Madrid Embassy files, lot 58 F 57, “440—U.S. Negotiations”

No. 842
Report by the Interdepartmental Working Group on Spain to the Chairman of the Mutual Assistance Advisory Committee (Gordon) 1

top secret
MAAC D–3/2

As requested in your memorandum of February 22 concerning the use of the $100 million appropriated for Spain in the Mutual Security Appropriation Act of 1951, the inter-departmental working group on Spain has prepared the attached memorandum containing a breakdown of these funds.

The breakdown was prepared in accordance with the MAAC decisions stated in your memorandum:

  • “1) It would not be appropriate for MSP funds to be used to finance directly dollar expenditures for the construction of military facilities to meet U.S. requirements in Spain. This is based on the view that expenditures of MSP appropriated funds for this purpose do not appear to constitute assistance to Spain within the terms of the Mutual Security Appropriation Act.
  • “2) It would be appropriate for counterpart funds, generated through the purchase of dollar commodities for the Spanish economy, to be used for the construction of military facilities in Spain, even if for exclusive use by U.S. forces.”

In brief, this breakdown is based on the premise that the primary purpose to be served in using these funds is to create sufficient “spendable” counterpart funds to meet the peseta costs of U.S. military construction requirements through FY 1953, estimated at $78 million peseta equivalent. Under this procedure the dollar cost of construction for this same period, estimated at $52 million, will be financed by the Defense Department. It has also been assumed that the cost of the construction program (of which the above amounts represent the estimated funds required for the first year) will be equally divided over a three-year period.

[Page 1810]

If the Spaniards should be unwilling to accept a proposal along the lines of the attached memorandum, a somewhat similar proposal in a different form could be made. Under this alternative $88 million (i.e., $100 million dollars less $12 million for military training equipment) would be used to purchase local currency to cover the peseta cost of the first year of the military construction program in Spain. The dollar cost of construction would be financed by the Defense Department. This procedure would, of course, require a modification of the MAAC decision that none of the MSP funds may be used to finance direct dollar expenditures for the construction of military facilities to meet U.S. requirements in Spain. If this alternative were used, it would then be necessary to agree with the Spanish Government, as the Minister of Commerce has already indicated they are prepared to agree, on a joint U.S.–Spanish commission to determine how the dollars thus accruing to the Spanish Government should be spent.

In order to limit the cost of the program in Spain to the greatest possible extent, the U.S. should be prepared to make every effort to obtain Spanish agreement to one of these procedures, preferably the use of counterpart funds for the first year peseta cost of the military construction program.

It must be recognized, however, that obtaining agreement for such use of these funds will be an exceedingly difficult task, if it is possible at all. The Embassy in Madrid, in commenting on the working group’s memorandum, has stated its belief3 that the Spaniards would find the use of counterpart funds for U.S. military objectives entirely unsatisfactory. They point out that this has not been our policy with other European countries which have been relatively free to apply counterpart funds to their own economy. Furthermore, they observe, it would deprive the Spanish Government of the anticipated dollar exchange which would normally result from the conversion of U.S. currency in a base-building program. At the same time it should be noted, in this regard, that the Spanish Government has given numerous indications that it is most anxious to conclude a military agreement with the U.S. This interest will probably temper any tendency to insist on financial arrangements which would prejudice the successful conclusion of a military agreement. However, this is no assurance that the Spanish Government will accept these financial arrangements which will undoubtedly fall far short of the amount of assistance which the Spanish public has been led to expect.

It should be emphasized that both of the procedures outlined above suffer the same defect from a negotiating point of view—namely, [Page 1811] the lack of adequate Defense Department funds to meet the $78 million peseta equivalent cost of the U.S. military construction program in Spain during FY 1953. The result is that, unlike similar programs in other countries, we are endeavoring to make available aid funds perform double duty, e.g., through the exceptional use of counterpart for a U.S. military construction program. It must be assumed that the Spanish Government will, sooner or later, observe this distinction in the case of Spain and our negotiating position will be proportionately affected.

