S/SNSC Files, Lot 63 D 351, NSC 104 Series

Memorandum by the Executive Secretary of the National Security Council (Lay) to the National Security Council 1

secret

NSC 104

U. S.Policies and Programs in the Economic Field Which May Affect the War Potential of the Soviet Bloc

Reference: Memo for NSC from Executive Secretary, same subject, dated February 12, 19512

The President has referred the enclosed letter by the Secretary of State and its attached report on the subject for consideration by the National Security Council of the “Recommendations on Substantive Measures” contained in Part II–A therein. The Secretary of the Interior, the Secretary of Agriculture, the Secretary of Commerce, the Economic Cooperation Administrator and the Director, Bureau of the Budget, are being invited to participate in consideration of the enclosure by the Council, the Secretary of the Treasury and the Director of Defense Mobilization.

The President has referred the “Recommendations as to Organization” contained in Part II–B of the enclosed report to the Director, Bureau of the Budget for separate consideration.

Also enclosed is a copy of the letter from the President to the Secretary of State requesting the enclosed report.

[Page 1024]

The analysis of the “Vulnerability of the Soviet Bloc to Existing and Tightened Western Economic Controls”, and the analysis of the “Trade of the Free World with the Soviet Bloc”, referred to in the enclosed letter by the Secretary of State, are being transmitted separately by the reference memorandum.

It is recommended that the “Recommendations on Substantive Measures” contained in Part II–A of the enclosed report, as adopted, be submitted to the President for consideration with the recommendation that he approve them and direct their implementation by all appropriate departments and agencies of the U.S. Government under the coordination of the Secretary of State.

James S.Lay,Jr.
[Enclosure 1]

The President to the Secretary of State

confidential

My Dear Mr. Secretary: Recent developments in the international situation require that the United States review and adjust certain of its policies and programs with respect to its international economic activities. It is necessary that we now take such measures as are feasible to prevent the flow to countries supporting Communist imperialist aggression of those materials, goods, funds and services which would serve materially to aid their ability to carry on such aggression. We must enlist the cooperation and support of other nations in carrying out those measures; and in securing such support we must stand ready to take such steps as may be necessary to minimize the economic dependency of cooperating nations upon Communist imperialist countries. Such objectives must necessarily be achieved without materially impairing our collateral aim of increasing the flow, and assuring the sound allocation, of strategic and critical materials to the free countries of the world.

It is my desire that to the extent that legislation, organization and funds permit and subject to your advice and concurrence with respect to foreign policy objectives, all appropriate programs of the Government now be adjusted and hereafter administered in the light of the above determinations. I desire that you keep me currently informed of the actions taken by the various agencies involved in support of these objectives.

Further, I request that you take the lead in developing recommendations, for submission to me within the next 30 days, of additional measures to achieve these purposes. The development of recommendations will require an analysis to be undertaken by the Economic Cooperation Administration, with such assistance from other[Page 1025]agencies as it may request, of the economy and trade of Communist imperialist aggressors as well as the economy and trade of countries trading with them and the development of specific programs for the adjustment of those trade patterns.

I am having copies of this letter transmitted to the Secretaries of Defense, Treasury, Agriculture, Commerce and Interior, to the Economic Cooperation Administrator, and to the Director of Central Intelligence with the request that they undertake such studies and analyses and participate in the development of recommendations as you may require.

I am also sending copies of this letter to Mr. Harriman and to the Director of the Bureau of the Budget with the request that they work closely with you in the development of the recommendations, the latter especially on those which have organizational and budgetary implications.

Sincerely yours,

Harry S. Truman
[Enclosure 2]

The Secretary of State to the President

secret

Dear Mr. President: In accordance with your letter of December 28th concerning U.S. policies and programs in the economic field which may affect the war potential of the Soviet bloc, I submit herewith a report containing the recommendations of the Department of State, together with supporting material setting forth our conclusions as to the nature of the vulnerability of the Soviet bloc, the nature of the economic relationships between the Soviet and non-Soviet worlds, and the implications of alternative lines of action.

