Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

261. Memorandum of Discussion at the 454th Meeting of the National Security Council⁰

Newport, Rhode Island, August 1, 1960.

[Here follow a paragraph listing the participants at the meeting and agenda item 1.]

2. Commitments for Grant Military Assistance to Certain Free World Nations With Well-Developed Economies (NSC 5906/1 ; NSC Action No. 2121; Memo for NSC from Executive Secretary, subject: “Nations Financially Able to Purchase Military Equipment and Training”, dated November 19, 1959; NSC 5916; NSC Actions Nos. 2158 and 2185; Memos for NSC from Executive Secretary, subject: “Commitments for Grant Military Assistance to Certain Free World Nations with Well-Developed Economies”, dated February 17 and 20 and July 20, 1960; NSC Action No. 2187)¹

Mr. Gray presented this subject to the Council. (A copy of Mr. Gray’s Briefing Note is filed in the Minutes of the Meeting and another copy is attached to this Memorandum.)² Mr. Gray then called on the Under Secretary of State to summarize the State-Defense report on the subject transmitted by the reference memorandum of July 20, 1960.

Secretary Dillon recalled a report to the Council on this subject dated February 17 which indicated that steps had been taken to assure that, except in specific instances where the President may determine that U.S. interests otherwise require, no new commitments for the provision of military equipment on a grant basis would be offered to the U.K., West Germany, France, Austria, and Luxembourg. The report before the Council today covered five countries not covered in the previous report, namely, the Netherlands, Italy, Portugal, Belgium, and Japan. These five countries had been certified by the Treasury Department as financially able to pay for military assistance. The situation in these five countries had been studied after an evaluation of the plans of the country teams. Secretary Dillon said he was not suggesting that decision be made at the present time as to the long-term prospects for military assistance for these countries. He proposed to report to the Council in September on the Mutual Security Program resulting from the planning exercise which had involved the country teams. At that time he expected a decision on the general order of magnitude of the extent to which these five countries would be included in future long-range military assistance programs. However, a decision was needed now on FY 1961 funds for these countries. All five countries had been included in the illustrative presentations to Congress but funds for them had not been released. It was now necessary to make a decision as to the use of the funds.

Turning to the financial capabilities of the five countries, Mr. Dillon said he had examined the present and prospective financial position of each country and had concluded that the foreign exchange and reserve position of each country was not an obstacle to its paying for its military equipment. In each case the reason for military assistance was the country’s domestic budget in relation to its total national resources. All five countries were planning an increase in the proportion of resources devoted to defense and we were trying to induce them to make this proposed increase larger. Even though such increases take place, however, these countries would not be able to reach their force goals. The Joint Chiefs of Staff had established strategic force objectives identical with MC–70 requirements, except that the JCS objectives are higher in naval requirements, because of the greater anti-submarine need as seen by the JCS. None of the five countries would be able to achieve the JCS objectives even after annual defense increases, assumed to be 7 per cent for Belgium, 6 per cent for Italy, 5 per cent for the Netherlands, 4 per cent for Portugal, and 11 per cent for Japan. Secretary Dillon felt that these increases were within the range of possibility and that the countries concerned might even do better, but in any case there would be defense deficits ranging from $1.6 billion in the case of Italy on down. These five countries could not achieve the JCS force objectives from their own resources. Consequently, Mr. Dillon thought the U.S. would either have to provide military assistance or change the force objectives. The study on the Future of NATO may lead us to propose some changes in the force objectives but these objectives cannot be changed unilaterally at the present time.

Mr. Dillon asked how the U.S. could fill the defense gap of these five countries to the extent it was in our interest to do so. He believed the answer did not lie in cutting off grant military assistance. Such an action on our part would decrease rather that increase the defense efforts of these countries and would lead them to feel they are not regarded as important. Moreover, there was some conflict between our desire to redeploy our own forces from Europe and our desire to eliminate military assistance. It would be more feasible to redeploy U.S. forces from Europe if indigenous forces were first built up by military assistance. Secretary Dillon felt that five years from now these five countries would be able to carry the current rate of military buildup plus replacement costs. There would, however, still be deficits in meeting the strategic force objectives. Cost sharing was very important in getting these countries to increase their military expenditures.

Mr. Dillon said that this year about $181 million worth of military equipment was involved in the case of these five countries. It was true that the military program for the five countries was larger but this program included F–104s and a multilateral program already approved as well as missiles in Belgium and Jupiter in Italy. In the case of Belgium, less than $2 million in spare parts and electronic equipment is involved aside from the F–104s. In view of this small amount and the situation of Belgium, Secretary Dillon felt it would be most inopportune to refuse to continue military assistance to Belgium.

