Foreign Relations of the United States, 1951, National Security Affairs; Foreign Economic Policy, Volume I

Current Economic Developments, Lot 70 D 467, FRC Acc. No. 72A6248¹

Current Economic Developments

[Extract]

secret

[ Washington ,] January 2, 1951.

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US Foreign Aid Programs: Study of Certain Issues

Proposals are now being formulated within the Government for US foreign economic and military assistance programs for fiscal year 1952. These proposals cover military aid to western Europe and supporting economic assistance, military assistance to other countries, and a broad program of aid to underdeveloped areas, primarily South and Southeast Asia. Although these programs have not yet been fully developed, tentative agreement has been reached on certain issues regarding the form and content of the legislation which will be requested from Congress. In addition, the National Advisory Council has considered the financial aspects of these programs and has approved principles governing counterpart policy in connection with US aid, the relation of such aid to monetary reserves, and the use of loans versus grants as the form of US assistance.²

Form of Legislation. Although Congressional leaders will be consulted before final decisions are made on the precise form of the proposed legislation, a Foreign Aid Steering Group consisting of representatives of the State, Defense and Treasury Departments, ECA and the Budget Bureau has reached preliminary agreement on several aspects of this question. This group has agreed that all economic and military grant assistance requests should be submitted to Congress in one package in order to emphasize the unitary theme of building our security by promoting situations of strength in the free world. All Congressional appropriations for these programs should be made to the President to be allocated by him to the appropriate administering agencies. Some flexibility should also be provided for the interchange of funds within and between the various programs. Although there is still some question concerning the extent to which existing legislation should be utilized in the new legislation, the Steering Group tends to prefer a bill which would incorporate existing legislation by reference, together with such amendments and new authorizations as may be required.³ The major issue at the present time concerns the manner in which the programs should be grouped within the one legislative act. In general, programs could be grouped on a purely regional basis or on a functional basis which would reflect their principal objectives, i.e., the promotion of military strength or the promotion of political and economic strength, within the overall framework of building for security. The final arrangements will probably represent a combination of these two approaches.

Financial Policy Aspects. On the basis of only tentative estimates of the amounts involved in proposed US foreign assistance, the National Advisory Council has approved financial principles which should govern the extension of such assistance. The NAC discussed the extent to which the effect of US aid on the level of monetary reserves of a country should be considered in the allocation of aid to that country. It was decided that US assistance to European countries should be dictated primarily by considerations of mutual defense, but that most critical examination will be required when an increase in the level of reserves results, or is likely to result, from such assistance. The present policy of not extending grant assistance for the purpose of increasing reserves should also be continued. However, if the US feels that failure to provide aid would prejudice the defense effort, aid should not be withheld because it would increase reserves, nor should the unanticipated accumulation of reserves as a result of the vigorous application of appropriate economic and financial policies automatically result in the reduction of aid where a country is making the maximum contribution to mutual defense. This is not considered a serious problem in connection with the programs for the underdeveloped countries since these programs are not likely to influence appreciably their levels of reserves.

Although it was generally agreed that, as at present, recipient countries should not be required to deposit local currency counterpart for end-use military items received from the US, a question arose as to whether the present policy of requiring counterpart for economic assistance to Europe should be continued. Under the present circumstances, with all economic assistance to European countries to be provided as a basis for sustaining the military effort, it was asked whether the counterpart requirement would contribute to this effort and whether it might not instead offer conflicts between our military objectives and the objectives of financial stability which have been the aim of counterpart programs in the past. The NAC decided that counterpart deposits would still appear to be useful in influencing recipient countries to follow internal financial policies in support of the common defense effort. However, the Council also agreed that they should be permitted to use these deposits directly for military expenditures where this seemed to be desirable for the defense effort. In view of the diverse nature of the grant assistance programs for the underdeveloped countries and the varying political and economic circumstances in these areas, the NAC has recommended that the administrators of these programs should be allowed substantial discretion in determining the extent to which counterpart deposits should be required and the terms and conditions under which they may be spent. In general, counterpart deposits, commensurate in value to the dollar costs of the goods supplied by the US, should be required at least for goods sold through private commercial channels.

The National Advisory Council has recommended that assistance to Europe should continue as for the past two years on a wholly grant basis, and that both loans and grants should be used in the programs for the underdeveloped areas. Because the latter are part of a longer range program whose precise magnitude and form cannot now be determined, and because of uncertainties concerning the availability of supplies for them, it is not possible now to determine precisely the extent to which such programs might be financed on a loan or grant basis. However, the NAC has laid down three general principles in this connection: 1) grants should be made so far as possible for programs which are (appropriate for such financing because of their inherent character, such as technical assistance, aid programs based on recommendations of the Griffin report⁴ on Southeast Asia, and related projects; 2) loans should be made where a country is in a position to service a loan and projects are of the appropriate type; and 3) such loans should be financed by the established lending institutions under their usual terms and conditions rather than as special categories of loans. The NAC also recommended that an increase of up to $1.5 billion in the Eximbank’s lending authority should be included as an integral part of the foreign aid program.

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1. Master set of the Department of State classified internal publication Current Economic Developments for the years 1945–1969, retired by the Bureau of Economic Affairs.

2. The National Advisory Council on International Monetary and Financial Problems coordinated the policies and operations of United States representatives on the International Monetary Fund and the International Bank for Reconstruction and Development, the Export-Import Bank, and all other U.S. agencies involved in the areas of foreign loans, and foreign financial exchange and monetary transactions. NAC membership included the Secretary of the Treasury (Chairman), the Secretaries of State and Commerce, the Chairman of the Board of Governors of the Export-Import Bank, and the Administrator of the Economic Cooperation Administration. The master file of the records of the NAC for the years 1945–1958, as retired by the Bureau of Economic Affairs, Department of State, comprise item 70 of Federal Records Center Accession 71A6682,15 boxes.

   The NAC decisions on the matters under reference here were embodied in Action No. 442 taken at NAC Meeting No. 168, December 26, 1950 (FRC Acc. No. 62A613, Box 16, NAC Actions).

3. The following Acts of Congress, as amended, comprised the major elements of existing foreign aid legislation: the Economic Cooperation Act of 1948 (Public Law 472, 80th Cong.; 62 Stat. 137), authorizing the European Recovery Program; the Mutual Defense Assistance Act of 1949 (Public Law 329, 81st Cong.; 63 Stat. 714), providing for a comprehensive military assistance program; and the Act for International Development (Title IV of the omnibus Foreign Economic Assistance Act of 1950–Public Law 535, 81st Cong.; 64 Stat. 204), authorizing technical assistance under the Point Four Program. This legislation, reflecting amendments through the year 1951, is contained in Mutual Security Act of 1951 and Other Basic Legislation, House Committee on Foreign Affairs, 82d Cong., 2d sess., Committee Print (Washington, Government Printing Office, 1952).

4. For documentation on the economic and technical assistance survey mission to Southeast Asia headed by R. Allen Griffin, February–April 1950, see Foreign Relations, 1950, vol. vi, pp. 1 ff.