APPENDIX

STATEMENT SUBMITTED BY EDWARD T. DICKINSON, MEMBER, FMACC, AT THE MEETING OF THE HOUSE FOREIGN AFFAIRS COMMITTEE, JUNE 22, 1950

USE OF COUNTERPART FUNDS FOR MDAP PURPOSES

I. Two types counterpart funds

A. Five percent of local currencies so received are set aside with title vested in the United States to meet ECA administrative local currency expenditures and to acquire strategic materials. United States title to these funds does not lapse at the end of ERP.

1. Such local currency funds surplus to ECA requirements for the above two purposes are transferred to the United States Treasury for use by other United States Government agencies. Under current legislation, the Treasury is required to debit a corresponding portion of dollar appropriations of such agencies when the local foreign currencies are transferred to these agencies.

2. ECA has no objection to congressional action permitting the use of the 5 percent local currency funds, which are surplus to the requirements of ECA as stated in ERP legislation, by other United States Government agencies without surrender to the United States Treasury of a corresponding amount of appropriated dollars. Nor does it object to the transfer of these 5 percent local currency counterpart funds to foreign governments for military or other purposes by gift or otherwise if Congress so desires. However, ECA would not wish to be held responsible for the administration of such funds for military purposes and 'would recommend that such administration be placed in the hands of the MDAP organization.

(a) As of April 30, 1950, ECA had transferred to the Treasury local currency counterpart funds in an amount equivalent to but not convertible into $21,316,000. It had a balance on hand of $157,875,000 in local currencies after authorized expenditures for administrative costs and strategic materials and after the abovementioned transfers to the United States Treasury. Against this balance on hand, commitments were outstanding in an amount of $21,538,000 in local currencies for acquisition of strategic materials. In addition, strategic material purchase negotiations are under way which will involve further commitments. ECA keeps the comparatively large balance in local currencies on hand in order to have funds available for the strategic materials program as it develops and to maintain a reserve for administrative costs and public information expenses in local currencies. It has been the practice of ECA to supply local currency funds to the Treasury on request, if it is considered that such requested funds are not required for ECA uses.

(b) At the present time the bilaterals under MDAP require that the local governments supply administrative and certain other costs in local currencies to the MDAP missions in those countries. Therefore, at the present time the use of the 5 percent local currency counterpart funds to meet the administrative expenses of MDAP would not represent a saving of dollars. There might, however, be other local currency expenditures by the MDAP missions which are not covered by the present bilaterals and in the event the 5 percent counterpart funds were made available for those expenses they would represent a saving in dollars for the MDAP program, provided that Congress had ruled that the MDAP Administration need not deposit an equivalent amount of appropriated dollars in the United States Treasury. The use of the 5 percent counterpart funds by foreign governments for military expenses and for additional military production would not decrease the dollar requirements of those countries until such time as they were in a position to produce items currently being procured for them under MDAP from new United States production.

B. The 95 percent portion of local currency counterpart funds is the property of the participating foreign governments but can be expended for purposes of eco

nomic recovery and development only in agreement with the ECA Administrator who acts after consultation with the NAC.

1. ECA is unalterably opposed to the diversion of these local currency funds from their present purposes by congressional action.

(a) Not only would legislative change be required but each of the ECA bilateral agreements would be subject to renegotiation.

(b) In the opinion of Mr. Harriman (and myself) such action by Congress would nullify in great part the tremendous accomplishments in the interests of the United States of both the ERP and the NAT. We cannot ignore the political implications of this major change in policy, particularly since it is contrary to our oft-repeated public assurances that the Marshall plan was not intended for military purposes in the guise of economic recovery. In light of the current widespread acceptance of the Communist-sponsored peace petition and the strong neutrality movement within Europe it would be unfortunate to provide the Communists with an effective propaganda weapon based on their contention that they were correct when they attacked the Marshall plan from its inception as a subterfuge to prepare western Europe once again for war.

(c) Even assuming the fundamental change in the Economic Cooperation Act and the bilateral agreements which would be required to permit the use of counterpart funds for military rather than economic recovery purposes, such use of counterpart funds would not, in fact, add to the total economic and military strength of the countries in question.

