Foreign Relations of the United States, 1952–1954, Western Europe and Canada, Volume VI, Part 1

700.5 MSP/12–254

No. 298
Memorandum by the Special Assistant to the Secretary of State for Mutual Security Affairs (Nolting) to the Secretary of State¹

secret

Washington, December 1, 1954.

Subject: NSC Meeting on the FY 1956 MSP

Discussion:

At the NSC meeting on Friday, December 3,² the Council will discuss FY 1956 Budget Considerations. At that time an oral presentation will be made on military and non-military parts of the FY 1956 Mutual Security Program.

A. Military Programs

On the military side, we understand that Defense will propose that the Executive Branch request $700 million for FY 1956 and the reappropriation of unexpended balances from old funds. This estimate is based on certain budgetary and fiscal factors which are discussed in Tab A. These factors are (1) expenditure rates, (2) program objectives and requirements and (3) use of Defense funds for “lead time” financing.

Generally, the Department should not argue that any specific sum of money should be requested for military assistance in FY 1956 solely for reasons of foreign policy. The determination as to the funds required is essentially a Defense judgment if the funds are adequate to assure attainment of the program objectives. However, the Department should not accept the Defense estimate until we have received adequate answers on the following points:

1. That the proposed level of expenditure of $3.3 billion in FY 1956 represents the best balanced distribution of U.S. production between domestic and foreign military requirements and that proper weight has been given to the international situation and commitments to our allies;

2. That there will be an agreed level of programs for FY 1955/56 which would be used as the basis of discussion with our allies on the extent of U.S. aid and that Defense will undertake active procurement against those programs without regard to the availability of military assistance funds;

3. That the Budget Bureau will agree to the principle of Defense funds being used to finance procurement lead-time for common use items required by military aid programs, without tying up MDAP funds for this purpose;

4. That the proposed estimate will be adequate to finance fixed program costs, OSP costs and procurement costs of non-common items;

5. That the Executive Branch will be prepared to support future military aid appropriations to reimburse Defense for deliveries of common-items to the military assistance program.

I have discussed these points with Mr. Stassen, who agrees with this approach. I have also mentioned to Mr. Hensel that I would recommend that you raise these questions. He said that he would welcome a discussion of them in the NSC.

B. Non-Military Programs

On the economic side, the Department should generally support Mr. Stassen whose presentation will reflect the decisions reached in your office on Tuesday, November 30 (Tab B). In this connection you may wish to point out the following considerations:

1. That, in connection with the current review of basic national policy, we will wish to examine the question of whether we should continue to build up military forces in friendly countries beyond their economic capacity to support such forces without the injection of considerable economic aid by the U.S.;

2. That, after the review of our basic national policy and the nature of the threat, we may wish to consider whether the present distribution of resources between military and non-military aid reflects the proper balance;

3. That, before presentation of these programs to Congress, we may wish to consider further the forms and techniques through which we extend non-military assistance—e.g., a U.S. “soft loan” institution, continuation of FOA in FY 1956, use of regional institutions, etc.

Recommendation:

That you support Mr. Stassen on the presentation of the non-military activities for the purpose of reaching a one-line budget estimate; with respect to the military aid, you seek to have Defense furnish answers or assurances on the points set forth above prior to agreeing to any specific new fund request for military aid.

Tab A

Memorandum by George S. Newman of the Office of the Special Assistant to the Secretary of State for Mutual Security Affairs

Subject: FY 1956 Military Assistance Program

The Department of Defense will probably propose that the Executive Branch request $700 million in new funds for FY 1956 and the reappropriation of all unexpended balances from old funds. We understand that Defense feels that, from a purely budget and fiscal point of view, no new financing of military assistance is required in FY 1956 but is prepared to request the $700 million which it considers is in the nature of a contingency fund.

This estimate reflects the Defense desire to place the military assistance program on a “pay-as-you-go” basis whereby the program would seek appropriations to finance only those deliveries made in the fiscal year. The costs of procurement prior to delivery would be met from Defense funds. Upon delivery of items to MDAP, Defense would be reimbursed from military assistance funds.

The validity of the estimate of $700 million is dependent upon a number of factors, of which the major ones are as follows:

Expenditure Rate

The $700 million estimate is based on the assumption that, in FY 1956, expenditures (and deliveries) will be approximately $3.3 billion, which is slightly above the rate achieved in FY 1954 and projected for FY 1955. This expenditure rate is based on the further assumption made by Defense that, with respect to U.S. production, there will be no change in current mobilization base policies or in present priority and allocation policies between domestic and foreign defense requirements. The acceptance of this assumption automatically operates to set physical limitations on the military matériel available for our allies.

We do not have sufficient information on the production picture to permit a judgment on whether the Defense proposal represents the best balanced distribution in light of our national security objectives. It should be noted that the projected FY 1956 expenditures largely reflect meeting commitments made during the FY 1950–1954 period and do not take into account to any significant degree commitments for military aid made during the current fiscal year, bilaterally (Turkey, Pakistan, etc.) or multilaterally (NATO Annual Review). While shifts can be made to meet these newer commitments, it will involve our failing to complete on schedule some part of the 1950–1954 commitments.

A major consideration relating to the expenditure rate is whether, in your judgment, the projected world situation, including rearmament of Germany and the additional tensions this may generate, justifies an increase in foreign military assistance expenditures and deliveries.

