Foreign Relations of the United States, 1950, National Security Affairs; Foreign Economic Policy, Volume I

Policy Planning Staff Files

Memorandum by Mr. Hamilton Q. Dearborn of the Council of Economic Advisers to the Executive Secretary of the National Security Council (Lay)

top secret

Washington, May 8, 1950.

Subject: Comments on NSC 68

This memorandum is prepared in response to the Committee decision of May 2 that NSC 68 should be further considered at a meeting on May 9, and that written questions and comments should be prepared as a basis therefor.

Three basic questions are raised by NSC 68:

1) The adequacy of the intelligence data and analysis on which rest the conclusions as to the current status of, and trends in, the relative strength of the United States and the Soviet Union;

2) The degree to which the policy conclusions of NSC 68 are best adapted to remedy the deficiencies disclosed by analysis; and

3) The best programs, and their cost and economic significance, for implementing those policy conclusions, or alternative policy conclusions.

The Basic Intelligence Data and Analysis

The major analytical conclusions drawn are the following:

Concerning direct military strength:

1. “Unless the military strength of the Western European nations is increased on a much larger scale than under present programs and at an accelerated rate, it is more than likely that those nations will not be able to oppose even by 1960 the Soviet armed forces in war with any degree of effectiveness.” (p. 19¹)

2. “At the time the Soviet Union has a substantial atomic stockpile [mid-1954]² and if it is assumed that it will strike a strong surprise blow and if it is assumed further that its atomic attacks will be met with no more effective defense opposition than the United States and its allies have programmed, results of those attacks could include: laying waste to the British Isles…³ destruction of the vital centers and of communications of Western Europe… and delivering devastating attacks on certain vital centers of the United States and Canada.” (p. 20⁴)

Concerning economic and military potential:

3. “… the total economic strength of the U.S.S.R. compares with that of the U.S. as roughly one to four.… Assuming the maintenance of present policies, while a large U.S. advantage is likely to remain, the Soviet Union will be steadily reducing the discrepancy between its over-all economic strength and that of the U.S. by continuing to devote proportionately more to capital investment than the U.S.” (pp. 16, 17⁵)

4. “The military budget of the United States represents 6 to 7 percent of its gross national product (as compared with 13.8 percent for the Soviet Union). Our North Atlantic Treaty allies devoted 4.8 percent of their national product to military purposes in 1949. This difference in emphasis between the two economies means that the readiness of the free world to support a war effort is tending to decline relative to that of the Soviet Union.” (p. 25⁶)

5. “… a full-scale effort by the U.S. would be capable of precipitately altering this trend. The U.S.S.R. is on a near maximum production basis.… In the U.S., on the other hand, a very rapid absolute expansion could be realized.… Even Western Europe could afford to assign a substantially larger proportion of its resources to defense, if the necessary foundation in public understanding and will could be laid, and if the assistance needed to meet its dollar deficit were provided.” (pp. 17, 25⁷)

It is, of course, outside the competence of the Council of Economic Advisers to appraise the analysis of military strength prepared by the agencies submitting NSC 68. The Council’s concern is only that the analysis should be in a form most helpful to the work of the Ad Hoc Committee.

From this standpoint, it would appear desirable that the data on percentage expenditures on defense and investment which are used in NSC 68 to illustrate probable trends in military and economic strength should, to the extent feasible, be supplemented by data showing absolute amounts. The reason for this is that absolute figures tend to be more helpful than percentage figures in determining quantitative objectives. To bring the defense expenditures of European NAT countries up to the same proportion of national output as in the Soviet Union, for example, would require nearly a three-fold increase in their defense budgets.

With the proposition that “a very rapid absolute expansion could be realized” in total United States production of all goods and services there is full agreement. This, in turn, would render more supportable any given level of defense outlays. The size, composition and rate of the expansion in total output that might be achieved with a full effort would be one of the major considerations governing program formulation under NSC 68. On them would depend the extent to which any major new programs adopted would require a reduction in consumption, the imposition of selective or general price and allocation controls, cutbacks in expenditure programs other than for defense and foreign aid, or increases in taxes.

For these reasons the Council considers that a careful analysis of the productive potentialities of the United States economy must be a central feature of the analytical framework supporting program recommendations that may be reached under NSC 68. Such an analysis is important from the standpoint of general economic policy regardless of whether new programs recommended may be of large or moderate dimensions.

The Policy Conclusions of NSC 68

The basic policy conclusion reached by NSC 68 is as follows:

“In the light of present and prospective Soviet atomic capabilities, the action which can be taken under present programs and plans… becomes dangerously inadequate, in both timing and scope, to accomplish the rapid progress toward the attainment of the United States political, economic, and military objectives which is now imperative. A continuation of present trends would result in a serious decline in the strength of the free world relative to the Soviet Union and its satellites.… It is imperative that this trend be reversed by a much more rapid and concerted build-up of the actual strength of both the United States and the other nations of the free world.” (pp. 63, 64⁸)

It is stated that “a comprehensive and decisive program… would probably involve:

• “1. The development of an adequate political and economic framework for the achievement of our long-range objectives.
• “2. A substantial increase in expenditures for military purposes.…
• “3. A substantial increase in military assistance programs.…
• “4. Some increase in economic assistance programs and recognition of the need to continue these programs until their purposes have been accomplished.
• “5. A concerted attack on the problem of the United States balance of payments.…
• “6. Development of programs designed to build and maintain confidence among other peoples in our strength and resolution, and to wage overt psychological warfare.…
• “7. Intensification of… operations by covert means.…
• “8. Development of internal security and civilian defense programs.
• “9. Improvement and intensification of intelligence activities.
• “10. Reduction of Federal expenditures for purposes other than defense and foreign assistance, if necessary by the deferment of certain desirable programs.
• “11. Increased taxes.” (pp. 56, 57⁹)

Again, the Council is in no position to appraise those policy conclusions relating to the basic military security and foreign policy of the United States. The Council’s concern is that the conclusions and program recommendations that may be approved both reflect and contribute to our basic economic strength.

