Foreign Relations of the United States: Diplomatic Papers, 1945, The Near East and Africa, Volume VIII

890F.51/2–2245

Report by the Ad Hoc Committee of the State–War–Navy Coordinating Committee²⁵

February 22, 1945

Recommended Procedure for the Extension of Financial Assistance to Saudi Arabia

the problem

1. To formulate and to recommend the procedure to be followed in the immediate future for the purpose of furnishing economic assistance to Saudi Arabia.

facts bearing on the problem

2. Just prior to the establishment of SWNCC, conversations between the State, War and Navy Departments resulted in the submission of a memorandum to the President²⁶ with respect to the provision of financial aid to Saudi Arabia. It was pointed out that the current budgetary deficits of that country are a source of concern to this Government, and it was recommended that all possible steps be taken to supply aid, including, if necessary, a request to Congress for an appropriation to be used directly to this end. The President approved this recommendation in principle.

3. With the establishment of SWNCC, the problem of devising ways and means of achieving the objectives so approved by the President was laid before it. This Sub-Committee was, in turn, constituted for the purpose of investigating and reporting as to the procedure to be followed.

4. The most important economic fact in connection with Saudi Arabia is the presence in that country of rich oil resources presently under concession to American companies. Although the War Department has an interest in Saudi Arabia because of its geographical location athwart the most direct air route to the East, it is the oil of Saudi Arabia which makes that country of particular interest to the armed services. It is the wartime inability to develop the existing oil concessions in a normal commercial fashion which is the main source of the present budgetary deficits. It has been recognized from the beginning that, in addition to the extension of self-liquidating loans for projects by an agency such as the Export-Import Bank, a solution not available for the moment, the channels of possible assistance to Saudi Arabia divide broadly into two:

(a) The immediate and interim, although indirect, assistance which can be furnished by the War Department through (1) the construction of military air fields, (2) the improvement of roads, and (3) the despatching of a military mission; and

(b) The longer range and much more important direct assistance which may conceivably be supplied through arrangements relating to the oil resources.

5. The Sub-Committee’s consideration has been given to both of these avenues of approach. In the case of the former, on February 7, 1945, SWNCC referred to the Sub-Committee a paper, SWNCC 19,²⁷ consisting of a report to the Assistant Secretary of War²⁸ from the Army Deputy Chief of Staff²⁹ reciting the projects which the War Department is prepared to embark upon immediately. They are: (a) the establishment of a military mission,³⁰ (b) the improvement of certain roads, and (c) the construction of an airport at Dhahran. The first two are not regarded by the War Department as necessary to the prosecution of the present war and will be proceeded with only upon the State Department’s assurance that they are advisable and in the national interest in order to assist in the accomplishment of other important objectives. The construction of the Dhahran field is, on the other hand, considered by the War Department to be necessary to the prosecution of the present war.

6. The State Department member of the Sub-Committee reports that the State Department is ready to extend the formal assurances required with respect to the military mission and road improvement projects. The State Department also strongly favors the third project but, on the basis of information received by it, is of the opinion that permission to construct the Dhahran field cannot be obtained from King Ibn Saud until after British consent is procured, which, in this instance, involves concurrence by the British members of the Combined Chiefs of Staff. In the case of all three of the War Department projects there is, of course, the need for prior discussions and negotiations with Ibn Saud in order that he shall have been fully informed, and shall have approved in advance, of everything that is proposed to be done. Assuming the fact of British consent to the proposed air field, it is the recommendation of the State Department that a War Department representative be sent immediately to Saudi Arabia to meet with Colonel Eddy, the American Minister, to discuss the presentation to King Ibn Saud of the plans for the three War Department projects. It will be for Colonel Eddy, in consultation with the War Department representative to recommend whether or not the military mission and the road improvement projects are to be presented to the King as matters on which the War Department is prepared to proceed immediately and irrespective of the construction of the air field; or whether the three projects are to be taken up simultaneously on the basis that Saudi Arabian consent to the air field is a sine qua non of this Government’s decision to provide the other two.

