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

65. Memorandum of Conversation⁰

Washington, November 15, 1962.

PARTICIPANTS

• Dr. Gerhard Schroeder, German Foreign Minister
• Dr. Karl Carstens, State Secretary, German Foreign Ministry
• Erich Feldweg, German Embassy Interpreter
• Robert M. Brandin, Department of State
• Secretary Dillon
• Under Secretary Fowler
• Acting Assisting Secretary Bullitt
• F. Lisle Widman
• Raymond J. Albright

SUBJECT

• Military Offset Arrangements; Development Assistance Activities

Following his greeting to the Foreign Minister, Secretary Dillon remarked that the President had spoken yesterday about the necessity for a larger German defense budget and about the importance we place on the agreements for logistics cooperation which had been concluded by our respective defense ministries in the form of the Strauss-Gilpatric understandings. He noted the importance of fulfilling these agreements for the benefit of both countries and the Alliance.

Minister Schroeder said that with respect to these agreements for military cooperation he could only respond as the Chancellor had done to the President. Neither the Chancellor nor he knew the details of the problems which had arisen. However, they promised to look into the matter immediately upon their return. He noted that the Chancellor had said he would do everything in his power to arrive at a proper solution. Minister Schroeder said he could only reaffirm, as had the Chancellor, that they did not intend to withdraw from commitments that may have been made. He noted that the short memorandum on the problem which the President had offered to provide to the Chancellor today should greatly facilitate following up on the matter when they returned. In the meantime, he would appreciate it if the Secretary would give him more details on the problem and possible solutions.

Secretary Dillon said that these arrangements for military cooperation had become even more valuable than we had realized at the time the agreements were reached about a year ago. By these agreements the supply systems of our two countries had been joined in a way which made them more effective and cheaper to operate than if we duplicated our efforts. For example, the U.S. had made available U.S. Army training areas and had allotted 50% of the U.S. Air Force total training time in the Federal Republic to the German Air Force. Since the U.S. produces great quantities of the most modern military equipment, we have been in a position to sell this equipment to Germany more cheaply than alternative sources. In addition, we have given high priority to deliveries to Germany and have indicated our willingness to make changes in equipment to meet German needs. The problem that has arisen concerns $300 million of payments that were to be made by Germany for such equipment during the second half of this year. We have been informed that because of cut-backs in the German defense budget about two-thirds of this sum is not to be paid on schedule.

Minister Schroeder inquired whether the payments due were for deliveries that have actually been made or whether there has been a slow-down of U.S. deliveries and therefore a corresponding slow-down in payments.

Secretary Dillon responded that the payments we expect are for services we have performed according to the agreements, but that the German defense budget levels prevent payment.

Minister Schroeder said he was surprised to encounter this problem in Washington, since he had not heard about it before he left and he was not familiar with arguments on the German side.

Secretary Dillon said that the German Defense Ministry tells us they simply have no money. However, he wanted Minister Schroeder to understand that there was no disagreement between our defense ministries on the terms of the basic understandings. It was merely that the expected and agreed payments appear now not to be forthcoming.

Minister Schroeder said he was surprised that the problem stemmed from a shortage in the 1962 budget. He would have supposed that the Defense Ministry could not have ordered more than that for which it could actually make payments. If it were the 1963 budget he could understand there might be a problem.

Secretary Dillon commented that perhaps the Defense Ministry expected an extra appropriation for the 1962 budget. He referred Minister Schroeder to Herr Schiffers in the Defense Ministry as the man who is familiar with this defense budget problem.

Minister Schroeder wondered how the Finance Minister would allow the Defense Ministry to over-commit itself, and he presumed that Secretary Dillon would not allow the U.S. Defense Department to become engaged in commitments which we could not pay.

Secretary Dillon noted that the Strauss-Gilpatric agreement of February 2, 1962,¹ set forth specific, agreed figures and schedules concerning when payments should be made, so that the Defense Ministry certainly knew that far in advance what payments were expected of them this year.

Minister Schroeder stated that once the German party in Washington receives the memorandum offered by the President they will know where the difficulty lies and can come up with a proper solution upon their return.

[Here follows discussion of additional funding for the International Development Association and foreign economic assistance to Latin America, Africa, and South Asia.]

0. Source: Department of State, Conference Files: Lot 65 D 533, CF 2181. Confidential. Drafted by Raymond J. Albright (Treasury) on November 16 and approved by Dillon’s office on November 21. The conversation was held in Dillon’s office.
1. This agreement was an exchange of letters between Strauss and Gilpatric. (Telegram 1796 from Bonn, February 2; Department of State, Central Files, 762.0221/2-262) Final text was in telegram 1774 from Bonn, January 31 (ibid., 762.0221/1-3162), as amended in telegram 1789 from Bonn, February 2 (ibid., 762.0221/2-262). Regarding the October 24 understanding, see Document 53. On September 24, Gilpatric and Strauss signed a second memorandum of understanding, which provided for the expansion of U.S.-German military cooperation and the continuation of the financial offset arrangements. The text of this agreement has not been found.