You will recall that the Secretary set up a series of meetings to discuss in
general terms the over-all aid picture for FY
‘55. An analysis of the attached memoranda of these informal conversations
reveals the following general conclusions and highlights:
Mr. Nolting was directed to prepare, strictly from State Department sources,
an analytical study3 of the feasibility of including FY 1955 MDAP
appropriations within the Defense budget.
[Tab A]
Memorandum of Conversation, by Walter Trulock of the
Staff Operations Section of the Executive Secretariat
top secret
[Washington,] September 4, 1953.
Subject: 1955 Foreign Aid—NEA
- Participants: The Secretary
- C—Mr. MacArthur
- S/P—Mr. Bowie
- NEA—Mr. Byroade
- E—Mr. Waugh
- S/MSA—Mr. Nolting
- NEA—Mr. Gardiner
Mr. Byroade referred to the favorable action of the 83rd Congress on the
NEA foreign aid program. He said
that what was done with the money appropriated for FY 54 would determine whether or not
Congress would act favorably on the FY 55
program. He felt that if the situation in Iran and Egypt could be
stabilized, good progress could be made in the whole area. Mr. Byroade
tabled a memo showing preliminary NEA
projections on new authorizations for FY
55.
Military Assistance
a. Greece and Turkey
The Secretary asked why the Department should be responsible for
recommending the level of military aid. He felt that the foreign
military assistance program should be included in the Department of
Defense budget. He said that in some cases the decision as to whether or
not military assistance should be granted was more of a political
decision than a military one, but in the case of Greece and Turkey he
felt that Defense should have the primary responsibility for determining
and justifying the size of the military program.
b. Iran
In response to a question from the Secretary, Mr. Byroade said that
military assistance to Iran was both military and political. He said
that, if the situation in Iran stabilizes, then Iran could become a
vital part of the “northern tier”, in which case the Department of
Defense should determine the level of military aid to Iran.
c. Arab States
[Page 645]
The Secretary asked whether the Defense people would advocate military
aid to the Arab States on military grounds alone. Mr. Byroade doubted
that they would.
The Secretary said that he felt the primary purpose of our military
assistance to the area was to maintain internal stability. He felt that
the possibility of invasion from without and of resisting successfully
such an invasion were less likely than in Europe. Mr. Byroade said that
this was exactly the line the executive agencies had taken during the
Congressional presentation of the 1954 program. He said that the Defense
Department had proposed a program in 2 phases: (1) sending small, but
effective, military missions to advise the military regimes in most of
that area. (2) The second phase would be the creation of a holding force
against outside aggression in which the favorable terrain would prove
most vital. He said that Congressional reception to this testimony had
been favorable but that domestic pressure had kept the size of the
program down.
d. Israel
Mr. Byroade pointed out the need to obtain more cooperation from the
Israelis. He said that as the Arab military forces become stronger, it
will be necessary for us to think about a military mission to
Israel.
Mr. MacArthur asked why we obtained no quid pro quo in Israel. Mr.
Byroade replied that there has been no grant military aid in Israel,
that we had permitted them to make purchases in the U.S., but that we
had also denied their request to purchase certain items. He said that he
did not favor grant aid to Israel other than infrastructure unless they
agreed to furnish us more information about the size and composition of
their forces.
e. Pakistan
The Secretary asked if the determination on military aid to Pakistan was
purely a military problem or if political factors were predominant. Mr.
Byroade said that it was necessary to consider the effect on India of
military assistance to Pakistan and that for this reason the Department
has been holding back on granting military aid to Pakistan. Mr. Byroade
said that the responsibility for justifying military assistance programs
has been a joint one shared by the Departments of State and Defense. The
Secretary said that it seemed to him that in the case of Iran and the
Arab States military assistance was a quasi-political matter.
Economic Assistance
a. Greece and Turkey
Mr. Byroade said he would like to continue small economic assistance
programs in Greece and Turkey. In response to a question
[Page 646]
by the Secretary as to the relation of the
present economic programs in that area to defense, Mr. Gardiner felt
that economic assistance was necessary if Greece and Turkey were to
maintain their present levels of military effort. He added that the
Greek and Turkish soldiers were one of the “best buys” on the Defense
expenditure counter. Mr. Nolting felt that it would be easier to cut the
economic assistance programs to Greece and Turkey than the programs in
other NEA areas. Mr. Byroade said that
the figure for FY 54 for Greece and
Turkey might have been too low had it not been for the “pipeline”. He
said that in the case of economic aid to Greece, Turkey and Israel, he
favored a reduction every year. He pointed out that FOA would be responsible for the
Congressional presentation of the FY 55
economic assistance program. The Secretary asked if the Department
shouldn’t decide as a matter of policy on the desirable levels of
economic assistance. Mr. Byroade agreed and added that we should work
closely with Defense and FOA in
developing the program.
