Foreign Relations of the United States, 1955–1957, Soviet Union, Eastern Mediterranean, Volume XXIV

324. Memorandum of a Conversation, Department of State, Washington, May 18, 1955¹

Washington, May 18, 1955

SUBJECT

• Interdepartmental Meeting on Turkish Economic Problem

PARTICIPANTS

• Treasury:
  • Mr. Andrew N. Overby—Assistant Secretary
  • Mr. C. Dillon Glendinning—Deputy Director, Office of International Finance
• Defense:
  • Mr. H. Struve Hensel—Assistant Secretary, International Security Affairs
  • Mr. Charles A. Sullivan—Chief of Policy Division
• FOA:
  • Mr. D.A. FitzGerald—Deputy Director for Operations
  • Mr. Cedric Seager—Director of NEA Division
  • General William E. Riley²
• State:
  • NEA—Mr. George V. Allen, Chairman
  • NEA—Mr. William O. Baxter
  • NEA—Mr. Francis F. Lincoln
  • NEA—Mr. H. Daniel Brewster
  • FN—Mr. John Parke Young
  • Miss Matilda Milne³

Mr. Allen opened the meeting stating that Mr. Hoover had expected to attend this meeting on the Turkish problem but, unfortunately, had had to leave for the West Coast a few hours earlier. He explained that Mr. Zorlu had arrived in Washington Tuesday afternoon and would be available Thursday, Friday, and Saturday morning for meetings with representatives of the Department of State and other agencies. He then called on Mr. Young to make a brief summary presentation of the conclusions of the Inter-Agency Committee on Turkish Economic Problems.

Mr. Young referred to a secret document, prepared by the Committee, on “US Aid to Turkey”, dated May 17, 1955,⁴ which had been circulated to all those present and called attention especially to the summary, the conclusions on Page 2 of the document, as well as the measures needed to achieve economic and financial stability, noting specifically the points covered on Page 6. The general areas in which reforms were needed, he pointed out, were: (1) qualitative and quantitative control by the Central Bank over credit; (2) bringing the over-all budget into approximate balance, including expenditures for State enterprises; (3) measures to expand the export of Turkish products and to improve “the competitive position of Turkish exports on the world market” (This point, he explained, was a subtle way of referring to devaluation.); and (4) eventual elimination of control of imports and foreign exchange.

Mr. Young then explained that he had discussed the aforementioned points informally with International Monetary Fund representatives who agreed with them. He had also learned that the I.M.F. expects to send a mission of experts to Turkey on June 2, and Mr. Merle Cochran, who will head the mission, will arrive in Turkey on June 16 for a stay of ten days or so.

In opening the discussion, Mr. Overby stated that the problem before the group as he saw it was to determine what defense forces we want the Turks to maintain and how much we are willing to pay for them. Also, can that amount be found in the Defense Department budget? This was a problem he considered primarily a Defense Department responsibility. He did not think the Turks would, for political reasons, be prepared to cut back their development program. … In response to a question from Mr. Allen, he stated that he did not believe a loan in any traditional sense was a good or wise, or even a desirable, solution. The Turkish defense problem will go on for years and it would be a disservice to give them a loan. He wished to emphasize particularly that we do not want to bail out Turkey’s short-term European creditors. Any aid we give should be closely associated with Turkey’s defense effort. He indicated that after we decide how much aid we will give them for defense, the Turks will have to negotiate whatever extensions are necessary with their European creditors.

Mr. Allen pointed out that the Department’s interest in extending extraordinary aid to Turkey was based on the Turkish military posture as the eastern anchor of NATO and a pivotal country in Middle East defense arrangements. It was Mr. Allen’s understanding that a reduction in the numbers of the Turkish Army would not greatly reduce their defense budget and would not extricate them from their present serious troubles. Mr. Hensel picked up this theme and noted that 1954 actual figures (shown on Table 1 of Mr. Young’s paper) indicated that total defense expenditures ran 912 million Turkish liras, whereas the total amount devoted to investment (in the economy, not limited to government expenditures) was 2,236 million liras. He, for one, was most anxious to wait for the Holcombe Study with its analysis of what the Turkish economy could support. He, in principle, did not believe the US could go on indefinitely supporting forces beyond the means of the country. As concerns the expenditures associated with the proposed additional 800 million dollars end-item program referred to in the Young report, he noted that the Joint Chiefs of Staff had never given that “commitment” its entire blessing, and there was considerable doubt in the Defense Department as to whether Turkey could effectively operate a “modernized” army equipped with this additional material.

When Mr. Allen asked whether the US Government had recommended devaluation to any other countries in so many words, it was pointed out that this step had been taken in a few cases such as Korea, but that usually such advice was given in a veiled way by pointing out that the country was “over-importing and underexporting”. Mr. Young warned against the US having to take the blame publicly for devaluation, especially in the light of the strong Turkish Government stand on this issue.

