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

266. Memorandum of Discussion at the 465th Meeting of the National Security Council⁰

October 31, 1960.

[Here follows a paragraph listing the participants at the meeting.]

1. Long-Range Military Assistance Plans (NSC Actions Nos. 2149–b, 2158 and 2275; Memo for NSC from Executive Secretary, subject: “Commitments for Grant Military Assistance to Certain Free World Nations with Well-Developed Economies”, dated July 20, 1960; Memos for NSC from Acting Executive Secretary, subject:

“Long-Range Military Assistance Plans”, dated October 7 and 28, 1960)¹

Mr. Gray introduced the subject and called upon Secretary Gates. (A copy of Mr. Gray’s Briefing Note is filed in the Minutes of the Meeting and another is attached to this Memorandum.² Mr. Gray did not read that part of the Briefing Note dealing with NSC Action 2275.)

Secretary Gates stated that the Five Year Military Assistance Plan³ was being presented to indicate the improvements in military assistance planning which were being effected as a result of the recommendations of the Draper Committee; to provide the basis for understanding the proposed FY 1962 budget request; and to deal with the problem of NSC Action 2275. He noted that military assistance problems were co-mingled with problems of U.S. military programs, the U.S. Budget and the balance-of-payments, and strategic, economic and political considerations. Secretary Gates concluded his introduction by stating his judgment that the proposed FY 1962 program was about right. He then called on Secretary Dillon.

Secretary Dillon briefly reviewed the history of the establishment of the Draper Committee which was created, he said, as a result of a recommendation by the Secretaries of State and Defense to the President in the fall of 1958. The Committee was requested to re-examine the purposes of the military assistance program. One objective of this re-examination was to counter a tendency toward indiscriminate Congressional cuts in the program. Among the recommendations of the Draper Committee which were approved in principle by the President were the following: (a) that long-term plans for military assistance should be developed; (b) that order-of-magnitude dollar guidelines should be provided to the planners to assure feasibility of the plans which they developed; (c) that military assistance planning should be decentralized to the field; and (d) that guidance provided to the planners should be as specific as possible and should be based upon and implement national security policy objectives and guidance.

As a first step in the implementation of the Draper Committee recommendations, mutual security operations plans (MSOPs) had been developed for each country receiving assistance.⁴ The objectives for these plans were taken, Secretary Dillon indicated, from approved national security policies. In recognition of the close relationship of economic, political and military objectives, all such objectives which were susceptible of being achieved through the military assistance program were included in the MSOPs. The MSOPs provided more detailed guidance to the planners in the field than they had previously. The decentralization of decisions on military assistance planning put a premium on clear and precise instructions to the field and upon focussing responsibility in the MAAGs, the U.S. operations missions, and the unified commanders. To this end the Department of Defense had revised its instructions and manuals.

The field was also given order-of-magnitude dollar guidance for planning purposes. These guidelines were not regarded as binding but simply as trial financial yardsticks to be used in measuring the extent to which objectives set forth in the MSOPs could be met. These financial guidelines were realistic and tight enough to force decisions. The field was also requested to estimate each country’s contribution to its own defense on the assumption that we would continue to press for increased defense expenditures where a country was falling behind. The field was also asked to identify significant short-falls. The field submitted its estimates to Washington for review early last summer. Finally, Secretary Dillon reminded the Council of the decisions at Newport last summer, including the agreement that the Council would make a further review of the programs for the Netherlands, Italy, Belgium, and Japan in connection with this presentation of the five-year military assistance plan. He stated that instructions had been given to U.S. Ambassadors pursuant to NSC Action 22754 but that this advice was not to be given to the countries concerned until we presented our FY 1961 programs to them. Secretary Dillon then called on Mr. Irwin to present the five-year plan. (A copy of Mr. Irwin’s presentation is filed in the Minutes of the Meeting.)⁵

At the conclusion of Mr. Irwin’s presentation, General Lemnitzer amplified the views of the Joint Chiefs of Staff on the subject. He stated that the Joint Chiefs wholeheartedly supported long-range military assistance planning. The need for such planning had long existed and Congressional opponents had often criticized the military assistance program because it was not based on such long-term planning. He did not predict, however, that the same opposition would not be critical of the planning itself if it were submitted to Congress. He noted that the Joint Chiefs had participated in and made a thorough review of the plans. He went on to point out that force goals for other countries were related to our own plans and force goals. Therefore, the development of a long-term plan for military assistance permitted the military services to better inter-relate military assistance with U.S. plans and procurement. Such inter-relationship was important because the items supplied under the military assistance program could no longer be obtained off the shelf; procurement lead time had become important.

Training for foreign military forces was, General Lemnitzer suggested, one of the most important things that we did. Such training had not only a military value but also an important value in getting across the principles of the American way of life. Orientation tours for high-level military officers were especially important and should be expanded and emphasized. General Lemnitzer went on to suggest that we should exploit the principle of cost-sharing. We should continue to seek ways to increase the contributions of those countries which were able to pay. Cost-sharing did not necessarily mean equal sharing by the U.S. and the country concerned. Our program in Japan was a good example of what could be done through the cost-sharing technique.