7. The Sub-Committee’s consideration of the second method of approach to Saudi Arabia’s financial difficulties, namely, the oil resources, resulted in a unanimity of conclusion that the only permanent solution of these difficulties lies in increasing the development and commercial utilization of the petroleum deposits. A normal commercial exploitation of these resources should provide the royalties which mean financial stability to Saudi Arabia. The problem at the moment is that production is well below the point where the royalty revenues to the King are adequate to his country’s needs. As of the end of 1945, it is expected that production will reach a level where oil royalties approximate 7½ millions of dollars; whereas the King’s annual requirements from oil royalties, as distinct from and exclusive of all of his non-oil revenues such as the pilgrim traffic, are approximately double this amount. The direct financial aid from the United States, contemplated in the memorandum for the President, should be directed towards filling up this gap by one means or another until such time as it is reasonable to expect that the resumption of normal trade conditions will admit of a production which supplies the necessary royalties.

8. The Sub-Committee concluded that the next step should be for the State Department to approach Senator Connally, as Chairman of the Senate Foreign Relations Committee, and to lay the problem informally before him, in the hope that his responses would shed some light on the particular kind of solution that would meet with Congressional favor. The Sub-Committee is of the opinion that it would be desirable for the State Department’s representative in such conversation to have been supplied in advance with two things: first, an estimate, worked out in as detailed and precise a manner as possible from available figures, of Saudi Arabia’s actual needs for financial aid over the next few years, and, second, a number of alternate plans, even though formulated in the broadest outline, for the extension of such aid. It is the Sub-Committee’s thought that the Senator in all events will desire to have as exact an idea as possible of the actual amounts of money involved; and, further, that, should be appear disposed to explore the matter of specific plans in any detail, it would be wise to have suggestions at hand to make to him for his consideration. In this connection the Sub-Committee discussed a number of possible alternatives which this Government might follow in making available such funds as Congress may appropriate. These alternatives included the following:

a. Advances to the Saudi Arabian Government to be repaid from future royalties.

b. Loans to the Saudi Arabian Government to be secured by interests in the oil reserves.

c. Purchases by the United States Government, either from the Saudi Arabian Government or from the interested private companies, of direct interests in the oil reserves in the ground.

d. Purchases from the private companies of oil above ground for future delivery.

e. Options to purchase oil above or below ground.

f. Loans to the private companies to make advance royalty payments, or to build facilities to increase production

g. Construction by this Government of facilities which will result in increased production.

h. Outright grants to the Saudi Arabian Government of sums needed to make up budgetary deficits.

9. The Sub-Committee’s consideration of the foregoing methods did not extend to the advocacy of any one of them as against the others. They are merely regarded as suggestive of the different types of plans which can be elaborated and, if the circumstances warrant, brought to the attention of Senator Connally. The Sub-Committee did incline very much to the view that the most fruitful approach undoubtedly lies along some line involving active and direct participation by the private companies in the financial burdens involved.

10. Whatever form the financial assistance to be provided by this Government may ultimately take, the Sub-Committee was in complete agreement that it should be accompanied by arrangements for intimate and continuing participation by this Government in the supervision and administration of Saudi Arabian public finances. This could probably best be accomplished by detailing American financial advisers to work directly with the Saudi Arabian Government. Some considerable degree of American supervision in this regard is also important from the standpoint of assuring the achievement of one of the major objectives of the assistance program, namely, an improvement of the standards of living and general economic well-being of the Saudi Arabian population.

recommendations

11. The Sub-Committee’s specific recommendations as to the procedure to be followed immediately are:

I. The War Department’s Projects

A. Airfield at Dhahran

1. A letter in the form of Appendix A³¹ should be sent immediately by SWNCC to the Joint Chiefs of Staff requesting the latter to take up with the Combined Chiefs of Staff, as a matter of urgency, the question of British approval of the proposed field.

2. As soon as such approval has been secured and appropriately communicated to the King through the British Foreign Office, negotiations with respect to the field, including efforts to secure post-war rights of the nature specified in SWNCC 19, should be undertaken under the supervision of the State Department.

