Foreign Relations of the United States, 1961–1963, Volumes VII, VIII, IX, Arms Control; National Security Policy; Foreign Economic Policy, Microfiche Supplement

330. Memorandum from McNamara to Rusk, July 3¹

July 3, 1963

SUBJECT

• Balance of Payments

In a memorandum dated April 20, 1963 to the Cabinet Committee on the Balance of Payments, the President requested that I submit recommendations on specific actions which could be completed by the end of 1964 with a target of a gross reduction in the annual rate of Department of Defense expenditures abroad of $300–400 million below FY 1963 levels.

A draft memorandum to the President in response to his request is attached.

May I have your comments on the course of action recommended in the memorandum.

Robert S. McNamara

Attachment

SUBJECT

• Reduction in Department of Defense Expenditures Entering the International Balance of Payments

This is in reply to your Memorandum for the Cabinet Committee on Balance of Payments, dated April 20, 1963, which requested, in part, that after consultation with the State Department, I recommend specific actions, capable of completion by the end of Calendar Year 1964, which would achieve a gross reduction in the annual rate of Department of Defense expenditures abroad of between $300–400 million below the FY 1963 level.

Department of Defense Expenditures Overseas

In the absence of action along the lines recommended and discussed below, Department of Defense expenditures entering the international balance of payments during FY’s 1963–66 are estimated as follows:

	($ Millions)
FY 1963	$2,739
FY 1964	2,686
FY 1965	2,700
FY 1966	2,698

These estimates are based on the currently planned deployment of our military forces and the continuation of all current Department of Defense programs designed to reduce expenditures overseas and increase foreign military receipts. They also reflect a moderate increase in price and wage levels overseas anticipated for this time period.

As you know, I have made a concerted effort during the past year to reduce the net adverse balance of Department of Defense transactions entering the international balance of payments. During the period FY 1961–63, the net Department of Defense adverse balance, i.e., gross expenditures overseas less receipts, was reduced by approximately $850 million—from $2,334 million to $1,477 million. This reduction was achieved by holding our expenditures relatively constant despite increased international tension and inflation abroad, and by increasing receipts.

With respect to these greater receipts, Germany and Italy have agreed to offset all or part of our defense expenditures in these countries by increased spending for U.S. military goods and services. Our efforts to increase sales of U.S. military equipment to other allied countries will continue to be pressed. However, we believe that the $1 billion of annual receipts projected for the period FY 1964–66 are a realistic maximum.

Guidelines for Developing the Actions Proposed Herein

Further actions to reduce Department of Defense expenditures overseas as outlined in Attachment A are based on the following:

1. U.S. commitments of effective military forces will continue to be met.

2. A gradually increasing capability of the Armed Forces to deploy rapidly will permit some reduction in other forces permanently in-place overseas.

3. Our increased strategic missile capability will permit, by the middle of CY 1964, somewhat less reliance on overseas based manned bombers.

Summary of Recommended Actions

The actions affecting our present deployments in Europe are:

1. The consolidation on four bases and some reduction (from 103 to 80) in our present B–47 Reflex posture by July 1, 1964.

2. The transfer of the responsibility for the air defense of Spain to the Spanish Government by January 1, 1965.

3. The return of the F–102 air defense squadron from Iceland by July 1, 1964.

4. The use of increased MATS capabilities to permit the return of 32 C–130 aircraft from France by April 1, 1964.

5. A reduction in the Army Line of Communications (LOC) in Europe predicated on some reductions in theater reserve stocks, relocation of issue stocks and placing in standby status certain facilities in Western France.

In the Pacific, the more important redeployment actions recommended are:

1. The elimination of the obsolescent B–57 wing in Japan 6 months earlier than programmed (i.e., July 1, 1964). The 12th Tactical Fighter Wing (F–4C aircraft) now programmed to deploy to Japan upon the phase out of the B–57 wing would be retained in the U.S. to increase our capability to respond to contingencies elsewhere in the world.

