Memorandum of Conversation, by Mr. Arthur Z. Gardiner of the Bureau of Near Eastern, South Asian and African Affairs 1

Subject: Near East and South Asia Aid Program

Participants: Mr. McGhee—NEA
Mr. E. G. Mathews—SOA
Mr. Gardiner—NEA
Mr. Claxton—H
Mr. Moreland—H
Reps Bolton (Ohio)
Burleson (Tex.)
Carnahan (Mo.)
Chatham (N.C.)
Chiperfield (Ill.)
Zablocki (Wise.)
Javits (N.Y.)

Mr. McGhee indicated that the Department of State welcomed the opportunity to consult House leaders before making any commitments on a new program of great importance. Mr. McGhee began his presentation by referring to the previous meeting of the NEA Subcommittee when he had mentioned that the economic situation in various South Asian and Near Eastern countries was seriously deteriorating. In support of this statement, he referred to the food situation in India, where there was an overall shortage of 4 to 5,000,000 tons of grains, and famine threatened in West Bengal, Madras, and Bihar. In Iran the crop failure in 1949 had resulted in grave food shortages and a generally deteriorating economic situation. In Pakistan also, while grain supplies were plentiful, other food imports were necessary, and the economy of Pakistan, threatened by the impasse in trade relations with India, was scarcely able to afford adequate importations.

A second focus of economic deterioration was indicated in the price structure in various countries. Prices were rising dangerously at the rate of 3% monthly in India and in Pakistan, and India was also facing deterioration in its industrial plant (dis-investment). New private investments since the war in India had amounted to only a total [Page 182] of $20,000,000 from abroad, of which only $1,000,000 had come from the United States.

A third indicator in the deterioration of the economic situation was indicated in studies of balances of payments. India’s balance since April 1950 had become unfavorable, and the drafts that India can make on sterling balances were insufficient to cover the gap in Indian requirements. Pakistan had an adverse balance of trade, and Iran for the year ending 1950 had shown a deficit of $30,000,000. Unemployment figures which were available showed a very heavy burden on local economies, and concealed unemployment through surplus agricultural workers was prevalent through the whole area. Finally, it was estimated that there were 10,000,000 refugees on the subcontinent as a result of partition, only half of whom had been settled, and 750,000 destitute Arab refugees as a result of the Palestine conflict.

Such were the underlying conditions that called for remedy. Mr. McGhee then turned to the significance of the area as a whole in view of the United States’ national interests. He pointed out the extent of aid that had been furnished to Western Europe, and that as a consequence of events in the Far East, aid programs had been instituted in Far Eastern countries as far west as Burma. The area stretching from Egypt through the Arab States and Iran to India and Pakistan was receiving no significant aid from us.

The Korean War may well mean that the struggle of the USSR and the free world has been transferred to Asia. We could not dismiss from our plans and calculations the consideration that the Chinese Communists might move next in extended aggression to the South Asian areas. The South Asian countries, in particular India and Pakistan, represent a nucleus of strength. They have had a military tradition which was fostered when they were a part of the British Empire and an ardent nationalism, both of which indicate an ability to resist outside aggression unless such an aggression was forthcoming on an overwhelming scale. He mentioned the manpower contribution of India in the last war. Mr. McGhee indicated the great value of Nehru’s support of our policy in Korea and the possibility that India and Pakistan would fight effectively in the event of armed Communist aggression in states on their borders. These countries have free middle-of-the-road governments which it is in our interest to support.

