Foreign Relations of the United States, 1951, European Security and the German Question, Volume III, Part 1

740.5 MAP/4–451: Telegram

The Secretary of State to the United States Deputy Representative on the North Atlantic Council (Spofford), at London¹

secret

Washington, May 29, 1951—7 p. m.

Todep 468. ToISA. To ECC from ISAC.

Part one of three

We have spent considerable time in deliberation over interim financing scheme suggested in London 5242, April 4,² and in attempting to devise other schemes which in our opinion, might deal with problem more expeditiously and with least undesirable effects. We regret delay in passing our views to you but as you realize problem is extremely difficult one, having many implications for total effort which Eur countries will be encouraged to make.

Main results that can be achieved through US participation in an interim financing scheme are: (a) to expedite mil production and procurement thus minimizing time lag before European-produced material is available to defense forces; (b) to expand production base for Eur rearmament; (c) to overcome protectionist obstacles now hindering placement of contracts with most efficient Eur producers; (d) to introduce US technological skills at early stage in order improve quality and efficiency of European-produced matériel. Principal problem is thus to devise scheme which will promote these objectives, and, at same time minimum disincentive effects on Eur willingness take necessary measures to maximize use their own physical and financial resources. It is recognized that no scheme completely eliminates disincentive effect which necessarily arises once US places contracts in Eur for delivery to NATO countries. However, we feel that perhaps scheme described in Part Two this cable has less built-in disincentives than yours. We wld like to deal briefly in Part One this cable with principal considerations which caused us to suggest an alternative scheme.

1. Estab of fund (“say $500 million” as you suggest), to be allocated for procurement on behalf unknown recipients in undetermined amts, wld in our opinion create a serious disincentive. It seems probable that potential recipient countries will avoid placing contracts in Eur until they are sure what items they will receive from this fund and how much of fund will be used on their behalf. To avoid this we feel recipients shld to maximum extent possible be identified at time of placing contracts and that total amts to be procured on behalf of each recipient country shld also be made known to it. We agree completely with what appears to be implied in your scheme that (a) recipient country shld be notified that amount they receive from this scheme will be part of total end-item aid extended to them, and (b) producing country shld be notified that dol earnings accruing to them as result of scheme will be taken into account in allotments of aid.

2. It is our feeling that attempt to get multilateral agreement to interim scheme wld necessarily involve delays and therefore not meet immed problem of overcoming delays in contract-lettinb, which delays are one of principal reasons for any scheme. Advantage of proposed scheme in accompanying cable is that it is essentially unilateral in nature and will not involve time-consuming negots with NATO countries. (Believe further, thought shld be given to setting up multilateral arrangement leading to some form of central procurement, at least for some major items of matériel. We will cable you further on this longerrun problem.)

3. The revolving fund idea contained in your scheme makes no special contribution to our objective of securing additional Eur production or procurement. Same effect can be achieved by taking into account in future allocations of aid disbursements under scheme. Problem is to find more Eur financing for mil production, a purpose which is unlikely to be furthered by requiring Eur countries to fin these particular contracts (i.e. those initially placed by U.S.) as opposed to some other contracts. We are therefore somewhat concerned by prospect that your insistence they pick up particular contracts will require substantial negotiation with Eur countries without any significant contribution to promoting additional Eur efforts. Revolving fund scheme also involves some difficult technical obstacles. In particular, once appropriated dols have been spent in order to procure local currency, dols repurchased must go into miscellaneous receipts and cannot revert to appropriations for reuse.

These in summary are principal considerations which have prompted us to suggest alternative scheme in Part Two of this cable. As already indicated we recognize that there are disincentives in any scheme but believe arrangements we propose are less harmful in this respect, and therefore more likely to be effective in accelerating mil production in Eur.

Part two of three

Fol is ISAC proposal on interim U.S. financing of mil production in Eur:

1. ISAC agreed in principle to U.S. procurement on a limited scale of mil end-items produced in Eur for delivery after fiscal year 1951–52.

2. “Limited scale” implies not only a limit on the total amount ($300 million has been discussed as order of magnitude generally in mind) but limitation to critically important items whose production to meet scheduled requirements (generally to a known recipient) is clearly not forthcoming in absence of U.S. contract placement, and, as far as may be feasible, to certain clearly defined classes of items so that expectations of similar U.S. procurement of other classes of items can be forestalled.

3. Agreement is “in principle” only since there is yet no information available to ISAC on items that might be so procured, either by type, by amount, or by country in which production would take place.

4. Contracts would call for settlement in currency of country where production occurred and shld in gen provide for a minimum of prepayment or progress payment by U.S. in order to postpone as long as possible the settlement payments.