Program Objectives and Requirements

Within NSC policy, supplemented by guidance from the Secretaries of State and Defense, the JCS have developed 1956 military objectives, criteria and force goals. Based on this JCS guidance, the military service departments have prepared deficiency programs which, if met by U.S. military aid, will enable our allies to have combat effective forces by the end of 1956 at a level the JCS deems desirable from a U.S. security point of view.

The 1950–1954 military assistance programs (approximately $17.2 billion) represent substantial progress in meeting these deficiencies, and funds have been made available to Defense to finance these programs. However, the services estimate 1955–1956 deficiencies at approximately $4.9 billion which should be met to fulfill the JCS force goals. While the program level for FY 1955–1956 is estimated by the services at $4.9 billion, this figure contains deficiencies which the services themselves consider can be deferred or are relatively infirm. Based on the presentations made by the services, approximately $3.5 billion represents reasonable deficiencies which should be programmed in FY 1955–1956. To finance these deficiencies, $1.2 billion was appropriated in FY 1955 and Defense is requesting $700 million for FY 1956. It is estimated that certain fixed charges and fund losses due to new legislation on financial procedures will substantially reduce the funds available for end-items and training in 1955 and 1956.

If the military buildup of our NATO and other allies is not to be disrupted and brought to a slow stop, we should be able to discuss with our allies and assure them of aid beyond that contained in the FY 1950–1954 programs. This aid is represented by the FY 1955–1956 program of $4.9 billion which, under Defense’s plans, would be financed only in part through FY 1956.

It is essential that the Ambassador and the MAAG be in a position to discuss with the foreign government the extent of U.S. military aid during FY 1955–1956 if the forces which we consider essential qualitatively and quantitatively, from a U.S. security point of view, are to be developed. Agreements on the aid to be furnished would have to be reflected in Defense procurement plans to assure the timely arrival in the hands of our allies of the needed equipment. If the military assistance program is placed on a “pay-as-you-go” basis, such procurement would have to be undertaken without regard to the immediate availability of military assistance funds for the initiation of procurement, but on the understanding that the necessary military assistance appropriations to reimburse Defense would be sought in the year the deliveries are to be made.

A major consideration here is to reach agreement on the level of deficiencies (approximately $3.5 billion) which it is expected that the U.S. would meet through the military aid program for the FY 1955–1956 period. This level would serve as the basis for developing programs which our Ambassadors and MAAG’s could use in their discussions, bilaterally or multilaterally, with our allies as the U.S. contribution to the buildup of mutual military strength. Against these programs, it is essential that Defense agree to undertake procurement to assure delivery of equipment in accordance with the buildup needs for our allies.

Financial and Budgetary Factors

The Defense estimate of $700 million for FY 1956 military aid is based largely on the assumption that Defense funds would be used to cover the costs of financing the procurement of common Defense-military assistance program items against FY 1956 and future military aid program requirements (“lead-time” financing), and that the military aid program appropriations would be on a “pay-as-you-go” basis. These assumptions represent a radical change in the administration of the military aid program. For this new system to function satisfactorily, it will require (1) the agreement of the Budget Bureau to permit Defense to use its funds in this manner, and (2) a change in attitude on the part of the Service Departments and their procurement officers, who are naturally reluctant to tie up service funds in contracts which do not directly carry out the services’ own procurement programs, and (3) full explanation of this new procedure to the Congress, particularly with respect to the implications for future appropriations. In the event the “lead-time” financing principle is accepted, it will require that at some future date we will have to ask Congress to appropriate funds for military assistance significantly in excess of the $700 million proposed for FY 1956.

It should be noted that this technique of financing is applicable only to those items which are common to Defense’s own domestic program and the military aid program. We have not received sufficient data to enable us to make a judgment on the adequacy of the $700 million in new funds to meet fixed costs, OSP costs and the costs of the procurement of non-common items.

The major consideration here is whether the Budget Bureau concurs in the use of Defense funds for “lead-time” financing; whether Defense will take the necessary administrative measures to assure the success of this technique, and whether the $700 million is adequate to meet the costs of the programs which are not covered by the “lead-time” financing principle.

Tab B

Paper Prepared in the Office of the Special Assistant to the Secretary of State for Mutual Security Affairs³

Mutual Security Program Summary of Fiscal Year 1956 Budget Recommendations Non-Military Activities (4 Millions)

Area		Direct Forces Support	Defense Support	Development Assistance	Technical Cooperation	Other	Total
Europe		—	*75.0	—	—	$25.0	$100.0
Near East, Africa and South Asia		$45.0	190.0	$235.0	$67.4	—	537.4
Far East and the Pacific		567.0	517.0	—	24.0	†250.0	1,358.0
Latin America		—	—	23.0	‡31.5	—	54.5
Other		—	—	—	9.0	131.5	122.5
Global Contingency		—	—	—	—	150.0	150.0
	Grand Total	612.0	782.0	258.0	131.5	547.5	§2,331.4

1. Drafted by George S. Newman.
2. For a record of this meeting, see Document 300.
3. Drafted in S/MSA; the drafting officer is not identified.
4. Includes European Technical Exchange. [Footnote in the source text. A handwritten notation on the source text at this point reads: “Spain—23+2 (TE): Jugo—25+15 (DFS)+1 (TE): TE—10.”]
5. Contribution to Asian regional economic organization. [Footnote in the source text.]
6. Includes $1.5 million for contribution to Organization of American States Technical Assistance program. [Footnote in the source text.]
7. An additional $200 million will be requested for transfer to Defense to replace military assistance funds diverted to non-military purposes in FY 1955. [Footnote in the source text.]