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

NAC Files, Lot 60 D 137

Memorandum by the NAC Staff Committee to the National Advisory Council

secret

[Washington,] July 25, 1951.

NAC Doc. No. 1172

Subject: Financial Policy Aspects of Fiscal 1953 Mutual Security Program

The President has requested the National Advisory Council to review financial policies applicable to the Mutual Security Program for the fiscal year 1953 (NAC Document No. 1171).¹ The Staff Committee has reviewed the earlier actions of the Council in this general area, and presents the following conclusions and recommendations for consideration.²

(1) Gold and Dollar Reserves of Recipient Countries

(a) Europe

1.—U.S. foreign economic assistance under present conditions should be determined primarily by considerations of mutual defense. The present policy of not extending grant assistance to European countries for the purpose of increasing gold and dollar reserves should be continued. Where an increase in reserves occurs or where such an increase seems probable, taking into consideration net receipts of dollars from all sources, including military expenditures, the situation will require the most critical examination.

2.—Where, in the opinion of the US, failure to provide dollar aid would prejudice mutual security, such aid should not be withheld merely because the US anticipates that one of the effects of such aid would be to increase the reserves of the recipient country.

3.—In general countries participating in the defense effort should not be required to reduce the present level of reserves as a prerequisite for receiving US aid.

4.—Where the country is making a satisfactory contribution to mutual defense, an unanticipated accumulation of reserves occurring as a result of the vigorous application of appropriate economic and financial policies should not automatically result in the reduction of aid.

(b) Underdeveloped Areas

Aid to under-developed areas is generally intended to increase total resources available for economic development and creation or expansion of essential social services. It is not generally intended to cover balance of payments deficits. Although grant assistance may be given in appropriate cases to under-developed areas for the purpose of financing internal costs of development it is in general unlikely to have substantial influence on the trend of reserves in such areas. Therefore, presently conceived programs for the under-developed areas do not appear to present major questions relating to levels of reserves.

2) Counterpart Policy

(a) Europe

1.—For Military Goods and Services. It is recommended that, as in the past, counterpart deposits should not be required by recipient countries for military goods and services given on a grant basis. This policy would also appear appropriate for other areas.

2.—For General Economic Assistance. It is recommended that counterpart deposits should be required for all direct grant assistance. It is also recommended that legislation permit the use of counterpart funds directly for military expenditures where such use would most advantageously facilitate the defense effort.

(b) Underdeveloped Areas

1.—In view of the diverse nature of the programs and the varying political and economic circumstances in such areas as the Middle East, South Asia, and Southeast Asia, it is recommended that the administering agencies of grant assistance economic programs should have substantial discretion in determining the extent to which counterpart funds may be appropriately required country-by-country and on the terms and conditions under which counterpart may be expended.

2.—In general, it is recommended that counterpart deposit for grant assistance be required at least in those cases where the goods supplied are to be sold through private commercial channels either directly or by the recipient government. In some instances a policy of requiring counterpart deposits for the full amounts of goods supplied may be desirable if in fact this policy should be of value as a means of influencing general monetary and economic policies and facilitating economic development.

3.—Generally, it would appear desirable that where counterpart deposits are required the amounts should be commensurate in value to the dollar costs of the goods supplied. Commensurate value would be determined by appropriate exchange rates in accordance with existing NAC actions.

4.—It is suggested that counterpart deposits be made available to meet the United States local costs of administering the programs but that no fixed percentage of proceeds need be assigned for such costs nor that the United States attempt to use such funds for general administrative expenditures of this Government.

(3) Loan-grant Policy^*

I. Economic Assistance

(a) Europe

For the last three years the Council has recommended that extraordinary assistance to Europe should be on a grant basis. There appears to be no reason for changing this policy during the coming year.

(b) Underdeveloped Areas

1.—Insofar as physical availabilities will permit, it is proposed to foster economic development in some countries at a rate which may be faster than they might undertake exclusively on a loan basis. Grants may be required to influence the character as well as the rate of development.

2.—For fiscal 1953 loans should be extended by the established lending institutions, namely the Exports–Import Bank and the International Bank for Reconstruction and Development, under their usual terms and conditions. The Executive Branch should not request authority or appropriations from Congress for special categories of loans.

3.—Where countries are in a position to service loans, bearing in mind their longer range development needs, and the projects are of the appropriate type, the programs should be put on a loan basis. It will be necessary to review the proposed programs country-by-country to determine the amounts which the individual countries might finance on a loan basis.

II. Military Goods and Services

Military goods and services should be provided on a grant basis or against cash payment, not on a credit or loan basis.

1. Not printed.
2. This paper was considered by the Council at its meeting on July 27 (No. 181), minutes not printed. The Council approved the conclusions and recommendations of the Staff Committee as set forth below in Action No. 482.
3. The principles set forth in this section are not designed to cover the financing of strategic and critical materials. The financial terms and conditions for facilitating production of strategic materials are covered in NAC Document No. 1151 (Revised). [Footnote in the source text. NAC Doc. No. 1151 not printed.]