Secretary Dillon believed Portugal should not be considered capable of paying for the kind of new military equipment it needed. Portugal was really an underdeveloped country with a GNP of $236 per capita. This was less than the per capita GNP for Greece and Japan and only Turkey had a lower GNP in NATO. Portugal was run by a dictatorship with which financial stability was axiomatic. Although Portugal was well off in reserves, it did not have the budgetary capacity to buy modern military equipment. We could not expect Portugal to do more than it was doing at the present time. A total of about $17 million was involved in military assistance to Portugal. Such assistance is related to the Azores base which is important to the U.S.

In the case of Japan about $25 million worth of equipment is involved, primarily excess F–86Ds, Nikes, other guided missiles and destroyers. The assistance we provide to Japan has a close relation to our own forces since the build-up of Japanese forces will enable Japan to undertake missions now performed by U.S. forces. In view of the Japanese popular reaction to the ratification of the Mutual Security Treaty, the Japanese feeling with respect to bases, and the fact that the amount involved is not large, Mr. Dillon felt we should proceed with the $25 million program for Japan.

In the case of Italy, Mr. Dillon continued, $90 million worth of new matériel was involved, including improvements in Italian air forces, modernization of the army, and Terrier and Tartar missile systems on ships being built by the Italians. Italy was very well off so far as foreign exchange was concerned but the country’s per capita income was only $572 in 1959, the lowest of any country in NATO except for Portugal. With this low per capita income, Italy has defense expenditures amounting to 3.8 per cent of its GNP. Eventually Italy will be able to increase its defense expenditures even though it has the problem of depressed areas in southern Italy and has tax rates probably equivalent to those in the U.S. Italy has certainly cooperated with the U.S.; it welcomed the IRBM despite its large communist and socialist parties. Mr. Dillon felt it was necessary to continue helping the Italians with military assistance.

Mr. Dillon reported that the Netherlands had a GNP of $900 per capita, the lowest figure of any country in NATO except Italy and Portugal. The Netherlands also had a heavy public debt amounting to 48 per cent of the GNP. The Netherlands tax rate was high, even higher than the tax rate in Italy, amounting to about 29 per cent against 25 per cent for the U.S. (Mr. Dillon pointed out that in speaking of tax rates, he had made adjustments to take account of social insurance charges in the European countries and agricultural surplus and local government expenditures in the U.S.) The Netherlands was devoting 4.5 per cent of its national income to defense and was planning to increase this figure to 5 per cent over the next few years, compared with a figure of 9 per cent for the U.S. The Netherlands had been exemplary in living up to its commitments. The military assistance program for the Netherlands this year included aircraft for antisubmarine warfare, other aircraft improvements, Nike, Terrier (cost-shared) and Sergeant missile systems.

Concluding his presentation, Secretary Dillon recommended that the Council note the State-Defense report, agree upon the desirability of maintaining pressure on these five countries to continue increasing their contribution to the defense effort in order that the objectives of NSC Action No. 2158 might be achieved, and approve proceeding in FY 1961 with the programs of military assistance to these countries substantially as presented to and endorsed by the Congress, subject to such reductions as may be required by Congressional reduction of the total military assistance appropriations. Any curtailment in military assistance programs for Belgium, Italy, and the Netherlands after the funds for these programs were appropriated would have unfavorable political effects. Mr. Dillon said that in about six weeks he would be ready to present the Mutual Security Program for FY 1962. At that time he anticipated there would be a full discussion of military assistance for these countries.

Mr. Gray pointed out that the Secretary of the Treasury’s determination that the five countries were financially able to pay for their military equipment had been based on strictly financial considerations. He asked Secretary Anderson whether he wished to comment.

