Foreign Relations of the United States, 1952–1954, Western Europe and Canada, Volume VI, Part 1

ECA–MSA files, lot W–745, “Budget Bureau Presentation 1953”

No. 267
Memorandum by the Deputy Special Representative for Economic Affairs in Europe (Porter) to the United States Special Representative in Europe (Draper) ¹

secret

[ Paris ,] October 9, 1952.

Subject:

• Basis and Composition of U.S. Aid to Europe (Other than End-items) in Fiscal Year 1954.

1. These comments relate to a memorandum submitted by John Kenney to Averell Harriman on September 24th entitled “Revised FY 1954 Program Requirements for Title I (Europe)” and a supporting document, “Rationale and Administration of Aid to Major European Countries in FY 1954”.² There is also a second supporting document—“Proposed Materials Development Program for FY 1954”—to which my comments do not relate since I have examined it only cursorily.

2. The views given here are tentative and strictly personal. I found strong disagreement with some of them—especially the view that there should be more offshore procurement with direct aid correspondingly reduced—in the course of a staff discussion yesterday. This opposition may later change, or I may conclude that my current thinking does not fit the facts.

3. No brief summary will do the Washington papers justice, but in connection with these comments the following aspects of the Washington proposals should be borne in mind:

a. The aid program for the forthcoming year is regarded as a transition to a new economic relationship between the U.S. and Europe which, it is hoped, can be crystallized in the coming year.

b. The MSA/W memo assumes an offshore procurement program of $1 billion, and proposes a direct financial aid program of $1,178.5 million.

c. The proposed program would probably require a major change in the justification to be given the Congress. Heretofore our aid has corresponded to a balance-of-payments deficit, kept within reasonable bounds by recipient governments. MSA/W now forecasts that the aid which they believe France will need for defense purposes next year will produce a corresponding increase in French dollar reserves. Some increase in the Italian and German reserves is also likely. The justification for American financial aid to France (and perhaps other countries), therefore, would be to help the recipient government establish a defense budget larger than it can be expected to do out of its own resources.

d. I conclude, perhaps incorrectly, that the main basis for future aid, to which this year’s program would be a transition, would be that of supplementing other countries’ budgets for defense purposes, pending the time when our NATO partners could carry the defense load without our help.

4. My comments are:

a. I prefer the notion of a caretaker budget to a transitional one. It is difficult to prepare a transition without anticipating what it will lead to. I very much believe that the time has come for a new economic relationship with Europe, but only the next administration can establish this—in close consultation, I hope, with European governments.

b. Our justification for aid next year ought to rest on reasons now understood and accepted by the Congress and the public. A new reason this next year is likely to excite mistrust. We should bear in mind that we not only need to convince a Congressman but that he needs to convince his constituents. We should try to avoid the unfounded but damaging charge that we seek new reasons to keep on giving away money.

c. We should try to raise the amount of offshore procurement for FY 1954 to more than $1 billion. The amount of direct financial aid should be correspondingly reduced. I suggest that we examine the possibility of raising offshore procurement to a point that no direct aid would be needed in the EDC countries, the UK, Norway and Denmark (i.e. to about $1.75 billion). This may be more than is practical, but it is one possibility that should be fully examined.

d. To the extent that France will need direct financial aid it should be given for the specific purpose of supporting resistance to communist aggression in Indochina. This would still be direct budget support, but this specific case would be easier to defend than the general principle.

e. Some continuing aid to Austria, Greece, Turkey, Yugoslavia and perhaps Spain and Iceland should be given for the same reasons that we have given it in the past. My preliminary reaction is that the amount of $224 million indicated for them by MSA/W is a reasonable figure.

f. There should also be aid funds for the purposes of the Moody Amendment and Technical Assistance.

g. Aid given on the basis suggested above would seem to come within the framework already accepted by the Congress. Offshore procurement would be increased if feasible; it could probably be increased at least enough that the balance-of-payments criterion could fit all cases except France. In the French case an exception could most probably be justified because of the heavy burden of the war in Indochina, which burden accrues mainly in francs rather than in dollars. While it is desirable to increase offshore procurement and reduce direct aid, it should not be necessary to go all the way. If it develops that some direct aid is needed to maintain balance and flexibility, this should be possible if the total amount is downward from this year.

h. These comments take the Washington forecasts on faith. As time permits, however, we plan to check them against our local assessment.

