Foreign Relations of the United States, 1961–1963, Volume IX, Foreign Economic Policy

143. Memorandum From the President’s Deputy Special Assistant for National Security Affairs (Kaysen) to the Ambassador to India (Galbraith)⁰

Washington, June 22, 1962.

SUBJECT

• Tied Aid

1. We are now tying a very substantial proportion of our aid, and we propose to go even further in this process. The current flow of foreign payments on the aid account reflect earlier commitments made when we were not trying to enforce the present degree of tying.

The attached memoranda give some figures on the magnitudes involved for FY 1963.¹ I am sure you have seen them, but you may not have a copy available to you in New Delhi.

For FY 1963, total overseas expenditures are $1,022 million out of $3,271 million total expenditures on the aid account (excluding PL 480 and MAP, which gives rise to almost no foreign expenditures). This total involves three major elements: One, use of AID funds for dollar procurements in third countries. Two, various kinds of transactions, the sum and substance of which is the use of dollars to acquire local currencies. Three, contributions to international organizations. These amount respectively to $241 million, $690 million, and $149 million. The third item is a contractual obligation which we cannot control. This leaves the first two.

2. Offshore purchases from third countries, as they are called in the barbarous language of AID, now come almost entirely from other underdeveloped countries. As you know, there is a list of 19 prohibited countries, including all the industrialized countries, from which offshore purchases are forbidden, except by special waiver. The characteristic example of what now happens is that, say Pakistan, is allowed to use dollars to buy steel from India rather than from the U.S. It is argued by AID that cutting off this possibility would involve an ultimate loss that outweighed the gains in immediate dollar savings. First, it would greatly increase the cost of steel to Pakistan and thus diminish the effectiveness of our aid proportionately. Second, it would deprive India of a market which is economically here. This is more important for India, for whom outlets for her newly growing industrial exports are a problem, than it is for more advanced countries. Finally, since India’s aid claims are scrutinized in light of its total flow of foreign resources, the dollar saving is only transitory. A decrease in India’s opportunity to earn dollars by trade will generate a demand for an increase in aid, which in substantial part will have to be met.

As you see from the discussion in the attached memorandum, the major part of the third-country procurement has occurred in your part of the world.

3. The larger item which we can try to control is the purchase of local currencies for dollars, either in the form of budget support, contracts for local services, direct hire of foreign personnel, or whatever. An inspection of the figures shows that this kind of activity is most heavily concentrated in Latin America and Africa (see Table I of the April 6 memorandum).² This, in turn, reflects two facts: (a) Many of the countries in these areas do not now possess adequate governmental machinery for raising funds internally, whether by taxation or borrowing, and applying them to aid programs. (b) In these same countries, the will may be as deficient as the means. Our own political interest in getting aid programs started and in focussing heavily on those programs which are immediately visible—health, education, and housing, for example—means that in the absence of means and will for providing local resources through local means, we must resort to the use of dollars to purchase local currencies in one fashion or another.

As you know, we are now moving, not entirely independently of stimuli from you, to require that the U.S. funds so used be placed in segregated accounts which can be spent only in the U.S.

4. However, this does not entirely solve the problem. Where a country has small exchange earnings, where it spends a small proportion of the earnings in the U.S. in any event, and where dollar aid is large in relation to the previous flow of exchange earnings, tying can be relatively effective. This is the case for some of the smaller Latin American countries. However, it is not the case for many countries, and especially not for large countries such as India. It does not seem possible to make such countries treat all dollar aid as a net addition to their demand for U.S. exports. It is not, of course, that it is inconceivable that a mechanism can be found for this purpose. Rather, any mechanism would require agreement by the country concerned and acceptance by other suppliers, which I think it highly unlikely we can achieve. Further, if we could achieve it, it would be at a cost to ourselves which would negate in large part the very purpose we seek to attain. In the first place, such restrictions on purchases from non-U.S. suppliers would be inconsistent with our attempt to get other countries to bear a larger part of the costs of providing aid. They, too, could play at the game of trying to force recipients to spend all receipts in their currencies directly on their own goods. Second, the countries themselves would be unwilling to impose so drastic an alteration in their patterns of supply. If we tried to get them to do so, we would defeat in some degree the political gains we seek to achieve by aid. Further, even if these alterations in behavior were possible, they would take some time to achieve. I am convinced that it is unwise to treat our balance of payments problem as if it were a permanent one and alter our fundamental policies and practices in a long-run way to correspond to a temporary problem.

I do not deny that we can do something more than we have been able to do in respect to the purchase of local currencies for dollars, and that there are arguments against this practice quite independent of our balance of payments difficulties. I think, however, it is a mistake to view this as a magnitude which can be pushed down very substantially below its present level.

5. The conclusions I draw from this discussion are twofold: One, we should certainly do as much as we can to see to it that dollar expenditures in connection with aid are only those necessary to achieving the aims of the aid program. We should do the same in other areas of government expenditure. However, I think we should not expect that this in itself will change the current balance of payments deficit into a surplus.

What is more important, we should recognize that the problem caused by large foreign holdings of dollar claims that might cause a run on the dollar has only an indirect and not a direct connection with the continuing deficit in our balance of payments. My own judgment is that we have to go further than we have gone in attacking this problem directly. It would be a mistake to focus all our energies on the balance of payments part of the problem and none on those actions which can directly affect the likelihood that foreign holders of dollar claims will try to turn them into gold at a rate which we cannot stand. This memorandum is not the place to argue this point in detail, but I mention it simply to put the matter in proper perspective.

Carl Kaysen³

0. Source: Kennedy Library, National Security Files, Countries Series, India, General. Confidential. The source text accompanied the President’s June 22 letter to Galbraith, Document 142.
1. No memoranda are attached to the source text and, with the possible exception of the April 6 memorandum cited in footnote 2 below, are not further identified.
2. Reference may be to an April 6 memorandum from Frank M. Coffin to Secretaries Rusk and Dillon, describing a joint Treasury and AID study underway on possible means of lessening the impact of the foreign aid program on the U.S. balance of payments. (Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold)
3. Printed from a copy that bears this typed signature.