(1) Where counterpart funds have been used for investment purposes-as in France and Italy-they have been used to finance investments which are vital to the economic and military strength of those countries. In France, they have been and are being used for rehabilitation and development of coal mines, railroads, electricity facilities, etc.; in Italy, for essential agricultural reclamation, railroads, public works, steel production facilities, etc. Since these are all essential productive uses which have been proposed by the governments in question and reviewed by ECA, diversion of counterpart funds from them would weaken the economic strength upon which the military strength of these countries must be based, and so would not result in any net gain in terms of total economie and military strength.

(2) In countries such as Norway where counterpart funds have been sterilized because strong inflationary pressures make it unwise to expend additional funds on investment projects, the same reasoning would apply to their use for military expenditures. Inflation would cause grave harm in terms of both economic and social dislocations, and so would jeopardize the military preparedness program.

(3) ECA counterpart funds should in no case be considered an additional and separate source of financial resources which can be tapped at will for even highly desirable expenditures, such as those for essential military purposes, without having an impact upon the economies in question. In passing the Economie Cooperation Act, Congress indicated that the local currencies accruing as the counterpart of ECA grant assistance should not constitute a windfall of resources. The contribution to the recovery of the participating countries which Congress intended counterpart to make could be made only through planning the use of counterpart in terms of the total financial situation obtaining in each country and the use of all resources within that country. In terms of this framework, counterpart has been considered an integral part of the total resources within the countries and its utilization has been planned as a component part of total resources. Counterpart funds cannot be spent for any new purpose without either being diverted from the purposes for which they are now being used or alternatively being added, with inflationary consequences, to total Government expenditures. In this respect they are in precisely the same position as any other funds available to the European governments.

(4) It has been contended that the utilization of 95 percent counterpart for military purposes would provide additional leverage for the United States in assuring the direction of these expenditures in the proper military channels. We are not in accord with this contention, believing that the governments concerned will be more impressed by the availability of counterpart for economic purposes wherein we could effectively withhold our sanction for its utilization than they would be if the funds were available for military purposes in connection with which the participating governments would not feel the same internal political compulsions nor react as vigorously to the withholding of our sanction.

(5) Additional military expenditures by local foreign governments to promote the mutual defense concept of NAT should be obtained:

(i) From a stringent examination of existing military budgets to eliminate nonessential or obsolete items under the integrated defense concept.

(ii) By a careful examination of total national budgets to eliminate, or curtail, relatively less essential expenditures not necessary to the maintenance of internal security and national morale; i. e., by a diversion of funds from less essential uses, (iii) By noninflationary increases in total national budgets, financed either by noninflationary internal borrowing or heavier domestic taxes. If the internal financial situation in certain countries permits counterparts to be spent where they have previously been sterilized or permits an increase in the rate at which they are spent, they can be used to finance economic development on a larger scale and thus, in turn, free other revenue to finance military expenditures. II. Summary

A. ECA would have no objection to the use of 5 percent local currency counterpart funds by other United States Government agencies or by foreign governments if Congress so desires, provided that these funds are surplus to the requirements of ECA. ECA would prefer not to administer such funds, however.

B. ECA is unalterably opposed to the diversion of the 95 percent local currency counterpart funds for military purposes since, as indicated above, such use would not result in any net gains in the terms of the total economic and military strength of the participating country. Under these circumstances it would be unfortunate to create a situation wherein communistic propaganda could claim that the Marshall plan was intended from the start merely to prepare western Europe for

war.

DEPARTMENT OF STATE,

June 8, 1950.

Following are the texts of statements submitted today to the Senate Foreign Relations and Armed Services Committees and to the House Foreign Affairs Committee by Ambassador to the United Kingdom Lewis W. Douglas in support of the mutual defense assistance program; by Ambassador to Greece and Ambassador-Designate to Iran Henry F. Grady in support of military aid to Greece; by Ambassador to Turkey George Wadsworth in support of military assistance to Turkey; by Ambassador to Iran John C. Wiley in support of the military assistance program for Iran; by Ambassador to Korea John J. Muccio in support of military aid to the Korean Security Forces, and by Ambassador to the Philippines Myron Melvin Cowen in support of the mutual defense assistance program for the Philippines:

STATEMENT OF AMBASSADOR DOUGLAS, UNITED STATES AMBASSADOR TO THE UNITED KINGDOM

I regret that urgent matters keep me at my post in London and prevent my appearance before the committees that are considering the mutual defense assistance program. This statement summarizes the views which I would have preferred to make in person, had that been possible.

