As you know, the formation of the national budget for Fiscal Year 1955 is now
in progress and is moving rapidly towards completion. The Mutual Security
part of the budget has been the subject over the past several weeks of
intensive hearings by the Bureau of the Budget, involving both the estimated
military requirements and the estimated economic requirements of our allies.
The total estimate of requirements for the next fiscal year is considerably
lower than the amount appropriated by the Congress for Fiscal Year 1954.
This is principally due to the fact that the Defense Department is placing
its financing of military end-item assistance on a more current basis than
heretofore—i.e., it will utilize the very large backlog of appropriated and
unexpended funds (approximately $10.5 billion) to reduce the amount of new
funds required in the coming fiscal year.
In order to enable the agencies involved to refine more precisely the Mutual
Security requirements for the next fiscal year, it is necessary that certain
basic decisions be reached. We are faced by
[Page 660]
deadlines in the near future which cannot be met
unless the major decisions are promptly taken. These deadlines are: the
requirement of the Bureau of the Budget to present the total U.S. budget to
the President around December 15; the President’s desire to have discussions
with Congressional leaders on next year’s legislation during December; the
desirability to have draft legislation on the Mutual Security Program
completed and ready for introduction early in the next session. You will
recall that the President agreed with certain Congressional leaders at the
last session that the Mutual Security Program for next year would be in the
form of new legislation which would eliminate the “patchwork” of present
statutes. The drafting of new legislation has proceeded as far as possible
in the absence of the basic decisions referred to above, and even after such
decisions are reached it is expected that the completion of such legislation
will require a considerable amount of time.
The Bureau of the Budget has presented a list of major issues concerning the
Mutual Security Program with which you are familiar. The attached paper (Tab
A) attempts to set forth the major issues as I see them, and to make
recommendations on each. I hope that it may serve as a basis for meeting
with you early next week in order that the State Department position can be
firmed up on these matters.
[Tab A]
Staff Memorandum by the Acting
Special Assistant to the Secretary of State for Mutual
Security Affairs (Nolting)
confidential
Washington, November 24, 1953.
Consideration of the following three questions will help, I think, to
reach conclusions on the major issues concerning the Mutual Security
Program for Fiscal Year 1955:
What types of mutual assistance are required for FY 1955 and what are the approximate
amounts of each type?
What are the most effective and efficient means of administering
each type of assistance?
What form of coordinating machinery within the U.S. Government is
necessary for effective administration of the programs?
I. The following appear to be the types of assistance which will be
required in Fiscal Year 1955 in order to carry out our strategic
[Page 661]
objectives, both foreign
policy and military, together with estimates of amounts of each type:
- (1)
- Military end-item assistance (worldwide estimate of new funds
required $2.4 billion).
- (2)
- Defense support, closely related to the ability of our allies
to maintain their forces at agreed levels or related to the
exercise of U.S. base rights in foreign countries (estimate $1.1
billion, including $800 million to France for the Indo-China
war).
- (3)
- Assistance in the economic development of countries important
to the U.S. (estimate of capital funds required over a four-year
period $1 billion).
- (4)
- A Technical Assistance Program (estimate $150 million).
- (5)
- Economic grant assistance, principally for Korea (estimate
$350 million).
- (6)
- U.S. contributions to United Nations programs (estimate $100
million).
II. Concerning the military program (items 1 and 2 above), the Department
on the staff level has taken the position that all economic aid directly
related to maintaining the defense effort of our allies and to the
acquisition and maintenance of bases for U.S. forces should be included
in military aid appropriations. In Fiscal Year 1955 this would cover aid
to France for Indo-China, U.K., Spain, Greece, Turkey, and Yugoslavia.
Except for France and the U.K., such aid could be provided by “common
use” programs. The U.K. assistance could probably be met by increased
offshore procurement. “Budget-support” aid for France for the Indo-China
war will probably take the form of payments to the French Government
against its budget expenditures for Indo-China. This could be done by a
special line of credit out of Department of Defense military assistance
funds. A large part of the proposed economic aid for Formosa could also
be furnished by the Department of Defense in the form of “common use”
items.
On the assumption that end-item military assistance funds will be
appropriated to the Department of Defense, it is the staff view that
defense-support funds should also be appropriated to the Department of
Defense and administered by it. The justification for defense-support
assistance is primarily a military justification—viz., to enable our
allies to maintain in readiness, and in the case of Indo-China to
maintain in battle, forces which we consider necessary to our common
cause. To separate defense-support funds from other military assistance
funds would, in our judgment, weaken the case for defense-support
appropriations. It would also complicate the problem of administration.
The necessary coordination between the Department of State and
Department of Defense to safeguard the important foreign policy aspects
involved in the application of defense-support aid will be discussed
below.
[Page 662]
With regard to the third type of assistance, economic development, the
major issue may be stated as follows:
Is it desirable to shift from an economic grant aid policy to a loan
policy? If so, what proportion of economic aid requirements for
Fiscal Year 1955 can be handled as loans, and by what U.S.
agency?
As the idea of loans in lieu of grants has been considered in the
Executive Branch, a number of different views have been developed. In
general, those who favor the idea do so for three reasons: (a) loans
will enable recipient countries to do better long-range economic
planning, in view of the fact that a line of credit could be extended
over a longer period of time and provide more certainty than grant aid,
which can be provided only on an annual basis; (b) for the long run it
may be good business to hold promissory notes, even of countries whose
present prospects of payment are not good; (c) it will be easier to
obtain loan authority than grant authority from the Congress. Those who
do not favor the idea of loans in lieu of grants do not seem to have an
adequate answer to the fact that the 83rd Congress has virtually gone on
record in opposition to the continuation of large grants-in-aid for
economic assistance to foreign countries.