Secretary Anderson first complimented the President on the speech to the Republican National Convention.³ He then said he was concerned about our future military assistance programs. We seemed to go through the cycle of formulating planning figures, then presenting such figures to other governments and to Congress, then formulating expenditure proposals. The first two steps, that is, planning figures and presentations, were said not to be very important but suddenly we reach the expenditure proposal stage of the cycle and this stage was presumably very important. Secretary Anderson pointed out that Western Europe had made great strides recently. Western European countries and Japan as well had increased their foreign exchange holdings while the U.S. was the one country whose foreign exchange holdings had declined. Secretary Anderson believed that each of these five countries devoted a smaller proportion of its GNP to defense than did the U.S. Similarly, he believed no country devoted as large a share of its national budget to defense as did the U.S. Taking into account all measures of aid to the five countries, one would have to conclude that our aid to them had gone up. Regional aid, in which these countries participated, was involved in this conclusion. The Joint Chiefs of Staff had devised strategic objectives for these countries which were higher than the MC–70 requirements. With respect to the capability of countries to meet budgetary requirements, Secretary Anderson wished to point to the position of the U.S. If we were to assure the stability of our currency, render assistance to underdeveloped countries (including $600 million to Latin America) and then provide military assistance to Europe until the European standard of living equals ours, we would find that we had created a world quite different from that in which we live today. Secretary Anderson felt such a course of action is impossible for the U.S. Due to the failure of Congress to enact various revenue measures proposed by the Administration, government revenues are about to suffer a decrease. Large assistance programs to Latin America, to the Congo, and to other parts of Africa are just beginning. Secretary Anderson felt the U.S. would soon be faced with the problem of a large budgetary deficit. He also felt that the taxes of the five countries included in the State-Defense report were less than the taxes collected in the U.S., if proper adjustments were made in the tax rates of the various countries. The U.S. would also have a tremendous agricultural surplus problem in the near future since the wheat crop was far above normal. Secretary Anderson had recently been talking to European bankers who had told him that they were concerned lest the U.S. should attempt actions beyond its financial capacity. He felt the time had come when we must begin to say, this year, that building Polaris, Atlas, and a strategic striking force, and providing assistance to underdeveloped countries, is more important than grant military assistance to Europe, even though we are committed to such assistance. Such a policy, Secretary Anderson concluded, was in his opinion simply good judgment; he knew it made good fiscal sense.

Secretary Herter asked to what extent the balance of payments was a factor in grant military assistance to the European countries. Secretary Anderson said it would be helpful if these countries purchased their military equipment. Secretary Herter said he had assumed that from the military point of view the items provided the European countries by our assistance were very important. He doubted that it would be possible either to put pressure on these countries to buy their own equipment or to let them go without the equipment. The immediate issue seemed to be whether or not to secure the release of funds approved by Congress. He asked whether he had been correct in understanding Secretary Anderson to say that other things were more important than military assistance to Europe. Secretary Anderson replied that in his view we could not continue to have the kind of economy we now have and continue on with activities we are now engaged in. We must face up to the necessity of making choices between various policies. In his opinion Latin American assistance was more important than military assistance to Europe. Secretary Herter thought that the money for military assistance to the five European countries had already been requested and appropriated by the Congress. Secretary Anderson said that at a meeting of certain members of the Council last fall,⁴ it had been agreed that the Administration would request funds from Congress for military assistance to these countries but would not spend it. We seem now to be at the point of deciding to spend such money. Secretary Anderson believed we could not afford to continue our program of give-away assistance. He thought the lives of the Europeans were important to them as well as to us.

[1 paragraph (121/2 lines of source text) not declassified]

Mr. McCone noted that the increase in the gold reserves of the five countries included in the State-Defense report was almost equal to the decline in U.S. gold reserves. Secretary Anderson said that the increase in the gold reserves of these countries was equivalent to our loss of gold plus all the newly-mined gold during the period of such loss.

Mr. Gray asked whether Secretary Anderson was suggesting that the FY 1961 military assistance program to the five countries not be carried out. Secretary Anderson said this was his suggestion [1 line of source text not declassified]. He felt that each country should be told that we could not carry out this military assistance program. The President said the European countries should be making greater efforts to provide for their own defense. In part we are supporting their defenses through our retaliatory capabilities, through our navy, and through our air force. In addition to all that, we are providing military assistance. Secretary Anderson said that last fall there had been a feeling that MC–70 requirements should be reviewed because they might be too high. Now strategic objectives for these five countries were greater than the MC–70 requirements. If we had to assist the five countries to achieve their strategic force objectives, we would be unable to build a road system in this country and we might have to raise taxes. If a large budgetary deficit occurred in the U.S., what had already happened to our gold reserves would be insignificant compared to what would happen in the future. World financial stability would be destroyed. Secretary Anderson emphasized once more that governmental revenues would decrease as a result of the failure of Congress to pass certain proposed legislation. Mr. Reid said that a study by the Bureau of the Budget indicated that the actions of Congress had either decreased revenues or increased expenditures by $1.6 billion and that pending legislation would add $2.4 billion to this figure.

Secretary Dillon said that if the House appropriations were not increased by the Senate, a $200 million reduction in force improvement would result. The cost of maintenance would be $1.2 billion, leaving $200 million for force improvement. These figures were subject to adjustment in light of actual appropriations and would probably be less. Last year’s inadequate appropriations caused a curtailment of the program and resulted in our asking for increased appropriations this year. There is talk of a 25 per cent reduction for FY 1961.

At this point Mr. Gray pointed out that the President had to leave the meeting at 4:15 for another engagement. He suggested the item under discussion be disposed of as rapidly as possible in order that the Council might proceed to the discussion of U.S. policy toward the Congo. Ambassador Timberlake was awaiting the Congo discussion.

