ECAMSAFOA files, lot W–13, “DMS Documents”

No. 846
Interdepartmental Policy Statement on Spanish Aid Negotiations 1

top secret
[DMS D–7]

Spanish Aid Negotiations

introduction

1. On March 4, 1952, the Mutual Assistance Advisory Committee2 adopted a program for the use of the $100 million appropriated in 1951 for military, economic, and technical assistance to Spain. This program is based on three principle assumptions: (1) the unexpended balance of the $100 million appropriation will be carried over to FY 1953; (2) there will be no additional Spanish aid program for that year; and (3) the primary objective of US policy toward Spain at this time is to obtain rights for US use of Spanish air and naval bases and related logistic facilities.

2. The $100 million aid program has been developed to support the achievement of military requirements in Spain as established by the Department of Defense. The aid program, while coordinated with the U.S. military requirements in Spain, at the same time provides economic, military, and technical assistance to Spain in accordance with the provisions of MSP legislation.

3. The estimated construction cost of the desired U.S. military bases totals approximately $390 million. (This is exclusive of requirements for rehabilitation of Spanish railroads—estimated at $15 million.) This cost is spread evenly over a three-year period at an annual estimated expenditure of $130 million. Past experience indicates that the program will require, in each year, 40% US dollar expenditures and 60% local currency (pesetas), or $52 million and $78 million in peseta equivalent.

4. In accordance with the MAAC decision of February 2, 1952, (D–3/1 of February 4, 19523) the $52 million in direct dollar costs of military requirements for FY 1953 will be supplied from Defense Department funds. The MAAC finding was as follows: [Page 1825]

“It would not be appropriate for MSP funds to be used to finance directly dollar expenditures for the construction of military facilities to meet US 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 Appropriations Act.”

5. The program for the use of the $100 million appropriation will produce sufficient counterpart funds to cover the required $78 million in peseta equivalent in FY 1953. The MAAC finding of February 2, 1952, in this connection was as follows:

“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 US forces.”

program

6. The program for the use of the $100 million, as adopted by MAAC on March 4 for negotiating purposes, is as follows:

Item Dollar-Financed Imports($ millions)
a. Military end-items for training purposes 12
b. U.S. Army requirements for railroad rehabilitation through FY 1953* 15
c. Development of Spanish munitions industry*
d. Investment projects for development of Spanish economy including development of strategic materials production 17
e. Commodities provided to offset inflationary impact of $100 million equivalent in peseta investment 50
f. Technical Assistance 1
100

*The negotiators should emphasize that these items can be considered as defense assistance. [Footnote in the source text.]

(In addition, $52 million for the dollar costs of military construction through FY 1953)

7. The above program provides for military assistance in the amount of $12 million, economic assistance in the amount of $87 million, and technical assistance in the amount of $1 million. As in current MSA practice, the Spanish Government will be required to deposit peseta counterpart against economic and technical assistance (although some or all of the counterpart required against [Page 1826] technical assistance might be waived) in the amount of $88 million. Because of time lags in the deposit of peseta counterpart funds against economic aid provided to Spain, it will probably be necessary, in order to accommodate the military construction schedule, to arrange for advance deposit of counterpart by the Spanish Government.

8. Item (e) requires special comment. It provides $50 million in dollar commodities calculated to offset the internal inflationary impact peseta expenditures in connection with the aid and military programs. It is estimated that items (c) and (d), which provide a total of $22 million for investment imports, will also give rise to internal peseta investment requirements of approximately equal magnitude, (i.e., $22 million peseta equivalent). (Conversely, it is assumed that item (b), railroad rehabilitation, will not give rise to any additional peseta expenditures, based on an estimate that sufficient shop facilities and manpower are already available for this program.) Also $78 million in peseta equivalent is to be used for military investment, thus bringing the total peseta investment expenditures in connection with aid and military programs to $100 million peseta equivalent. It is estimated that $50 million of imported commodities which will directly and indirectly increase the supply of goods available to Spanish consumers will be sufficient to offset this inflationary impact, taking into account increases in Spanish indigenous production.