When it comes to the question of what particular economic assistance
requirements can be met by liberal loans, there is a difference of
opinion among the geographic bureaus of the Department. NEA, for example, does not feel that the
requirements for the Near East and South Asia can be met entirely by
loans. It is my opinion that most, if not all, of the economic
requirements in the NEA area can and
should be handled on a loan rather than a grant basis, excepting, of
course, technical assistance; but I believe you will want to discuss
this question more thoroughly with Mr. Byroade.
If loans in lieu of grants are decided upon, there are several possible
ways of extending the loans. The first would be through the creation of
a new U.S. government corporation—a Development Loan Corporation—for
which authority and capital would have to be sought from the Congress.
Such a corporation should, in my opinion, be headed by a Board of
Directors, the majority of whom are appointed by the Secretary of State.
It should have a small staff in Washington, but no staff permanently
stationed overseas. The management of the corporation should be
responsive to the policy guidance of the Secretary of State. Information
necessary for the successful functioning of the corporation should be
supplied by the economic sections of the missions of the Department of
State overseas, both routinely and upon specific request of the
corporation via the Department of State. Staff members of the
corporation
[Page 663]
would presumably
make field trips from time to time to make investigations of loan
applications. Principal reliance for effective reporting on progress of
projects should, however, be placed on the Embassy in the country
concerned.
An alternative would be the Export-Import Bank. This would require
certain basic decisions within the Executive Branch to liberalize the
lending policy of that institution. Whether or not it would require new
legislation is presently under study. As you know, the Department of
State has constantly pressed for a more liberal lending policy on the
part of the Export-Import Bank, particularly with regard to Latin
America. In order for the Export-Import Bank to be an effective
instrument for the policy of loans in lieu of grants, it would be
necessary for the bank to change its orientation in order that foreign
policy considerations should have more weight than at present in the
granting of loans.
As between the two alternatives above, I am inclined to favor the former,
i.e., the creation of a new Development Loan Corporation, for the
following reasons: (a) the new corporation could function directly under
the policy guidance of the Secretary of State; (b) the present portfolio
of the Export-Import Bank would not be disturbed; (c) the new
corporation could make loans on more liberal terms without creating
pressures in the same degree for the renegotiation of existing loans
held by the Export-Import Bank. It has to be taken into consideration,
however, that the request for authorization and capitalization of a new
Development Loan Corporation would be more difficult to obtain from the
Congress than would be any necessary modification in the existing law
governing the Export-Import Bank.
The fourth type of assistance—Technical Assistance—has a record of
success and should be continued on a steady, long-range basis.
Adjustments in the direction of fewer projects should perhaps be made
after study on a country-by-country basis. On the assumption that
military assistance in the expanded sense will be administered by the
Department of Defense, and that a lending institution will administer
most of the economic assistance, it seems clear that the Technical
Assistance Program could be most efficiently and economically
administered by the Department of State.
Of the remaining two types of assistance, it appears that the major, if
not the only, case for grant economic assistance will be for
rehabilitation purposes in Korea. Under the concepts outlined above, the
Korean economic rehabilitation program might well be administered by the
Department of State with an overall saving of U.S. manpower and
administrative expense.2
[Page 664]
Finally, funds for the multilateral programs, as previously suggested,
should be sought as a part of the budget of the Department of State,
which should administer them. This would represent no great departure
from the present procedure.
III. A very important question involved in the above outline is the
provision of the necessary coordinating machinery within the U.S.
Government. The principal problem of inter-agency coordination concerns
the military aid funds. It would not be difficult, I think, to work out
an effective and simple method of direct coordination between the
Departments of State and Defense, to provide effective guidance without
interference. The introduction of a third agency would only serve to
delay decisions and diffuse responsibility. Proper and effective
guidance with respect to military aid programs in order that they may
conform with foreign policy objectives need not place an onerous task on
the Department. Selective participation in the program process (planning
assumptions and determination of requirements, program review and
approval, and determination of munitions assignment priorities) would
provide the necessary policy guidance for the military aid program.
Within policy guidelines from the Department of State the responsibility
for the successful administration and efficient operation of the
military aid program should be in the Department of Defense.
Coordinating arrangements should be established legislatively or by
Executive Order to assure maximum coordination, to define clear lines of
responsibility, and to prescribe definite procedures for each
agency.
IV. Conclusions and Recommendations
In order to move forward in the process of developing the budget and the
legislation for the Mutual Security Program for next year, it is
necessary that conclusions be reached on these questions:
- (1)
- Should the “Military Assistance Program” include defense and
budget-support items? (Recommendation—Yes).3
- (2)
- If so, should these funds be sought as an appropriation to the
Secretary of Defense? (Recommendation—Yes).4
- (3)
- Should the Administration seek in all possible cases to
substitute liberal-term loans for grant economic assistance,
excepting Technical Assistance Projects?
(Recommendation—Yes).5
- (4)
- If so, should this be done by the establishment of a new
Development Loan Corporation or through the Export-Import Bank?
(Recommendation—Through the establishment of a new corporation,
unless adequate arrangements can be
worked out to assure
[Page 665]
the responsiveness of the Export-Import Bank to guidance on foreign policy grounds in its lending
policy).
- (5)
- Should a separate Foreign Operations Agency be continued?
(Recommendation—No, provided military assistance in its broader
definition is administered by the Department of Defense and
loans are substituted for most grant economic aid. Under these
conditions, the remaining aid activities would be comparatively
small and would not justify maintaining a separate
agency).