There is appended to the report an analysis of the vulnerability of the Soviet bloc, prepared in the Department of State on the basis of its own intelligence reports and of those of the Defense establishment.* There is also appended an analysis of the economies and trade of the free world with Soviet bloc countries, prepared by the Economic Cooperation Administration with the assistance of the Department of State and other agencies.*

The report contains a series of substantive recommendations for immediate action to strengthen our own controls and those of friendly countries. It also recommends further exploration of a number of lines of action which there has not yet been time to consider fully.

As activities in this field require constant review and consideration and as the possible lines of action are of interest to several departments[Page 1026]and agencies of the Executive branch, it is also recommended that an interdepartmental Economic Defense Strategy Board be established for the purpose, among others, of considering proposed economic defense programs and their relationships to foreign policy objectives and other foreign operations. If you concur in this recommendation, it would be desirable for this Board to be established promptly.

Pending the establishment of any new mechanism, I suggest that the report be considered by the National Security Council. I believe this particularly desirable as certain aspects of this subject are already before the Council.

The pressure of time has made it impracticable for us to seek and obtain final approval of the report from the other departments and agencies interested in this subject. We did, however, seek their comments and suggestions on our preliminary draft and have endeavored to reflect their views. We have also had the benefits of the views of the Bureau of the Budget and of Mr. Harriman’s office in the development of the recommendations.

There is one additional aspect of this matter to which I should like to draw your attention. In considering the possibilities and alternatives open to this government, it became clear that the Soviet bloc economy is relatively so self-sufficient that techniques of a new and unorthodox nature must be developed and applied. Application of many of these techniques requires employment of covert measures. The Central Intelligence Agency is now preparing a document which sets forth those covert measures which appear to be germane to the conclusions and recommendations of our report,

Sincerely yours,

Dean Acheson

[Subenclosure]

secret

Report to the President on United States Policies and Programs in the Economic Field Which May Affect the War Potential of the Soviet Bloc 3

introduction

As Soviet aggressive intentions have become more and more evident, the United States, and under its leadership other important nations of[Page 1027]the free world, have progressively adopted stronger and stronger measures, both positively to build up their own strength and negatively to reduce the strength of the Soviet orbit. The establishment of the North Atlantic Treaty Organization, the European Recovery Program, and improved international relationships in the fields of trade, finance and economic development, have helped constructively to create strength in the free world. Negative measures to impair the Soviet war potential began with the imposition by the United States, in March 1948, of export restrictions or prohibitions on the shipment of strategic goods to the Soviet Union and the satellite countries of Eastern Europe. In the following months and years those controls were progressively tightened, and, through international negotiation, were extended to cover exports of similar items from Western European countries. Today, an important segment of the free world’s exports to Soviet-dominated areas has been prohibited or brought under control.

The invasion of South Korea by communist forces served as an unmistakable warning to the free world that it must accelerate its efforts to develop a preponderance of military and economic strength over that of the Soviet bloc. The defense mobilization program of the United States, Canada and Western Europe is a constructive response to this warning. It has also been necessary to step up our efforts to impair the strength of the Soviet world through the intensification or extension of controls over its trade and financial relationships with outside areas.

The present report has been prepared with a view to recommending the measures which should now be adopted, or continued, to weaken the war potential of the Soviet bloc consistently with the objective of building greater economic and political strength in the free world.

As a basis for its conclusions (Part I) and recommendations (Part II), the report in Part III surveys the vulnerability of the Soviet bloc to western economic controls, analyzes the position of the free world countries in their trade with the Soviet bloc, and examines the effectiveness and practicability of various control techniques that are available.

As used in this paper, the term “Soviet bloc” includes the USSR, Bulgaria, Rumania, Hungary, Albania, Poland, Czechoslovakia, the Soviet zone of Germany and Communist China.

