52. Memorandum From the Assistant Secretary of State for European Affairs (Tyler) to the Under Secretary of State for Economic Affairs (Ball)0

SUBJECT

  • US/FRG military balance of payments negotiations

The next military balance of payments meeting will be held in Secretary Dillon’s office at the Treasury on Monday, October 9 at 4:30 p.m.1 Participants, in addition to Secretary Dillon and yourself, will be Ambassador Dowling, Deputy Defense Secretary Gilpatric, Mr. Charles Sullivan (Treasury), Mr. Henry Kuss (Defense), and Mr. C. Arnold Freshman (GER).

The tactics for dealing with the current military balance of payments negotiations and the prospective additional foreign exchange expenditures involved in the augmentation of US forces in Germany will be considered. In this connection, it may be anticipated that State will be asked to join Treasury and Defense in agreeing to the position incorporated in the Treasury draft of September 29, 1961 (Tab A).2 In essence, this position contemplates the early expansion of the scope of the current negotiations (underway since April and directed at correcting an existing military payments imbalance) to include consideration of the additional financial problems which will develop in the event that US forces in Germany are augmented. The Ambassador, on the other hand (Bonn’s 700 at Tab B),3 has recommended that the current negotiations be pursued to a conclusion and that the problems associated with a possible augmentation of the US forces be considered separately in a negotiating framework which emphasizes primarily the common defense rather than the balance of payments aspects.

The Current Negotiations

The current balance of payments negotiations with the FRG have as their objective the conclusion of a multi-element package which will largely offset the present US military payments deficit.

A major element of this package is increased German military procurement in the United States. The Embassy has recently estimated, on [Page 130] the basis of discussions held thus far, that the FRG procurement for the period January 1961-March 1962 will be approximately $400-450 million.

In its draft, the Treasury notes that the technical level discussions of the various package elements have been slow. While true, it should be noted that this cannot be attributed solely to problems raised by the German negotiators. (Some of these, in connection with a long-term German commitment on procurement, are elaborated upon in a recent Embassy draft on this subject at Tab C.)4 Lack of rapid progress is as much attributable to delays in Washington guidance on such key points as joint use of facilities, reduction of US war reserves, availability of weapons systems, and use of facilities in third countries.

Prospect of US Troop Augmentation in Germany

Even assuming that the current negotiations can be successfully concluded, an additional foreign exchange problem of sizeable dimensions will arise if US forces in Germany are augmented. In anticipation of this the Ambassador has made certain recommendations for raising this problem with the FRG. From the summary of his recommendations and the summary of the Treasury-Defense position below, it appears that there is agreement on the objective but not on the tactics.

The Ambassador’s Recommendations

Ambassador Dowling has recommended that the current balance of payments negotiations be actively pursued to a conclusion. He favors early resort to a new, separate approach to the FRG to discuss the financial implications of augmentation of US forces in Germany.

The Ambassador’s recommendations are based on the following considerations:

1.
We stand a better chance of securing increased German efforts if the problem of troop augmentation costs is considered in a framework of joint US/FRG military efforts for the common defense rather than purely as a balance of payments problem;
2.
The scope or objectives of the current balance of payments negotiations are not such as to permit sole reliance on them as a vehicle for increasing German contributions to the level required by augmentation because:
a)
a long-term German procurement commitment cannot be envisaged. (In addition to the prevailing uncertainty with respect to NATO military requirements and future economic trends—which might, for example, encourage the Germans to build up their own armaments production—[Page 131]there are political and, to some extent, legal problems which make it difficult for the FRG to enter into such a commitment.)
b)
no package proposal presently envisaged can provide the leverage we require. (In the Treasury draft substantial negotiating leverage is attributed to the readiness of Defense to provide German forces with a Cooperative Logistics System. Whether this is in fact the case cannot be determined until the term Cooperative Logistics System as used by Treasury and Defense is more precisely defined so that all three agencies have a clear understanding of what is being offered, as well as what the offer is worth. It is important, for example, to understand that giving the Germans a supply service and sharing our reserves with them applies only to those military items which we both use. The offer to share war reserves may have less magic than is implied, since in event of hostilities we, as the Germans and our other Allies are aware, would share these reserves. Thus the Germans may be unwilling to pay for something they would expect to get for nothing if the need arises. Another consideration is that the bulk of our military supplies are stored in France. The French would, of course, have to be informed of any large scale US-German sharing arrangement. This could be a particular problem if, in order to share our equipment with the Germans, it became necessary to construct additional facilities in France.
c)
the contingency aspect of augmentation might of itself result in the slowing down of the current negotiations.

The Ambassador proposes in essence that the financial problems of the augmentation be covered within a political framework, with the Germans simply being asked to take on this increment in our foreign exchange deficit as a responsibility of their country in the present international situation. The Ambassador suggests that prior to October 17, he and, if possible, Secretary McNamara or Deputy Defense Secretary Gilpatric lay before the Germans the entire range of problems arising out of US and FRG preparedness actions. The objective of this presentation would be to impress upon the FRG the need for urgent action and to lay the groundwork for the political decisions which the new FRG Government must take. Shortly after the new government is installed, i.e., after October 17, the Ambassador proposes that negotiations on the specific problem of meeting the costs of augmenting the US forces take place in Bonn. The Ambassador would hope to be joined by State, Defense and Treasury representatives from Washington, preferably at the Under Secretary level.

The Treasury-Defense Position

Substantively, the Treasury-Defense position contemplates an immediate fusion of the current negotiations which have been underway since April with consideration of the future additional foreign exchange problem which will develop in the event of US military augmentation. In [Page 132] terms of the mechanics, it is the Treasury-Defense recommendation that the current negotiations be raised from the technical to the political level by the despatch, immediately following the installation of the new German Government, of a letter from the President to the Chancellor. This would be followed by the despatch on or about October 20 of a State-Treasury-Defense team headed by Deputy Defense Secretary Gilpatric to carry on the first phase of the “discussions.”

(In the previous Treasury draft the word selected was “negotiations”. The change may indicate a movement in the direction of the position recommended by the Ambassador at least to the extent of having actual negotiations preceded by an initial Dowling-Gilpatric presentation to the FRG designed to stimulate the Germans to lay the groundwork for the necessary political decisions, to impress upon them the need for action, and to elicit from them suggestions as to how best to proceed.)

Recommendations

For the reasons set forth by the Ambassador the current balance of payments negotiations should not be used as a vehicle for dealing with the foreign exchange problems arising from the possible augmentation of US forces in Germany. The current negotiations should be concluded as expeditiously as possible. The US augmentation problem should be raised separately at the political level along the lines proposed by the Ambassador.

  1. Source: Department of State, Central Files, 811.10/10-961. Secret. Drafted by Andrew Stalder (EUR/GER) on October 8 and concurred in by Robert H. Kranich (EUR/RA) and Martin. The date is handwritten on the source text.
  2. No record of this meeting has been found.
  3. Not attached. A copy is in Department of State, Central Files, 811.10/9-2961.
  4. Not attached. A copy is ibid., 811.10/9-2261.
  5. Not attached and not found.