Policy Planning Staff Files

Memorandum by the Assistant Secretary of State for Economic Affairs ( Thorp ) to the Secretary of State 1

top secret

Subject: Draft Report to President

1. One of the underlying assumptions in the Report is the notion that the USSR is “steadily reducing the discrepancy between its overall economic strength and that of the U.S.” (page 6). So far as the evidence included in the Report is concerned, I do not feel that this proposition is demonstrated, but rather the reverse. It rests largely upon statistics showing that the USSR is diverting a higher proportion of its gross national product to investment and defense than is the United States. In this instance, percentage figures are completely misleading. Put in dollar terms, the facts seem to be as follows for 1949:

Gross Investment Defense
(billions of dollars)
Consumption Total
USSR 16.5 9.0 39.5 65.0
US 34.0 16.2 199.8 250.0

I do not have the data to add the figures for the “Soviet orbit” and the NAP countries, but they are in almost identical proportions. The NAP countries have a much larger gross national product, so they Would also run far ahead of the satellites in absolute terms. Therefore, in actual rather than proportionate terms, the expansion in the US economy was double that of USSR during 1949, and that was probably somewhat below our rate of expansion for the previous year.

The suggestion is made but not developed that new investment in the USSR was much more significant relative to military requirements. This may be somewhat true—but in 1949, US steel capacity increased about 2 million tons. The Soviet would have had to record a 10% jump in one year to have kept pace. I suspect that our oil reserves and capacity both increased in the US more rapidly than in USSR, in absolute terms. It is of course true that our economy is more advanced, and therefore our investment covers a wider variety of items. But the television manufacturer cannot be disregarded as a national asset. (Even the manufacturer of Kirsten pipes made carburetors during the War.) Even in the narrow definition, the point is in doubt. I suspect a larger proportion of Soviet investment went into housing. The largest single item in the US investment picture in 1949 was in electric power, which is certainly a “war-supporting industry.”

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But it is said, the dollar in which the calculations are made goes much further in the Soviet Union. This is undoubtedly true for labor (and military pay) but so far as machinery and capital goods are concerned, the argument is not at all clear. Their costs are extremely high.

Furthermore, it is not clear that the USSR has such a tremendous capacity for rapid expansion. The 25% now alleged to being applied to gross investment is a very high rate for any country to maintain. Furthermore, rapid expansion on their part requires general development which inevitably runs into bottlenecks. Oil is one case in point, and transportation is another.

I have made no study of this subject. It may be true that the lower expenditure on defense by the USSR is more productive, and the case can of course rest on the military budget apart from the more general investment figures. However, the broader economic case is clearly not proven. In fact, all the evidence in the report points the other way, that the actual gap is widening in our favor.

Even if the case could be made, I am not sure of its significance. If one compares the total economic capacity, the gap is so tremendous that a slight and slow narrowing would have little meaning. Our economy has doubled its capacity about every twenty years for at least four such periods, and it has not stopped growing. Population increase, technology and compound interest take care of that. And the USSR will have great difficulty in making comparable gains in absolute terms because it starts from so much lower a base.

2. On the economic side, I feel that we cannot emphasize enough the disaster which an economic depression would be. This could destroy the entire structure even though we might weather the storm ourselves. The inventory adjustment in early 1949 did plenty of harm in the international field. This is not only the hope of the Kremlin but the fear of our friends. We may be doing all that we can to stabilize internally and we hope to be successful. However, there are ways in which we could protect our friends somewhat from our own economic Wrongs, if we really were concerned about the problem. At least the fears and doubts could be reduced.

3. So far as the military picture is concerned, it seems to me that some consideration should be given not only to the drain which must be involved in the maintenance of a non-productive army, but to the extent to which it is immobilized by the necessity of demonstrating the iron hand in the Soviet Union itself and in the various satellites. Money spent to maintain a huge standing army is not necessarily money which is widening the gap of preparedness. The comparisons of military budget figures should take this into account.

4. On page 5, it seems to me that the relations with the satellites involves more than a vulnerability. It must be a continual strain and [Page 220] burden on energy, manpower and attention—perhaps a liability rather than an asset in case of war. In this connection, it would be helpful to be able to compare our contributions to build up other countries with the Soviet drain on the satellites.

  1. Transmitted through Under Secretary of State Webb.