Although we may start with the first position outlined above and, if the MAAC should agree, revert to the alternative should that be necessary, it is essential that we be fully prepared to meet the situation which will arise if we are unable to agree with the Spanish Government on either of these two procedures. There appear to be three possibilities in this regard:

  • First, the Spanish Government may not grant the U.S. the use of all the air and naval facilities desired. In that event the present total cost estimates would be reduced and could be met, to the extent then required, as indicated in the following two paragraphs.
  • Second, construction work during the first year could be limited to the $52 million, which the Defense Department is to provide from its budget,4 and such additional amounts as it may be able to obtain as a result of further reprogramming within its budget. Larger amounts to compensate for the limited first-year construction program could then be budgeted for FY 1954 and FY 1955.
  • Third, funds (not specifically earmarked for Spain) could now be provided in the Defense Department’s public works budget to cover both the estimated dollar and peseta costs for the first year of the military construction program in Spain.

The effect of these alternatives is, of course, to raise the “cost” of the desired military facilities in Spain by the amount of the peseta expense of the construction program. Under the two procedures outlined at the beginning of this memorandum, the “cost” of the first year of the program would be a maximum of $152 million. Under the latter alternatives this “cost” would be increased to a maximum of $230 million. In determining which of these alternative courses of action should be followed, the MAAC may consequently wish to consider whether the U.S. should undertake expenditures of this magnitude in Spain.

Draft agreements covering economic assistance and military assistance are currently being prepared by the agencies concerned. [Page 1812] Administrative plans with regard to an MSA mission and a MAAG are also being made.

[Attachment]

Program for the Expenditure of $100 Million MSA Appropriate for Spain

The Problem

To prepare a program for the spending of $100 million MSA appropriation for Spain for “military, economic, and technical assistance” which will:

a)
generate sufficient “spendable” counterpart to meet the peseta costs of U.S. construction requirements through FY 1953, estimated at $78 million peseta equivalent.
b)
finance necessary imported materials for the rehabilitation of Spanish railroads to the extent envisaged in the U.S. Army estimates of required transportation support for the U.S. construction requirements program through FY 1953.
c)
provide for financing of development of strategic materials in Spain of interest to the U.S.
d)
provide for financing for rehabilitation and development of the Spanish munitions industry to the extent that such development is of interest in connection with the general defense of Europe.
e)
generate sufficient “spendable” counterpart, in addition to a) above, to meet the estimated peseta costs of investments under c), d) and ??.
f)
provide for reasonable amount of technical assistance to Spain.
g)
provide for a reasonable amount of direct military assistance to Spain, in the form of limited amounts of military end-items for training purposes.
h)
finally, provide for financing of investment projects for the general economic development of the Spanish economy.

In preparing such a program, the working group was faced with the fact that the above 8 objectives are essentially competitive one with another, so that the essence of the problem was to achieve a balanced program in which each objective was given its proper weight and priority. In theoretical terms, the problem was to equate the marginal utility of the amounts allocated to each of the foregoing objectives, within the limits of certain absolute priorities and interpreting utility in the light of total U.S. foreign policy objectives in Spain, and with due consideration of certain essential inter-relationships among the various objectives.

In considering this problem, the working group made certain assumptions: [Page 1813]

a)
that, insofar as possible, the program should be self contained and should neither inflate nor deflate the Spanish economy. It should not inflate because, for political and military reasons, the Spanish economy should not be allowed to deteriorate as a direct consequence of U.S. military activities. It should not deflate because, in order to bring about a net deflationary effect on the Spanish economy, funds needed for allocation to primary U.S. objectives would have to be diverted to other uses.
b)
absolute priority should be given to program objectives calculated to support the achievement of U.S. military requirements in Spain.
c)
no incremental peseta expenditures would be involved in the rehabilitation of Spanish railroads, on the further assumption that adequate facilities and labor were already available to use the imported materials.
d)
no incremental peseta expenditures in the Spanish national defense budget would be required to put to use such military end-items for training purposes as would be supplied.
e)
the peseta investment required in conjunction with foreign exchange investments in projects for economic development of the Spanish economy, inclusive of investments in strategic materials development and development of the Spanish munitions industry, would be approximately equal to the foreign exchange investment.

