is only about two-thirds
that of 1937. The volume of European imports, on the other hand, approaches or sur-
passes that of the immediate prewar years. The United Kingdom, however, is a notable
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exception in both cases. The exchange and transfer problems thus generated have been
heightened further by rising price levels. Western European exports, though lagging
below prewar, have increased moderately since a year ago. Eastern European coun-
tries are exporting little more than half their prewar volume.
Exports from the United States fell well below the level for the corresponding
months of 1947 primarily as a consequence of the world shortage of expendable gold
and dollars. Nevertheless, on a quantum basis United States exports during the first
half of the 1948 were at a rate about double that of the prewar years. United States
imports, on the other hand, though increasing in volume moderately over the level of
1946-47, were only slightly above prewar. Consequently, the dollar gap between United
States imports and exports continued to be large and contributed cumulatively to
monetary and exchange problems abroad. In 1946 and 1947, the United States had a
net export balance of roughly 5 to 10 billion dollars respectively; in 1948 its export
balance was at an annual rate of about 6 billion dollars.
The progress toward economic recovery observed in this summary of developments
during the second quarter of 1948 is encouraging. It must be strongly emphasized, how-
ever, that the attainment throughout the world of conditions of economic well-being,
even approximating those prevailing before the war, will require still higher levels of
production in many countries and a larger volume and better balance in world trade
than at present.
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1. This review has not been coordinated with the intelligence organizations of the
Departments of State, Army, Navy, and Air Force, though information copies were
circulated on 14 July. The information herein is as of 12 July 1948.
2. This copy of this publication is for the information and use of the recipient
designated on the front cover and of individuals under the jurisdiction of the recipient's
office who require the information for the performance of their official duties. Further
dissemination elsewhere in the department to other offices which require the informa-
tion for the performance of official duties may be authorized by the following:
a. Special Assistant to the Secretary of State for Research and Intelligence, for
the Department of State
b. Director of Intelligence, GS, USA, for the Department of the Army
c. Chief, Naval Intelligence, for the Department of the Navy
d. Director of Intelligence, USAF, for the Department of the Air Force
e. Director of Security and Intelligence, AEC, for the Atomic Energy Com-
mission
f. Deputy Director for Intelligence, Joint Staff, for the Joint Staff
g. Assistant Director for Collection and Dissemination, CIA, for any other
Department or Agency
3. This copy may be either retained or destroyed by burning in accordance with
applicable security regulations, or returned to the Central Intelligence Agency by
arrangement with the Office of Collection and Dissemination, CIA.
This document contains information affecting the national
defense of the United States within the meaning of the
Espionage Act, 50 U.S.C., 31 and 32, as amended. Its trans-
mission or the revelation of its contents in any manner to
an unauthorized person is prohibited by law.
The President
Secretary of State
Chief of Staff to Commander in Chief
Secretary of Defense
Secretary of the Army
Secretary of the Navy
Secretary of the Air Force
Executive Secretary, National Security Council
Chairman, National Security Resources Board
Chief of Staff, US Army
Chief of Naval Operations
Chief of Staff, US Air Force
Joint Chiefs of Staff
Atomic Energy Commission
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U. S. GOVERNMENT PRINTING OFFICE
2746-5--1948
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