U.S. Department of State
FRUS, 1961-63, Vol. IX: Foreign Economic Policy
Office of the Historian

[Section 8 of 18]

134. Memorandum of Conversation

//Source: Washington National Records Center, RG 286, AID Administrator Files: FRC 65 A 481, White House, FY 1962. Confidential. Drafted by Chenery on March 10 and approved in the White House on April 20. The meeting was held at the White House. Attached to the source text is a note from Easum to Hamilton, March 20, indicating that a draft of the memorandum of conversation had been approved with minor changes by Lingle and Coffin, and Easum initialed clearance for Hamilton on the note. An attached undated memorandum from Battle to Dungan indicates that the memorandum of conversation had also been approved by Ball.

Washington, March 9, 1962.

SUBJECT

Conversation with the President on AID Matters

PARTICIPANTS

The President Mr. Ball Mr. Bell Mr. Dungan Mr. Hamilton Mr. Lingle Mr. Coffin Mr. Gaud Dr. Chenery Mr. Nicholson

1. Mr. Hamilton outlined the division of functions among himself, Mr. Lingle and Mr. Coffin/1/ and introduced Mr. Lingle.

/1/Walter L. Lingle and Frank M. Coffin were Deputy Administrators, AID.

2. Mr. Lingle made a brief statement about his approach to his new responsibilities in AID. He said that he intended to make it his first job to get the Agency properly staffed and organized. He thought it was important to have a clear understanding from the President as to the nature of the job that AID was supposed to do, particularly in relation to the Alliance for Progress.

3. The President inquired about the distinction between programs and operations. There were statements by Mr. Coffin, Dr. Chenery and Mr. Lingle to clarify the nature of the programming process and the way in which programs were formulated in a specific case.

4. The President expressed concern about the way in which AID policies in certain countries would be presented to Congress, particularly for India, Poland, Yugoslavia and Ghana. He suggested that Ambassador Galbraith should testify on the Indian situation. He expressed a desire to discuss the policy in the other countries with Mr. Hamilton and Mr. Hutchinson/2/ before they testified before the Congressional Committees on this subject.

/2/Presumably Edmond C. Hutchinson, Assistant Administrator, Bureau for Europe - Africa, AID.

5. There was an extensive discussion of the Alliance for Progress and the difficulties in getting it properly organized. Mr. Lingle stressed the need for a clear directive from the President to AID so that responsibility would flow in a direct line through the Office of the Administrator to the Coordinator of the Alliance (and a definition of responsibilities for the Alliance within the Department of State). The President explained his reaction to the chaotic picture that was presented in the previous meeting on the Alliance two weeks ago,/3/ but agreed with Mr. Hamilton and Mr. Lingle as to the desirability of the Alliance remaining within AID. It was agreed that the Alliance should be visible as a separate entity but not otherwise become a separate agency. The President said that the other AID regional bureaus would have to recognize the special position of Latin America in the AID program at this time and not feel neglected because of the emphasis being put on the Alliance. It was generally agreed that the main problem in getting the Alliance organized was to find a strong deputy for Mr. Moscoso/4/ who could take over most of the administrative work and leave him free for program decisions, negotiations, and external representation of the Alliance. The possibility of Mr. Nicholson's/5/ being available as a Special Assistant to Mr. Hamilton to help organize the Alliance for Progress was discussed.

/3/Reference may be to a February 16 meeting of several senior administration officials with the President on the Alliance for Progress. (Memorandum of conversation, February 16; Department of State, Presidential Memoranda of Conversation: Lot 66 D 149, January - July 62)

/4/Teodoro Moscoso, U.S. Coordinator of the Alliance for Progress.

/5/Presumably James T. Nicholson, member of the Advisory Committee on Voluntary Foreign Assistance.

6. Mr. Bell outlined his understanding of the way in which the activities of the Export-Import Bank, Food for Peace and other U.S. agencies engaged in foreign assistance should be coordinated by AID. He stated his understanding of the Executive position that the focus of the responsibility to put together the various agencies' positions in a particular country and coordinate the U.S. action should be the Administrator of AID and the regional Assistant Administrators. The President asked Mr. Ball for comments on this point, and Mr. Ball agreed with the statement made by Mr. Bell. Mr. Bell was asked to prepare a directive which would clarify this relationship.

135. Paper Prepared in the Agency for International Development

//Source: Washington National Records Center, RG 286, AID Administrator Files: FRC 65 A 481, Development Financing, FY 1962. No classification marking. The source text, labeled "FINAL DRAFT," was forwarded under cover of a memorandum from Easum to AID Executive Staff, April 4, for discussion at a meeting of the Executive Staff on April 5 at 8:30 a.m. For an unofficial record of discussion of this meeting, April 5 (ES/RA - 23), which was attached to the source text, see the Supplement.

ES/D - 26 (Rev.) Washington, April 4, 1962.

DOLLAR REPAYABLE DEVELOPMENT LOAN TERMS

I. Scope of Paper

This paper sets out the criteria which govern the establishment of the terms of all AID dollar repayable development loans. These loans include those which may be made under the authority of Chapter 2, Titles I (Development Loan Fund) and II (Development Grants and Technical Cooperation) and Chapter 4 (Supporting Assistance).

The purpose of the paper is to assure reasonable consistency in the establishment of AID loan terms.

II. Basic Criteria

A. AID loan terms will be based primarily on an estimate of the borrowing country's capacity to service long-term foreign debt.

B. A 40-year maturity, 3/4 of 1 percent credit fee and 10-year grace period will be applied to most of the less-developed countries.

C. When analysis of long-term foreign debt-servicing capacity shows that a particular nation's prospects are more favorable than that of most of the countries, harder terms will be applied.

III. Combinations of Development Loan Terms

Either of the following two combinations of terms will be employed as appropriate unless other terms have been approved by the Administrator.

(A) (B) Maturity 40 years 15, 20 or 25 years Grace Period 10 years 0 to 5 years Interest 3/4% credit fee 3/4%, 3-1/2% or 5-3/4%

IV. Application to Specific Countries

A. On the basis of a periodic world-wide review, the combination of terms applicable to each potential borrowing country is established in Attachment A.

B. The Administrator will approve any changes in this pattern in the absence of a world-wide review.

V. Other Considerations

A. Terms for short-term, emergency balance of payments or budget support requirements will include a maturity of up to 5 years, 3-1/2 (or more) percent interest and a grace period when necessary not to exceed two years.

B. For loans to private borrowers and to public self-liquidating revenue-producing projects, procedures will be utilized to maintain a normal debt burden on such borrowers without unduly aggravating the host country's balance of payments difficulties. Thus, in the usual case, a two-step arrangement will be concluded between the borrower, the host government and AID, which provides for dollar repayment by the borrower on normal terms (approximating Export-Import Bank terms). However, this loan may be repaid in local currency to the host government, which then will assume the obligation to repay AID in dollars but on terms similar to those which otherwise would be established by AID for direct loans to the host government.

AID also retains discretion when appropriate, to establish direct loans on normal terms to private enterprise and revenue-producing self- liquidating public projects.

Attachment A

40 Year Package

LA FE Bolivia Burma El Salvador Cambodia Guatemala Indonesia Haiti Korea Honduras Laos British Honduras Philippines Nicaragua Taiwan Paraguay Vietnam

AFE NESA Ethiopia Afghanistan Ghana Jordan Liberia Turkey Morocco Egypt Nigeria Yemen Somalia Ceylon Sudan India Tunisia Pakistan Ivory Coast Nepal Mali Sierra Leone Uganda Kenya Tanganyika Gabon Other African Countries

Terms on Chile and Colombia will be determined as a result of discussions on the consortia to be established for these countries.

136. Memorandum From the President's Deputy Special Assistant for National Security Affairs (Kaysen) to the President's Special Assistant (Dungan)

//Source: Washington National Records Center, RG 286, AID Administrator Files: FRC 65 A 481, Development Financing, FY 1962. Official Use Only. Forwarded under cover of a memorandum from Dungan to Lingle, April 19, which noted in part: "I thought you might be interested in having Carl's comments which appear to be quite pertinent."

Washington, April 14, 1962.

SUBJECT

Comments on the Attached Paper, "Dollar Repayment Development Loan Terms"/1/

/1/Document 135.

1. The paper seems to me good as far as it goes with the exception of one or two minor points which I discuss below. However, it errs by omission in failing to deal with the question of what the mix of loans available to any given country will be. In no country is it likely that all the aid will be given in terms of a single set of loan conditions. Therefore, some countries may in fact be receiving some loan funds on the A basis and other funds on the B basis.

2. The division of countries suggested in the appendix seems reasonable. It is consistent with the internal surveys of stated development in Latin America made by Hollis Chenery's office./2/ A minor point is that Chile seems to have disappeared from the list of Latin American countries./3/

/2/These surveys have not been found.

/3/A marginal handwritten note next to this sentence reads: "This has been repaired."

3. 5B raises a problem. It appears to imply that development banks and similar institutions in recipient countries must always make loans to private enterprise at "normal" (equal commission?) rates. One of the functions of these development banks is to encourage private investment by making capital available at lower rates. It may be argued that this raises the problem of subsidizing individual entrepreneurs to their personal profit. This is a genuine problem but one which should be met by the tax system of the host country in such a way as to permit re- investment of profits but to penalize high personal consumption out of entrepreneurs' incomes.