The Program

On the basis of the foregoing objectives and assumptions, the working group has developed the following program, in terms of dollar expenditures and related peseta investment requirements. As an item of information, the third column lists the counterpart deposits which would be required under existing practice. (It should be noted that the expected counterpart deposit total the equivalent of $88 million, i.e. more than the peseta costs of the U.S. construction requirements.)

One of the most crucial aspects of the following program is the relationship between total peseta investment and the allocation for commodities to offset the inflationary impact of such investment. It will be noted that the ratio used is 2 to 1, i.e., $50 million worth of commodities are programmed against peseta investments of $100 million, although this ratio was arrived at after careful analysis of the data available on the Spanish economy and the probable results of an injection of peseta spending of this magnitude, it cannot give more than a reasonable order of magnitude, and should be subject to further continuous study during the course of the program.

[Page 1814]
(all figures in millions of dollars)
Dollar Financed Imports Peseta Investment Counter-part Deposit
U.S. Naval and Air Force Requirements through FY 1953 *(52) * 78 0
Commodities provided to offset inflationary impact of peseta investment 50 0 50
Military end-items for training purposes 12 0 0
Technical Assistance 1 0 1
U.S. Army Requirements for railroad rehabilitation through FY 1953 15 0 15
Development of Spanish munitions industry 5 5 5
Investment projects for economic development of Spanish economy and development of strategic materials production 17 17 17
Totals 100 100 88
*(152)
  1. For the membership of the Interdepartmental Working Group on Spain, see footnote 3, Document 837.
  2. Document 837.
  3. See the letter from Jones, supra .
  4. For the origin of this $52 million figure, see footnote 7, Document 840. Although the letter containing the JCS proposal for a negotiating program was sent by Secretary Lovett to Secretary Acheson on Mar. 4, the MAAC Working Group on Spain had advance knowledge of its contents.
  5. In accordance with the understanding reached by MAAC, it is assumed that the direct dollar costs of U.S. requirements in Spain will be financed from sources other than the $100 million MSA appropriation. The figures of $52 and $78 million are arrived at in the following manner, on the basis of information and estimates supplied by the Department of Defense: Total U.S. requirements for construction are $389 million (Navy, $59 million; Air Force, $330 million—using Deployment A; Army requirements for transportation support are entered separately). These requirements are to be phased evenly over a 3 year period, or at the rate of approximately $130 million per year. The first year is defined as the period ending June 30, 1953. In each of the 3 years of the construction period, 40% of the total cost will be in dollars ($52 million) and 60% will be in pesetas ($78 million). [Footnote in the source text.]
  6. In accordance with the understanding reached by MAAC, it is assumed that the direct dollar costs of U.S. requirements in Spain will be financed from sources other than the $100 million MSA appropriation. The figures of $52 and $78 million are arrived at in the following manner, on the basis of information and estimates supplied by the Department of Defense: Total U.S. requirements for construction are $389 million (Navy, $59 million; Air Force, $330 million—using Deployment A; Army requirements for transportation support are entered separately). These requirements are to be phased evenly over a 3 year period, or at the rate of approximately $130 million per year. The first year is defined as the period ending June 30, 1953. In each of the 3 years of the construction period, 40% of the total cost will be in dollars ($52 million) and 60% will be in pesetas ($78 million). [Footnote in the source text.]
  7. In accordance with a recently concluded arrangement with DMPA, strategic material production projects will be financed under their administration. This will involve advances on the future production of such items as copper, tungsten and pyrites. Insofar as funds are required beyond those provided by this arrangement with DMPA, they could be provided out of the investment projects fund here suggested. [Footnote in the source text.]
  8. In accordance with the understanding reached by MAAC, it is assumed that the direct dollar costs of U.S. requirements in Spain will be financed from sources other than the $100 million MSA appropriation. The figures of $52 and $78 million are arrived at in the following manner, on the basis of information and estimates supplied by the Department of Defense: Total U.S. requirements for construction are $389 million (Navy, $59 million; Air Force, $330 million—using Deployment A; Army requirements for transportation support are entered separately). These requirements are to be phased evenly over a 3 year period, or at the rate of approximately $130 million per year. The first year is defined as the period ending June 30, 1953. In each of the 3 years of the construction period, 40% of the total cost will be in dollars ($52 million) and 60% will be in pesetas ($78 million). [Footnote in the source text.]