60. Memorandum From the President’s Deputy Special Assistant for National Security Affairs (Kaysen) to President Kennedy0

On Thursday1 you will be having lunch with the Finance Ministers and Bank Governors of the Paris Club.2 The list is attached at Tab 1.3 As you will remember this was a joint suggestion of Dillon and Ball. The main idea of having this luncheon was to talk to these people personally about the underlying cause of the deficit in our balance of payments, namely, our disproportionate share of the defense and aid burdens for the whole free world. These people have heard the song before but never in a way which would give them a real feeling of how central it is to your thinking. This is something that you can convey directly in a way no one else can. There follows a sketch of some of the points you might make. These points have been cleared with Ball, and they are quite similar to those which Dillon would ask you to make independently, which are shown at Tab 4, with the exception noted in paragraph 2.4
You should refer again, as you do in your speech,5 to the supplemental resources agreement of the IMF Paris Club and how we welcome it. Since these men represent the nine contributing countries other than ourselves, direct expression of U.S. appreciation is appropriate. You may want to say something here about the question of further developments in the international monetary field, in addition to what is in your speech. If you do, it could be along the lines of recognition that the expanded economic strength of other countries in the Free World could properly be reflected in their expanded role in the international monetary system. We recognize the fact that there is more than one way the system might evolve in relation to the central role of the dollar, and we do not foreclose consideration of alternative schemes of improvement for the payments system. (Note: Secretary Dillon would not welcome such a statement. It would mean your taking a public position on the issue of whether we are or are not committed to maintain the dollar as a major international currency in the long-run.)
A few figures. Our deficit last year was $2.5 billion. This year, as Dillon will have said in his bank speech, we expect it to be somewhere in [Page 150] the neighborhood of $1.5 billion. Set against this a net military expenditure abroad (after receipts from military sales and other offsets) of $2 billion, and untied aid expenditures which have been running over $1 billion, which we hope to get down below $1 billion this year. Thus, more than the whole of our deficit arises from military and aid expenditures.
It is worth noting that our military expenditures involve gross payments abroad in the neighborhood of $3 billion. Two-thirds of these payments are in the NATO area where all your auditors, except the Japanese, come from. The Swedes, although neutral, are just as much beneficiaries of these expenditures as the members of the NATO Alliance and they know it. By comparison, NATO members undertake very little in the way of foreign military expenditures except for the UK, other than those connected with offset purchase arrangements with us. We will try to reduce these expenditures to the extent that they do not impair the common security. However, we cannot reduce them substantially unless someone else picks up more of the burden. This is especially true in the NATO area. At Tab 2 are attached estimates of the military budgets of the NATO countries and the portion reflecting foreign expenditures by them. The only substantial figure, besides that of the UK, is the German, and that reflects chiefly the military sales agreement with us. Also attached are the figures that Secretary McNamara gave to General Eisenhower about German military strength and expenditures at your suggestion. These figures do not of course reflect the substantial internal burden of our defense costs, which are likewise high in relation to those of our allies.

The European countries tend to be more critical of our aid expend-itures than of our military expenditures. Sometimes they have viewed them as reflecting American notions which are not really their concern. It is important to make the point that aid expenditures are security expend-itures in behalf of the free world just as much as military expenditures are. There may well be differences of view about transactions with particular countries and criticism has tended to focus on these, but by and large the rest of the world is recognizing that aid is in their, as well as our, security interest and begin to join in bearing the burdens. They have understandably in the last years focussed their efforts on their own reconstruction and their own economic progress. Now that they are making such striking success even though we have tied their aid for a year, we are still more liberal in this respect than any other donor. The $1 billion of untied aid that we continue to give out of our total aid budget of nearly $5 billion is larger absolutely and proportionately than the untied aid of other national donors combined, excluding the International Bank and affiliated institutions.

Further, in the 2-1/2 years since our governments agreed to increase capital flow to the less-developed countries through DAC (of which [Page 151] Sweden is not a member), although the total flow has increased, the share of the U.S. has increased rather than decreased.

The Europeans sometimes view aid as merely trade promotion. This is more true of their aid than it is of ours, since most of their aid loans are for short-terms at high rates. In these circumstances we cannot continue to extend long-term, low-rate loans, since in effect our aid is merely used to repay their loans. It is important for this to be recognized and for the terms of their loans to move closer to ours. In rejecting the notion that our aid is merely trade promotion, you might point out that we have a substantial export surplus on commercial account, excluding any AID- financed exports. It was about $3 billion last year.

We have borne the burden because we think it is in the interest of free world security; we know that our own security is intimately tied up with that of other major nations in the free world but they must recognize the converse relation. They must remember that during the period when they were unable to make any contribution we willingly carried the whole load alone. Just with respect to the six common market countries and the UK, we have extended in the past a total of $33 billion worth of foreign aid since 1946 (see Tab 3, which breaks these figures down by categories and countries). (It is worth noting that since more than half the aid was extended before 1950 when prices were substantially lower than they are now, this total would be more than $40 billion in current prices.) In addition to this sum, we have disbursed a larger amount (about $55 billion) to the rest of the world over the same time period. We do not remind others of this in order to earn their gratitude, but simply to point out that we bore the responsibility when we could, and if others do not join when they can and we no longer can do it all, our common security will be impaired.
The conclusion to be drawn from all this is that while both continued strong effort by the U.S. directed at reducing unnecessary overseas expenditures by the government and promoting exports and further strengthening the international payments machinery in train the problem of the U.S. balance of payments reflects fundamentally the problem of political responsibility in the free world and cannot be considered independent of that problem.
  1. Source: Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, Bank Fund Meeting. Secret.
  2. September 20.
  3. Also known as the Group of Ten.
  4. None of the tabs is attached or has been found, but see footnote 4 below.
  5. Tab 4 may be the same as Document 61.
  6. Regarding President Kennedy’s speech to the Boards of Governors of the World Bank and the International Monetary Fund on September 20, see Document 62.