5. Dol earnings accruing to central banks of NATO countries from U.S. settlement of such contracts will, like all dol earnings, be taken into account in allotment of gen econ aid to countries.

6. Local currency for settlement of contracts may be obtained by purchase from central bank of country in which a contract is let, but need not be obtained only by that method. The method employed will be determined by ECA and other interested U.S. agencies, after considering the desirable incidence of dol accruals and all sources of local currency funds available to U.S.

7. Delivery of end-items procured in Eur will be taken into account in determining total U.S. end-item programs of individual recipient countries, and will be governed by principles, conditions, and limitations that apply to all portions of end-item program. In gen, recipient country will be advised in advance of origin of Eur procured end-items in order to permit proper technical consultation and supervision; disposition of such end-items will, however, remain subject to U.S. discretion just as do any undelivered portions of end-item program.

8. Procurement under this proposal by U.S. of certain end-items in Eur can only be financed out of appropriations resulting from existing Mutual Security Program request. Distribution of Eur produced end-items among countries will be determined in same way as that of U.S. produced end-items. Accordingly, although use of Eur sources of supply may well affect quantities of particular end-items procured and may, therefore, indirectly affect total amount of end-item aid to any particular recipient, this practice cannot give any government reason to count on having more of its needs met by U.S. aid than would otherwise be case. This fact shld be made unmistakably clear to each recipient govt so that U.S. action will not appear to reduce the country’s responsibility to procure mil end-items with its own resources.

9. It will often be desirable to assign a contract orginally let by U.S. procurement authorities to procurement authorities of recipient country, because of advantage of technical supervision by that country, continuity with subsequent Contracts that wld be let by that country, or budgetary consideration of recipient country, or to facilitate use of recipient country’s EPU account for obtaining currency with which to settle contract; but there will be no gen presumption that contracts shld be so assigned and no major negotiating effort will be devoted to such assignment. In event of such assignment negot will, of course, have to make clear relation between any such acceptance of liability for payment and gen econ and end-items aid programs for country concerned.

10. The extent to which contracts may be placed within recipient countries or in countries different from recipient can be determined only after study of what items meet conditions expressed in para 2.

11. Before this program is put into operation, there will be prepared an approximate statement of kinds of items to be procured, the countries in which production will take place, amounts to be procured, and the likely recipients. This statement will be reviewed by ISAC before plans for such procurement are put into operation.

12. The selection of items for such contract placement, and all discussions or negot in connection with such U.S. procurement, must be oriented toward extreme importance of making NATO govts realize that such procurement represents limited interim contract placement; any Eur expectation that U.S. will continue such a practice or extend it outside or beyond limited scope decided unilaterally in advance, must be minimized.

13. In interest of speed, and to minimize danger foreseen in para 12, we shld not attempt to arrange or negotiate multilateral responsibility of any sort in connection with this interim program of U.S. procurement in Eur. However, this program shld be carried out in maximum feasible cooperation with DPB, and full advantage shld be taken of DPB recommendations.

14. These principles have been agreed without prejudice to any more permanent multilateral system involving central procurement of, or financial responsibility for, certain major mil end-items produced in Eur. Consideration of such system will be undertaken promptly.

15. No additional requests for funds are being made for specific purpose of financing this scheme. A determination of source of funds shld be postponed until such time as reply is obtained to Part III of this cable, providing a more detailed idea of content of contemplated program.

Part three of three

In order to assist in determining appropriate amounts to be set aside for procurement it is essential that we have some idea of amounts and kinds of items for which contracts shld be let in Eur. It wld be appreciated, therefore, if you cld prepare a statement which presents so far as possible a catalogue containing (a) specific items that cld be so procured, (b) countries in which production is likely to take place, (c) the likely recipients, (d) amounts to be procured with probable costs expressed in dol equivalents, and (e) prospective delivery schedules.

We feel you are in better position to prepare this type of statement but wld like opportunity to review it before plans for interim scheme are put into operation. This is particularly important since essential nature of projects must be demonstrated if funds from existing appropriation requests are to be made available. In this latter connection it is our feeling that projects shld be selected which will result not only in economical and expeditious production of critically needed items, but which will expand the production base to meet continuing needs of Eur rearmament.

Acheson

1. Also addressed to Batt at London; repeated to Paris for MacArthur and Katz and to Heidelberg for Handy. Martin (RA) drafted the telegram with Schelling and Locker (ECA) and cleared it with ECA and the Departments of State, Treasury, and Defense.
2. Ante, p. 118.