General Lemnitzer emphasized that our plans should be worldwide in character and that we should not let the needs of NATO detract from the needs of other areas of the world. Military assistance was already important in Asia and might become increasingly important in the Middle East. There were also emerging problems in Africa and Latin America. It was important, he said, to support an initial increase in funding. In order to continue deliveries at the rate of $2.2 per year, we would need an appropriation of $2.4 billion in FY 1962. This was less than half of the sum that would be required if we attempted to achieve the strategic force objectives. General Lemnitzer noted that the efforts of the Communist Bloc were growing. Mutual assistance was a vital component of our security policy and needed to be related to the magnitude of the Communist threat. General Lemnitzer concluded by stating that he believed the program proposed was a reasonable, although austere, one and justified strong support.

Secretary Dillon concluded the presentation of the five-year plan with some observations on foreign policy aspects. He noted that Mr. Irwin had indicated that if military assistance deliveries were maintained at present levels, we should be able to maintain a minimum acceptable defense posture, though a posture far short of meeting the objectives of NSC papers. In many cases, especially in the Far East and the Near East, success of the military assistance program depends upon education and training. Problems in such areas could not be met through more assistance than was projected under the plan.

Mr. Dillon went on to observe that in stating that the proposed programs were adequate, State and Defense could not assure the Council that the aid contemplated would be all that would have to be asked for. In preparing these plans we were operating on the assumption of economic growth in the countries aided and on the assumption of a capability and willingness on their part to increase their share of defense expenditures. Accordingly, in the less-developed countries these estimates were quite tentative. Furthermore, with the renegotiation of base agreements during the next five years, there will be increased pressures for additional assistance. The Communists were attempting to create chaos and trouble wherever they could. Presently they were putting pressure on such places as Cambodia, Burma, Indonesia, and Africa. They are making every effort to change U.S. allies into neutrals and neutrals into Communists. We had to have the means to move material quickly to trouble spots. The plans reflected our expectations as to needs for meeting existing or anticipated Communist pressures. However, if the Communists in the future should concentrate their efforts at some place or some time, our efforts would have to be increased.

Mr. Dillon stated that he was aware of the importance of economic improvement in the less-developed countries. Since political and economic stability were recognized as objectives of our policy, we would need to find ways to increase the amounts provided for economic development while maintaining security in these countries. In this connection we were looking at the problem of Southeast Asia at the moment.

The NATO problem, Mr. Dillon indicated, was different but more disturbing. The danger in NATO arose from the fact that we were falling further and further behind in achieving our objectives. We could not meet our objectives even with a greatly increased effort. This problem was complicated by our efforts to get the NATO countries to increase their assistance to the less-developed nations. This gap was recognized by the NATO countries and was weakening their confidence in NATO military capabilities. This was creating a very dangerous situation. The NATO countries could do more than they are doing or plan to do and all are agreed on the necessity for increasing their efforts. The question was how best to induce the additional effort. The action that we took also had to be related to other U.S. actions in NATO, including the re-examination of NATO strategy for the next ten years. Our plans for OEEC and the Development Assistance Group were also clearly related to our military assistance plans for NATO. To cut off or greatly reduce our aid would not result in an increase in country effort; in fact, it would have the opposite result. Such action would mean that there would be nothing to fill the military gap or to provide the U.S. support which was needed from a political point of view. The only solution was to continue assistance on a cost-sharing basis (except in the case of Greece and Turkey), making clear that we expect increased effort from these countries and that we will re-assess our aid if they do not make such an effort. Secretary Dillon noted that no grant assistance was contemplated for Germany, the U.K., Luxembourg, France or Austria.

Secretary Dillon observed that military assistance created no balance-of-payments problem. In fact, such assistance might help our balance-of-payments situation since, under the proposed programs, there would be increased cash purchases of U.S. supplies and spare parts as a result of increased European effort. We also had to bear in mind the relationship of this problem to U.S. forces abroad. If our balance-of-payments situation caused us to reduce these forces, we would have to increase military assistance. Simultaneous reduction of U.S. forces and military assistance would cause such a loss of confidence in NATO that it would have the gravest possible effects on the structure of NATO. It was, therefore, important to maintain adequate assistance to NATO in FY 1962. Secretary Dillon pointed out that the NATO portion of the new obligational authority contemplated for FY 1962 was $1 billion. He noted that our plans contemplate continued assistance to Belgium, the Netherlands, Portugal and Italy and dealt briefly with each of these in turn. In the case of Belgium, there would be a special problem next year because of the difficulties Belgium was having in the Congo. The Netherlands planned a fifteen per cent increase in their defense effort for next year, following a twelve per cent increase in 1960. In connection with our military assistance plans for the Netherlands, we had to take account of the fact that the U.S. was continuing military assistance to Indonesia. Our planning contemplated a steady increase in Italian defense expenditures. We would work to enlarge this effort but the political situation in Italy was such that a reduced level of U.S. support could result in a Left-Wing government. Secretary Dillon noted that the funds contemplated for these four European countries represented a twenty-five per cent decrease over the funds provided in FY 1961. This decrease was, however, related to programming realities and did not represent a trend.