b. Reserve Contingencies
Mr. Byroade felt that the $50 million figure for “reserve contingencies”
would be easier to justify before the Congress if it were added in with
other figures under economic assistance such as the item for “special
economic assistance to the Arab States”. He referred to the difficulties
he had experienced in trying to justify the reserve contingency figure
in this year’s program.
c. “Carry-Over”
Mr. Nolting pointed out the difficulties involved in projecting
expenditures from year to year in economic and technical assistance
programs. He predicted a sizable carry-over in the FY 54 appropriations. Mr. Gardiner said that
we had been very frank with the Congress in this presentation. He said
that the only way for Congress to underwrite long term projects such as
dams was to appropriate money each year. It was felt that a project
should not be started until the required funds had been appropriated and
that, therefore, several years’ appropriations for a development project
might accumulate before the contracts were let. He pointed out that such
accumulation could not properly be called a carry-over.
d. India and Pakistan
The Secretary asked about the level of economic assistance to India and
Pakistan. Mr. Byroade said that this was always a controversial item but
felt that a $200 million program for those countries would further the
interest of the U.S. in that area. In Mr. Byroade’s opinion our future
position in the Far East-South Asian area depends much more on India
than on Korea or China. The Secretary asked if we could buy this with
economic assistance to
[Page 647]
India.
Mr. Bowie asked what do we buy with economic assistance there.
Mr. Byroade replied that we were buying democracy in India. He said that
the next election would come in 1956 and that he would like to see the
present system and the present personality retained. He felt that India
would never go communist under Nehru in spite of the many difficulties
we have had with him.
Mr. Bowie asked what results could be obtained from economic assistance
that could not be obtained with investment capital. Mr. Waugh replied
that this was an academic question. Mr. Bowie said that it should be
possible to underwrite U.S. investments in that area and that it would
be better from a foreign relations standpoint to conceal grants as
loans. Mr. Byroade agreed that the sooner we could get out of the “grant
business” the better off we would be and the better our position in the
world would be. In response to a question by Mr. Bowie as to the use of
the grant aid, the Secretary said that in effect it was budgetary aid.
He illustrated this by describing the approach made by the Indian
Government during his trip to that area. Mr. Byroade pointed out that
they had over-simplified their approach and that there was a foreign
exchange factor involved. The Secretary said that he had asked the
Indians this question directly and that they had denied the importance
of the foreign exchange factor.
Mr. Gardiner said that the Indians’ 5-year plan was being financed by (1)
the Indian Government, (2) the IBRD,
(3) sterling “draw-downs”, (4) countries supporting the Colombo
Plan,4 and (5) U.S. assistance. He said
that much of U.S. assistance was devoted to community development in the
villages, and that it was unlikely that private money would consider
investment in this type of project. Mr. Gardiner added that these
projects involving water resources were the type of project that are
sometimes considered in the U.S. to belong in the public, rather than in
the private, sector of the economy.
“Soft Loan” Bank
Mr. Nolting suggested that, in view of the Congressional desire to
terminate economic assistance, some thought might be given to the
establishment of a “soft loan” U.S. corporation. This bank should
operate without the bankable loan requirements of the EX-IM Bank and the
IBRD. The long run record of
repayments might not
[Page 648]
be good
and there would be certain economic disadvantages, but Congress might be
willing to appropriate money for such a device that they would otherwise
be unwilling to authorize.
The Secretary said that he had given some thought to this idea. He felt
that it would have the great advantage of flexibility. It would not be
necessary to justify each single item or project. He pointed out that
events do not always fall in line with the presentation of the program
to Congress and cited recent developments in Iran and Egypt as examples.
The Secretary said that another advantage of a soft loan bank would be
that it would permit the planning of long range projects, such as dams,
without relying on year to year appropriations by the Congress. The
Secretary pointed out, however, that from the standpoint of the Treasury
there is little distinction in the first instance between a withdrawal
for a loan and for a grant. Shifting over from grants to loans would
not, therefore, help Mr. Humphrey’s budget picture a great deal.
Mr. Waugh’s Views
Mr. Waugh favored the idea of separating military assistance from foreign
aid and said that Mr. Kalijarvi felt that foreign aid will have to be
reduced sharply and eliminated soon. Mr. Waugh said that his recent
travels around the country have convinced him that, if fiscal policies
are the administration’s number one problem, agricultural surpluses are
its number two problem. He said that we now have on hand a $3 billion
crop surplus with a prospect of a larger carry-over into the 1954 crop
year. He added that both parties are committed to price support
programs.