CK

137. National Security Action Memorandum No. 146

//Source: Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 146. Confidential. An information copy was sent to General Maxwell D. Taylor.

Washington, April 20, 1962.

TO

The Secretary of State The Secretary of Defense The Attorney General Director of Central Intelligence Director, Bureau of the Budget

SUBJECT

Improvement of Police Training and Equipment in Newly Emerging Countries

The President is interested in seeking improvements in the equipment and training of police forces, particularly in the capitals and other major cities, of many of the newly emerging countries to assure that they can maintain order without the excessive use of violence. In addition, the President is interested in having a review made of whether the organizational location of technical assistance on police training should remain under AID or be handled in some other manner.

The President would like to have you designate representatives to participate in a study of these two questions under the leadership of the Department of State. As a part of this study he would like to include an examination of the police techniques in the United States, in France, Italy and other selected countries to assure that our technicians are aware and take advantage of the extensive police experience in these capitals. In addition, he would like to have the study avail itself of the work already done by the Special Group (Counter-Insurgency)./1/

/1/NSAM No. 124, January 18, 1962, which established the Special Group (Counter-Insurgency) is printed in vol. II, pp. 48 - 50.

The President wishes to have your recommendations as soon as possible concerning ways to improve the training and equipping of police forces in sensitive areas and what organizational changes, if any, are needed to improve our performance in this field.

McGeorge Bundy

138. Letter From the President's Military Representative (Taylor) to the Deputy Under Secretary of State for Political Affairs (Johnson)

//Source: Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 146. Secret.

Washington, April 20, 1962.

Dear Alex: I am writing you in your capacity as Chairman-designate of the interdepartmental committee set up to implement National Security Action Memorandum No. 146./1/ My purpose in writing is to make available to your committee my personal views on this important matter of improving U.S. organization and techniques in support of police training in foreign countries.

/1/Document 137. In an April 25 memorandum to the heads of the other Departments participating in this study, Secretary Rusk formally designated U. Alexis Johnson as chairman of the committee. (Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 146)

In considering the requirements for police-type training abroad, I am first struck by the diversity in the problems of various countries. In some, the primary need may be for crime prevention and routine police techniques such as are found in our city and state police forces in the United States. At the other extreme there are other countries with a requirement for paramilitary constabulary forces of the kind maintained in many Latin American countries to offset the armed forces and to protect the regime against subversion and coup d'etat. Between these extremes are many gradations which involve activities related to the work of the FBI, the Army, and the CIA.

Thus, every country tends to pose a special police problem to be diagnosed and resolved by our ambassador with the help of his country team. It is his task to produce an effective program suited to the needs of his country which utilizes all U.S. assets to meet the local situation without concern for departmental lines of jurisdiction. This local plan should represent the best use of U.S. assets to meet the particular indigenous problem.

I have no difficulty with this concept and consider that its general acceptance would meet, in principle, the organizational requirements abroad, provided that our ambassadors understand their responsibility and are acquainted with the assets of the various Federal departments at home which can support them. The difficult question is how to deal with these differing country team programs when they reach Washington. They will, presumably, arrive through State Department channels but, after reaching State, they must be sent to some focal point in the Government where over-all responsibility will rest for their implementation and support at the Washington end.

It appears to me that this focal point could be in State, in AID, in Defense, or in a newly created agency. As I am instinctively averse to the latter solution except as a last resort, I feel that we should first explore thoroughly the relative merits of the first three solutions. It is this exploration of pros and cons which I would regard as the primary task of your new committee.

It might be worthwhile to ask State, AID and Defense to submit separate plans showing how they would carry out their responsibility if this task were assigned to them. Such a plan should include the designation of the key individuals who would be nominated to the principal positions. Of one thing I am quite sure, namely, that the head man must be a strong figure, supported by a joint staff representing AID, FBI, Defense, and CIA. I would prefer to find this individual in AID, but the primary consideration is to get the best man and set him up in the best place to produce results. This pragmatic consideration, I feel, should take precedence over any question of principles with regard to civil versus military control or any related scruple.

Please excuse the long letter on the ground that my work in the Special Group (Counter-Insurgency) has aroused a very keen interest in the police training program. I am at the disposition of your committee for any follow-up discussion which you may desire.

Sincerely,

Maxwell D. Taylor

139. National Security Action Memorandum No. 150

//Source: Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 150. Confidential. Information copies were sent to General Taylor and David E. Bell. NSAM No. 150 apparently originated with a suggestion from Chester Bowles who, after traveling in Iran, Ethiopia, Egypt, Pakistan, and Afghanistan, observed that the U.S. Army Corps of Engineers could make a "massive contribution" to the U.S. overseas development effort. (Airgram 355 from Karachi, March 6; Department of State, Central Files, 611.90D/3 - 662) A memorandum from Harold Saunders to McGeorge Bundy, April 16, followed up on Bundy's request for an NSAM on this subject. (Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM No. 150)

Washington, April 20, 1962.

TO

The Secretary of State The Secretary of Defense

SUBJECT

Using U.S. Military Engineers as Contracting Agents on AID Projects

The President would appreciate your exploring the possibility of expanding the use of our military engineers as contracting and supervisory agents on AID projects.

He is aware that the Army Corps of Engineers and the Navy's Bureau of Yards and Docks are now working very effectively in this capacity on a number of projects. He recognizes that there may be situations where, for political or economic reasons, we can not use the engineers this way. However, he believes that we should take advantage of their skill and excellent reputation wherever possible and that some expansion of their activities may be of considerable value to our aid programs.

Would you please review the opportunities and problems in this field and report your recommendations to the President by 1 June./1/

/1/The deadline for the report was later extended to September 1, 1962. (Memorandum from Bundy to Rusk and McNamara, June 13; Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 150) For a follow-up response in a memorandum from Acting AID Administrator Coffin to McGeorge Bundy, October 30, as well as a dissenting view contained in a memorandum from Robert L. Moorman, Deputy Director of Engineering (AID), to Fowler Hamilton, November 9, see the Supplement.

McGeorge Bundy

140. Memorandum From the Administrator of the Agency for International Development (Hamilton) to President Kennedy

//Source: Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM No. 159. Confidential.

Washington, May 25, 1962.

SUBJECT

Methods for Improving the Coordination of Economic and Military Aid Programs

In accordance with NSC action 2447 of January 18, 1962,/1/ the Agency for International Development has studied ways in which improved planning and programming techniques might contribute to more effective coordination between economic and military aid programs. A report on the subject is attached to this memorandum./2/ The main conclusions and recommendations of this study, which I will summarize below, have been discussed with the agencies concerned/3/ and have been agreed to in principle. I propose to carry them out promptly.

/1/Document 130.

/2/The report, entitled "Methods for Improving the Coordination of Economic and Military Programs," May 24, is not printed.

/3/An example of the interagency process is the detailed review of an earlier draft of the report by Komer in a memorandum to Frank Coffin, May 2; see the Supplement.

1. Purpose, Character and Scope of Program Coordination

The aim of improved coordination between military and economic aid is to enable both programs to be used more effectively in the achievement of U.S. foreign policy objectives. Coordinated programming of military and economic aid requires (a) an assessment of the balance between the total amounts of each (the "mix" problem); and (b) an examination of ways in which each program can support the other, to the maximum advantage of overall U.S. interests (the "side-effects" problem).

While the instruments to be coordinated are the dollar aid programs, it is obvious that meaningful coordination requires examination of the effect of dollar aid on the allocation of the larger volume of non-aid resources available within recipient countries, and particularly on their allocation between military and development uses.

To improve coordination, it is necessary that there be greater concert in planning the separate programs both in the field and in Washington. Traditionally, the determination of how much should be allocated to each program has usually proceeded by separate consideration of the military and the economic results to be achieved. The combination of military and economic aid received by a country as a result of this procedure has not previously been subject to significant revision on the basis of an evaluation of total U.S. objectives in the country. Deliberate assessment of the proper balance between military and economic programs is intended to rectify this shortcoming.

Coordination between the programs is quantitatively a significant problem in only a small number of countries on the Sino-Soviet periphery (e.g., Korea, Taiwan, Vietnam, Thailand, Pakistan, Iran, Turkey, and Greece), although it is worth noting that these countries receive a relatively large share (about 40 percent) of total U.S. military and economic aid. The problem is quantitatively smaller, but not insignificant, in a number of other countries, (e.g., the Philippines, Morocco, Ethiopia, Indonesia and Burma). It is of negligible significance in the majority of aid-receiving countries in Latin America and Africa. However, even in these countries, there is a potentially important problem that requires serious attention in coordinated aid planning. This problem relates to military sales agreements, financed by official U.S. sources, with countries in which MAP grant-aid may be quite small, e.g., Brazil and Argentina. In some cases, the net effect of such agreements may simply be that "economic" aid funds help to finance purchases of military end-items. In any case, because of the impact which such sales may have on the use by recipient countries of their own resources, and hence on the effectiveness of economic aid programs, it is essential that such sales agreements be given coordinated consideration before they are formally discussed with potential buyers.

2. Getting the Best Mix Between Military and Economic Aid

As mentioned above, I regard the consideration of alternative ways of using various total amounts of U.S. resources in particular countries and regions as essential for comparing the costs and benefits of different courses of action, and thereby reaching better decisions concerning the use of aid and furtherance of U.S. foreign policy objectives.