In Japan we planned a modest program of $50 million per year. Japanese defense expenditures were at the lowest level in proportion to GNP of any country we assisted. This was due primarily to the postwar American policy which had resulted in constitutional prohibition of Japanese military forces. The principal objectives of the program for Japan were the following. We want a defense build-up and the Japanese feel that they can make steep increases in their defense budget; such a build-up should make it possible for the Japanese to carry part of the load in the Far East. U.S. bases in Japan, especially naval bases, were important to us. The new Mutual Security Treaty allowed us continued use of the bases for ten years. If we were suddenly to start to reduce and eliminate our assistance after ratification of the Mutual Security Treaty, we would strengthen the forces favoring neutralism in Japan. A token military assistance program was absolutely essential for this reason. In the case of Japan there were a number of ways in which we could improve our own balance-of-payments and budgetary situation. One of these was the settlement of the GARIOA debt. We had had to postpone negotiations first because of the Mutual Security Treaty negotiations and then because of the new Japanese elections. Prime Minister Ikeda had given us assurances that after the elections, Japan would be prepared to conclude negotiations on the subject. Ikeda had been responsible for the earlier negotiations as Japanese Minister of Finance and fully recognized Japan’s obligation. If we realized $600 million over a period of thirty years from this settlement, we would receive $20 million per year which would offset nearly one-half of the budgetary cost of the contemplated military assistance program.

Concluding his comments, Secretary Dillon stated that he believed that the world-wide program for FY 1962 should provide NOA about $2.4 billion. This was a figure which was slightly higher than planned deliveries because of the need to build up the pipeline. The NOA level in following years would be about $2.15 billion. Secretary Dillon then read a proposed Council Record of Action which would have had the Council:

• “a. Consider the report on the results of the long-term military assistance planning prepared by the Departments of State and Defense.
• “b. Concur in the development of FY 1962 military assistance program requests for the countries covered in the plan in the general magnitude indicated therein, subject to the normal processes of budget review.
• “c. Agree that the underlying intent of NSC Action 2275 to increase the defense efforts of Belgium, Netherlands, Italy and Japan would be carried out by making clear to these countries that future U.S. military assistance will be directly related to appropriate increases in their defense efforts.”

Following Secretary Dillon’s comments, the President noted that Secretary Dillon had briefly mentioned the problem of the U.S. balance-of-payments. Secretary Dillon had indicated that in the case of the NATO countries, the provision of military assistance would even result in some improvement in our balance-of-payments. We all realized, the President stated, that the two big problems facing us were the budget and the balance-of-payments. He felt that studies of the military assistance program should not be confined to amounts but should also seek to determine what kinds of assistance would have a real effect in diminishing the balance-of-payments problem. If the balance-of-payments got out of hand, there would be a disintegration of confidence in the world. We should see what we could do about this problem and should provide assistance in kind to the limit of our ability. The budget problem was serious but even that was not so important as the balance-of-payments problem.

In response Secretary Dillon noted that assistance to NATO (other than Greece and Turkey) was entirely in kind. Even under cost-sharing arrangements, we furnished American equipment. Assistance to Japan was also in kind. In the case of the countries we were discussing, military assistance had no balance-of-payments effect. In fact, as previously noted, increased European defense budgets could have a positive effect on the U.S. balance-of-payments.

The President referred to General Lemnitzer’s statement that the biggest service we could provide to these countries was training. So far as we did such training in the U.S. it was all right, but big programs in countries like Laos and Cambodia involved spending dollars abroad. This was a very important problem which was not being recognized in the current political campaign. It was not merely a balance-of-payments problem but a problem of loss of confidence in the dollar. The President suggested that a Treasury representative should participate in planning of this kind.

Mr. Irwin said that State and Defense were very conscious of the need to keep down dollar expenditures. Eighty-five to ninety per cent of the military assistance funds were spent in the U.S. and did not enter into the balance-of-payments. We were trying to decrease the remainder. One way this had been done was by cutting off maintenance and support funds for countries able to pay. Such action helped reduce the outflow and increased the inflow of dollars. We would emphasize training in the U.S. or establishment by a country of completely independent training facilities within its own borders. Nonetheless, we would do some training in the field through the MAAGs and in the case of Laos and Vietnam, by means of special forces teams. However, relatively small amounts of dollars were spent abroad for training. Mr. Irwin pointed out that during most of the 1950’s, military assistance had had a small deficit effect on the balance-of-payments, but during 1959–1960, it had been an overall gainer of foreign exchange.

Secretary Dillon said that he recognized that military assistance did involve a budgetary problem. State felt that the figure suggested was the best and fairest figure that could be worked out between State and Defense as to the share of military assistance in the total defense budget. He noted that the total defense budget, including AEC expenditures, was $45 billion or a little more.