Mr. FitzGerald said that his answer to the question of where the money to aid Turkey is to come from, is that he does not know unless Congress is asked for a supplemental appropriation. Mr. Overby said he felt such a request would be unwise. Mr. FitzGerald then pointed to the very real short-term problems, such as payment for oil imports, and the slow-down in certain manufacturing and processing industries due to a lack of imported raw materials. Mr. Baxter, at this point, stated that Socony, he had just heard, had been given oral assurances that a confirmed letter of credit would be opened by the end of May for June shipments. Mr. FitzGerald then stated that on the longer pull he was fairly pessimistic about the adequacy of the estimates of both the Embassy and the Young Committee unless there were substantial cuts in the defense and investment programs. He considered the price tag for economic aid to carry on both programs at present levels might be between 800 million and a billion dollars over five years.

A brief discussion took place about the excellent results achieved in Greece following a sharp devaluation preceded by an effective economic stabilization program. Broad aspects of devaluation, investment and hoarding were also touched upon.

Mr. Hensel then reiterated that none of the conditional commitment made last June for one-quarter of the 800 million dollars in hardware had as yet been met, and that in the 1.4 billion military aid program for Fiscal Year 1956 there was no additional money earmarked for Turkey. It was always possible to find money within the program for the most pressing military problems, but this always had to be done at the expense of other country programs. Mr. Overby stated that it was really a question of the priority to be given Turkey. He then asked if the Turks had been informed that a $300 million loan was not in the cards. Mr. Allen replied “no” …

Mr. Allen then asked whether the US Government was trying to get the Turks to cut their investment program because such a cut will be beneficial or because we are trying to find an excuse to refuse aid. Mr. Hensel replied we could find the money if it would help but without a stable economy, more aid would just be swallowed in the whirlpool. Mr. Hensel continued that Turkish force goals are illusory if the Turkish economy is not able to support the defense establishment planned. It would be in an unsound military position unless supported for the most part by the country’s own resources. At this point Mr. Baxter noted that in the cases of both Greece and Turkey it had always been the US Government’s understanding that we expected to have to supply end item aid and spare parts over a considerable period of time to maintain the desired level of forces.

Mr. Hensel also commented that Turks have seen this economic crisis coming on for some time and he felt that it was quite proper for the Department of State to be frank with the Turks. At that point Mr. Hensel raised the question of an adjustment in the exchange rate and placing US personnel abroad on a gold payment basis. This problem, if raised by Mr. Allen, he thought might be an indirect hint to Mr. Zorlu of a need for devaluation. In response to a question as to what the Embassy’s views were on this problem, Miss Milne said that latest information was that the Embassy, MAAG and USOM/T did not feel the Turkish Government should be approached on this question at present, but that it should be settled only as a part of an across-the-board exchange rate change.

Mr. Allen then raised the question as to what tactics should be followed in case Mr. Zorlu agreed to our “conditions” concerning a modification of the investment program, a tightening up of credit, balancing of the over-all budget, control of imports, and possibly even devaluation. Should we, in response to his request for a loan on this basis, meet a request for perhaps $80 million to meet the immediate crisis? Mr. Hensel believed that if the Turkish Government was prepared to meet the conditions, and adequate assurances could be given to the US Government concerning their sincerity, we should say that we would use our best efforts to obtain additional aid for them. We would have to so space this aid that it would depend on Turkish performance. … Mr. Hensel stated that he would help if we can get the right commitments.

At this point, discussion took place about the “high-level mission to Turkey” and Mr. Hensel and Mr. Overby both questioned the desirability of such a mission. Mr. Overby believed that the decision on this matter had to be made in Washington and that the Turks know what to do as far as economic measures are concerned and will do it when they have learned that they will get only X amount of money and no more from the US He again stressed that the US should make it clear that we will give no aid to bail them out with their European creditors. The group agreed that any financial stabilization program must include a provision that the Turks must fund their current short-term debts. In response to a question from Mr. Allen as to whether any additional aid should be handled through the present machinery in Ankara or by a special group, it was the consensus that the present team in Ankara, strengthened by the necessary additional technicians, could best do the work.

Mr. Allen then asked what his line should be with the oil companies if they threatened to discontinue oil shipments to Turkey. It was generally felt that State should take a firm line on this problem and inform the oil companies, if they inquire, that it was entirely their decision to make as to whether oil should be shipped to Turkey beyond what the Turks could pay for, and that their decision should be based on purely commercial reasons. Mr. Hensel agreed.

Mr. Allen proposed that very much the same group meet with Mr. Zorlu at one of the meetings scheduled before Mr. Zorlu’s departure. It was considered best to have Mr. Allen and State representatives meet with Mr. Zorlu at a first meeting and that the remainder of the committee would be on call for a further meeting if Mr. Allen considered it desirable.

In a brief discussion as to the desirability of requesting Congress for additional aid to Turkey, it was considered that it would be undesirable because the presentation on the aid legislation is now well under way … Mr. FitzGerald and Mr. Overby considered that aid in grant form was preferable to a “hard” loan. There was then some discussion of the possibility of some form of “soft loan”.

1. Source: Department of State, Central Files, 882.00/5–1855. Confidential. Drafted by Brewster on May 23.
2. Deputy Director for Management, Foreign Operations Administration.
3. Chief, Exchange Rates, International Financial Division, Office of International Financial and Development Affairs.
4. In January 1955, a US Interagency Committee on Turkish Economic Problems, composed of representatives of the Departments of State, the Treasury, and Defense held its first meeting. The report is not further identified.