9. Since the program makes provision for increased supplies of goods calculated to offset the impact of peseta spending incident to the combined aid and military programs, it can be said to be noninflationary and to impose no additional burden on the Spanish economy as a result of U.S. military objectives.

10. Although the above program provides for development of Spanish strategic materials, it is planned that the direct cost of development of sound projects, where U.S. acquisition of the material to meet current requirements is involved, will be financed by the Defense Materials Procurement Administration out of Defense Production Act funds. Investment for other raw materials projects will be financed as a priority program under item (d).

11. It should be noted that this program does not take into account a possible loan component. It is not yet clear whether the 10% loan requirement of Section 522 of the Mutual Security Act of 1951 will apply.4 If there is to be a loan component of economic [Page 1827] aid to Spain this may necessitate some changes in the above program.

12. The problem of determining what rate(s) of exchange will be sought on which counterpart is to be deposited is at present under consideration. Because of the complexity of the Spanish multiple exchange rates system this problem is a significant one and will require considerable study.

negotiation

13. The foregoing program for the use of the $100 million is considered to be the most desirable from the point of view of U.S. objectives and every effort should be made to obtain Spanish agreement to it. In particular, it should be a primary objective of the aid negotiations to obtain the Spanish Government’s agreement to make available $78 million of peseta counterpart to finance the peseta cost of U.S. military construction requirements through FY 1953.

14. The Embassy in Madrid has stated its belief that the Spanish Government would find the use of counterpart funds to finance U.S. military requirements in Spain entirely unacceptable. The Spanish view may be that this has not been U.S. policy toward the other European countries which have applied counterpart funds to the improvement of their own economies.

15. If Spanish officials take this position, it should be emphasized that use of counterpart for the benefit of European civilian economies, while an integral part of the European Recovery Program, has now been superseded. It is the objective of the Mutual Security Act of 1951 to make maximum use of counterpart to support increased defense efforts (e.g., Sections 502, 523(3)). While recognizing that Spain is not a member of NATO, the program of aid to Spain, within the framework of the Mutual Security Program, is calculated to accomplish specific bilateral military objectives in support of the common defense of Europe, including Spain. Military facilities for joint use and joint benefit are to be constructed. While we are not asking, at this time, for an increase in Spain’s own defense effort, the use of these facilities by the U.S. and the use of counterpart for their construction are directly comparable to the efforts being made by other European aid recipients to strengthen common defense of the West.

16. If it proves impossible, in the course of negotiations, to reach agreement on the use of $78 million peseta counterpart for the military construction program, the Spanish Government may be informed [Page 1828] that a somewhat lower figure will be recommended to Washington. For the information of the negotiators, probably the minimum figure which would be acceptable in Washington would be in the neighborhood of $50 million equivalent.

17. If a figure lower than the $78 million peseta equivalent is agreed upon, there must necessarily be a reduction in the size of the FY 1953 U.S. military construction program and/or additional use of Defense Department funds (beyond the $52 million already programmed) to finance peseta expenditures.

18. A reduction in the $78 million counterpart contribution might also necessitate some changes in the programming of the $100 million.

19. Difficulty may also arise as to proposed programming of the $100 million in terms of general categories of imports. The proposed division is to some extent flexible, although there should be no departure from the concept of programming so as to avoid any additional inflationary impact on the Spanish economy. Proposals for changes in the dollar division should, of course, be referred to Washington.

  1. This document was circulated under a cover memorandum by Sheppard, dated Mar. 20, and designated DMS D–7. For the background of this paper, see Document 843.
  2. The minutes of this session, designated MAAC M–16 and dated Mar. 13, are in Madrid Embassy files, lot 58 F 57, “440—U.S. Negotiations”.
  3. Document 837.
  4. Mutual Security Act of 1951, P.L. 82–165 (65 Stat. 373), Oct. 10, 1951, Section 522 amended Section 111(c) of the Economic Cooperation Act of 1948 as follows:

    “Of the assistance provided under the applicable provisions of this Act with funds made available under the authority of the Mutual Security Act of 1951, as great an amount (in no event less than 10 per centum) as possible shall be provided on credit terms.”