The President referred to economic assistance and defense support, noting that we keep hoping for cooperation from the richer countries in this area. If military assistance was actually helpful to the U.S. balance-of-payments, why did we not get the richer countries to help us with our budgetary problem by picking up some of the defense support and economic assistance? In response, Secretary Dillon pointed out that he and Secretary Anderson were planning to go to Germany soon⁶ to attempt to get the Germans to increase their contribution to economic assistance. The President suggested that they ought to go to two or three other countries. The President said that he did not argue with the order-of-magnitude of the proposed program but he did not think that we were tough enough about insisting that our military assistance be provided in kind. Also, we ought to get other countries to pick up more of the economic aid burden. Secretary Dillon indicated that he would be making some suggestions on economic aid in the next two or three weeks.

Secretary Anderson said that he did not want to be unduly critical of those who had prepared these plans, but he had a feeling of frustration when he read statements like the following which appeared in the summary of the plan: “Any amounts in FY 1962 substantially less than $2.4 billion will make it improbable that a strategic concept that includes reliance on allied military power and bases to meet the cold, limited, and general war threat can be maintained. The implementation of any other budget or financial policy to the extent that it requires a substantial downward change in the FY 1962–1966 plan will require a change in basic U.S. national policy and strategic objectives for the FY 1962–1966 period.” Secretary Anderson observed that whenever a suggestion was made for a reduction of military expenditure in any respect, the answer was always put in terms of which divisions should be pulled out of NATO or in terms of proposing to pull the 7th Fleet out of the Formosa Straits. Nothing else, it seemed, could be done to reduce military expenditures.

Secretary Anderson said he was astounded by the comments that had been made on the balance-of-payments. If this proposed program were put into effect, he could not assume responsibility for the security of the dollar. The London gold market had opened at $36 an ounce this morning. This reduction in the price of gold was not simply a matter of chance; it was the result of hard work. The loss of confidence in the dollar was being registered on the face of the world. We talk about what other countries will do but they have a good thing going and know it; they are not going to give it up as a result of persuasion by us. They are not that loyal to NATO nor do they feel that kind of obligation to us as a result of our Marshall aid. These countries were not going to support the dollar. The only way that we could get countries like Germany to take action was to get them to put these expenditures into their budgets. A long-term loan to the U.S. would be only a palliative. When we talk about military assistance, we should insist that countries like Germany and France buy their military equipment requirements.

Secretary Dillon interjected to say that Germany and France did purchase their military assistance needs; nothing was included in the five-year plan for these countries. Secretary Anderson stated that we should consider the other countries then. We could not afford such aid and if we continued it, we would face the worst collapse you ever saw. This year there had been a $4.5 million increase in our trade balance on current account and yet the balance-of-payments deficit was running at an annual rate of $5–6 billion in the third quarter. If we ran such a deficit for twelve months, we would destroy the international gold standard.

Secretary Anderson pointed out that we had received only $1.4 billion for military assistance last year, yet now it was proposed that we go for $2.5 billion. We were talking of a five-year plan but if we had made such a plan in 1955, it would have been out of date in 1956. The balance-of-payments problem did not face us until 1956. We were in trouble right now and had to take action now. Secretary Anderson then reviewed the various NSC actions on this subject, quoting several of them. He went on to point out that the financial side of the plan had not been approved by those who provided the money. Treasury was given a few days to look at such plans and then, when we got into an argument, was told that this was not a good time to reduce assistance. He again emphasized that continuing on this course would bring us the greatest holocaust we had ever seen.

The problem was how to get increased effort from these countries, Secretary Anderson observed. We would not get it, he felt, by doing what was proposed. The lines on the chart should go in opposite directions; that is, U.S. aid should be decreasing while the country efforts increase. Italy, Japan, Belgium, and the Netherlands were all able to pay. The trouble that Belgium was having in the Congo was peanuts compared with the troubles facing the U.S. We were facing a day of reckoning. We were going to have to continue economic assistance and much of the ICA aid could not be tied to dollar purchases. As for decentralization of the planning process, the field people just did not know the balance-of-payments problem. They had to be taught to do their job differently. The Secretary noted there were 354,000 dependents of U.S. personnel in Europe. These were a hazard, a liability, and a cost. Getting $20 million per year from a GARIOA settlement would not solve our problem. In the Secretary’s lifetime we had not been faced by a problem as serious as the one facing us today. Moreover, this was a unique experience; it had never happened to the U.S. before. He referred to a conversation with the Prime Minister of Malaya who had suggested that the U.S. was over-committed.

It is said, the Secretary stated, that this was just a budgetary problem. If he had to make a choice between a budgetary problem and a balance-of-payments problem, he would prefer the budgetary problem. However, every time we spend dollars abroad, gold went out of Fort Knox. People abroad are sophisticated and know all about the U.S. budget. If we let them believe that we are going to have a severe budgetary problem, it will destroy confidence in the dollar.