Various techniques may be useful for conducting the mix studies as part of the regular process of planning programs in major recipient countries. One technique would require a determination in Washington of alternative "high-low" combinations of dollar guideline figures, for military and for economic programs, to guide the formulation and evaluation by the Country Team of different program mixes. This is the technique which is being used this year in Greece, Turkey and Korea in connection with the program planning for FY 1964 - 1968. Another technique would require formulation by the Country Team of a "minimum" and a "preferred" program for military and for economic aid, without specification of dollar guidelines from Washington. Essentially similar analysis and judgments are called for by both techniques.

It is also necessary, with both techniques, to examine the effects over time of the alternative aid combinations. In some cases, of which Turkey may be an example, greater aid allocation to productive investment over a five-year period may permit both more economic growth and a sufficient expansion of self-financed defense outlays to offset some reductions in MAP deliveries. Such an outcome would depend on measures to assure that a large part of the resulting increases in output is devoted to reinvestment and to defense financing by the recipient country.

Action Planned: I plan to make the "mix" exercise a regular part of coordinated planning in the key countries in which both programs are large, and to employ, in different countries, various techniques for assessing the aid balance. In other countries, formal exercises of this sort will not be necessary. However, in countries in which significant military sales are contemplated, a corresponding analysis will be required of the political, economic, and military consequences of differing amounts and kinds of sales transactions, before decisions are made.

3. Mutual Support Between Programs

In addition to the problem of the proper balance between programs, effective coordination requires that the planning of each program take full account of the opportunities that may exist for supporting the other program. Such complementarities may entail indirect benefits, such as the contribution of improved military security toward raising the productivity of civilian investment, or the contribution of economic and social development toward increasing the effectiveness of internal military security programs. They may also entail more direct benefits, such as the contribution of military infrastructures, technical training programs, and engineering and construction battalions toward raising civilian output; or the contribution of civilian transportation investment to improved military logistics.

The general implication of such complementarities is that the design of both military and economic programs should take into explicit account, as secondary criteria of choice, the sorts of side-effects that represent benefits of primary importance to the other program. The aim of this effort should be to find, on the military side, for example, a combination of forces, equipment, and infrastructures that is approximately as effective as other possible combinations, in military terms, and yet performs substantially better, in economic, social and political terms. The design of development programs should make a similar effort to take into account, as secondary criteria of choice, those side-effects that may contribute to advancing the military program.

These points are not new. The emphasis already placed on civic action in the MAP planning guidance, in the recent survey teams, and in the AID/DOD formula for funding civic action projects, represents the same approach. But in countries in which the U.S. programs and the domestic defense establishments are relatively large, much more can be done in this direction.

Action Planned: In revising programming methods, I intend to place greater stress on the role of non-military side-effects as an important element in the planning of military programs, and of military side- effects as an important element in planning economic programs. In all the relevant countries, the Country Team will be asked to indicate the specific meas-ures and projects by which the local military establishment can provide benefits to the civilian economy, and to estimate the value of such benefits that are being and can be provided. The Country Team will also be asked to identify specific ways in which the development program is providing benefits to the military effort. In one or two key countries, pilot studies may be undertaken to see the extent to which the military program and defense establishment can be appropriately used to obtain substantial non-military benefits.

4. Meshing the Planning and Programming Cycles

One obstacle to improving coordination between the programs arises from the fact that their planning cycles are usually out of phase with each other. The A.I.D. cycle starts about six months later than the MAP cycle. This gap gradually diminishes in the next few months, and disappears by March, when both programs are presented to Congress. A gap reappears in the fall when programs are finally approved for execution.

The fact that the two program cycles are usually out of phase is not the major obstacle to improved coordination, but it does create problems that interfere with coordination. Probably a greater obstacle has been that the economic programs are usually planned on an annual basis, while the military programs are formulated as part of a five-year plan. The program changes which coordination may require can be more effectively worked out over a five-year planning period than an annual period.

Action Planned: I am shifting the planning of economic programs to a five-year basis, comparable to the military programs, in countries where it is feasible and desirable to do so. In order to mesh the cycles, I also intend to take the following steps: (1) To consolidate the A.I.D. and MAP programming and policy guidances into a single document that would go to the field in February or March of 1963, to guide planning of the FY 1965 - 1969 programs; (2) To request submission by the Country Team of both military and economic plans, as parts of a single country assistance strategy, by early or mid-August of 1963. This joint country assistance plan would allow for prior consultation between the Ambassador and the Unified Commander concerning the proposed submission; (3) Beginning in the summer and fall of 1962, to make the inter-agency review of each program a more effective joint effort for identifying issues relating to program coordination, and, beginning in the fall of 1963, to hold these inter-agency hearings at about the same time in the cycle.

5. Personnel, Organization and Procedures for Coordination

Besides the foregoing suggestions concerning methods of coordinated programming, coordination can be furthered by various administrative and procedural measures. Some of these measures relate to exchanging A.I.D. and ISA personnel in Washington, as well as encouraging a few A.I.D. people periodically to attend key courses at the Military Assistance Institute, and a few ISA and prospective MAAG personnel to attend the Institute for International Development conducted by A.I.D.

A number of other suggestions have been advanced concerning arrangements that might be made in the field. One of these would establish an assistant director for economic-military planning in three or four of the relevant U.S. A.I.D. missions (e.g., Korea, Thailand, Vietnam and Turkey), and an assistant MAAG chief for economic-military planning in several other relevant countries (e.g., Greece, Iran and China). Another suggestion, advanced by the Budget Bureau, is to establish a central, coordinating staff attached directly to the Ambassador to perform essentially the same function. A third suggestion is to establish an A.I.D. advisor, attached to the Unified Command, whose aim would be to bring economic considerations into the process of reviewing MAAG plans at the Unified Command level.

Action Planned: Some of these suggestions are alternatives. Some are mutually supporting. I intend to test in various countries several, and maybe all, of the suggestions relating to organizational and personnel arrangements in the field.

In addition to arrangements of this sort in the field, improved coordination requires some modification of organization and procedures in Washington. Organizationally, it requires that A.I.D., besides administering the economic aid programs, strengthen its capacities and procedures for program coordination. For this purpose, the central A.I.D. coordinating staff must be intimately associated with both military and economic programs and must function as an impartial advisor to me to help in carrying out coordinated planning techniques, and to identify issues that require decision by me in my role as program Coordinator. In this connection, I envisage the following coordinating procedure in Washington: (1) In the light of a comparison between alternative aid mixes received from the field, the coordinating staff of A.I.D. would prepare a list of issues, together with its suggestions for resolving them; (2) After suitable inter-agency discussions, including appropriate consultation with the Advisory Group on military assistance, I would make decisions on these issues; (3) If any objections remained, the Department of Defense could, of course, appeal such decisions to the President.

Action Planned: I intend to put the above suggestions into effect, as far as possible, in connection with the current Washington review and evaluation of the "mix" exercises on Korea, Greece, and Turkey, and to develop and adapt them for future use, as appropriate. To encourage closer relations between the agencies concerned, I also plan to have periodic meetings of top policy-making officials to consider problems of mutual concern to both programs.

Fowler Hamilton

141. National Security Action Memorandum No. 159

//Source: Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 159. Secret. A copy was sent to David Bell.

Washington, May 31, 1962.

MEMORANDUM FOR

The Secretary of State The Secretary of Defense The Administrator, AID

SUBJECT

Methods for Improving the Coordination of Economic and Military Aid Programs/1/

/1/In a May 31 memorandum to the President, Komer provided background on the problems of coordinating military and economic aid. He also indicated that the President's staff and the Bureau of the Budget strongly supported the AID proposals, and suggested that the President sign this NSAM "to put the necessary steam behind the exercise," which was "designed to endorse AID's efforts and to stimulate Hamilton to take hold firmly of his supervisory responsibilities." (Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM No. 159)

I have reviewed the memorandum submitted by the Administrator, AID/2/ in response to paragraph 4 of NSC Action 2447 and generally endorse the actions he plans to take. While I recognize that considerable experiment may still be necessary before we devise the most effective techniques for getting the best overall "mix" of US aid to any given country, the actions planned appear to me to be a major step in the right direction.

/2/Document 140.

I expect the AID Administrator, as part of his responsibility for continuous supervision and general direction of foreign assistance programs, to put the new procedures promptly into effect. It is my desire that all agencies concerned render him full and effective cooperation to this end.

If any major complications arise in this process, I would like them brought promptly to my attention. I also desire a progress report on actions taken and any further recommendations in the light of the experience gained with the new procedures no later than 15 January 1963./3/

John F. Kennedy

/3/Monitoring the progress of this report as well as the related tasking for a final report on NSC Record of Action No. 2447 (see Documents 130 and 140) are summarized in Department of State, Follow Up Reports: Lot 70 D 264, Vols. VI - IX. Ultimately, the White House agreed to defer the report on NSAM No. 159 for further review (memorandum from Herbert Gordon (S/S - S) to John A. McKesson (S/S), October 9, 1963; ibid., Follow Up Report for the Period May 29, 1962 through June 1964), but the report still had not been submitted by late 1963 when the President's Committee To Examine the Foreign Assistance Program assumed responsibility for the review of foreign military and economic assistance planning. See Document 175.