During the months since the Congress last considered this program, the plans then outlined have begun to produce the reality of strength and action at which they aimed. This good beginning is reflected in many ways, and not least in the heartening confidence which is developing among our European associates.

The North Atlantic Treaty organization has started work. The last meeting of the council of the treaty powers has indicated clearly the beginnings of a realistic and forceful grappling with the many problems involved in reestablishing the strength of the west.

In Europe, the tangible flow of arms and equipment from the current MDA program has demonstrated the genuineness of American implementation of the mutual aid concept of the treaty and has encouraged all the member countries. Moreover by making direct contributions to the dollar material and machine-tool requirements involved in the additional military production projects of the other NÁT countries, we are enabling these countries to utilize an increasing portion of their own industrial capacity for the production of military equipment. Our aid is making a contribution to the build up of the balanced collective forces required for defense of the North Atlantic community in a degree and to a margin far greater than the mere mathematical proportions involved would indicate.

The beginning of a cooperative and coordinated plan of defense made by the nations of the Brussels Pact is now being advanced steadily within the newer and broader context of the North Atlantic Treaty. The European countries of the treaty are making substantial defense efforts.

In other fields than that of defense, there is more significant evidence than ever before that the nations of western Europe recognize the importance of a real

and enduring unity of purpose and the importance of giving it form and direction. The Council of Europe, which the west German Government has been invited to join, is evidence of this understanding. The achievements of the Organization for European Economic Cooperation-the OEEC-including the European Payments Union that is about to be established are real and significant. The imaginative and courageous proposal of the French Government for the creation of a free trade area in respect of coal and steel, for the abolition of discriminatory freight rates and prices, and for the establishment of an international authority to insure that these things be put into effect and to discharge certain other responsibilities is one of the most important and constructive concrete proposals since the end of World War II for advancing the economic amalgamation and therefore the strength of western Europe through unity that has been made.

In the economic field, which I am sure Ambassador Harriman will cover in greater detail, there has also been genuine progress. This progress reinforced the determination of the free peoples of Europe. It is axiomatic that the will to resist tyranny and aggression-the will to fight for one's own community-must stem from knowledge that there exists something worth fighting for. The Marshall plan has accelerated the efforts of the Europeans to reestablish a state of affairs in which their liberty can flourish and their faith in liberty can take firmer and deeper root.

All of these factors, and I wish to emphasize that American military assistance is a most important one, have engendered a growing confidence, shared by all members of the North Atlantic Treaty, that they can and will develop the military strength necessary to deter aggression, prevent war, and reestablish stability in the world. American participation in the North Atlantic Treaty and American support through the MDAP have vastly strengthened the determination of our Allies to join with us to win the peace. These are not mere words. The abysmal failure of the efforts of the Communists to incite strikes against the unloading of MDAP cargoes is one clear evidence of the truth of these statements.

By direction of the Kremlin and as a matter of the highest priority, the Cominform undertook many months ago an organized campaign to foment and incite such strikes. The Cominform made a bad mistake. It underestimated the intrinsic determination of the Europeans when faced so baldly with the alternatives of accepting the spurious concept of "peace at any price" as against action to strengthen free men for the defense of their freedom. The Communist campaign is directed not only at the Europeans, but also, indirectly, at ourselves. They no doubt hoped to bring doubt to our minds as to the fortitude of the Europeans and to persuade us that Communist subversive forces in Europe were so strong that military aid would be going down a rat hole. The non-Communist labor unions, the governments, the people of the countries at which this campaign was directed, have overhwelmingly repudiated the siren call of the Cominform. MDAP cargoes are being unloaded regularly, and they are being unloaded by regular longshoremen, working of their own volition to do a job they are anxious to perform.