The President said that one thing was not clear to him. Was it true that the military assistance program itself would result in a budgetary deficit? Secretary Anderson agreed that it would not produce a budgetary deficit if cuts were made elsewhere but he pointed out that $1 billion more was proposed for military assistance. Secretary Dillon said that the figure was $600 million rather than $1 billion. However, he agreed with what Secretary Anderson had said about the dollar, about the balance-of-payments, and about the time factor. His only disagreement related to the programs for Japan, Belgium, Portugal and the Netherlands where ten per cent of the total projected assistance was scheduled to go. It was absolutely certain that if aid to these countries was eliminated, they would not buy the same amount in the U.S. In fact, they would not buy it at all. The result would be a weakened fabric of defense. He stated that if the choice was between purchase here and grant assistance, he would favor purchase. These countries had gold. The problem, however, was the size of their defense budget. He noted that the defense budgets of the Netherlands and Japan are increasing substantially. He concluded by saying that these programs involved no balance-of-payments effect, only a budget effect. He agreed that the budget effect should be considered in the overall budget review. Secretary Anderson said that we could not afford an increase of fifty per cent in military assistance. If you added up all security expenditures and the service on the debt, you got a figure that was seventy-five per cent of the budget. Where then could you cut? It was difficult to see how you could make cuts in the rest of the budget and do what the people on both sides in this election were calling for. If we took in in taxes one hundred per cent of all personal income above $16,000 our revenues would be increased by only four per cent.

Mr. Irwin pointed out that the increase to $2.4 billion in NOA was intended not to increase but to maintain expenditures. We had been living off the pipeline of $8 billion built up in the period 1953–1954. The President agreed that perhaps this was so, but while you were building up the pipeline, you created this budget problem. Mr. Irwin pointed out that military assistance constituted 17.2 per cent of the total defense effort in Belgium. If we adopted the proposed program with cost-sharing, the proportion would go down to 4.9 per cent in the period 1962–1966. The reduction for the Netherlands would be from 19.3 per cent to 10.3 per cent; for Portugal, from 27.7 per cent to 7 per cent; for Japan, from 19.8 per cent to 9 per cent; and overall, from 17.7 per cent to 8.2 per cent. The President asked Mr. Irwin how much military assistance would increase U.S. exports and improve the U.S. balance-of-payments. Mr. Irwin said that we did not know that it would increase our exports, but it should maintain them. It would result in a decrease in the U.S. proportion of the defense effort in these countries and should have a good effect on the balance-of-payments.

Secretary Anderson observed that last year we had had a $3.8 billion balance-of-payments deficit. We had all agreed as to the necessity of improving the U.S. exports. This year exports had been increased by $4.5 billion. This should have meant a surplus in our balance-of-payments. Instead, we would have the biggest deficit in the history of the U.S. In the first quarter the deficit had been running at an annual rate of $1.8 billion. Now, however, it was anticipated that the deficit would be over $3 billion for the year and it was running at an annual rate of $5-$6 billion in the third quarter. We were going to have a terrible time with the problem of balancing the budget. He did not understand how we could balance the budget and still increase military assistance. The President said that he assumed that when Secretary Anderson referred to balancing the budget, he was talking about the cash budget. The plan as he understood it, called for military assistance expenditures in the same amount as in the past. He therefore could not see how military assistance would create a new problem so far as the cash budget was concerned. Secretary Anderson replied that if NOA was raised, expenditures eventually had to increase.

Secretary Gates suggested that the Council look at this program from the defense standpoint for a moment. This program was interrelated with U.S. deployments. It was a better program, he felt, to support Free World strength than the alternatives to it. The President asked whether any dependents had been ordered back from overseas. He suggested that we had better stop sending them overseas. Secretary Gates observed that we were faced by a very serious choice. He understood the balance-of-payments and budget problem and had himself emphasized their importance. However, the proposed program was a better program to base ourselves on than on some of the other things that we were doing. He noted that the program would be subject to annual review.

Secretary Anderson stated that the dollar was under pressure and that the world was watching us. The promises that had been made in this campaign had triggered a run on the bank; something else might have triggered it if the campaign had not done so. We were saying in the campaign that we were going to appropriate more without raising taxes. The only alternatives then were to borrow and inflate or to impose controls. Those abroad who held our money knew that these were the alternatives. They could pull out their deposits in this country and we would be off the gold standard.

Mr. Stans pointed out that there had been no discussion with Budget about resources in the development of this plan. He felt there were some facts that needed to be considered in this connection. The mid-FY 1961 budget review had indicated a surplus of $1.1 billion. We know that the situation has since eroded. Although we could not say so publicly, it was possible that we might end the year in the red. Defense expenditures were moving up as a result of action by the Services and revenues were down because of reduced corporate profits. It would not be critical if there was a deficit this year but this year’s budget provided the base for the next one. The FY 1962 budget had built-in increases for civil programs of $1.75 billion. In addition, Congress had earmarked $800 million of revenues for highway construction. Together these two items made a total of over $2.5 billion of added charges and would eat up all of the expected revenue increase without a single new program.

Looking down through the years, we faced an even greater problem. A Library of Congress study indicated that the U.S. national debt was $90 billion more than the debts of all other Free World countries put together. Our per capita debt was also larger. We owed tremendous amounts beyond this for past services in the form of military and civilian retirement. We had a $300 billion obligation to veterans. These commitments totaled three-quarters of a trillion dollars. These chickens were coming home to roost in the form of $1.5-$2 billion increases each year in budget expenditures.