142. Letter From President Kennedy to the Ambassador to India (Galbraith)

//Source: Kennedy Library, National Security Files, Countries Series, India, General, 6/11/62 - 6/24/62. Confidential; Eyes Only.

Washington, June 22, 1962.

Dear Ken: Yesterday I had a meeting with Fowler Hamilton and his Regional Directors to discuss the effect of aid programs on our balance of payments./1/ In the course of the discussion I asked how effectively we could tie the funds we were giving. As I understood the responses of the several Regional Directors, this varies greatly from country to country, depending on the pattern of trade. I am not sure that they have made their point clear to me or that they answered the arguments you made on your recent visit for a more effective and complete tying program.

/1/The President met with Hamilton and other AID personnel on June 21 from 4:10 to 5:35 p.m. (Kennedy Library, President's Appointment Books), but no further record of this meeting has been found. A June 18 memorandum from Dungan to Hamilton outlined four subjects for discussion at the meeting: general review of AID budget and programming processes, review of program progress in FY 1962 by regions, elimination of procedural defects, and peculiarities in some of the regions. (Washington National Records Center, RG 286, AID Administrator Files: FRC 65 A 481, White House, FY 1962)

I have asked Carl Kaysen, who listened to the discussion, to write the attached memorandum for you, setting forth the issues as they arose out of that discussion./2/ I would appreciate it if you would respond to him with as much technical detail as seems appropriate and without the limitations that you might feel in discussing the matter with one who is not a professional economist.

/2/Document 143.

Sincerely,

John F. Kennedy/3/

/3/Printed from a copy that indicates Kennedy signed the original.

143. Memorandum From the President's Deputy Special Assistant for National Security Affairs (Kaysen) to the Ambassador to India (Galbraith)

//Source: Kennedy Library, National Security Files, Countries Series, India, General. Confidential. The source text accompanied the President's June 22 letter to Galbraith, Document 142.

Washington, June 22, 1962.

SUBJECT

Tied Aid

1. We are now tying a very substantial proportion of our aid, and we propose to go even further in this process. The current flow of foreign payments on the aid account reflect earlier commitments made when we were not trying to enforce the present degree of tying.

The attached memoranda give some figures on the magnitudes involved for FY 1963./1/ I am sure you have seen them, but you may not have a copy available to you in New Delhi.

/1/No memoranda are attached to the source text and, with the possible exception of the April 6 memorandum cited in footnote 2 below, are not further identified.

For FY 1963, total overseas expenditures are $1,022 million out of $3,271 million total expenditures on the aid account (excluding PL 480 and MAP, which gives rise to almost no foreign expenditures). This total involves three major elements: One, use of AID funds for dollar procurements in third countries. Two, various kinds of transactions, the sum and substance of which is the use of dollars to acquire local currencies. Three, contributions to international organizations. These amount respectively to $241 million, $690 million, and $149 million. The third item is a contractual obligation which we cannot control. This leaves the first two.

2. Offshore purchases from third countries, as they are called in the barbarous language of AID, now come almost entirely from other underdeveloped countries. As you know, there is a list of 19 prohibited countries, including all the industrialized countries, from which offshore purchases are forbidden, except by special waiver. The characteristic example of what now happens is that, say Pakistan, is allowed to use dollars to buy steel from India rather than from the U.S. It is argued by AID that cutting off this possibility would involve an ultimate loss that outweighed the gains in immediate dollar savings. First, it would greatly increase the cost of steel to Pakistan and thus diminish the effectiveness of our aid proportionately. Second, it would deprive India of a market which is economically here. This is more important for India, for whom outlets for her newly growing industrial exports are a problem, than it is for more advanced countries. Finally, since India's aid claims are scrutinized in light of its total flow of foreign resources, the dollar saving is only transitory. A decrease in India's opportunity to earn dollars by trade will generate a demand for an increase in aid, which in substantial part will have to be met.

As you see from the discussion in the attached memorandum, the major part of the third-country procurement has occurred in your part of the world.

3. The larger item which we can try to control is the purchase of local currencies for dollars, either in the form of budget support, contracts for local services, direct hire of foreign personnel, or whatever. An inspection of the figures shows that this kind of activity is most heavily concentrated in Latin America and Africa (see Table I of the April 6 memorandum)./2/ This, in turn, reflects two facts: (a) Many of the countries in these areas do not now possess adequate governmental machinery for raising funds internally, whether by taxation or borrowing, and applying them to aid programs. (b) In these same countries, the will may be as deficient as the means. Our own political interest in getting aid programs started and in focussing heavily on those programs which are immediately visible--health, education, and housing, for example--means that in the absence of means and will for providing local resources through local means, we must resort to the use of dollars to purchase local currencies in one fashion or another.

/2/Reference may be to an April 6 memorandum from Frank M. Coffin to Secretaries Rusk and Dillon, describing a joint Treasury and AID study underway on possible means of lessening the impact of the foreign aid program on the U.S. balance of payments. (Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold)

As you know, we are now moving, not entirely independently of stimuli from you, to require that the U.S. funds so used be placed in segregated accounts which can be spent only in the U.S.

4. However, this does not entirely solve the problem. Where a country has small exchange earnings, where it spends a small proportion of the earnings in the U.S. in any event, and where dollar aid is large in relation to the previous flow of exchange earnings, tying can be relatively effective. This is the case for some of the smaller Latin American countries. However, it is not the case for many countries, and especially not for large countries such as India. It does not seem possible to make such countries treat all dollar aid as a net addition to their demand for U.S. exports. It is not, of course, that it is inconceivable that a mechanism can be found for this purpose. Rather, any mechanism would require agreement by the country concerned and acceptance by other suppliers, which I think it highly unlikely we can achieve. Further, if we could achieve it, it would be at a cost to ourselves which would negate in large part the very purpose we seek to attain. In the first place, such restrictions on purchases from non-U.S. suppliers would be inconsistent with our attempt to get other countries to bear a larger part of the costs of providing aid. They, too, could play at the game of trying to force recipients to spend all receipts in their currencies directly on their own goods. Second, the countries themselves would be unwilling to impose so drastic an alteration in their patterns of supply. If we tried to get them to do so, we would defeat in some degree the political gains we seek to achieve by aid. Further, even if these alterations in behavior were possible, they would take some time to achieve. I am convinced that it is unwise to treat our balance of payments problem as if it were a permanent one and alter our fundamental policies and practices in a long-run way to correspond to a temporary problem.

I do not deny that we can do something more than we have been able to do in respect to the purchase of local currencies for dollars, and that there are arguments against this practice quite independent of our balance of payments difficulties. I think, however, it is a mistake to view this as a magnitude which can be pushed down very substantially below its present level.

5. The conclusions I draw from this discussion are twofold: One, we should certainly do as much as we can to see to it that dollar expenditures in connection with aid are only those necessary to achieving the aims of the aid program. We should do the same in other areas of government expenditure. However, I think we should not expect that this in itself will change the current balance of payments deficit into a surplus.

What is more important, we should recognize that the problem caused by large foreign holdings of dollar claims that might cause a run on the dollar has only an indirect and not a direct connection with the continuing deficit in our balance of payments. My own judgment is that we have to go further than we have gone in attacking this problem directly. It would be a mistake to focus all our energies on the balance of payments part of the problem and none on those actions which can directly affect the likelihood that foreign holders of dollar claims will try to turn them into gold at a rate which we cannot stand. This memorandum is not the place to argue this point in detail, but I mention it simply to put the matter in proper perspective.

Carl Kaysen/3/

/3/Printed from a copy that bears this typed signature.

144. Memorandum From the Administrator of the Agency for International Development's Executive Assistant (Funari) to the Administrator (Hamilton)

//Source: Washington National Records Center, RG 286, AID Administrator Files: FRC 65 A 481, White House, FY 1962. Official Use Only.

Washington, June 23, 1962.

SUBJECT

Summary of Meeting with White House Staff, June 23/1/

/1/Another summary record of this June 23 meeting was prepared by Easum, undated. (Ibid.)

Mr. Dungan opened the meeting by saying that he thought the session with the President on Thursday, June 21, was helpful./2/ However, he said that the President noted certain deficiencies in preparation for that meeting and that there were certain problems concerned with A.I.D.'s presentation. Dungan said, in his opinion, that it was unfortunate that facts and figures were not at fingertips when called for by the President. He indicated that the President was unhappy with the inability of A.I.D. to provide information on (a) the follow-up and implementation of loans and projects, and (b) the effect of these loans, grants and projects on balance of payments. Dungan stated that nearly all of the questions that the President might ask could have been anticipated and could be anticipated in future meetings.

/2/See footnote 1, Document 142.

Dungan further indicated that at the next meeting A.I.D. officers should be prepared to tell the President what can be done with the existing A.I.D. program to help the dollar and gold reserve positions./3/ He indicated that the President is much concerned. For example, he said, was it necessary for the U.S. to provide for local costs, particularly in housing? Mr. Coffin replied that he could understand the President's concern but was not sure that in the development aspect of A.I.D.'s program much improvement could be made vis-a-vis balance of payments problem.

/3/In a memorandum to Secretary of the Treasury Dillon and AID Administrator Hamilton, June 20, President Kennedy stated:

"1. I would like in the future for all actions which affect our dollar drain or balance of payments to be brought to my attention before final decision is made.