Part I

conclusions

The following are the most important conclusions reached after reviewing present policies and programs and appraising possible additional lines of action:

1. The economy of the Soviet bloc is, to a large extent, free from dependence on trading relationships with the non-Soviet world. Segments[Page 1028]of its economy, however, and particularly some closely related to the war-making potential, are susceptible to external pressures. These vulnerable spots are, broadly speaking, in the fields of machinery and equipment, precision tools, anti-friction bearings, electronics, certain non-ferrous metals, rubber and certain grades of essential minerals. Selective controls directed at these vulnerable spots can achieve most of the results that could be achieved through a complete embargo.

2. The volume of trade between Eastern and Western Europe is today at about 40 percent of the pre-war level; the strengthening of controls proposed in this report will mean a further reduction in this trade. A diminution of trade as a result of this process of strengthening international controls is desirable, provided adequate provision is made to assist the non-Soviet world to meet the resulting economic dislocations and provided the shrinkage is effected through programs which maintain the political unity of the West.

3. It is not at this time in the best interests of the free world to pursue a policy of complete embargo against the USSR and its European satellites. (The policy with respect to exports to China is dealt with in recommendations 1 and 7.) Without significantly increasing the net economic advantage to the West, a complete embargo might well serve to orient the European satellites, particularly Poland and Czechoslovakia, even more rapidly and more deeply toward the USSR; it would make more difficult the settlement of the problems of Germany and of Austria; it would increase the risk of our having to resort again to the Berlin airlift; and, if urged by us, it would raise major doubts in the minds of the other free nations as to the sincerity of our objective of a peaceful settlement of the existing differences with the USSR.

4. The effectiveness of external pressures on the Soviet bloc, to a large extent, depends upon the degree of cooperation of the members of the non-Soviet world. There are, however, limitations on the degree of control other governments can undertake. Many governments are limited in the extent to which they can take political decisions against the Soviet bloc, some by the presence of large indigenous Communist parties, some by public demand for an official policy of neutrality, and some by the fear of direct military reprisals. In addition, many countries of the free world are dependent in varying degrees on trade with the Soviet bloc. Complete stoppage or a significant decrease in this trade would result in serious economic dislocations, particularly among the countries of Western Europe.

5. The economic dislocations could be mitigated to some extent by gradual readjustments which would require the development of alternative sources of supply and the opening up of markets in the Western world for goods now marketed in the Soviet bloc. However, these [Page 1029]readjustments would require major alterations in some of the domestic policies of the U.S. and other countries. Domestic policies such as those relating to the export of products in short supply, the protection of national maritime fleets and the protection of domestic industries would have to be readjusted to fit the concept of a self-contained and mutually re-enforcing Western world.

6. Despite the cost, the principal nations of the non-Soviet world are cooperating and can be expected to cooperate further in a series of measures, short of full-scale economic warfare, which can materially retard the building of the Soviet war potential. It is important, however, in order to increase the likelihood that other nations will expand and strengthen their existing controls, that the concept of “economic defense” as distinct from “economic warfare” be maintained. Certain neutral governments will not participate fully in any case, but to some extent their lack of cooperation can be offset by special measures.

7. Western Germany, although agreeing in principle to the imposition of selective controls, is faced with formidable enforcement problems in making such controls effective. Unless measures are devised for enforcing controls on exports from Western Germany, particularly illegal traffic and transshipments, the effectiveness of Western controls generally will be greatly impaired.

8. As many of the measures employed in World War II to damage the German war economy are of limited usefulness against the relatively self-sufficient Soviet bloc, new techniques for exploiting the latter’s weaknesses should be constantly sought. These techniques should be designed not only to weaken the Soviet war-making potential, but also to place an increasing strain on economic and political relations within the Soviet bloc. Because of their security aspects, certain techniques in this and related fields should be closely guarded and not dealt with directly as part of the more traditional measures.

9. Plans should be formulated and made ready for implementation to deal with a situation of full-scale economic warfare in the event the Soviet bloc initiates such a policy, or in the event that developments make it advisable for the non-Soviet world to adopt this course.