I do not mean to imply, by the enumeration of these signs and portents, that the job the North Atlantic community has cut out for itself is well on the way to completion, because it is in fact only well started. But I do find the very real progress which has been made all the more remarkable in the light of certain psychologically upsetting and disturbing developments during the last year. The knowledge that Russia has achieved an atomic explosion, the announcement of the possibility of the hydrogen bomb, the inexcusable action of the Soviets in shooting down an American plane over the Baltic, the reinspired tensions around Berlin, the engulfing of vast areas of the Far East by the evil forces of Soviet communism-these and other events have brought home to every thoughtful American and every thoughtful European the enormity of the problems we face, and the consequences to ourselves, our children, and our civilization if we do not face these problems together and solve them.

The unity of thought and purpose which is growing among Europeans, their new confidence in their joint efforts, are tied intrinsically to the faith of the peoples of the North Atlantic community in the intentions of the United States. Our country occupies a position of moral and material leadership of vital importance to all the world which believes in freedom and the dignity of man. More than any other one thing, our leadership holds together the free peoples of the world. For the United States to falter now might be a fatal blow to the West of which we are such an important part and to our undertaking so to restore the strength of the Atlantic community that war may be avoided and a lasting peace established.

Having prepared jointly with our associates of the North Atlantic Treaty a foundation and a framework for real strength, it is important that we proceed without hesitation to the development of that power which will preserve the peace we cherish. We have learned that ony the strong can settle issues with the Kremlin peacefully. Collateral dividends are derived from a condition of strength. Not only does the spirit of the North Atlantic nations move forward with each new demonstration of their growing security, but our combined strength exercises a powerful attraction on neighbors as well, whether they are in Europe or somewhere else. I am well aware of other areas of the world in which our interests are gravely threatened by Russian aggression and subversion. The situation in southeast Asia, for instance, is one of vital importance to western Europe, to ourselves, and to our common problem and joint endeavors. What happens in Asia affects Europe profoundly. The reverse is equally true-the achievement of a state of strength and readiness in the North Atlantic community, which will permit the stabilization of our relations with Russia on a secure and peaceful basis will do much to give assurance--and a sense of direction-to those Asiatic nations which are struggling to protect their new and unfamiliar freedom from Soviet aggression.

Last year I ended my statement on the mutual defense assistance program by saying that I had become more and more convinced of the interdependence of the countries on both sides of the North Atlantic and that in no field was this more true than in the field of defense. Our enlightened self-interest calls on us to assist the nations of western Europe in putting into effect our collective defense plans, for in the world in which we live today their defenses are in effect our defenses. In my statement last year I also said:

"A redressing of the unbalance of power in Europe caused by the last war to an extent unprecedented in modern history is a prerequisite to stable relations. For this reason it is, I believe, essential to our vital national interest to give no evidence of slackening or faltering but rather to press on full steam ahead with our program. I therefore hope that the military assistance legislation will be promptly enacted by the Congress. This is the language which is understood." Those statements I now reaffirm, with my convictions strengthened by the developments during the past year which I have outlined. I am aware of the danger of weakening ourselves and the community of which we are a part by undertaking to carry a burden heavier than our resources can sustain. But I have no doubt that this danger can be avoided and that the task to which in our own national interest we have set our hands and minds can be successfully carried through. I am confident that the brains, the learning, the ingenuity and the advanced technology of our western civilization can secure for us the peace we seek without a burdensome and unimaginative balance of mere mass against the mass which threatens us. I believe we will find among our resources those which are essential to strengthen our military position sufficiently to satisfy our security requirements, and that we will do this without endangering our political and economic structures. It is equally my belief that the peoples and the governments of western Europe are prepared to meet the problem and to shoulder their share of the burden. The Atlantic Pact countries comprise over 300,000,000 active and intelligent people with resources-spiritual and intellectual, technical and material, industrial and political-which are vastly superior to the resources commanded by another power which employs communism as a weapon to further its imperialistic designs.

We have made an encouraging start along the difficult road to security and peace. Our defense plans are being integrated through the actions of the North Atlantic Treaty organization. Our American investments aimed at restoring the economic health of western Europe and reestablishing the strength which, combined with our strength, is needed to preserve the peace, are already proving their soundness.

The mutual defense assistance program for the coming year has been presented to Congress by the executive branch. No nation should embark on a program of this character or having embarked on it should continue to, unless its national interests dictate that it do so. Our national interests, the ultimate preservation of our institutions require, I believe, that we firmly and steadfastly carry forward the program we have commenced. The enduring peace we seek may be achieved by following this course. It cannot be achieved by faltering.