Mr. Waugh referred to Henry Hazlitt’s recent article on foreign aid in
Newsweek and emphasized the need to separate
military, economic and technical assistance programs and to educate the
public on the distinction between the three and the advantages of each.
Mr. Waugh said that he had found almost no public opposition to defense
spending. He said that there were certain FOA missions in countries where there were no programs to
justify such missions and added that these should be eliminated.
Conclusion
Mr. MacArthur said that the military assistance program should be
included in the Defense budget and should be justified on the grounds
that this program is one of our best investments in U.S. security. The
Congress and the people should be told that if we don’t spend these
dollars for collective security it would be
necessary to spend many more dollars on our own
defense system and would still not achieve the same degree of
security.
Mr. Byroade said that if Congressional support were to be obtained for
another year of foreign aid it would be necessary to
[Page 649]
reduce the present cost of administering
the program. He referred to Senator George’s comments along these lines.
Mr. Waugh said that Mr. Kalijarvi felt that Senator Mansfield could be
most useful in connection with next year’s foreign aid program.
The Secretary referred again to the soft loan bank idea and said that the
repayments for such loans might prove to be much higher than we would
expect now. He said that production financed by such loans might one day
prove extremely useful to the U.S. A soft loan bank would remove the
“give-away” label from our foreign assistance programs. He said that
many Congressmen find it extremely difficult to answer their
constituents when they ask “Why not build roads and dams in your own
district rather than in India?”
Mr. Byroade asked if a soft loan bank might not reduce the demand for
sound bankable foreign loans. The Secretary said that such a soft loan
bank should be authorized to grant loans only to borrowers who had been
refused by the IBRD and the EX-IM
Bank.
The Secretary said that this discussion had been useful for preliminary
thinking. He added that it would probably be necessary to scale down,
and perhaps shift the form of, the NEA
preliminary proposals.
[Tab B]
Memorandum of Conversation, by J. Stewart Cottman of
the Staff Operations Section of the Executive
Secretariat
top secret
[Washington,] September 4, 1953.
Subject: FY 1955 Foreign
Aid—Far East
- Participants:
- The Secretary
- C—Mr. MacArthur
- S/P—Mr. Bowie
- E—Mr. Waugh
- FE—Mr. Johnson
- S/MSA—Mr. Nolting
Mr. Johnson stated that particularly in view of the situation in
Indo-China and Japan that for FY 1955 he
visualized no appreciable cuts below this year’s appropriations figures
for the Far East.
Indo-China
In Indo-China, implementation of the anticipated stepped-up military
program calls for a FY 1955 estimate of
about $1.5 billion. This figure compares with $1.3 billion granted for
FY 1954. Mr. Nolting said that $500
million allocated for end-items might be cut
[Page 650]
back by Defense because of the amount of material
in the pipeline and presently on hand in Indo-China. The Secretary
questioned whether the increased tempo of military operations in
Indo-China did not make cuts in the end-item appropriations infeasible.
Mr. Johnson said that while expenditures for particular types of
equipment and services might vary with the situation, the total need is
expected to be of the same order of magnitude as in FY 1954.
Japan
Mr. Johnson stated that the Japanese economy had received considerable
assistance from the $528 million dollar fund administered by the Defense
Department. Four Divisions of armed forces have already been equipped
and the available funds will go far toward establishing two additional
divisions. However, $75 million additional will be needed for a
six-division force and $175 million will be necessary to establish and
maintain the projected Japanese Air Force program. The projected
military program for FY 1955 will require
the additional $150 million without considering any economic aid.
Economic Problems
Mr. Johnson noted that the Japanese had a $1.3 billion trade deficit last
year despite heavy dollar expenditure by the U.S. Japanese reserves run
about $1 billion. Mr. Bowie asked if this reserve was all in dollars.
Mr. Johnson said this figure represented a total reserve. To Mr. Waugh’s
question as to whether we could anticipate increased Japanese exports,
Mr. Johnson said that his best information indicated that at this time,
we could not. He added that the Japanese fiscal policy could stand
considerable tightening. The Secretary mentioned the difficulties he had
encountered in trying to convince Yoshida of the necessity of applying
necessary economic controls. Mr. Bowie asked to what extent trade with
Communist China could alleviate Japanese economic difficulties. Mr.
Johnson replied that according to his best figures, Japanese trade with
the China mainland before the war constituted only about 15% of the
total (or about $300 million per year). In reference to trade with the
UK, Mr. Johnson added that Japanese sterling balances were dropping at a
rate comparable to that of her dollar balance. Along this line Mr.