Our aggregate defense expenditures, Mr. Stans pointed out, were almost ten per cent of our GNP. In all the countries to which we were providing assistance, the percentage was substantially less. For example, the figure for NATO countries was less than five per cent.

The Council was not being asked to approve the five-year plan but it was being asked to approve a program of the general order-of-magnitude proposed for FY 1962, subject to budget review. Presumably, it was intended that such review should be as to details only. This planning concept was not being presented with the details which were usually presented in connection with the budget. It started out with the so-called strategic objectives which frequently exceed MC–70 objectives. We did not take account of the willingness of the countries themselves to support these strategic objectives. The strategic objectives call for ten divisions for Italy as compared with five under MC–70. Since even the lesser MC–70 goals were not going to be achieved, it was unrealistic to plan for larger goals. The proposed program of $11 billion for five years was sixty per cent more than Congress had been willing to appropriate in the last five years. There was no indication as to what the plan would require in defense support assistance which was a substantial part of the Mutual Security Program. Apart from their political unwillingness to meet the strategic objectives, some countries, for example, Korea, want to reduce those objectives. There was no indication that such desires were taken into account in the development of the plan. There was also no indication as to whether the plan took account of Soviet intentions to reduce Russian forces.

Mr. Stans went on to say that there were no indications that reductions had been made in other programs to take account of missiles to NATO; for example, to take account of the recent MRBM decision.⁷ Secretary Gates observed that he had previously noted the relationship between these decisions and the military program. Mr. Stans stated, however, that we had done nothing but note the relationship. He also pointed out that there were various studies on NATO presently underway which could affect our assistance programs and that NATO planned to review the MC–70 goals in the spring. It was difficult, he said, to judge the proposed program without reference to the military strategy. It was also difficult to see why we could induce other countries to do more only by increasing our own assistance. They might increase their efforts more if we reduced our aid. He agreed with sub-paragraph a of the proposed Record of Action but he could not agree with the proposal that the Council concur in the proposed FY 1962 program. Military assistance should compete with the rest of the defense budget; that had been the idea a year ago when we had put military assistance in the defense budget. Mr. Stans concluded by stating that for years now we had transfused our strength to European countries. Now they were strong. We could not continue these transfusions without reducing our own strength.

Mr. Irwin noted that the military assistance plans were aligned with strategic policies in NSC documents. The Joint Chiefs of Staff based their strategic objectives on the policies of the NSC. He went on to say that, as had been stated, MC–70 objectives were slightly smaller than JCS strategic objectives. Of the ten divisions included in the strategic objectives for Italy, five represented the NATO first line requirement and the other five represented the NATO second line requirement. These latter five had never been at full strength and were not fully supported in the plan. The plan provided for support at a level which would mean minimum achievement of objectives. If these objectives were to be implemented fully, it would cost $25 billion. The $11 billion provided for in this plan was less than one-half of the cost of meeting the JCS strategic objectives. We do, Mr. Irwin stated, take account of Soviet actions in everything relating to our forces and to military assistance. However, the recent NIE on the Soviet force reductions indicated that the reduction in Soviet military manpower did not involve reduction in Soviet military strength. The Soviet action was designed to strengthen Russian military forces and to make manpower available to the economy. There was a question also as to whether they would in fact carry out their present plans. He noted that the Soviets were well into the second generation of modernization whereas, if the proposed five-year plan were carried out, European forces would still be heavily dependent on obsolete equipment. He agreed that the MRBM decision had to be considered in relation to this plan. He said that, of course, we could not be sure how the review of NATO strategy would come out but it was his guess that we would come out with basically the same strategy, which was based on agreed political strategy. If we continued to accept a forward strategy, there might be some changes in military assistance—for example, there might be increased modernization—but the plan would not be basically affected. All of this planning had been approached from the point of view of our own interests and had attempted to take account of the balance-of-payments and economic problems. The Mutual Security Program, in both its economic and military aspects, is essential to the maintenance of the Free World position and U.S. leadership. To reduce it substantially would have dangerous repercussions on the political, military, and psychological side that were similar in character to what Secretary Anderson was worried about on the financial side. This was only one of the programs included in the budget and was de minimus so far as balance-of payments effects were concerned. All programs, he felt, should be looked at with the same care.

The President observed that if the possibility of balancing the budget next year is being endangered, he would not send the budget forward without definite recommendations on taxes. Another problem was, of course, how much you could tax without slowing up the economy. You could increase taxes for a short time or in a wartime situation but we were talking here about the next forty years. There was not, however, much hope for getting favorable action on taxes. Attempts to eliminate the postal deficit and to get interest rates on a realistic basis had not succeeded. It just did not seem possible to impress Congress with the necessity for action. In connection with the President’s last remark, Secretary Anderson noted that it had not been possible even to get hearings on changing the exceptions in the tax laws relating to Building and Loan Associations and to cooperatives.

