Foreign Relations of the United States, 1955–1957, American Republics: Central and South America, Volume VII

513. Memorandum of a Conversation, Department of State, Washington, April 8, 1955¹

Washington, April 8, 1955

SUBJECT

• Peruvian Long-Term Credit Purchase of Submarines

PARTICIPANTS

• Mr. H. Struve Hensel, Asst. Secretary of Defense for International
• Security Affairs
• Mr. Chas. Sullivan, OSD, Dept. of Defense
• ARA—Mr. Holland
• E—Mr. Waugh
• S/MSA—Mr. Nolting
• OFD—Mr. Corbett
• AR—Mr. Jamison

The problem under consideration was the proposal that 7-year credit be extended for the purchase by Peru of 2 submarines from the Electric Boat Company, regarding which officials of that company have approached Defense.

Mr. Hensel outlined the point of view of the Defense Department in favor of this transaction, mentioning principally the following points: Defense’s concern over extensive purchases of military equipment often on credit terms by Latin American governments from non-U.S. sources which led to the proposal of National Security Council policy of favoring credit which was approved; the JCS have indicated that Peru’s acquisition of the submarines will contribute to hemisphere defense; the submarine is a type of military equipment which is least likely to be used for any aggressive purpose; the building and sale of these submarines by a U.S. firm is preferable to similar sale from a European source; the credit would be available under the provision of the present legislation which requires utilization of $200,000,000 of MSP funds for loans. Although he said he did not attribute great importance to this point, Mr. Hensel pointed out that the granting of this loan would help meet the Congressional requirement.

Mr. Holland indicated that while there were obviously disadvantages in following either course, those which led him to the conclusion that the transaction should not be approved were principally the following:

(1) The borrowing capacity of every Latin American country is limited; and the extent to which that borrowing capacity is utilized for the purchase of military equipment reduces in proportion the amount which can be used for borrowing for purposes which will contribute to the economic well-being and strength of the country.

(2) The granting of long-term credit to Peru for military purchases in this specific case will inevitably mean that other Latin American governments, many of them in a much less favorable economic position even than Peru, will desire similar credit for military purchases. These requests will be difficult, if not impossible, to refuse, even though in most cases they could not begin to be justified on economic grounds. There exists an inevitable tendency, particularly on the part of the numerous military governments in Latin America, to procure military equipment not for hemisphere defense, but simply because their leaders like to have it around for display purposes and in order to appear strong in relation to their neighbors.

Mr. Holland indicated that while he had definite reservations about the granting of credit of any kind for Latin American purchases of military equipment, he recognized that the three-year credit provision of the law is an accomplished fact which has already been applied in several cases. He was specifically opposed, however, to extending credit terms over longer periods, as in the Peruvian submarine case, because of the economic factors referred to above and the precedent it would establish for other requests, the approval of which would be damaging to the credit positions of governments. Mr. Waugh emphasized the unproductiveness of loans for military equipment, and their undesirability on any economic grounds. On the other hand, Mr. Nolting pointed out that the $200,000,000 loan provision was included in the law by Congress for the purpose of encouraging loan assistance rather than grant assistance to the extent possible, and stated that Congress might well seriously question our refusal to grant credit to Peru at the same time we ask to provide military equipment on a grant basis.

To counter the view that credit granted for submarines would be at the expense of productive purposes, Mr. Sullivan mentioned a provision of Peruvian law under which he said that a specific percentage of receipts is allocated to the Navy for its own purposes. He said that this provision of the law would appear to preclude utilization of such funds for other than Navy purposes and insure that U.S. refusal to authorize building of the submarines would simply mean that they would be bought from a non-U.S. source. Mr. Holland said that he would look into that aspect of the matter.

It was agreed that there exists a fundamental difference of view between State and Defense on this matter and that it should be resolved as quickly as possible. In view of the fact that State’s position implied a revision of NSC policy, it was indicated that State is initiating a request for a review of the policy by NSC. Mr. Hensel agreed with this procedure for endeavoring to reach a decision.²

1. Source: Department of State, Central Files, 723.5621/4-855. Secret. Drafted by Jamison and approved by Holland.
2. In a brief letter, dated April 13, Hensel informed Holland of his understanding that ARA would seek to have the NSC change the section of NSC 5432/1 dealing with credit purchases of U.S. military equipment. The final paragraph of the letter reads:

   “Inasmuch as implementation of the existing NSC policy, which is favored by this Department, involves certain legislative considerations which must be acted upon by Congress this year, it is essential that the matter be resolved immediately. It would be appreciated if you would obtain the necessary decisions within the week in order that appropriate actions may be taken.” (Department of State, Central Files, 723.5621/4–1355)