From this standpoint, “the development of an adequate political and economic framework for the achievement of our long-range objectives” would appear to be the governing concept which embraces all the specific areas of activity listed in NSC 68, and in the light of which specific programs must be appraised. It embraces not only ponderable elements of economic and military strength, but also the imponderables of political faith and action. It embraces not only the conduct of our foreign policy, but also the conduct of our domestic policy.

It would seem of the highest importance that the development of a broad policy framework be regarded as central in the work of the Ad Hoc Committee, rather than as an ancillary project for continuing study. Only such a framework can give adequate guidance in approaching such problems as how, over a considerable period of years, economic and social resources can be devoted to military ends with maximum emphasis upon the productive economic strength of the whole economy; or the way in which the structure of taxation and incentives in our economy might best be used to ensure the full achievement of our potential.

Viewed in this light, there appears to be a need for an expansion of the areas of specific action which are listed in NSC 68. The inclusion of additional areas where policy recommendations may be required will depend in considerable measure on the size of new programs that are likely to come under consideration by the Committee, but the following tentative listing is suggested:

a) Measures to increase capacity in strategic areas of the economy. These might involve tax measures, credit measures, price support programs or market guarantees (as in the case of agriculture), etc. In some cases, clear identification of needed goals and the reasons for them might be enough to lift voluntary effort to the required levels.

b) Measures to promote an efficient and equitable allocation of resources. Depending on the size of new programs, such measures might, if needed, range from voluntary allocation agreements in selected fields to more general types of allocation policies.

c) Measures to promote a stable and equitable distribution of purchasing power. Again depending on the size of new programs recommended, such measures, if needed, might range from purely voluntary programs in selected areas to more general types of price-wage policies, tax policies, etc.

d) Finally, to the extent which seems desirable in the light of a balanced assessment of other program recommendations and of general economic developments, a general program designed to promote the full utilization of the United States potential for economic growth. NSC 68, in the Council’s view rightly, stresses the serious risks to the achievement of our broad policy objectives which would arise from economic instability, and the crucial importance to those objectives of a stable and expanding economy.

The immediately foregoing points make clear the high relevance to NSC 68 of the target studies for the general economy which the Council of Economic Advisers has had continuously under way. These studies need to be expedited, amplified, and more closely articulated with the problems raised by NSC 68.

It will have been observed that the above listing is framed more in terms of policy aims than of specific fields of action, and that it embraces the two final points in the NSC 68 listing, namely, “reduction of Federal expenditures for purposes other than defense and foreign assistance”, and “increased taxes”. This approach appears desirable in order to avoid pre-judgment. A major program to expand our economic and military potential might well require some selective increases in expenditures outside the areas of direct defense and foreign aid. It might also be found that certain tax concessions, as well as tax increases, might be an important element in such a general program. It may also appear that if we take up the slack in total output and employment which has developed since the end of 1948, every expansion of defense will not require contraction elsewhere.

Programs and Costs; the Broad Implications of NSC 68

The preparation and appraisal of programs to carry out the objectives of NSC 68, as they may be approved, is a major task of the Ad Hoc Committee. Until some notions of magnitude and duration are available, it is difficult to appraise the implications of NSC 68 in even the most preliminary way. Certain broad comments may, however, be put forward.

In the Council’s view, the United States economy’s capacity for growth is such that substantial new programs could be undertaken without serious threat to our standards of living, and without risking a transformation of the free character of our economy. Yet the adoption of such programs would create major problems of economic and social policy. Unless carefully and imaginatively prepared, their adoption could create concerns on the part of the Congress and the public which could ultimately threaten their success.

These problems and concerns stem in large measure from an inadequate appreciation of our capacity for growth. They stem from a conviction that increased defense must mean equivalently lowered living standards, higher taxes and a proliferation of controls.

In some measure, these apprehensions can be reduced by education and persuasion. In some measure they can be offset by appeal to the people’s basic willingness to sacrifice in the interests of a free society. But in considerable measure they will remain, and will strongly influence both the magnitude and the character of new programs that can be realistically put forward.

This means that programs cannot be framed solely, or even predominantly, in terms of our physical capacities. It means that there will be limitations of a non-economic character on increases in expenditures, and pressures of like character toward reducing expenditures in non-defense areas and revising our tax structure. These limitations and pressures must be taken into account. From the Council’s standpoint, the basic problem will be to contribute to the development of recommendations which can make a maximum contribution to our economic and military strength within this framework.

Hamilton Q. Dearborn

Approved:

Leon H. Keyserling

1. See p. 250.
2. Brackets appear in the source text.
3. Omissions throughout the document are indicated in the source text.
4. See pp. 251–252.
5. See p. 248.
6. See p. 256.
7. See pp. 249 and 256.
8. See p. 290.
9. See p. 285.