The President said grant military assistance was a difficult problem. His feelings were those of Secretary Anderson but he believed we had got ourselves committed to such an extent that we could not completely eliminate military assistance at this time. He had been struggling with this question for fourteen years. During all this time he had said that military assistance to Europe is an emergency measure designed to restore Europe militarily in the same way that the Marshall Plan restored Europe economically. However, all the Europeans are carefully watching the debates in Congress; they will know how much Congress authorizes to the nickel and will say we are running out on them if we propose to give them less. Mr. Dillon felt that a full debate on the future of military assistance should take place when the Council took up the Mutual Security Program for 1962.

The President believed we ought to inform the European governments that military assistance on the present scale will have to be discontinued after this year. Secretary Anderson said he would not worry too much about the FY 1961 military assistance program if the European governments could be told they would not receive any grant military assistance after FY 1961. Mr. Douglas⁵ said some parts of the FY 1961 program were subject to review. The President said that if Congress did not provide as much money as was requested, we would have to carry out absolutely essential activities and proportionately reduce other activities.

In response to a question from Secretary Anderson, Mr. Dillon said that if the total military assistance appropriations were reduced by Congress, it would probably be necessary to reduce the large Italian and Netherlands programs.

Mr. Gray suggested that the five governments should be told that they cannot continue to look forward in the future to the same level of military assistance they have received in the past. The President agreed, adding that we need not give all the reasons for this policy. He felt it was high time that such action was taken. Mr. Gray believed this action would meet one of the principal Treasury-Budget objections to the State-Defense report. Secretary Anderson felt the European governments should also be informed that if military assistance funds are reduced by Congress, military assistance programs will have to be cut. The President believed the European governments should be told that in the future our military assistance programs would be reduced, not increased. He added that we had made great efforts to bring Germany into European defense activities but no one had been slower than Germany in meeting commitments.

The National Security Council:⁶

a. Discussed commitments for grant military assistance to the Netherlands, Italy, Portugal, Belgium and Japan, in the light of the report on the subject prepared by the Departments of State and Defense (transmitted by the reference memorandum of July 20, 1960), and presented orally at the meeting by the Under Secretary of State.

b. Concurred in the recommendation of the above-mentioned report that steady political pressure should be maintained on the Governments of the Netherlands, Italy, Portugal, Belgium and Japan, both bilaterally and multilaterally, to induce them to increase the proportion of their resources devoted to defense in view of the ultimate objective that new commitments for the provision of military equipment on a grant basis should not be offered to nations which are financially able to pay for such equipment.

c. Noted the President’s authorization to proceed with the programs of military assistance to the Netherlands, Italy, Portugal, Belgium and Japan for FY 1961 substantially as presented to and endorsed by the Congress, subject to such reductions as may be required by Congressional reduction of the total military assistance appropriations.

d. Noted the President’s directive that the Governments of the Netherlands and Italy should be informed at an early date that they cannot in the future look forward to the level of grant military assistance they have received in the past; that the Governments of Belgium and Japan should be informed that they must anticipate an eventual decrease in the level of U.S. grant military assistance; and that decisions as to the future grant military assistance program for each country should be taken following notification to that country.

e. Noted that the Council at an early date will give further consideration to grant military assistance for the Netherlands, Italy, Portugal, Belgium and Japan in connection with the forthcoming report on long-term military assistance planning, including the levels projected therein for FY 1962.

Note: The actions in c, d and e above, as approved by the President, subsequently transmitted to the Secretaries of State and Defense for appropriate action.

[Here follow agenda items 3 and 4.]

Marion W. Boggs

0. Source: Eisenhower Library, Whitman File, NSC Records. Top Secret. Drafted by Boggs on August 4.
1. Regarding NSC 5906/1, NSC Action No. 2121, Lay’s November 19, 1959, memorandum, and NSC 5916, see footnote 8, Document 250. Regarding NSC Action No. 2158, see footnote 13, Document 250. Regarding Lay’s February 17 memorandum, see footnote 1, Document 254. Regarding NSC Action No. 2187, see footnote 4, Document 254. Copies of Lay’s February 20 and July 20 memoranda are in Department of State, S/S–NSC Files: Lot 63 D 351.
2. Not printed.
3. For text of Eisenhower’s July 26 address, see Public Papers of the Presidents of the United States: Dwight D. Eisenhower, 1960–61, pp. 589–601.
4. Not further identified.
5. James H. Douglas, Deputy Secretary of Defense.
6. Paragraphs a-e and the note that follows constitute NSC Action No. 2275. (Department of State, S/S–NSC (Miscellaneous) Files: Lot 66 D 95, Records of Action by the National Security Council)