2. The return to the U.S. of 16 C–124 transports from Japan and 16 C–130 transports from Okinawa by October 1, 1964, using our increased airlift capabilities to meet much of the Pacific logistics requirements, reduced by the redeployments.

3. The return to the U.S. from Japan of the 66 F–102 aircraft (20 of which are presently programmed to be removed by July 1, 1964) and the transfer of the responsibility for the air defense of Japan to the Japanese Government by approximately January 1, 1966, utilizing the increased capabilities of the Japanese Air Self Defense Force, and the increased capabilities of the USAF to rapidly deploy F–4C aircraft to Japan during the periods of tension or at the outset of hostilities for air defense missions.

In addition, I recommend a series of actions which would produce foreign exchange savings in such areas as contractual services, POL procurement and construction. We also anticipate that savings will be achieved through better personnel management. All of these actions are discussed in greater detail in Attachment A.

Effect of Recommended Actions

My recommended actions would achieve in CY 1965 and FY 1966 a reduction in overseas expenditures of approximately $300 million below the FY 1963 level as follows:

($ Millions)
	Current Estimate	Revised Estimate Under Proposed Actions*
FY 1963	$2,739	$2,739
FY 1964	2,686	2,671
FY 1965	2,700	2,506
FY 1966	2,698	2,434

* Attachment B provides a detailed analysis of U.S. defense expenditures overseas.

Although the redeployments of Air Force units reduces our forward deployed forces, they would have a desirable effect on our capabilities to respond to contingencies anywhere in the world. A smaller portion of our forces would be engaged in substituting for allied self-defense forces, more would be available for concentrated use as conditions may dictate, and a smaller number would be deployed on the more vulnerable forward bases.

Nevertheless, the actions relating to Japan go beyond the specific recommendation contained in Mr. Gilpatric’s memorandum to you of February 8, 1963 relating to U.S./Japanese Defense Relationships. They involve a considerable withdrawal of aircraft from Japan. However, they are militarily desirable, apart from gold flow considerations, in the sense that they increase our reaction capability elsewhere. In addition, they emphasize for the Japanese our belief that Japan must depend more on its own self-defense capabilities in the future. In this connection I have been disappointed by the current level of Japan’s defense expenditures.

I believe the minor adjustments of Army strength in Europe are desirable, gold flow considerations notwithstanding, in the interests of better organization and management of our resources. This applies particularly to the reorganization and streamlining of the Army Line of Communications (LOC) in France. However, the Joint Chiefs of Staff state:

“The reduction in the Army LOC in Europe could have an adverse impact on the Army combat capability. Three areas of principal concern are the ability of the Army to respond quickly to an emergency in Europe after the cuts are made, the concentration of stocks in the forward area, and the extremely important politico-military implications of placing a part of the LOC in Western France on standby and reducing war reserve levels to 90 days. I believe this adverse impact can be minimized by cooperative logistics agreements in the form of joint depot utilization in Western France, by maintaining a capability in CONUS and Europe for rapid expansion in an emergency and by insuring that adequate airlift and sealift are available for a rapid reconstitution of the LOC.”

The possible termination of the Caribou program in Canada has been under review for some time. The FY 1963 procurement was undertaken in part to retain the option of using that aircraft if no more desirable alternative developed in the future while at the same time permitting some continued improvement in Army capability. Continuing study of this matter has led to the conclusion that the 157 Caribou on hand and on order as of June 30, 1963 will be adequate to meet our requirements in view of the availability of C–130E’s.

During your meeting with Prime Minister Pearson on 10–11 May 1963, you indicated that we were then reviewing our requirement for the Caribou. You will, of course, remember that we are committed to consult with the Canadian Government before any termination notice is announced. When I met on June 6 with Mr. Drury, the Canadian Minister of Defense Production, I told him that Caribou would have to compete on its own merits against other alternative solutions to the Army’s air transport problem. Thus, termination of Caribou procurement will not surprise the Canadian Government even though it will undoubtedly be disappointing.