10. The economic strength and cohesiveness of the free world will determine, in large measure, its willingness and ability to take adequate measures against the Soviet bloc. Accordingly, the various aspects of our foreign economic policy which are aimed at the positive goal of building free world strength should be adapted to the present situation and augmented. Among the programs which lend themselves to this objective, and which can be utilised to develop the alternative sources of supply, are our various loan and grant programs, Point IV, and the programs for trade barrier reduction in the free world.

[Page 1030]

Part II

recommendations

It is not possible to make final recommendations covering the entire subject under review without further study and consultation with other agencies of the Government. However, the following recommendations are submitted with a view to setting a pattern for immediate action and establishing machinery for carrying forward the consideration and development of policies and programs. Because of the interests of certain other departments and agencies of the Government in this subject, and because some aspects of it have been before the National Security Council, it is suggested that these recommendations be referred to the Council for review and consideration by it and other appropriate departments and agencies.

A—Recommendations on Substantive Measures

Export Controls

1. The U.S. Government should, pending further developments in the U.N., continue to prohibit all exports to communist China, Manchuria and North Korea, but should apply licensing controls so as to permit Hong Kong and Macao to procure from U.S. sources imports for local uses and for transshipment to non-communist destinations.

2. The U.S. Government should extend its present export licensing system over trade with the Soviet Union and its Eastern European satellites by requiring an export license for all products proposed for shipment to these areas. In licensing such exports, the U.S. should continue to prohibit exports of all items of significance in the atomic energy field, all arms, munitions and implements of war, all items which are determined to be in short supply, and all items which if exported would contribute directly to the Soviet war potential (the so-called I and I–A lists). The U.S. should normally deny the issuance of licenses for all items which, if exported in significant quantities, would contribute to the Soviet war potential (the so-called I–B list). All other items should be kept under constant surveillance through the comprehensive licensing system recommended above. Specific items should be added to the list of commodities which are restricted or prohibited on a selective basis and in accordance with established procedures and existing criteria for control, whenever such action is justified for short supply or security reasons.

3. The U.S. overall security objectives should be controlling in the implementation of Section 117 (d) of the Economic Cooperation Act of 1948 and of Public Law 843, Section 1304 (the Cannon Amendment). Accordingly, although the U.S. Government should prohibit or restrict shipments of important strategic goods to friendly countries, in accordance with policies and procedures which have been laid down[Page 1031]by the National Security Council, if necessary to prevent the frustration of U.S. security export controls or the misuse of U.S. economic or financial assistance, action should be taken in such a way as not to endanger other U.S. security objectives of equal or greater importance.

4. The U.S. Government should continue to provide vigorous leadership in the strengthening of the security export controls of the Western European countries, recognizing, however, that considerations of political feasibility, military risk and economic cost make it undesirable to press for European controls completely parallel to those exercised by the U.S. The U.S. should continue to press for (a) embargo to the Soviet bloc of scarce materials or equipment needed for Western defense programs, (b) international agreement to embargo or limit shipments of additional goods which are not yet fully controlled but have already been recognized by most of the Western European countries in the Coordinating Committee in Paris (COCOM) to be of strategic importance, (c) more effective international controls over transshipments and illegal trade, (d) maximum cooperation by countries, such as Sweden and Switzerland, which do not at present participate in multilateral export control arrangements, (e) measures to minimize past and future trade agreement commitments to supply goods of strategic importance, (f) measures to promote coordination among the Western European countries in their trade agreement negotiations with the East, and (g) improved organizational arrangements in COCOM and in the NATO to further these objectives.

5. The U.S. Government in association with the British and French Governments should request further action by the Federal German Republic to ensure more effective control over the illegal trade and transshipment of goods agreed for control in COCOM.

6. The U.S. Government should seek the further cooperation of the American Republics and where necessary that of other countries in applying export controls to direct shipments and transshipments to the Soviet bloc of items of strategic significance or in short supply.