Mr. McCone asked why we could not get other countries to carry more of the load themselves and referred in this connection to the increases that had occurred in the gold reserves of several NATO countries. The President noted that he knew from his experience that people abroad did not look at the problem in terms of GNP. Instead, they compared standards of living and asked us in what ways we are making a sacrifice. They do not think of the problem in dollar terms as we were doing in this discussion. Mr. Stans referred to the chart included in Mr. Irwin’s presentation, which indicated that $9.4 billion in military assistance expenditures would induce $93 billion in country effort. This kind of analysis overlooks the fact that U.S. defense expenditures are $45 billion per year, or $225 billion for the next five years. Mr. Stans wondered why we could not convince other Free World countries that, if we were going to be spending this much on their defense, they should not put more into their defense.

Secretary Herter reminded the Council that the five-year plan called for $1 billion per year for NATO countries of which only $200 million went to the five countries with which we were most immediately concerned. This was a relatively small percentage of the overall budgetary problem. Someone would have to exercise judgment as to its importance in relationship to other programs but State and Defense had done the best they could to develop a program of manageable size. If you asked the Italians to increase their defense budget, they might throw the government out. It was very difficult to get increased defense expenditures approved by the Italian Parliament when the income in the south of Italy was ten per cent of ours. Secretary Anderson suggested that, if we had to, we should say that all military training will be done in the U.S. It was being said that if we did not furnish military assistance, these countries would not meet their military needs through purchases. If this was the situation, we had better find it out. It was important that we find out whether these countries were interested in defending themselves. Secretary Anderson referred to the fact that when the U.S. had run a budgetary deficit in 1958, the Central Bank of Italy, under the instructions of the Italian Parliament, had withdrawn $2.5 billion in gold from the U.S. He said that the President had provided real leadership on these fiscal problems but the question was how we were going to raise the money required to support such programs. He noted that half our deficit since 1945 was accounted for by the Post Office and yet we could not get Congress to raise postal rates.

The President observed that you could not take this problem in a vacuum. If the problem was to be solved and stay solved and if you were going to avoid disaster, you would have to look at the whole budget. However, as long as we were facing a Soviet threat, we would have to make defense the prime factor. We should cut other programs and also require the Defense Department to make some hard decisions. Finally, additional revenues might possibly be needed. Secrectary Anderson felt we should tell other countries that if they want a tank, they should buy it. He pointed out that cost-sharing programs had resulted, in the case of the F–104, in the construction of a competitive aircraft factory in Europe at a time when two of the existing six aircraft factories in the U.S. could meet all U.S. defense needs. In the long run you could not live with this kind of situation.

Mr. Stans suggested that the difficulty was that we always assumed that we should do more; we started with a $2.5 billion program and then discounted it. We need first to determine what you could buy for $2.4 billion and submit the results to the usual budgetary review. We should also take a look at the effects of a lower figure—say, $1.5 billion—on our defense position. Sacrifices had to be made; to start with the presumption that we had to do more was fatal.

Secretary Dillon pointed out that in the preparation of the plan the planners had taken account of defense support. They had assumed, in developing their plans, that defense support would not increase, but would instead be phased out in accordance with the requirement of the Mansfield Amendment. The possible reduction in Korean forces would not, he said, result in a decrease in military assistance, although it might possibly mean a reduction in defense support. Such a manpower reduction in Korea would be based upon provision of better equipment to the Korean forces. He did not ask now for a determination of the level of one part of the budget, but he wanted to be able to submit a program of this magnitude to the Bureau of the Budget which could then look it over in detail. The military assistance program did not stand out in Mr. Dillon’s judgment as the program which should be cut before any other.

Mr. Gray, attempting to sum up the discussion, stated that he understood that it had been agreed that a decision on the FY 1962 military assistance program would not be taken in a vacuum; that is, in isolation from the rest of the budget. He pointed out that it had been suggested that there be a change in the determination contained in NSC Action 2275. This action provided that two countries were to be notified that military assistance will immediately be at a lower level and two others were to be advised of an eventual decrease in assistance. In response, the President stated that, as Secretary Anderson had pointed out, the problem was facing us right now and could not be dealt with on a gradual basis. The budget and balance-of-payments problem could destroy the defenses of the U.S. To say that we would tell other countries that we will reduce assistance to them next year or in two years would not solve the problem. Mr. Gray observed that these countries were to be told of our intentions at the time they are provided the figures for the FY 1961 program. The President stated that the world wants to know if we are going to meet our obligations. More and more he was beginning to think that this was a problem of revenue.

Mr. Gray turned to General Lemnitzer and asked whether, in developing the strategic objectives, the Joint Chiefs applied the same sort of hard judgments as when they developed U.S. force objectives. For example, were the strategic objectives for Pakistan really designed to deal with the Soviet threat? What part of these objectives reflected the desire of the Pakistanis to have forces of comparable size to those of India? The President observed that Pakistan was more afraid of Afghanistan than it was of India. Mr. Gray said that if that was so, the Afghan threat could be identified as a Soviet threat and his question was answered. However, if the U.S. defense budget was simply a compilation of unilateral Service requests, we would have a much higher budget than we did have. He wondered whether in arriving at strategic objectives we applied some judgment as to the ability of the country to finance such a military establishment. General Lemnitzer said that overall the Joint Chiefs did apply the same criteria as they applied in determining U.S. objectives. In Pakistan we had a variety of military objectives and we realize that these compete with economic needs. It was obvious you could not build Pakistani forces up to the point where they could withstand the Soviet Union if the USSR concentrated its forces against Pakistan. The program for Pakistan is pretty austere and of the kind that Ayub thinks he needs.