I have consulted with the Joint Chiefs of Staff with regard to the military acceptability of the foregoing measures. While recognizing the compelling economic issues inherent in the current balance of payments problem, they point out that “most of the measures designed to control gold outflow work against the military desideratum of maintaining a forward strategic posture based upon the deployment of substantial military forces in sensitive strategic areas overseas. The actions recommended in this memorandum which entail bringing home Air Force Units will, in varying degrees, increase the reaction time of our military response, particularly in the areas of the Western Pacific. The proposed reduction in the B–47 forces overseas [a reduction of 23 aircraft for a period of a few months] will occasion a readjustment of strategic nuclear targeting and, for a limited time, will reduce the weight of our nuclear attack. Also, the Joint Chiefs of Staff have expressed concern over the effect on base rights in Iceland, Spain, and Japan of a reduction of U.S. garrisons there unless such reductions are preceded by careful bilateral negotiations. However, if the contribution of these actions to the solution of the balance of payments problem is considered to outweigh the military risk involved, then the Joint Chiefs of Staff accept the proposals.”

Consideration of Additional Actions

In arriving at these recommendations I have considered a number of other alternatives. These actions included possible redeployments of additional U.S. forces now in Europe and the Pacific, changes in dependents policies, early termination of the SAC Reflex posture in Europe, and a further reduction in overseas POL procurement. In the course of preliminary discussions, the Department of State expressed concern over the possible adverse political and economic repercussions of substantial redeployments or a significant curtailment of POL procurement overseas.

To cite one example of these political constraints, we estimated earlier this year that approximately $20 million of our FY 1964 requirement for aviation gasoline normally procured in the Caribbean area could have been returned to the U.S. by restricting bids to U.S. sources. The added cost of this action would have been only $322,000. When weighed against the fact that other procurements for use overseas are being returned to the U.S. at premium differentials up to 50%, this proposal was very attractive from the budgetary standpoint, and was militarily sound. However, in view of the State Department objections, the procurement of the first half of our FY 1964 requirement was not restricted to U.S. sources.

In addition to the actions recommended herein, I am investigating the following areas which may result in additional savings over those now projected:

1. A review of personnel requirements for DOD communications activities overseas. My preliminary review indicates that some reductions in this area may be desirable.

2. A review of overseas headquarters with a view to streamlining and/or consolidating them.

3. A joint review with the State Department of our over-all force posture in Korea.

4. A review of the Air Force tactical maintenance concept with a view to establishing such maintenance in rearward areas, thus increasing our capabilities for non-nuclear conflict while reducing overseas costs.

5. A review of the possible redeployment of the 1st Marine Aircraft Wing from Japan to Okinawa and a review of the redeployment of the F–105 TFW from Kadena, Okinawa, to Guam.

6. A review of certain of our forces committed to NATO and deployed overseas, keeping in mind the possibility of redeploying some forces to the United States and in turn demonstrating frequently our ability to deploy to Europe in support of NATO commitments.

Other Possible Savings

I believe that savings of any substantial magnitude over those herein recommended or being reviewed could be accomplished at this time only through: (1) substantial redeployments to the U.S. or other dollar areas, and/or (2) significant reductions in the dependents authorized overseas.

Recommendation

I recommend your approval of the actions proposed in Attachment A.

I have discussed these actions with Secretary Rusk and he concurs in recommending approval. Secretary Rusk also stresses the necessity for a carefully coordinated information and consultation procedure to ensure that:

1. These actions will not be interpreted as a U.S. withdrawal of commitment to maintain the integrity and freedom of the Free World.

2. The specific countries involved in the proposed redeployments understand our reasons and are assisted in making any necessary adjustments in their own defense posture.

I suggest that a reaffirmation along these lines be included in the statement which you plan to make in July relating to the balance of payments problem.

1. Solicits Department of State comments on attached memorandum to the President regarding DOD actions to reduce expenditures abroad. Secret. 10 pp. Department of State, Central Files, FN 12 US.