7. The U.S. Government, in view of the Chinese Communist aggression in Korea, should press for the application of effective controls on exports to China. Its efforts through the United Nations should be directed at achieving agreement on economic sanctions by the maximum number of countries; if necessary to achieve a wide measure of agreement, such sanctions may be confined to a list of goods including atomic energy materials, arms, ammunition and implements of war, petroleum, and industrial equipment useful in producing war materials.

[Page 1032]

8. Multilateral arrangements among free world countries for the equitable distribution of materials in short supply should be used by the U.S., to the greatest practicable extent, to deny or limit shipment to the Soviet bloc.

Preclusive Operations

9. Arrangements for governmental procurement of commodities in short supply, including government-to-government purchase agreements, should be designed in such a way as to deny or limit shipments to the Soviet bloc, to the extent that this would not interfere with the primary procurement purpose of the arrangement.

10. To the extent that export controls, allocation and normal purchase mechanisms do not sufficiently limit the export to the Soviet bloc of materials in which the bloc is vulnerable, the U.S., after consultation with its major allies, should engage unilaterally or jointly in preclusive buying and the preemption of productive facilities to achieve this objective. Preclusive buying operations should concentrate in the first instance on such items as industrial diamonds, jewel bearings and mica, rather than bulk items. Efforts to preempt industrial capacity should be directed primarily at capacity capable of producing critical manufactured products, particularly those requiring large amounts of skilled labor, in countries which do not voluntarily prohibit the movement of these products to the Soviet bloc.

Financial Measures

11. The Strategy Board referred to under Section B of these recommendations should determine the point at which export controls have become so restrictive and other economic and political relations so curtailed that blocking of the dollars and dollar transactions of the USSR and its satellites would be appropriate.

12. Continued study should be given to the subject of gold with a view to evaluating measures of international cooperation which might prove fruitful in reducing the ability of the Soviet bloc to utilize gold.

Blacklisting

13. It would be undesirable at this time to publish a “blacklist” or “proclaimed list”. However, to assist in tightening the enforcement of existing export and other controls and as a preliminary step in preparing a more formal “blacklist”, arrangements should be made to develop a central file of information on individuals, firms and corporations suspected of evading U.S. or international controls.

14. The determination whether to publish a “blacklist” at a later date should be made after careful consideration by the Strategy Board referred to under Section B of these recommendations.

Technology

The U.S. should sponsor measures to strengthen security controls of plants and factories employing advanced technological processes.

[Page 1033]

16. The U.S. should press for more effective action by COCOM countries to implement their agreement that “the object of the embargo or quantitative controls should not be defeated by the export of technical assistance, design data, manufacturing technique, and specialized tools for making any controlled items.”

17. The U.S. should develop further programs to prevent the export of advanced technological information to the Soviet bloc, including export achieved through the movement of persons, and should enlist the cooperation of other countries in this effort. These programs should be devised in such a way as to create the least possible impediment to the exchange of such information among the nations of the free world.

Shipping

18. The U.S. should seek coordinated action on the part of the important maritime powers to prohibit the carriage to Soviet bloc destinations of all goods which are the subject of embargo.

19. The U.S. should explore the feasibility and desirability of instituting, in cooperation with other major maritime powers, a system of ship warrants and of control over the issuance of ship stores in aid of our controls on the movement of prohibited goods.

Decreasing Reliance on Trade with the Soviet Bloc

20. The U.S., with the aid of friendly countries, should pursue vigorously programs for increasing production of those basic materials that are now exported by the Soviet bloc. These programs should be carried out as part of our general program of procurement and development.

21. The bargaining position of friendly countries which now rely on the Soviet bloc for essential materials should be strengthened by making alternative sources for these materials in the free world more readily available. To this end, policies governing U.S. export controls on short supply items should be so designed as not to foreclose a shift to U.S. sources by friendly countries. In addition, a fund should be established, possibly out of ECA appropriations, to make possible the extension of financial aid to friendly countries to offset partially any increases in cost involved in a shift from Soviet bloc to free world sources, whenever such a shift would carry net advantages for the West. Pending further consideration, it is estimated that aid for these purposes would involve something less than $100 million annually.

