700.5 MSP/9–1853
No. 283
Memorandum of Conversation, by Christopher Van Hollen of
the Executive Secretariat1
Subject:
- Preliminary Discussion of FY 1955 Aid Program for NATO and European Countries
Participants:
- The Secretary
- Mr. Matthews
- Mr. MacArthur
- Mr. Bowie
- Mr. Merchant
- Mr. Waugh
- Mr. Kalijarvi
- Mr. Nolting
- Mr. Reinstein
- Mr. Bonbright
- Mr. Moore
- Mr. Vass
Basic Approach
Mr. Moore opened the discussion of the FY 1955 Aid Programs for the NATO and European countries by pointing out the necessity to undertake certain fundamental changes in the basic approach to such programs. Congressional debate on the FY 1954 programs had emphasized the pressure on the Hill to cut the amount of aid and to get away from “giveaway” programs. This was particularly evident in the case of the programs in Europe since such programs had been underway for a long period and, therefore, Congressional sentiment favored putting pressure on the European countries to find ways by which they could reduce the amount of aid. On the other hand, despite the strong sentiment for a reduction in aid, there was a real need for continuation of sizable amounts of assistance in some form, especially end-item assistance.
Mr. Moore said that the level of NATO programs had reached the point at which primary consideration should now be given to qualitative improvement. It was felt that ways must be found to so adjust the programs that proper account could be taken of recent developments, such as new weapons and the recent moves on the part of the Soviets. It was most important, however, that the programs not be reduced to the point where other countries would feel it unnecessary to continue their build-up efforts because, if this occurred, there would be a downward spiral in the European defense [Page 577] effort. Therefore, while it was necessary to change the form of aid, considerable end-item assistance should still be continued and strong efforts made to work out new approaches to the balance of payments problem. There were, of course, specialized situations such as those in Spain, Yugoslavia, Greece and Turkey which could not be provided for solely through the customary form of end-item assistance and, for this reason, special techniques adaptable to these individual problems would have to be devised.
Mr. Moore explained that the present thinking was along the following lines: (1) The funds for the FY 1955 aid programs would be carried as part of the Department of Defense budget and justified as part of that budget on the grounds that such assistance was being provided for the defense of the United States; in other words, although such aid was being sent our allies, this aid would actually be considered as an integral part of the U.S. defense effort. (2) The continued utilization of end-item assistance would provide a multiplier effect in that it would cost less to equip a foreign soldier than the cost of equipping a U.S. soldier under the same conditions. (3) If possible, transfer provisions should be included in the Defense Department budget. Thus, MDAP assistance could be carried as a fourth category in the Defense budget—the other three categories being the budgets of the three services—and a certain degree of interchangeability maintained between these four budgets. Our European allies would then feel that we were in a position to make necessary budgetary adjustments between our own defense burdens and their defense burdens as changing situations required.
In conclusion, Mr. Moore foresaw two general problems in connection with the new approach. First, it might give the Defense services too great control over funds which had previously been justified and administered separate from the regular Defense budget. Second, there was the problem of ensuring enough flexibility to deal with programs, such as Greece, Turkey and Yugoslavia, which required some type of common use programs, and the special case of Berlin.
End-Items for Europe, Greece and Turkey
Mr. Vass circulated a memorandum containing a breakdown of the projected end-item programs for Europe and Greece and Turkey, OSP for Europe, and possible non-end-item program requirements. (See Annex) After a brief discussion of certain detailed points relating to this memorandum, the Secretary asked how the projected programs, as set forth in the memorandum, compared with the appropriations for the present year. Mr. Vass replied that approximately $2.2 billion new funds had been appropriated for end-items in FY 1954, in addition to the $1.5 billion in unobligated [Page 578] funds carried over. On the other hand, the new money which was being tentatively suggested for FY 1955 amounted to $2.5 billion, or $3.0 billion, depending upon the prospects for a rapid German build-up. Mr. Vass stated that he did not think there would be any unobligated funds next year. Therefore, the new money requested would amount to practically the same, or only slightly more than the present appropriations, but substantially less than the sum of new money plus carry-over this year. Furthermore, the $190 million set aside for possible non-end-item programs requirements would be included under the over-all end-item figure. As a final point, Mr. Vass pointed out that in FY 1955 none of the $1.2 billion for the Indochina war should be treated as part of the European program, but instead, should be carried in the Defense budget as the cost of the U.S. contribution to the war in Indochina. Mr. Merchant added that, under the projected FY 1955 programs, with the exception of Berlin, it would be possible to say that economic assistance to Europe was being eliminated provided it were recognized that there was a liberalization of the criteria in the case of three or four countries which would be receiving common use items.
In the case of the $60 million for Berlin which was being recommended as one of the possible non-end-item program requirements (see Annex), Mr. Merchant explained that this program was in a different category from other programs such as those for Greece and Spain in that $30 million was to be allocated to the emergency work program, while the remaining $30 million was to be allocated for the investment program in Berlin. The allocation of $60 million for Berlin was not for dollars but for Deutsch-marks and an effort should be made to persuade the Bonn Government to put up the necessary amount of money to carry the full burden. However, if we were unable to convince the Germans to assume this burden, we should then attempt to obtain the necessary funds from Congress.