3. In anticipation of such negotiations, Colonel Voris H. Connor should be sent immediately to Saudi Arabia with instructions to discuss with the American Minister there the manner of the presentation to King Ibn Saud of the question of the air field at Dhahran. Colonel Connor shall be instructed to make clear to the American Minister that it is for the latter, in consultation with the War Department representative, to recommend whether the two projects described hereinafter in paragraphs B and C shall be presented to the King as matters upon which the United States is prepared to act without reference to the Dhahran air field, or whether the King’s consent to the construction of the latter on satisfactory terms is a condition precedent to American aid in the form of the military mission and the road improvement projects.

4. Actual construction of the field shall be commenced by the War Department upon receipt of official notice from the State Department that satisfactory negotiations with respect to it have been completed.

B. The Military Mission

1. The Secretary of State should notify the Secretary of War by letter that the mission is advisable and in the national interest.

2. The preliminary organization of the military mission should be proceeded with, including the prompt despatch of Colonel Voris H. Connor to Saudi Arabia where he will, in conjunction with the American Minister and subject to the conclusions of the latter as contemplated in sub-paragraph (3) of paragraph A above, discuss with the Saudi Arabian Government the scope and nature of the mission.

3. The Military Mission shall be actually despatched to Saudi Arabia upon receipt by the Secretary of War of notification from the Secretary of State that satisfactory negotiations with the Saudi Arabian Government with respect to the details thereof have been completed.

C. The Improvement of the Roads

1. The Secretary of State should notify the Secretary of War by letter that the road improvement project is advisable and in the national interest.

2. The preliminary plans for the road improvements should be proceeded with, including the prompt despatch of Colonel Voris H. Connor to Saudi Arabia where he will, in conjunction with the American Minister and subject to the conclusions of the latter as contemplated in sub-paragraph (3) of paragraph A above, discuss with the Saudi Arabian Government the details of such improvement program.

3. The road improvement shall actually be begun upon receipt by the Secretary of War of notification by the Secretary of State that satisfactory negotiations with the Saudi Arabian Government with respect to the details thereof have been completed.

II. The Oil Resources

A. The question of further financial assistance to Saudi Arabia, over and above those limited and interim benefits which will result from the War Department’s projects described above, should be further studied and related to the exploitation of the Saudi Arabian oil resources.

B. The State Department, for the use of its representative in exploratory conversations with the Chairman of the Foreign Relations Committee should prepare (1) an estimate of Saudi Arabia’s financial needs over the next few years, and (2) a suggested method, or alternative methods, by which, in the opinion of the State Department, direct financial assistance to meet those needs might be afforded by the United States. The documents so prepared by the State Department shall be laid by the Sub-Committee before SWNCC. Under Secretary of the Navy Bard has asked to attend the SWNCC meeting at which these documents will be considered.³²

C. After consideration by SWNCC and at its direction, the problem presented by the inadequacy of present royalty revenues should be discussed informally with the Chairman of the Senate Foreign Relations Committee by Assistant Secretary of State Acheson, with a view to ascertaining probable Congressional sentiment as to the best method of rendering financial assistance. The results of this conversation will be reported to SWNCC by the Sub-Committee, together with recommendations for such further steps as appear to be desirable.³³

25. Circulated by the State-War-Navy Coordinating Committee as SWNCC 19/1 on February 22, 1945.
26. Dated December 22, 1944, Foreign Relations, 1944, vol. v, p. 757.
27. Memorandum of February 5, 1945, from the War Department to the Department of State, not printed.
28. John J. McCloy.
29. Lt. Gen. Thomas T. Handy.
30. A United States Army Military Mission, consisting of a small ground force training group, under Col. Garrett B. Shomber, had been functioning in Saudi Arabia since 1944; for the establishment of the Mission, see despatch 145, March 29, 1944, from the Minister Resident in Saudi Arabia, Foreign Relations, 1944, vol. v, p. 678.
31. Not printed.
32. In accordance with the recommendations in this paragraph, the Department prepared two studies entitled “The Budgetary Requirements of the Saudi Arabian Government, 1945–1949” and “Alternative Methods for Direct Financial Assistance to Saudi Arabia”, neither printed. The studies were circulated by the State-War-Navy Coordinating Committee as SWNCC 19/2 on March 1, 1945.
33. By informal action, recorded in SWNCC 19/3, the State-War-Navy Coordinating Committee approved on March 2 the recommendations contained in paragraph 11.