22. A more comprehensive analysis than has so far been possible should be made to determine what specific products or services now being offered by the free world to the Soviet bloc could be diverted to other countries of the free world. This analysis should point out (a) how productive capacity might be reoriented to provide materials needed by the free world and (b) to what extent the diversion will require the reduction of such obstacles as high tariffs, quotas, and[Page 1034]shipping discrimination. Further study should also be given to the need for government purchasing of goods abroad now marketed in the Soviet bloc which can only be disposed of in the free world at a loss.

B—Recommendations as to Organization

1. Pending further consideration within the Executive Branch, the operating responsibility for carrying out approved policies should rest with the departments or agencies normally having responsibility in the particular field of action in question. In connection with its operating responsibilities, it is expected that each agency will provide the necessary staff work for the development of suggested operating programs within its assigned field.

2. To formulate overall operating programs, central staff work and analysis will be required for the purpose of coordinating and evaluating individual agency proposals as to the most promising course of action. This analysis must take into account the probable effects of proposed economic defense measures on the economies of friendly and neutral countries whose cooperation is necessary to make them effective. It should also consider the possibilities of using foreign assistance and other positive foreign economic programs to reinforce economic defense objectives. This centralized staff work should be organized and directed by the Chairman of the Board referred to in paragraph 3 below, who, for completed staff work, should make maximum use of the facilities of the departments and agencies having responsibilities in these fields.

3. The operating programs in this field must be carried on in terms of and in a manner consistent with our foreign policy objectives. The operations in this field must be coordinated with other programs and efforts in the field of foreign policy. It is therefore recommended that an Economic Defense Strategy Board be established under the Chairmanship of the Department of State. Other agencies to be represented on the Board should include the Departments of Treasury, Defense, Commerce, Agriculture and Interior and the Economic Cooperation Administration, the Central Intelligence Agency, and the Office of Defense Mobilization. This Board should consider proposed economic defense programs and their relationship to foreign policy objectives and other foreign operations; should aid in coordinating the operations of the various agencies; should assist in evaluating the effectiveness of operating programs; and should stimulate the development of effective policies and programs. The Board should recommend policies to govern operations in this field.

[Here follows Part III, a 30-page analysis upon which the conclusions and recommendations contained in the first two sections are based.]

  1. The source text, along with a cover sheet, was circulated as NSC 104 to members of the National Security Council as well as the Secretary of the Treasury, Secretary of the Interior, Secretary of Agriculture, Secretary of Commerce, Director of Defense Mobilization, Administrator for Economic Cooperation, and the Director of the Bureau of the Budget.
  2. Post, p. 1035.
  3. Transmitted separately by memo for NSC from Executive Secretary, same subject, dated February 12, 1951. [Footnote in the source text.]
  4. Transmitted separately by memo for NSC from Executive Secretary, same subject, dated February 12, 1951. [Footnote in the source text.]
  5. To be circulated as NIE–22, “Vulnerability of the Soviet Bloc to Economic Warfare”. [Footnote in the source text. For text of NIE–22, see p. 1046.]
  6. In a memorandum to Ambassador at Large Philip Jessup, dated February 9, Max W. Bishop, Department of State Staff Member on the National Security Council, directed the source text to Jessup’s attention and noted that it is “my impression that economic operations of this sort in peace time, if carried out properly, could be even more disruptive than total economic warfare under conditions of war.” (S/PNSC Files, Lot 61 D 167, NSC 104 Series)
  7. In addition to the United States and Canada, the Consultative Group and its Coordinating Committee include the German Federal Republic and the following NATO countries: the United Kingdom, France, Italy, Belgium, Netherlands, Luxembourg, Norway and Denmark. [Footnote in the source text.]