"2. Before any loan stabilization or AID agreement is made I would like to have an indication of what effect it would make on our dollar position." (Kennedy Library, Dillon Papers, Memoranda for the President, 5/62 - 6/62)

Mr. Dungan was then called from the meeting.

Mr. Kaysen agreed that local currency costs were the big problem. But he believed that A.I.D. needed a schedule of what can be done on given amounts of money. He believed that a priority list with costs of each individual item should be prepared so that A.I.D. could present to the President a meaningful schedule of expenditures and what those expenditures would accomplish. At the previous meeting A.I.D. officers were not successful in convincing the President that A.I.D. was able to scrutinize the expenditures in relation to what they accomplished. He cited the Vietnamese matter as an example.

Mr. Janow/4/ vigorously protested. He stated that A.I.D. officers had strenuously objected to the use of A.I.D. funds for what were essentially military and political purposes. He stated that FE had contested DOD, CIA and State every step of the way; but that he had been overruled in every instance. Kaysen replied that perhaps A.I.D. had not stood up to the pressures and that, in any event, if there was a substantive issue involved here the President should have been informed about it prior to the time a decision was made by the Secretary of State or the Secretary of Defense. Mr. Janow replied that Mr. Forrestal/5/ of the White House had been informed, that A.I.D. had been successful in reducing the amount from $25 million to $10 million and that members of the White House staff had informed him that political and military considerations were of overriding importance.

/4/Seymour J. Janow, Assistant Administrator, Bureau for Far East, AID.

/5/Michael V. Forrestal of the National Security Council Staff.

Mr. Kaysen then made the point that A.I.D. does not have the internal procedures necessary to substantiate its case and has not, as a general rule, communicated that case effectively to the decision makers.

Mr. Hutchinson commented that in the conflict of military and political considerations on one hand and development considerations on the other, that A.I.D. would never win. Mr. Kaysen replied that A.I.D. must nonetheless make the effort and apprise the President prior to the time of a hard decision being made at Cabinet level.

Mr. Amory/6/ interjected at this point to say that he thought that the A.I.D. officers were correct in contending that DOD and State must also be made aware of the President's concern over the balance-of-payments problem.

/6/Robert Amory, International Division, Bureau of the Budget.

Mr. Kaysen went on to indicate that at any time A.I.D. funds are expended on programs or projects in which A.I.D. does not believe, the President should be informed. He intimated that the President is not always aware that A.I.D. funds are expended to meet commitments made by the Department of Defense and State. Kaysen then urged A.I.D. officers to use the White House staff to warn the President before the Secretary of State and the Secretary of Defense make decisions involving A.I.D. funds.

Mr. Gordon/7/ commented that there was disagreement in the White House staff on these matters and he believed that this presented a problem. Mr. Kaysen replied that these members of the White House staff generally in touch with specific areas could be expected to present the arguments and debate the issues before the President. However, he commented again that the essential problem was that A.I.D. did not have the internal procedures necessary to make clear its position and to inform the President of the effects on the balance-of-payments position of the commitments made for political and military consideration.

/7/Lester Gordon, Deputy Director, Office of the Director for Program Review and Coordination Staff, AID.

Mr. Coffin then commented that, if this is the information that is needed, the meeting on Thursday/8/ would be too soon. He stated that A.I.D. would have to set up an internal machinery to flag balance of payments problems on each outlay of funds. He instructed PRCS to meet with the Program Officers of each regional bureau to start work on this immediately. Mr. Gordon commented that it was difficult to estimate the effect on the balance of payments in the first instance of each outlay. In effect, A.I.D. would be telling the President, not only the effects on balance of payments, but whether to aid the country or not, which was essentially a policy matter rather than a procedural one. There followed a brief general discussion of the reply that was to be made to the President's memo of June 22nd./9/ Mr. Kaysen indicated that it was not intended that the President should act as a loan officer. However, he insisted that A.I.D. should be able to present a schedule that will tell the President what the effects of each loan, grant and agreement would be on the balance of payments position.

/8/June 28.

/9/The reference should presumably be to the President's June 20 memorandum; see footnote 3 above. For Hamilton's response to this June 20 memorandum, see Document 12. For the President's reactions to it, see footnote 3, Document 12.

Mr. Coffin raised the matter of waivers of procurement. Mr. Waters/10/ commented that there was no standard, from a balance of payments viewpoint, by which one might judge effects of waivers of procurement.

/10/Herbert J. Waters, Acting Assistant Administrator, Office of Material Resources, AID.

Mr. Coffin then asked that the meeting with the President be postponed until after July 4th. Mr. Kaysen replied that he would attempt to get it for July 3rd and that most likely it could be postponed until after July 4th./11/

/11/No record of the next meeting with the President, which took place on July 6, 11 a.m. - 12:07 p.m., has been found. (Kennedy Library, President's Appointment Books) In a memorandum to Hamilton, June 28, Dungan wrote that Hamilton should be prepared to discuss three topics at this meeting: interim reporting system on proposed AID commitments involving the expenditure of funds abroad, the AID internal machinery for evaluating proposals which involve commitments to spend funds overseas, and a review of country programs with special attention to Latin America. (Washington National Records Center, RG 286, AID Administrator Files: FRC 65 A 481, White House, FY 1962)

Mr. Kaysen departed from the meeting. Mr. Coffin then instructed Mr. Gordon to prepare the necessary materials in consultation and conjunction with the various regions. The presentation to the President would include balance of payments problems, internal controls, and some consideration of the general administrative problem implied in Mr. Kaysen's request that the White House be informed prior to Cabinet level decisions.

John Funari/12/

/12/Printed from a copy that bears this typed signature.

145. Memorandum From President Kennedy to Secretary of State Rusk, Secretary of Defense McNamara, and the Administrator of the Agency for International Development (Hamilton)

//Source: Kennedy Library, National Security Files, Departments and Agencies Series, DOD, Vol. IV, 6/62. Secret.

Washington, June 23, 1962.

I am greatly disturbed at the apparent lack of control and coordination between our various programs in the international field and our seeming inability to assure that our political objectives are advanced by actions taken by AID or other agencies. I have specific reference to the announcement from New Delhi of the signing of a $250 million loan with the Indians at the very time when, in the United Nations, the Kashmir issue was being discussed and the MIG question was very much a live issue./1/

/1/The Soviet Union had proposed the sale of MIG planes to India.

In these circumstances, I believe it essential that, under the leadership of the Secretary of State, a procedure is developed to guarantee that before any major action is announced, such as an economic or military aid agreement, to explore fully its coordination with our foreign policy objectives. This procedure should precede any action. For example, I understand this week that Chile, Venezuela, Ireland/2/ and the UAR all abandoned an agreement that they had to sponsor the Kashmir resolution, leaving us holding the bag. It seems to me that some indication of our displeasure might be manifested by the slowing up of our AID agreements with those countries. Ireland finally came through./3/

/2/The word "Ireland" was inserted by hand.

/3/The last sentence was added by hand.

I would appreciate it if you would develop this procedure at the earliest possible time.

John Kennedy/4/

/4/Kennedy's signature appears in an unidentified hand, indicating Kennedy signed the original.

146. Telegram From the Embassy in India to the Department of State

//Source: Department of State, S/S Eyes Only Microfilm. Confidential; Priority. Relayed to the White House.

New Delhi, July 9, 1962, 7 p.m.

91. Department pass White House. Eyes only to Kaysen for the President. The President's letter and accompanying documents were delayed en route./1/ Accordingly I am using telegram to expedite response.

/1/Documents 142 and 143.

In recent years I have not believed that we could defend the aid program politically were it "both" a large budget charge and a substantial drain on payments balance. Since aid is an essential offset to our foreign policy we must minimize its impact on payments balance by every feasible means. (As I think you know, this is not a new conviction. I repeatedly blocked proposed democratic-liberal attacks on the Eisenhower administration for tying the DLF outlays.) Every step to minimize dollar loss will have some effect on the convenience, efficiency or effectiveness with which aid program is conducted in the particular country. Some damage to objectives of the aid program cannot thus be an objection per se. It is only an objection if the damage frustrates goals.

This leads me to comment on three other points in your memorandum before I get on to the main business of what we do, to wit:

(1) The test of a conserving measure is not as you say on page 3 paragraph 5 of your memorandum that it will fail "in itself (to) change the current balance payments deficit into a surplus." (Indeed I doubt that you meant this should be taken literally. We would both obviously settle for a healthy improvement.) The goal is to make aid as nearly neutral as possible in balance of payments effect. This increases our ability to use this valuable instrument without balance of payment calculation.

(2) I am distressed by your cautionary references about impairing the principle of multilateralism for an essentially short-run remedy. As we both agree, one of the profound tendencies of the American establishment is to commit itself to fashionable principles per se and not examine their effect and the effect of change on their effect. Multilateralism has worked well in these last years because we have paid for it. It has not worked in this century unless someone was financing it with large capital exports like ours in the twenties and again in the fifties. Germany, France and Italy can now be multilateral as hell (though not as multilateral as we are) because our deficit eases all the strain and more. But as the establishment has yet to realize no country is multilateral if it has payments problems and no country, not even Switzerland, would be. These are questions to be decided not on high principle but at the low level of national policy.

(3) I agree with your perspective pertaining point about liquidity arrangements and I too yearn to keep my card as a professional economist on these subtleties. But the fundamental problem is still what we earn abroad as against what we spend abroad. And that is properly the subject of our present concern.

