740.5 MSP/3–954
No. 290
The Acting Special Assistant to the
Secretary of State for Mutual Security Affairs (Nolting) to the
Director of the Foreign Operations Administration (Stassen)1
Dear Governor Stassen: I would like to discuss with you some of our misgivings arising from the slowness in placing off-shore procurement contracts in Europe. This has been a matter of increasing concern to us here in State and I would like to set forth some of our thinking on the matter, both with respect to the consequences of a failure to place a significant number of contracts this year and on what we can do to accelerate the placing of contracts. We are very much aware of the many factors which make OSP a complicated and slow operation, but there are certain things we believe can be done which will help speed the matter.
I understand there are two factors presently under consideration within the interested agencies which have a direct bearing on the timing and amount of OSP contracts to be let during this fiscal year. The first is the question of when to place follow-on contracts, and the second is the pricing formula. When Mr. Tracy Voorhees was in Washington last month we had several discussions with him, from which the following information was derived. First, Mr. [Page 604] Voorhees, with the approval of Mr. Kyes and Mr. Nash, is advocating the non-placement of follow-on OSP contracts in all cases in which the continuation of a line of production and the date of deliveries of end items are not affected by the withholding of contracts for the present. The reasoning of the Defense Department in advocating this procedure seems to be that it is sound business practice not to obligate OSP funds for follow-on contracts until the reorder point has been reached, on grounds that to do so will limit the flexibility of the U.S. in the use of OSP funds without accomplishing commensurate gain in terms of production or the continuation of a production base. Mr. Voorhees originally estimated that some $200 to $230 million worth of contracts might be affected if this idea is adopted. He now believes that perhaps a larger volume would be affected, and at our request he is seeking to determine as precisely as possible the amount of contracts which would be involved in such a decision. On the basis of these findings, I think we should consider together the policy questions involved. In a recent message, we have again requested USRO to give us the information about the volume of contracts involved in this consideration as promptly as possible.
On the question of pricing, I understand that Mr. Kyes is presently considering a new pricing formula as follows: where similar items are manufactured in the United States, the OSP price shall not exceed the U.S. commercial price plus cost of delivery, except in cases where the Director of OSP (Mr. Voorhees) shall determine that the contract is necessary in order to continue a production line important to U.S. security. In discussing the effect of this possible new pricing formula on the volume of OSP contracts in Europe, Mr. Voorhees said that he had not yet been able to determine the exact effect, although he expected it to have a major impact. Mr. Voorhees is analyzing its impact and will advise us as soon as possible.
From the point of view of this Department, there are two major political factors which we believe have an important bearing on these decisions. The first is the indication given by Secretary Dulles and yourself at the NATO Meeting last April2 concerning the general order of magnitude of OSP contracts which we expected to place in Europe this year—approximately $1 billion. In view of the transfers from Title I funds and other factors, the amount available for OSP during Fiscal year 1954 is, I understand, somewhat less than this, and is now approximately $850 million. To fall substantially below this figure would, in our opinion, raise doubts [Page 605] and misgivings in the minds of our European allies concerning our intentions for the future, even though such action might be justified in the case of follow-on contracts on strictly business principles similar to those currently in use in the United States. In addition, to fall substantially below this amount would, we believe, have a bearing on the fiscal and financial policies of our allies with respect to their defense budgets and the development of force plans through 1957 for this year’s Annual Review.
The second political factor relates to the strategy to bring about the ratification of the European Defense Community. The clear-cut policy on this is to proceed in all matters as if the EDC is coming into being—until such time as this is demonstrably an invalid assumption. Following this policy would mean that the withholding of OSP contracts should not, either in fact or by inference, be attributable to U.S. doubts concerning the ratification of EDC. It seems to us that, if the policy of withholding follow-on contracts is adopted, or a much stricter pricing policy is adopted, the interpretation will be made that this action is the beginning of the U.S. reappraisal against the possibility of non-ratification of EDC. Such an interpretation, in our judgment, would be extremely dangerous and harmful at this juncture.
Another factor which we have considered is the Congressional reaction. It is our judgment that, while Mr. Voorhees may be correct in his estimate that funds withheld until the reorder point has been reached would probably be carried over and made available for the next fiscal year, it is unlikely that additional funds would be appropriated for OSP. It is the considered opinion of this Department that the abrupt termination of OSP in Europe is not in the national interest and that the funds appropriated for Fiscal Year 1954 for this purpose should, unless factors not now discernible dictate otherwise, be spent for off-shore procurement in Fiscal Year 1954, and that additional but reduced amounts should be sought for OSP in Fiscal 1955.
At this time, I simply want to bring our thoughts on these matters to your attention. I believe that we should not reach a final governmental position until Mr. Voorhees has advised us from Paris regarding the orders of magnitude involved in the possible new criteria. Thereafter, I suggest that representatives of FOA, Defense, and State meet together to determine the policy questions involved.
Sincerely,
- Cleared with Vass and Moore. A typewritten notation on the source text reads: “Copy furnished Gen. Stewart (Defense) 3/10/54.”↩
- For documentation on the Eleventh Session of the North Atlantic Council at Paris, Apr. 23–25, 1953, see vol. v, Part 1, pp. 368 ff.↩