5. I wish to comment further on the principle of budget support as the central purpose of U.S. aid, for although I conclude that it is impractical at this stage of NATO development and in the prevailing political climate, there is nonetheless much that is attractive in the idea. The phrase “burden-sharing” is scrupulously avoided in the Washington paper, but the MSA/W proposal seems to me to be clearly a variant of this concept—although not accepting, of course, the French or British view of how big our share of the burden should be. The idea is attractive in the way that the principle of equity always is to fair-minded people. Budget support for defense purposes, as thus proposed, would be a somewhat rudimentary expression of the concept of the progressive income tax, applied to NATO needs. Within the U.S. we accept readily the idea of federal aid to roads though not yet to schools. During the last war we hesitated scarcely a day in providing federal funds to build defense housing for shipyard workers in Mississippi and other poor states. But I very much doubt that U.S. public opinion is ready to accept the idea of contributing directly to other peoples’ national budgets.

Among the dangers in this proposal are these:

a. This method of aid would be widely misunderstood and misrepresented at home. It would be argued that American taxes were being applied to a French budget in lieu of the taxes that some Frenchmen shirk paying. There would be just enough truth in this argument to make it popular.

b. If the main reason for our aid to a country is to help support its budget then it is hard to resist the conclusion that we should concern ourselves with every part of the budget. This could lead, for example, to examining the reasons for a subsidy to the French nationalized railroads. Before we had grasped what was happening we could find ourselves proposing to the French Government that freight rates be increased or that wages or pensions of French railroad workers be cut. Some Congressmen would surely ask Ty Wood why we hadn’t. Not only would this generate a lot of ill-will and distrust between allies, but it would be a major, even if unconscious, step toward making partners into satellites. There is surely a law of diminishing returns in this way of getting greater defense efforts. I suspect that if we carried this process very far that what we gained in arms we would lose in the will to use them.

6. Some of my colleagues take strong exception to the proposal that there should be a significant increase in the volume of offshore procurement matched by a decrease in direct financial aid. Among the reasons they give are these:

a. The Defense Department tends to look upon offshore procurement as a marginal source of supply, and this is known to European governments. The uncertainties in offshore procurement as a dependable source of dollars make it difficult for us to use this prospect to induce Europeans to undertake the defense budgets we consider to be necessary.

b. There is less flexibility in directing offshore procurement than in directing financial aid to the countries where the need for it may be the greatest.

c. The dollar receipts from offshore procurement would not, in the case of some countries, be available in the year in which they are most needed.

d. Until our offshore procurement can be assured on a longer term than is presently possible many prospective producers will be unwilling to invest in the conversion of facilities necessary to efficient, competitive production.

e. Direct aid, applied to national budgets, gives us more “leverage” on governments than does offshore procurement. (Of the various arguments for direct aid this persuades me the least. I think that the utility of leverage has been grossly exaggerated, and that we have also underestimated its costs in friction and even ill-will. There is no lasting substitute for old-fashioned persuasion based on facts, logic and confidence.)

f. Much of the Congressional support for the aid program is partly due to the fact that the aid program has financed the purchase of U.S. agricultural and industrial products for export to Europe. A further shift to offshore procurement might not strengthen the prospects of Congressional support as is sometimes assumed but rather might seriously weaken it.

7. Most of the foregoing are arguments that are not easily dismissed. Until I have examined them further I wish to caution that the opinions I have expressed here on the composition of next year’s aid are tentative.

8. While a caretaker budget seems to be the best that an outgoing administration can offer, we should nonetheless give the new administration our best judgment with respect to the most desirable economic relationship with Europe which, once it is in command of policy, it may wish to develop.³

1. On Oct. 13, Merchant sent a copy of this memorandum to Edwin M. Martin along with a covering letter which reads in part: “I think its [the Porter memorandum] main lines are correct and I think Paul showed courage and independence in urging his views on Bill Draper in the face of almost universal opposition from his staff. Just a few hours before Draper took off last week Anderson, Finlay, Porter, Dorr and myself met with Bill to discuss this paper which we had received only a few minutes before the meeting. We all endorsed its general approach, though there are obviously details or points of emphasis on which each of us would raise question.” (740.5 MSP/10–1352)
2. Reference is to the Kenney memorandum of Sept. 22, supra.
3. An unsigned “Addendum to Memorandum of Mr. Paul Porter to Ambassador Draper, dated October 9, 1952”, also Oct. 9, stated that a meeting was held in Ambassador Anderson’s office at 1 p.m. that day to discuss matters raised in this memorandum. While it was generally agreed that more time would be needed to study Porter’s memorandum, the group gave its general agreement to the principles and policy lines set forth and in addition concluded that “the Lisbon-type budget supporting OSP could be justified in FY 1952 because of the emergency situation in Indo-China.” However, continuation of such aid “becomes highly questionable, to say the least,” and it was necessary to ensure that Congressional committees understood that it would be better to grant outright financial aid or support to European budgets than “Lisbon-type OSP”. (ECA–MSA files, lot W–745, “Budget Bureau Presentation 1952”)