Foreign Relations of the United States, 1955–1957, Soviet Union, Eastern Mediterranean, Volume XXIV

336. Letter From the President’s Special Consultant (Randall) to the Secretary of the Treasury (Humphrey) and the Under Secretary of State (Hoover)¹

Washington, March 6, 1956.

Gentlemen: At your request² I flew to Turkey on January twenty-eighth, returning on February eleventh, and the purpose of this letter is to present to you as succinctly as possible the present state of my thinking with regard to the economic problems of the Turkish Republic.

My colleagues, Forest Siefkin³ and Dr. C. Edward Galbreath,⁴ are preparing a factual report, which will be available very shortly.⁵ The essential parts have already been communicated verbally to the staffs of the interested Departments.

Before leaving Washington we had the privilege of being intensively briefed by a wide variety of Departments and agencies that had knowledge of the Turkish problem, and enroute we had the benefit of conferences with the economic staffs of Ambassador Perkins and the Embassy in Paris, as well as with General Gruenther and his staff at NATO, and with Admiral Fechteler at Rome. I have the feeling that we were adequately prepared for our task.

Our objective was twofold: (1) to present to the officials of the Turkish Government the state of American public opinion with regard to economic aid, and (2) to persuade the Turkish Government to undertake prompt and decisive measures for the solution of their fiscal problems.

On this second point, we had an extraordinary break, caused not by anything we did but rather by the fact of our going.

While we were in Paris on our way to Turkey, Prime Minister Menderes faced up squarely to his financial problems, and announced to his people a program of financial reform containing nearly every element that we had had in mind for presenting to him. He had apparently decided that he should do this on his own, and not have it thought by his people that he had done it under compulsion from the United States.

The essentials of his program were as follows:

1. A balanced budget

2. Strict measures to control the further issuance of commercial credits by the Central Bank

3. The requirement that each State Enterprise operate within its own revenues, and not be dependent upon the Central Budget

4. No further increase in agricultural subsidies

5. Orderly procedures for the allocation of available foreign exchange.

In my private conferences with the Prime Minister and the President, I received the most categorical assurances that this reform program would be carried out meticulously, and my associates, in their dealings with the staffs of the various economic ministers, received the impression that everybody in Government meant business on this program. The Prime Minister repeated these assurances to us in front of his Cabinet, and at that time informed us that the following three executive decrees were being issued:

1. One to police the limiting of credit

2. One to police the individual budgets of the State Enterprises

3. One to regulate foreign exchange.

It seems to me, therefore, that consideration of the Turkish problem must now be undertaken on the hypothesis that Turkey has, in good faith, taken the initial governmental steps which the United States has long urged it to adopt.

More problems remain to be solved, but the beginning thus made is a courageous undertaking by the Prime Minister, and a direct turnabout from the laxity of the last two years.

It remains, of course, to be seen whether the Government will follow through on this program, and to that end, if you should so desire, I am prepared, with my colleagues, to return to Turkey early in May to check their progress.

I have come to the conclusion, however, in my own mind that the action presently undertaken by the Turkish Government merits a strong reciprocal vote of confidence from the United States, the details of which I shall discuss later.

Military Problem

My first impression on studying the Turkish problem was that this country was undertaking a military burden beyond its means, and that this should be reduced. The more I studied the problem, however, the more I doubted the soundness of that conclusion.

From the strategic point of view, it must be borne in mind that Turkey is of extreme importance to the United States. If we should lose Turkey, we might lose all of the Middle East. Both General Gruenther and Admiral Fechteler assured us that in terms of military cooperation, the relationship with Turkey was satisfactory. She has a good army, that is rapidly becoming well equipped.

Furthermore, her position vis-à-vis the Soviets is taken out of deep conviction, and would not change even though we should abandon aid. Speaking roughly, some 26 percent of her budget expenditure is military in character, which is about 8 percent of her Gross National Product.

Since the end of the war the number of men bearing arms has been reduced, and the present army is far more effective than it was, because of increased fire power.

NATO would strongly resist any cutback in Turkey’s force assignment because to do so would take the pressure off other allies who have been far less cooperative than Turkey.

This whole military question is moot, however, in my judgment because Turkey would never consent to cut back her forces. They have fought Russia for 300 years, and I think it would be politically impossible to persuade them to reduce their military effort.

One thing, however, in the military field needs doing and doing at once. All vagueness as to what the commitment of the United States is to Turkey on the military side should be eliminated. That whole program should be brought into sharp focus, and a new arrangement negotiated, if necessary, in order that hereafter there may be no further misunderstandings on this score. I have discussed this with Gordon Gray, and I am prepared to work with him on making our commitment clear.