However, as usual, I mostly approve your analysis and I now turn to affirmative action. This requires three broadly related steps as follows:

(1) Recognition that flat purchase of local currency for dollars is, on the whole, a most wasteful form of aid justifiable only in emergency circumstances.

Special cases like Vietnam apart, we buy local currency in countries that have not reached the stage of development where they can use capital imports from the United States or where we must bribe the government into domestic reforms. Local currency generated by dollars accomplishes nothing in the first instance that straightforward credits from the central bank would not accomplish. (Some of these programs trace to the time when Randalls/2/ of the world were uniting in defense of prehistoric view of currency management.) At a later stage the local currency does expand demand including demand for imports. In the absence of internal planning, in the presence of large differences in incomes and in the absence of exchange control, these reserves will ultimately finance imports of consumers goods or services (including travel) mostly for the comparatively well-to-do or the minority with American-European consumption standards. There is a nice question whether we should finance such imports even from United States. But, as you properly note, from Africa this demand will flow naturally to Europe. And even South Americans long ago learned that Parisian brothels are safer, cheaper, more conveniently located and possibly even more imaginative than those of New York.

/2/An apparent reference to Clarence B. Randall, Chairman of the Council on Foreign Economic Policy during the Eisenhower administration.

(2) The first part of the remedy is to accord a highly unpreferred rating to this form of aid. (For schools which you mention our main thrust should be provision of help with books, equipment and teacher training rather than local budget support. Local currency should come where at all possible from local taxes. We should adhere where possible to the old rule that we supply the foreign exchange component.) However, I concede the need for bribing virtue in some cases. And even though we persuade countries to create currency this has the well-recognized effect of expanding demand including demand for imports. We should be willing, perhaps as a fairly common course, to establish reserves against local currency expansion that is issued for approved purposes. However, we must establish firm rules. These reserves should under all circumstances be held in New York. And it should be part of the bargain that they may be drawn upon only for approved categories of procurement in the United States. At one step this policy reduces the supply of dollars floating around outside and gives partial control over both the place and object of use. To work out these arrangements will be time- consuming and inconvenient and there will, accordingly, be strong arguments against them from men who, naturally, want to get on with the job. Such objections call for sympathy without concessions.

(3) There remains, however, the third problem which is that dollars from trade can be easily substituted for dollars from aid. Except where trade earnings are negligible, to tie aid will lead only to a redirection of trade earnings if these customarily go elsewhere. Accruals from the provision of dollar-backing for the currency in the cases just cited can be spending for austere objects that would be required in any case from the United States while releasing other hard currency earnings for the Place Pigalle or for that matter Schneider-Creusot.

Here, however, the problem is no longer peculiar to aid in the form of local currency purchases. It exists wherever aid is combined with other sources of dollars, the possibilities depending on geography and the amount of other convertible currency available for switching to non- dollar procurement. And we must think of this indirect leakage at several levels. A South American country uses tied dollars for essentials in the US and has its untied dollars for elsewhere. India gets aid to cover most of its needed dollar procurement and uses its trade-earned dollars in Germany. Then there is a deeper leakage when India or Pakistan get non-project aid on PL - 480 wheat or cotton and thus do not have to curtail purchases in Germany to div up the necessary dollars for these resolute essentials procurable only in the US.

The only answer here is a measure of mild bilateralism. Aid being a substitute for American purchases, we must begin to put into all our significant aid agreement provisions against such substitution. The Nigeria formula is in the right direction. I do note the highly unmilitant determination in the aid memorandum--"would appear to require an effective system of exchange control . . . not always desirable . . . experiment will be (carefully) observed with a view to (possibly) extending." And the Nigerian case does not deal at all with what I have called the deeper leakage, i.e., the fact that aid or PL - 480 gets free what would otherwise have [to] be bought in the US leaving earned dollars for Europe. Here, and this is most important, we must keep solidly in mind that the colonial world which we have inherited has trade channels, specifications, consumer habits, financial arrangements, and a dozen other ties which automatically guide trade to the erstwhile European Motherlands. (In India and Pakistan it is infinitely easier to buy from England than elsewhere and where else can you get one where you pull the chair.) To combat and overcome this continuing bilateralism, which it is, we must have responses of our own and the aid leakages make them urgent.

First we must formulate a rule. It is broadly that major recipients of our aid--we can safely ignore the de minimus countries and should-- should have expenditures in the US as compared with the total in the other industrialized countries that are about in the same proportion that their combined aid and trade accruals in dollars are to the combined accruals from the other advanced countries.

This effort should initially be hortatory but no less vigorous for that reason. We can say that, if our costs prove to be seriously higher as the result, we will consider this in the aid allocation. We can afford to spend more for a reduced dollar drain. Note also that at any significant level of development, import controls to stop frivolous overseas use of scarce resources are essential and especially for countries receiving scarce dollar aid. Even in the most primitive country foreign trade is subject to some guidance and we can help.

You are wrong, I am sure, in suggesting that such action will invite retaliation. The major European countries cannot apply this rule because they are away ahead of it and for them the use of similar measures is not a matter of abstract principle but of need. On the other hand such pressure by us will encourage the European countries to extend more credits because they will not be financing their trade to the underdeveloped world out of our dollars. You will be interested to know that I broached this line of thinking to both Desai and Jha/3/ before they left on their current hunting trip. Both concede that we are financing their Western European imports, both were deeply depressed at the thought of redirecting their trade and both immediately asked if they could say in their discussions of aid with the Germans and other Western Europeans that the Americans were thinking along these lines.

/3/Morarji Desai, Indian Finance Minister, and Bibodanan Jha, Chief Minister of the Indian State of Bihar.

If hortatory efforts do not suffice, the next step would be gentlemen's agreements in negotiation of aid arrangements. Only then something stronger.

In communicating these ideas to the President you should not minimize the horror that they will arouse in the more theological of his followers. Nor should you fail to remind him that on these matters I am usually right though at that stage in time just before the need for action becomes generally evident and when as a result sensible proposals invariably arouse the maximum of righteous indignation./4/

Galbraith

/4/For reactions to Galbraith's views as set forth in this telegram, see the memorandum from Dick Cooper, Council of Economic Advisers staff member, to Kaysen, July 13; Kaysen's memorandum to the President, July 13; and Dillon's memorandum to the President, July 17; all in the Supplement.

147. Memorandum From President Kennedy to Secretary of State Rusk

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 6/62 - 3/63. Confidential. Copies were sent to George Ball, Fowler Hamilton, and David E. Bell.

Washington, July 10, 1962.

I have held two reviews of the overseas expenditures of AID with Mr. Hamilton, his Regional Directors and other members of his staff on June 21 and July 5 [6]./1/ Under Secretary Ball was present at the second of these meetings. Their purpose was to make clear to those responsible for administering the AID program how urgently they should pursue the task of holding to the minimum the balance of payments drain consequent on AID programs.

/1/See footnote 1, Document 142, and footnote 11, Document 144.

All development loans are now tied to U.S. procurement. A large share of the AID expenditures that create claims against dollars arise from cash grants and local currency purchases. Many of these have in the past been in response to crisis situations; recent examples are South Vietnam and Argentina. I think it would be most helpful if you were to see that the same sense of concern about the balance of payments impact of these programs was transmitted to your geographic bureaus, which must appraise requests for emergency funds.

John F. Kennedy/2/

/2/Printed from a copy that indicates Kennedy signed the original.

148. Memorandum From Secretary of State Rusk to President Kennedy

//Source: Kennedy Library, National Security Files, Departments and Agencies Series, AID, 1/62 - 8/62. Confidential. A handwritten note on the source text indicates the memorandum was taken from the President's weekend reading of September 13.

Washington, July 11, 1962.

SUBJECT

Coordination of Actions and Announcements on Economic and Other Assistance

I fully share your concern regarding the control and coordination of our foreign assistance actions to assure the accomplishment of our foreign policy objectives./1/ I am calling together top State and A.I.D. officials to ensure that they understand your concern and that our procedures are responsive to the task.

/1/See Document 145.

I am also writing to the Secretaries of the Treasury and Defense, the Director of USIA, and the President of the Export-Import Bank to ask their cooperation in this matter. The Secretary of Defense has already assured me of his full cooperation not only in connection with military aid announcements or actions but also with respect to military sales arrangements.

Assistant Secretaries of the geographic bureaus of the Department will be assigned full responsibility for assuring that the full range of political and other foreign policy considerations are considered prior to foreign assistance action. A.I.D. Assistant Regional Administrators will have the responsibility for keeping their counterparts in the geographic bureaus apprised of pending aid assistance actions and announcements, including P.L. 480 programs. If an issue arises in the discharge of these responsibilities, the issue will be referred immediately to the A.I.D. Administrator, Fowler Hamilton, and, if necessary, to me. I will, of course, bring to your attention particularly sensitive matters.

I am asking each Assistant Secretary to give this matter his closest personal attention and exercise the tough-mindedness required for the advancement of American interests. This involves a high degree of judgment. This process must inevitably involve judgments as to what is in the national interest--both in the short-run and in the long-term.

Fowler Hamilton and I will be prepared to discuss this matter with you further after our meeting with State and A.I.D. senior officers.