European Economic Picture
The Secretary remarked that he had recently received the impression that the economic situation in Europe, including the European dollar picture, had improved. Mr. Merchant agreed, pointing out that such improvement was particularly evident during the past few months and was caused in large measure by the influx of tourists, military expenditures and OSP contracts. Part of the improvement could also be attributed to restrictions on dollar imports. Mr. Moore commented that in spite of these improvements, there had not been an appropriate increase in the gross national product. As to Germany’s financial condition, Mr. Merchant said that Germany’s balance of payments picture was the best in [Page 579] Europe and, actually, the combined dollar reserves of Japan and Germany were comparable to the reserves of the sterling bloc area.
German Build-up
Turning to the question of the German build-up, Mr. Reinstein pointed out that the parenthetical figure of $1 billion (see Annex) was considered necessary to equip 12 divisions. Since we have so far provided funds for only six divisions and part of the aircraft build-up, it appeared to Mr. Reinstein that provision should be made in FY 1955 for the build-up of the entire 12 divisions. Mr. Bowie said that it would be desirable to discover precisely what funds were now available for the German build-up and what equipment was actually available. A good analysis was needed of the extent to which the U.S. would be expected to contribute to the German build-up since it was now extremely difficult to obtain definite figures from the Department of Defense. As a result, there was a cost range of as much as $5–$10 billion. Mr. Merchant concurred, saying that it was difficult to pin down those items which have been allocated for the German defense build-up since equipment was not stamped “MDAP” as it came off the assembly lines and, therefore, the Army was able to shift items around according to its current needs, such shifts making accurate accounting difficult. The Secretary said that he understood that Defense had $1 billion of end-item equipment stored in depots in Europe. Mr. Nolting said that the closest figure he had obtained was $300 million and Mr. Reinstein added that Defense had told Congress that $1.3 billion, which had already been appropriated, was to be used to equip German forces. The Secretary felt that it should be possible to obtain an answer to the direct question of whether or not there was $1 billion of equipment stored in depots in Europe for the German build-up.
Secretary’s General Reaction
Asked by Mr. Merchant as to his reaction to the FY 1955 European and NATO aid program which had just been presented, the Secretary replied that, on the whole, it appeared reassuring. Nevertheless, he was still scheduled to hold a meeting with the Latin American group,2 after which it would be necessary to put all the programs together, such a consolidation being required prior to October 1. The Secretary said that he, of course, did not know how the various program totals would add up, remarking that NEA seemed to have presented higher figures than the previous year.
[Page 580]1955 MDAP Appropriations in Defense Budget
Returning to the question of placing the FY 1955 Aid programs in the Defense budget, Mr. Nolting pointed out that such programs could be handled in one or two ways: (1) either through the establishment of a subsection in the Defense budget setting up a little MDAP program; or (2) lumping all such programs together and then working out the allocations between areas. One of the dangers of using the lump sum method was that there might be a temptation to use excessive funds in the so-called “hot” areas to the disadvantage of other areas. Mr. Merchant emphasized that, as a concomitant to putting the MDAP programs in the Defense machinery, it was important to ensure that a strong coordinating body including civilian agencies be established in order to protect the MDAP programs against the claims of the Defense services. Such machinery must be established at the top of the Defense Department in order to insure complete protection to these expenditures. The Secretary said that he was also disturbed about the lack of flexibility which might obtain under such an arrangement. Pointing out that there is now a fairly large degree of flexibility, for example in the cases of Iran and Indochina, he asked whether it was likely that the MDAP funds would be frozen in the Defense budget. Mr. Matthews replied that the flexibility depended upon (1) the authorization and (2) the people involved in administrating these programs within the Defense establishment. Mr. Nolting said that the planned techniques for providing flexibility (see last section of annex) were quite good. The gift of surplus commodities would be particularly saleable to Congress and some flexibility was provided in Section 513(b) under which the President had discretionary power to transfer funds up to $100 million. It might be possible to attempt to raise this figure and to leave the transfer functions in the President’s hands.
The Secretary said that, while it was recognized that those who would be responsible for the programs should also be responsible for their justification, he wanted to insure that necessary flexibility was not lost and that the programs were not subject to raiding by the armed forces. After brief discussion as to what office within the Department should prepare a study on this subject, it was agreed that Mr. Nolting would undertake the preparation of an analytical study of the feasibility of including the FY 1955 MDAP appropriations within the Defense Department budget. The Secretary stated that he wanted to obtain the Department’s thinking on this subject before talking with Mr. Stassen and, for that reason, it was advisable that the study be made solely from the State Department point of view without advance consultation with FOA.
[Page 581]In conclusion, the Secretary said that it seemed evident that a large part of the programs which related to military aid could not be covered by new appropriations for another year unless Congress could be convinced that such programs were not State Department “hand outs”. Mr. Kalijarvi agreed, adding that a number of Senators had evinced a strong desire to conclude “giveaway” programs and that they looked forward to the day when the FOA went out of operation.
- This was one of a series of meetings called by the Secretary of State “to discuss in general terms the overall aid picture for FY ’55”. (Memorandum by Walter K. Scott, Director of the Executive Secretariat, to the Acting Secretary, Sept. 18, 1953; 700.5 MSP/9–1853) For documentation on those meetings dealing with the Middle East and the Far East, see vol. i, Part 1, pp. 643 ff.↩
- See the memorandum of conversation, by Edward G. Cale, Oct. 2, 1953, vol. iv, p. 197.↩