Immediate Need

Short-term the Turkish economy is in desperate straits. For all intents and purposes their entire gold reserve has already been pledged, and they have almost no capacity to finance the most immediate import necessities. Such industry as they have is grinding to a halt for lack of imported raw materials and spare parts, the agricultural industry lacks motor fuel and lubricants for its new equipment, and so forth. There is reason to believe that in a period of perhaps two to three years, the new reform program, coupled with the completion of some of their public ventures that have not yet brought value into the economy, might restore some sort of balance to their trade. But the country may come close to bankruptcy in the next few months. It would do us little good to have an ally that is militarily strong only on paper, if the economy should go dead. The dangers of the internal unrest that might result are obvious.

To relieve this situation, I am altogether opposed to a soft loan. Furthermore, I do not believe the Turkish Government is going to request another loan in the near future.

They must have cash and have it now, however, and this would be my recommendation:

I propose that our staff in Turkey be forthwith given authority to obligate our Government for sufficient dollar-aid to Turkey to bring that country up for Fiscal 1956 close to the 100 million dollar total of aid which they received in Fiscal 1955. It is my understanding that these funds are available.

I propose that the time and manner of making these commitments be left to the discretion of our staff in Turkey. I was impressed with their caliber, and believe they can be trusted so to administer this fund as to bring the greatest possible benefit to the Turkish economy.

Time is running out, however, and I urge strongly that they be given this authority and be given it now.

Debt Problems

Turkey has a serious problem of short-term debt due to various European nations for capital equipment, and other items, purchased in the course of their too rapid industrial development.

These obligations are being handled on a hand-to-mouth basis without orderly planning. Turkey is pursuing a bilateral approach to these questions, trading as best it can with each nation, one at a time. This is costly to the Turkish economy. It forces them to buy in selected markets rather than buying on the best terms wherever available. They are being charged higher prices than competition would justify. I think that the only intelligent approach to that question is the familiar multilateral plan of having all the creditors around one table, and that the agency for accomplishing that would be OEEC. I recognize the apprehension felt by some of the Treasury staff that this would at once bring the United States into the picture, but I believe that that danger can be obviated, and I think that the multilateral solution is the only rational answer. Knowing the Treasury feeling, I did not urge this upon Turkey, but I do feel that I should make my viewpoint clear to you. In my opinion it is the only solution that will give all countries a new and fair start on trading with Turkey. Furthermore, we would thus greatly widen the number of countries that would have a stake in the economic survival of Turkey.

The long-term debt of Turkey is something over 900 millions of dollars. It ought to be refinanced. I would not be prepared to say that this is too much debt for the Turkish economy to bear, but the maturities need to be spread out over a longer period of time.

In our talks with the International Monetary Fund, we found that they hold the considered viewpoint that once Turkey embarks upon a monetary reform program, this international debt can be refinanced, possibly by bringing into the situation private banking capital from the United States and other countries. I was so impressed with what Messrs. Rooth,⁶ Cochran and Sturc⁷ said that I urged strongly to the Prime Minister and his Cabinet that they seek the early advice of the officials of that Fund with regard to their debt problem. I think that Merle Cochran should go back to Turkey just as soon as he can, and I believe that under his wise guidance a new and helpful debt program might be worked out for Turkey.

Devaluation

At no point while I was in Turkey did I let the word “devaluation” pass my lips. This was a studied effort on my part. I came to the conclusion that the logic of events almost inevitably will take Turkey to devaluation, and that it was highly important that this decisive step should be taken by the Turkish Government on its own initiative, and without compulsion from the United States. My slender stock in trade vis-à-vis Turkey is my personal relationship with the Prime Minister. I believe that we understand one another and have mutual respect for each other. I felt that all of that good will might be jeopardized if I let myself be in the position of recommending devaluation to him, because in earlier years he had publicly taken so strongly the position that he would never permit it. My colleagues, in talking with the staffs of the economic ministers, sensed that at the junior levels there is an understanding of the ultimate necessity for devaluation, and I think it would be wiser to let that pressure build up, so that devaluation comes about from inside forces rather than outside pressure.

I shall be available at any time to any of the interested agencies for further discussion of the Turkish problem, and of course to you for any further counsel that you may think I can give.

Sincerely yours,

Clarence B. Randall

1. Source: Department of State, Central Files, 882.00/3–656. Confidential.
2. According to a January 6 memorandum from Hoover to Dulles, Hoover and Humphrey, after learning that the Turkish Government wished to obtain an economic adviser and mentioned Randall in particular, met with Randall to urge him to accept the assignment. (Ibid., NEA/GTI Files: Lot 58 D 610, The Randall Mission 1956— January)
3. General Counsel, International Harvester Company.
4. US Government economist on the staff of the Council on Foreign Economic Policy.
5. A copy of the Randall Mission report is in Department of State, NEA/GTI Files: Lot 58 D 765.
6. Ivar Rooth, Managing Director and Chairman of the Board of Executive Directors, International Monetary Fund.
7. Ernest Sturc, Deputy Director European Department, International Monetary Fund.