Dean Rusk

149. Editorial Note

The Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development held its tenth meeting in Paris July 25 - 26, 1962, to discuss the results of the first annual Aid Review and future work. Ambassador James W. Riddleberger served as head of the U.S. Delegation and chairman of the meeting. Frank M. Coffin, AID Deputy Director, was also a member of the U.S. Delegation. For text of the communnique issued at the end of the meeting, along with a resolution adopted by the Committee on July 26, see Department of State Bulletin, September 10, 1962, pages 395 - 397. For Riddleberger's telegraphic report on the meeting to the Department of State, July 31, see the Supplement. Other documentation on the DAC meeting is in Department of State, Central File 800.0000.

150. National Security Action Memorandum No. 177

//Source: Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 177. Secret. Copies were sent to Dillon and Bell.

Washington, August 7, 1962.

MEMORANDUM FOR

The Secretary of State The Secretary of Defense The Attorney General The Administrator, AID The Director of Central Intelligence

SUBJECT

Police Assistance Programs

I hereby approve the recommendations of the interdepartmental committee on Police Assistance Programs,/1/ and direct that they be promptly put into effect as follows:

/1/These recommendations, contained in a July 20 memorandum from the Interdepartmental Committee on Police Assistance Programs to President Kennedy, as well as additional documentation on the formulation of police assistance programs, are scheduled for publication in volume VIII.

1. The US should give considerably greater emphasis to police assistance programs in appropriate less developed countries where there is an actual or potential threat of internal subversion or insurgency; to this end, while individual programs should be subject to normal review processes, AID should envisage very substantial increases in the global level of the FY 1963 program, with further increases in subsequent years where there is a demonstrated need. The DOD should also give, where appropriate, increased emphasis to the police aspects of existing MAP programs.

2. The Committee's statement of the role and function of police programs and criteria for their initiation in its report [is to] be the basis for guidance in Washington and to the field; using this guidance, AID should insure that Washington agencies and country teams give appropriate priority to police assistance, including equipment where needed.

3. Subject to the general policy guidance of the Secretary of State in internal defense matters, the Administrator of AID is charged, in his capacity as coordinator of US aid programs, with responsibility for coordination and vigorous leadership of all police assistance programs; that he establish an interagency police group, to be chaired by his designee, to assist him in this responsibility.

4. AID is charged with operating and funding responsibility for all such programs, except for their covert aspects and for those programs which the Administrator of AID, in consultation with the Secretary of Defense, decides should be carried out by the Department of Defense.

5. To carry out its responsibilities, AID should establish an office specifically charged with police matters, staffed with sufficient qualified personnel to: (a) provide centralized professional and technical planning guidance to the country teams, police missions and State and AID regional bureaus; (b) provide professional and technical guidance and professional and technical supervision in implementing programs; (c) establish and supervise training requirements for US police technicians, and standards for evaluating professional competence; (d) to conduct surveys and program evaluations; (e) to provide an essential repository of technical knowledge based on research in the latest techniques of controlling subversion and mass violence; AID should appoint a senior professional to head this office, responsible to the Special Assistant-Internal Defense with direct access to the Deputy Administrator; while line responsibility for AID police programs remains with each regional AID bureau, sufficient professional personnel should be assigned to the new Office to provide the centralized staff support outlined above.

6. AID should promptly devise methods for improving recruitment and training of personnel especially suitable for work with foreign police forces; other US agencies should cooperate in making qualified personnel available for duty with the police assistance program without prejudice to their career status.

7. AID should initiate the necessary studies and interdepartmental coordination looking toward early establishment of an international police academy under Government management to coordinate training more closely with US internal defense objectives and tighten US Government control over all training to improve its quality and insure its responsiveness to need.

8. To protect police programs, with their primarily internal defense rationale, from suffering as marginal competitors with primarily economic development projects, AID and the Bureau of the Budget should develop some means of providing the necessary degree of funding autonomy, such as creating a new AID line item for "internal defense" in the FY 1964 budget or funding through the Military Assistance Program though keeping the program in AID.

9. AID should develop ways to expedite a delivery of equipment, perhaps through stockpiling standard items.

10. Wherever possible, we should coordinate our police effort with similar programs of other friendly Western countries to assure that they are complementary; we should encourage such countries to provide similar assistance where appropriate, but not rely exclusively on them for this purpose; our aims in this respect should be to assure that adequate Western assistance is available to any country which needs it to deny the police assistance field to the Communist Bloc.

11. The Administrator of AID, as coordinator of US aid programs, is charged with carrying out the above recommendations,/2/ and he should report to me no later than 1 December 1962 on progress made;/3/ this report should include his revised FY 1963 and proposed FY 1964 program level.

/2/A letter from President Kennedy to Hamilton, August 7, emphasizing the importance of the AID role in launching this program, is in the Supplement.

/3/This report is contained in a memorandum from Acting AID Administrator Coffin to the President, December 1. (Washington National Records Center, RG 286, AID Administrator Files: FRC 67 A 1530, Chron Files, Dec. 1 - 9, 1962) For comments on the report, see the December 6 memorandum from General Maxwell D. Taylor to McGeorge Bundy, and the December 10 memorandum from Michael Forrestal to McGeorge Bundy, both in the Supplement.

12. The Special Group (C - I) should review the implementation of the Police Committee Report in accordance with the responsibilities assigned under National Security Action Memorandum 124./4/

/4/NSAM No. 124, January 18, which established the Special Group (Counter-Insurgency), is printed in vol. II, pp. 48 - 50.

John F. Kennedy

151. Circular Telegram From the Department of State to Certain Diplomatic Missions

//Source: Department of State, Central Files, 800.03/8 - 2962. Official Use Only; Priority. Drafted by Nathaniel McKitterick (IO/OES) on August 28; cleared by Richard H. Roberts (Agriculture) in substance, David Richardson (AID), Frank K. Hefner (IO/OIA), Charles M. Hill (EUR), and Louise McNutt (FE); and approved by Harlan Cleveland (IO). Sent to Paris, London, Bonn, Rome (Embassy and FODAG), and Tokyo. For background on U.S. policy toward multilateral world surplus food programs in 1961, see the memorandum from L.D. Battle to McGeorge Bundy, October 28, 1961, and McGovern's memorandum to Secretary Rusk, November 2, 1961, both in the Supplement.

Washington, August 29, 1962, 4:06 p.m.

353. Ref: Tokyo CW 8841 May 4, 1962./1/ Others CW 9447 May 5 [25], 1962./2/ Unless you see overriding objection to the contrary, please approach immediately highest appropriate government official and urge government make substantial pledge to World Food Program at Pledging Conference scheduled New York September 5, 1962. Inform said official that United States plans to pledge three year program, including $40 million in commodities and $4 million in shipping serv-ices, both at world market prices. In addition United States will pledge, subject to matching provisions and Congressional action set out below, $6 million in cash, which may be reduced to $5 million to the extent that additional shipping services are required. Cash pledge is subject to availability of appropriated funds. Cash pledge will also be subject to matching formula similar to that governing United States contributions to UN Special Fund and ETAP wherein United States contribution is managed so as not to exceed 40% of total. USG hopes other countries will likewise make equally generous contributions, thus avoiding any review of our own cash pledge.

/1/This instruction, sent to Embassies in FAO member countries, asked officers in charge to hold consultations with the governments to which they were accredited regarding prospective pledges to the World Food Program, unless they felt an approach at this time might be counterproductive. (Department of State, Central Files, 800.03/5 - 462)

/2/This instruction, a slightly revised text of CW - 8841, was sent to all Western European posts (including Reykjavik, Dublin, Vienna, and Belgrade), except Athens and Helsinki. (Ibid., 800.03/5 - 2562)

FYI. United States pledge will also be accompanied by the condition that USG will have to give prior approval in each individual case where United States commodities, services or cash are used for a World Food Program project./3/ This condition is necessary to avoid use of our contribution in countries and programs currently proscribed by legislative or administrative directives. FAO should be informed of this condition, but it is not necessary to so inform other governments since this condition is not expected to result in any curtailment of our pledge once that pledge is approved by Congress./4/

/3/At the United Nations/FAO Pledging Conference for the World Food Program, held at U.N. Headquarters in New York on September 5, the United States pledged the amounts specified in this telegram along with a number of reservations. See Yearbook of the United Nations, 1962, pp. 238 - 239.

/4/According to a letter from Secretary of Agriculture Freeman to Cleveland, October 15, leaders of the House and Senate Agriculture Committees deleted Title V of the Food and Agriculture Act of 1962 (enacted September 27, 1962), which would have given the Department of Agriculture explicit authority to participate in the World Food Program, and refrained from further denial of such authority under Title II of P.L. 480 and other legislation only after Freeman's personal assurance "that the Department of Agriculture would be the primary point of contact, in cooperation with the State Department, between our Government and the World Food Council." (Department of State, Central Files, 800.03/10 - 1562)

Rusk

152. Memorandum of Conversation

//Source: Department of State, Secretary's Memoranda of Conversation: Lot 65 D 330. Official Use Only. Drafted by Leatherman on October 1 and approved in U on October 11.

Washington, September 25, 1962, 3:30 p.m.