Turning to the question of how to remedy the present situation, which clearly was headed in the wrong direction and might lead to anarchy and Communism and the loss of this vast population to the Communists by default, Mr. McGhee pointed out that resources presently available to bolster local economies were inadequate. The list included British sterling balances, resources from Governmental bank [Page 183] loans, Point Four, and private capital. None of these resources are adequate to meet the pressing needs of most of the countries in the area in question. On the other hand, grant aid on the scale to which we have become accustomed in the European aid programs are not required in the area. Mr. McGhee referred to the findings of Mr. Gordon Clapp in the Near East, which related to the obstacles in the way of the development of technical rather than a financial nature. He stated that a program, involving grants ranging between 3 and 5 hundred million dollars annually, might well suffice to meet the needs of the area. This money, plus a core of administrators and technicians who would obtain necessary leverage in local situations through their authority to allocate funds, would meet the case. He emphasized that what we need is an economic aid program, and not a program of military aid, for reasons arising from the suspicions and susceptibilities of the countries in question. The program is not another Marshall Plan. It is not directed toward restoration of shattered economies and not involved with the many financial technicalities of the sophisticated European economy. It is not an UNRRA, as we will make terms regarding the use of our aid. What is proposed is a series of individual country programs composed of specific projects primarily related to the development of indigeneous food production and the basic resources of water and power, related as far as possible to the building of local economic and as a corollary, local military strength. There would be agreements with the countries concerned on the general lines of the ECA agreements, but it would not be a regional program with the local equivalent of an OEEC. The program certainly could involve India, Pakistan, and Iran with at least token programs in Ceylon, Nepal, Afghanistan, and also embrace several Arab States.

During the discussion Mr. Mathews and Mr. McGhee brought out the importance of the role of Nehru in weaning China from the influence of the Kremlin.

Throughout the presentation questions were raised by various members of the House from time to time. Mr. Chiperfield questioned the attitude of India in the Korean crisis, but appeared satisfied at Mr. McGhee’s summary of the Indian position and the unreality of expecting military aid from India at such a distance from her bases. Mr. Chiperfield also wished to know why existing financial facilities were not adequate to cope with the plans for development. Mr. McGhee pointed out that the funds available to IBRD were limited, and that the IBRD necessarily operated very cautiously as it must look to the United States money market for its funds. The Export-Import Bank operations were also restricted.

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Mrs. Bolton questioned whether the British could not do more in releases of sterling, but was told that in NEA’s view the British were releasing all the sterling that they reasonably could without danger to their economy, which it was to our advantage to avoid. Mrs. Bolton also inquired whether we were suggesting immediate legislation at this session of Congress. She was told that we were merely seeking consultation at this point and would require some time for consultation with foreign governments, before we could present an effective plan to Congress. Mrs. Bolton remarked at this point that she considered action imperative. Mr. Chiperfield raised the question of the India wheat deal and wondered why action had not been taken during Nehru’s visit to this country. The reasons for lack of action were explained, principally on the grounds of our reluctance to appeal to Congress on an ad hoc basis for the $80,000,000 required to give this wheat to India. Mrs. Bolton brought up the question of the Egyptian market for long staple cotton. She also inquired about the status of Tibet and it was explained that our policy regarding Tibet was dependent on Indian attitude, and that Nehru was raising the issue of Tibet with the Chinese.

In conclusion Mr. McGhee explained that the President had authorized discussion with the Congressional committees and that the Department of State sought the judgment of the committee on this whole subject. The response from all members of Congress present was most favorable, and Mr. McGhee was requested to present the case again before a full meeting of the Foreign Affairs Committee on September 14. Mrs. Bolton requested Mr. McGhee to keep the Chairman of the Foreign Affairs Committee and the Chairman of the NEA Subcommittee informed as to progress during the Congressional recess.

The question regarding publicity arose and Mr. McGhee took the line that action by the individual Congressmen in making their views as to the need for aid to this area and the significance of the area to our global interests would be most welcome and effective.2 It is clear that a program of this magnitude requires informed support from the public if it is to receive formal legislative approval. The fact that the Department of State has the matter under study can hardly need to be kept secret, but commitments must be carefully avoided and it is hoped that the program can be presented to the American people and to the American Congress in such a way that the necessary emphasis on our own national interests need not cause offense abroad.

  1. Copies to H, S/S, S/P, FE, EUR, SOA, NE, AF, GTI, A, NEA.
  2. A handwritten notation in the margin reads “Mrs. B[olton] will talk to Mme P[andit] says E. G. M[athews]”.