Johnson noted that wool imports to Japan are large, but there were raw
materials available on the islands for the development of a synthetic
fiber industry which in a relatively short period of time could be built
up to the point where wool imports could be reduced to a manageable
level. The question of financing such an industry was agreed to be
crucial in developing such a plan. Mr. Waugh said that the problem of
providing funds for economic development in Japan were scheduled to be
discussed at the
[Page 651]
forthcoming
Board meeting of the International Bank. The Secretary added that the
Export-Import Bank would probably not be in a position to provide any
funds for a textile synthetics operation.
Mr. Nolting asked for a run-down on the estimated cost for military
build-up. Mr. Johnson said $250 million plus the present Army fund
(totaling $778 million, of which $175 million is for the development of
air forces) is thought to be adequate for the proposed six divisions.
The force goal for Japan is 10 divisions. Mr. Johnson added that no
grant aid is contemplated, at this time, but noted that foreign exchange
reserves may be exhausted by late 1955. The Secretary asked if we were
doing all we should in regard to the Japanese financial situation. Mr.
Johnson suggested as a possible aid to dealing with economic problems
throughout the area, the establishment in the Department of the position
of Economic Coordinator for the Far East.
Korea
Economic Problems
Mr. Johnson said the U.S. is presently committed to a $300 million per
year program implementing the findings of the Tasca survey and an
additional $60 million for the U.S. share in UNKRRA.
The Secretary observed that though the Korean aid program was presently
popular he could foresee a time—possibly within a year—when the
enthusiasm of the Japanese and Chinese Nationalists would diminish and
they would change their attitude toward aid to Korea. The Secretary
asked about the possibility of stopping the U.S. contribution to UNKRRA.
Mr. Johnson explained that one of the advantages in U.S. participation
in UNKRRA was that, although we bore the greater share of the expenses,
other UN nations contributed
approximately $55 million for Korean rehabilitation which might
otherwise not be available. It was generally agreed that at this time
contributions from other nations should be encouraged.
Military Support
Mr. Johnson said that a good part of the $300 million would go toward
defense support. The cost of the contemplated 20-division military force
for Korea was estimated at $750 million per year with an additional
$200–5$250 million per year for direct military costs. It is
contemplated also that if UN forces
withdraw, they would leave a considerable amount of usable military
equipment for Korean troops, but that plans would have to be made to
replace this equipment as it was expended. To Mr. Bowie’s question as to
how many troops Korea could support without aid, it was the general
consensus that 5 divisions were the most that could be expected.
[Page 652]
Mr. Waugh suggested the
possibility of having the Defense Department assume responsibility for
military assistance in Korea, but it was thought that, for two years at
least, the Department of State was committed to $350 million a year.
Formosa
Mr. Johnson stated that Formosa had received a generous grant this year
from the Congress—more than was requested by the Administration. He
anticipated for FY 1955 a military
program costing $300 million would be adequate to ensure the attainment
of the force goals for Formosa by the end of FY 1955. The force goals are (1) a 21-division force with
appropriate support and (2) a fleet of PT 5 surface vessels and (3) an 8
and ⅓ wing air force comprised of 4 and ⅓ wings of jet planes and 4
wings of non-jet aircraft. It is estimated that this force with the aid
of the Seventh Fleet would be adequate to secure Formosa against any
attack from the mainland but would not provide for any large-scale
operations on the mainland by the Nationalists. Mr. Johnson added that
Taipeh would undoubtedly continue to press for a 60-division force.
Economic Aid
Economic aid program for Formosa is planned to consist of (1) economic
support of military expenditures and (2) economic development of the
country. For FY 1955 the economic
development program would be limited to approximately 10% of the $70
million designated for economic aid. However, it is planned that the
economic development program would be increased gradually over the next
four to five years with the result that Formosa could be largely
self-sustaining except for direct military expenditures. Mr. Johnson
estimated that the $100 million a year defense expenditures would
continue indefinitely.
Other Countries
It is anticipated that aid to Thailand, the Philippines and Indonesia
will continue at modest levels, with economic aid principally in the
form of Point IV-type programs.
Summary
Mr. Johnson estimated $2.6 billion for economic and military aid to the
Far East, of which approximately one-half would be granted Indo-China.
The Secretary suggested that it would be ideal if the Department would
take the position in the NSC that State
would not request any money for Indo-China not approved by Defense. It
was generally agreed that political considerations over and above purely
military ones would probably limit the effective implementation of this
approach at this time.