Mr. Stans stated that the FY 1962 program should be presented to the Budget in detail and that the Budget presentation should also include information on the sacrifices that would be involved in a lower program of, say, $1.5 billion. Mr. Irwin said that Defense was ready to submit details to the Bureau of the Budget. He pointed out that we did not plan to reinforce the conventional capabilities of NATO countries and that if the program were cut to $1.5 billion, you would be cutting NATO’s nuclear deterrent. The net effect, therefore, would be that NATO would have neither a defensive nor a nuclear offensive capability. The President suggested that Mr. McCone’s question was a good one—why were not these countries concerned about their own defense? Mr. Irwin pointed out that several of the countries receiving military assistance had increased their defense expenditures greatly and that we should be able to get further increases in their expenditures. The question here was whether the U.S. should continue doing what we were now doing. The President expressed the view that State and Defense should submit the proposed FY 1962 military assistance program through the budgetary process and that from that point it would be handled along with the rest of the budget.

Mr. Gray attempted to sum up the discussion, suggesting that the Council Record should show that the Council had considered the results of State-Defense planning and should reflect the fact that it was important to have long-range plans. In this connection Secretary Herter observed that such plans did not involve commitments. Mr. Gray went on to say that the Record would show that program levels for FY 1962 would be decided through the budgetary process. He asked whether the Record should show that no action had been taken on the Newport directive (i.e. NSC Action 2275). Secretary Dillon closed the discussion by stating that he would like to discuss the Newport directive with the President in the light of the Council discussion.

The National Security Council:⁸

a. Considered the report on long-term military assistance planning prepared by the Departments of State and Defense, as presented orally at the meeting by the Under Secretary of State and the Assistant Secretary of Defense (ISA); in the light of (1) the views of the Joint Chiefs of Staff (transmitted by the reference memorandum of October 28, 1960), as amplified orally at the meeting by the Chairman, Joint Chiefs of Staff, and (2) the views of the Secretary of the Treasury and the Director, Bureau of the Budget, on the U.S. balance of payments position and the situation with respect to the budget for FY 1962 and future years.

b. Agreed that decisions on military assistance program requests for FY 1962 should be made through the normal budgetary process.

c. Noted endorsement by the President of the principle of continued long-term military assistance planning. Noted, however, that this endorsement does not imply approval by the President of the specific plan presented at the meeting.

d. Noted that the Secretaries of State, Defense and the Treasury, the Director, Bureau of the Budget, and the Special Assistant to the President for National Security Affairs would discuss the subject further with the President.

e. Agreed to defer consideration of NSC 6014, “U.S. Policy Toward Italy”,⁹ pending further work on the FY 1962 budget.

[Here follows agenda item 2.]

Robert H. Johnson

0. Source: Eisenhower Library, Whitman File, NSC Records. Top Secret. Drafted by Johnson on November 2.
1. Taken November 11, 1959, paragraph b of NSC Action No. 2149 asked the Secretaries of State and Defense to prepare a report on “the future roles and contributions of the United States and other NATO nations with respect to the collective defense posture, as a basis for consultation with other NATO governments.” It specified the report “should provide guidance as to the main factors that should be taken into account, and what aspects should be emphasized or deemphasized in the future.” (Department of State, S/S–NSC (Miscellaneous) Files: Lot 66 D 95) Regarding NSC Action No. 2158, see footnote 13, Document 250. Regarding NSC Action No. 2275, see footnote 6, Document 261. Regarding Lay’s July 20 memorandum, see footnote 1, Document 261. Copies of Boggs’ October 7 and 28 memoranda are in Department of State, S/S–NSC Files: Lot 63 D 351.
2. Not printed.
3. Distributed as an attachment to Boggs’ October 7 memorandum. (Eisenhower Library, Special Assistant for National Security Affairs Records, NSC Series, Policy Papers Subseries, NSC 5916)
4. Not found.
5. Not printed. (Eisenhower Library, Special Assistant for National Security Affairs Records, NSC Series, Administration Subseries)
6. Dillon and Anderson visited Bonn November 19–23, Paris November 23–25, and London November 25–26. Documentation on their trip is in Washington National Records Center, RG 59, Conference Files: FRC 83–0068, CF 1781–1788.
7. Reference is presumably to a U.S. proposal to create a multilateral nuclear force in Europe.
8. Paragraphs a-e constitute NSC Action No. 2326. (Department of State, S/S–NSC (Miscellaneous) Files: Lot 66 D 95, Records of Action by the National Security Council)
9. Dated August 16, it is scheduled for publication in volume VII, Part 2.