Foreign Relations of the United States, 1958–1960, Eastern Europe; Finland; Greece; Turkey, Volume X, Part 2

332. Telegram From the Department of State to the Embassy in Turkey⁰

Washington, March 4, 1959, 9:09 p.m.

2786. Deptel 2304 to Ankara.¹

Deliver following letter from Under Secretary Dillon to Foreign Minister Zorlu:

“March 5, 1959

Dear Mr. Minister:

As a result of our discussion last December² when you explained to me the desire of the Government of Turkey to allocate TL 632 million of counterpart funds to meet a projected deficit in the 1959 budget of the Ministry of Defense, the United States gave intensive and careful consideration to this problem in the light of the Turkish economic stabilization program which the Government of the United States has strongly supported, directly through its own financial resources and indirectly through its participation in the International Monetary Fund and the organization for European Economic Cooperation.

I concluded at that time, that although the programs agreed upon with the IMF and the OEEC contemplated that the budget would be financed from revenue, and that the financing of new investments of the State Enterprises would be made from non-inflationary sources including Defense support counterpart, an increase in the allocation of counterpart to the Ministry of Defense to a level not exceeding TL 350 million would not jeopardize the stabilization program as a whole. (The figure of TL 350 million is, of course, a relatively high one. It represents an increase of more than 100 percent in the amount of counterpart funds of TL 170 million allocated to the Ministry of Defense during the Turkish Fiscal Year 1958, as well as a significant increase in the ratio of U.S. support to the Defense Ministry’s proposed budget, even at its higher level. In addition to counterpart financing, the United States is contributing to the defense budget through sizeable amounts of military hardware and common use items.)

I had assumed, also, that if the Turkish Government nevertheless decided upon a level of defense expenditure higher than could be financed from the sum of TL 1,156 million in Turkish revenue already allocated to the Defense Budget, plus the TL 350 million from the counterpart funds, the Turkish Government would, in accordance with its undertakings to the IMF and the OEEC, find the necessary revenue elsewhere in the budget without creating a budget deficit which would involve recourse to the Central Bank with consequent inflationary effects.

When I learned that Prime Minister Menderes had conveyed to Secretary Dulles and Secretary Anderson³ his satisfaction with the results of our December discussions, I was happy to conclude that the matter had been settled.

I was, therefore, surprised to note in Your Excellency’s letter on January 5⁴ that the Government of Turkey still desires to finance a defense level of TL 1,788 million in expenditures by requesting the use of counterpart to meet the whole of an estimated deficit of TL 632 million.

The use of additional United States defense support counterpart as an exceptional emergency measure to meet the deficit of the Ministry of Defense could easily leave exposed a more dangerous potential source of inflation in Turkey, namely, the investment programs of the State Enterprises. As you and Minister Polatkan will recall, a key factor in the Turkish stabilization program was the intention of the Turkish Government to avoid recourse to the Central Bank as a means of financing either a budgetary deficit or the investment program of the State Enterprises, and substantial reliance was to be placed on the use of the lira counterpart of foreign financial aid for the non-inflationary financing of this investment program. If, however, too large an amount of counterpart is diverted to the budget, there may not be enough available to support the investment program of the State Enterprises and possibly other necessary activities.

The fundamental objective that has guided United States thinking on this subject is that the United States wishes to provide the maximum support to Turkey’s effort to achieve its economic stabilization program, not only for greater stability in the present, but also as the most effective foundation on which both economic and military strength can be built in the long run. Unfortunately, we do not have information as to the projected level of the investment programs of the State Enterprises and manner in which the Government intends to fulfill its determination that these programs will be financed in a non-inflationary manner. I think you will agree that, viewing the stabilization program as a whole, it would be most unwise to reduce unduly the counterpart available for financing these investment programs until the scope of these programs is known. We are reluctant, therefore, to agree to a release of additional counterpart (i.e., beyond TL 350 million) until it is clearer that all sectors will be financed without recourse to inflationary financing.

The United States Government would welcome a fuller picture of Turkey’s over-all financing requirements and resources, including the investment programs of the State Enterprises, so that defense and investment needs can be weighed against available non-inflationary financing before any change in the current United States proposal for utilizing remaining counterpart is made.

I am happy to note from your letter that you have discussed these matters in a preliminary way with the United States Operations Mission Director and other United States representatives in Ankara. I would hope that you will continue to consult with them.

I am sure you know that the United States Government wants to see a satisfactory solution to the budgetary and other problems faced by Turkey in its efforts to maintain an adequate defense posture while developing the economic structure to enhance the well-being of the Turkish people.

With kindest personal regards,

Sincerely yours, Douglas Dillon

Under Secretary for Economic Affairs”

At time of delivery letter you should state US hopes that in course of consultations referred to in letter a careful joint review could be made by Minister of Defense and Chief of US Military Assistance Group in Turkey to discuss military consequences of alternative levels of defense expenditure. FYI. It is understood that in conducting such discussions U.S. officials would keep in mind our over-all objectives in assuring effective stabilization of the Turkish economy. End FYI.⁵

Dulles

0. Source: Department of State, Central Files, 782.5–MSP/3–459. Confidential; Verbatim Text. Drafted by Leddy, C. Ide of ICA, V. Mitchell of Treasury, and Boardman; cleared by GTI, NEA, ICA, and Defense; and approved by Dillon. Pouched to Paris for USRO.
1. See footnote 4 below.
2. December 9, 1958. A memorandum of their conversation is in Department of State, Secretary’s Memoranda of Conversation: Lot 64 D 199.
3. Apparently reference is to a December 18, 1958, message from Menderes to Dulles in which Menderes expressed his thanks for the release of counterpart funds to Turkey. A copy of the letter is Ibid., Presidential Correspondence: Lot 66 D 204.
4. No copy of this letter has been found. However, the substance of the message was reported in telegram 2304 to Ankara, January 21. In the letter Zorlu requested an increased allocation of counterpart funds to the Turkish defense program. (Ibid., Central Files, 782.5–MSP/1–2159)
5. In telegram 2630 from Ankara, March 13, Warren reported that he had delivered Dillon’s message to Zorlu on March 7, and that on March 11 Isik indicated that the Government of Turkey was committed not to finance State Enterprise through the central bank. (Ibid., 782.5–MSP/3–1359)