SUBJECT

Standard Oil Company's Opposition to AID Loans for Public Sector Oil Expansion

PARTICIPANTS

The Under Secretary Mr. David Sheppard, Executive Vice President and Director, Standard Oil Company of New Jersey Mr. Cecil Morgan, Executive Assistant to the Chairman of the Board on Public Affairs, Standard Oil Company of New Jersey U--Mr. Allan Robbins, Special Assistant (for International Business) to the Under Secretary SOA--Mr. F.D. Leatherman, India Desk Officer, Economic Affairs, Office of South Asian Affairs

Following an exchange of pleasantries, Mr. Sheppard expressed the concern of his company with respect to reports that the GOI was asking AID for a large amount of money for financing public sector petroleum projects in India which could be financed with private capital and which would compete with the Standard Oil Company. The Under Secretary said that there had been a request for financing of a pipeline, the foreign exchange cost of which might amount to about $5.5 million. Mr. Sheppard said that he did not wish to take the Under Secretary's time to discuss a problem involving a small amount of money in one country. In a larger context his company wished to express its opinion that public funds should not be diverted to areas of activity in which private capital stood ready to do the job. He left a copy of a memorandum (attached)/1/ on the subject, with the Under Secretary and Mr. Robbins.

/1/Not attached and not found.

The Under Secretary said that he appreciated the viewpoint of the Standard Oil Company; so much so in fact, that he had dwelt heavily on the part of private enterprise in development in his September 18 speech before the annual meeting of the World Bank (IBRD)./2/ He read a part of the speech (pages 6 - 9) and gave copies to Messrs. Sheppard and Morgan. The Under Secretary also remarked that the Department in recent instructions (CW - 8639 of April 27, 1962, and CA - 2673 of September 11, 1962)/3/ to all Foreign Service Posts had reminded our Ambassadors and other officials abroad of their continuing responsibilities with respect to support for and protection of American private business abroad.

/2/The text is printed in Department of State Bulletin, October 15, 1962, pp. 575 - 582.

/3/These instructions are in Department of State, Central Files, 200.11/4 - 2762 and 200.11/9 - 1162, respectively.

The Under Secretary said that Mr. Robbins would be dealing with problems of American business abroad as they occur in all parts of the world and would welcome a continuing exchange of views with the ESSO representatives.

153. Memorandum of Conversation

//Source: Department of State, Secretary's Memoranda of Conversation: Lot 65 D 330. Confidential. Drafted by O'Mahony on October 4 and approved in U on October 16.

Washington, September 26, 1962.

SUBJECT

West German Foreign Aid

PARTICIPANTS

Germans The German Ambassador/1/ /1/Wilhelm C. Grewe. The Minister for Economic Cooperation, Walter Scheel Gustav-Adolf Sonnenhol, Ministerialdirektor, Federal Ministry for Economic Cooperation Fritz Stedtfeld, Ministerialdirigent, Ministry of Economics Werner Johann Lamby, Federal Ministry for Economic Cooperation Hans Juergen Duerr, Press Chief, Federal Ministry for Economic Cooperation

Americans The Under Secretary Deputy Assistant Secretary William C. Burdett Edwin M. Cronk, American Embassy, Bonn George S. Springsteen, Office of the Under Secretary Jacob J. Kaplan, AID/IDOS Joseph E. O'Mahony, EUR/GER Magnitude of German Aid

Following introductory remarks by both sides, Minister Scheel opened the discussion by stating that he was anxious to receive Mr. Ball's comments and suggestions regarding the appropriate magnitudes of aid various industrialized countries might be expected to supply to the LDC's. He pointed out that this subject is of such importance that it must be discussed amongst donors at the highest levels of government.

As far as the Federal Republic is concerned, Minister Scheel maintained, fairly successful foreign economic assistance programs have already been launched and are being implemented. The Federal Government faces a number of problems and uncertainties, however, in regard to the future of the German economy and the size and type of foreign aid program it will be in a position to make available from now on. He pointed out in this connection that current German foreign aid cash outlays are made from funds derived to a large extent from extraordinary, non-recurrent sources (proceeds from the sale of Volkswagen shares, etc.), but that future official aid program payments must come almost entirely from a budget which is already overburdened.

The Under Secretary replied that aid problems, including those related to the need for giving regular consideration to how much economic assistance various countries might provide, will be with us for a long time. We must expect to encounter difficulties in attempting to sustain our aid expenditures. The American and German people may not always be aware of the necessity for maintaining foreign aid programs of sufficient magnitude to do the job that needs to be done. Tangible results from foreign economic assistance usually occur slowly and they may not always be apparent to the public.

We will need to discuss aid problems with each other on a regular basis, the Under Secretary stated, and we must keep in mind that matters such as the magnitudes of various countries' aid programs have political as well as economic implications. There must, of course, be a mutual recognition of each country's independence. When the U.S. makes certain suggestions regarding the magnitude of effort the U.S. or Federal Republic might take on as part of the common task, we are in no way suggesting that West Germany is an auxiliary power in this task. We expect to receive suggestions from the Federal Republic, and we are anxious to be of help to the Federal Republic where we can.

Minister Scheel responded that he wanted to assure Mr. Ball that the Federal Republic does not in any way regard U.S. suggestions as demands. The Federal Republic fully realizes that there is a very important and large job to be done, that it cannot be done by one country alone, and that there must be an apportionment of the effort.

The Federal Republic, declared Minister Scheel, does not intend to retreat from the current average level of economic assistance being extended to the LDC's. Chancellor Adenauer, Scheel added, committed the German Government to this policy at a recent news conference./2/

/2/Not further identified.

The Federal Republic, the Minister went on, is prevented from doing more than this by financial realities. The West German economy is not surging ahead any longer, and so tax revenues are not increasing to the same extent as in previous years. Deficit financing is impossible--the Federal Government must operate within its revenues--the constitution requires it. Given rising defense expenditures, therefore, there are severe limitations on the amount of funds available to the Federal Government for foreign aid.

The general guideline for German foreign aid, Minister Scheel explained, will be DM 3 billion, or approximately one percent of gross national product. As gross national product increases, the DM 3 billion annual target will be adjusted. However, the Federal Republic might not provide exactly this much every year, but will make it available on an average over a period of years. In 1961, for example, commitments ran far above DM 3 billion. In other years, therefore, they can be expected to run under DM 3 billion.

Public funds, Minister Scheel went on to explain, will not be sufficient to finance the full DM 3 billion annual program. Consequently, private funds must be tapped for this purpose. Private investment, after all, said the Minister, is usually a better form of aid than public investment. The Federal Republic realized a need exists for both kinds of investment, though, and will provide both.

Development Loan Terms

The Under Secretary pointed out that a meeting of minds is necessary on development lending terms. Differences in the terms attached to foreign loans extended by various countries, Mr. Ball stated, can, among other things, create political problems for us. When the U.S. finds it necessary to extend a very large volume of assistance to a particular country "to keep it from going down," and that country receives loans from other sources on much less liberal terms, the effect is that the U.S. is underwriting the repayment of these other credits. Such situations are obviously difficult to justify.

Minister Scheel answered that maturities for West German long-term development assistance credits have been stretched from 15 to 20 years. Such terms were never heard of in the Federal Republic prior to World War II. Interest rate policy is to charge 3 - 4 percent for loans connected with infrastructure projects, 4 - 5 percent on mixed infrastructure-commercial projects and close to German market rates on purely commercial projects. The latter rates, Scheel added, are almost always very far below the market rate of interest prevailing in the LDC requesting the loan.

Perhaps one reason U.S. and German development loan terms tend to differ in places, Minister Scheel remarked, is that in extending development assistance the Federal Republic looks primarily at the soundness of a given project and the outlook for its success, while the United States looks primarily at the balance of payments situation of the country. This whole subject of criteria for aid is going to be discussed in the DAC. While the Federal Republic has moved somewhat in the direction of the U.S. position on this question, very significant differences continue to exist between our two sets of criteria.

The Under Secretary pointed out that we are certainly very much concerned about the soundness of the projects we help finance, but we are concerned at the same time that the LDC's do not pile up debt service burdens that will lead to financial crises.

The LDC's, the Under Secretary added, must be taught financial responsibility. It could be extremely unsettling for LDC's to get into the habit of allowing themselves to get into financial trouble in the belief that they will always be bailed out. If we fail to take into account the ability of the LDC's to meet their foreign debt obligations, we are not doing them a service.

The DAC, the Under Secretary suggested, should examine the amortization curves of the foreign debts of the LDC's to avoid crisis conditions from developing. The DAC should take into account the ability of the LDC's to increase their export earnings. Unfortunately, many LDC's are unfamiliar with export promotion. In this regard, the OECD can be helpful in alleviating some of the trade problems facing the LDC's.

Minister Scheel agreed that the DAC and OECD should do these things. He added that in his opinion increased trade is the key to the problem of economic development. It is easier, even if less effective, to give capital to the LDC's than to open new markets for them.

At the same time, however, we must be careful, Scheel warned, to see that our investments in the export industries of the LDC's--especially the Latin American LDC's--are adequately planned on a worldwide basis. We must avoid investing in the banana or coffee industries of every LDC. Otherwise, we will only contribute further to the flooding of the world markets with such products.

Aid Coordination

One piece of unfinished business that lies before us at this time, Mr. Ball stated, is the determination of the roles individual Atlantic nations should play in contributing toward the common effort. We can expect the United States to take a leading role in certain places, the Federal Republic can take the lead in other places, and the EEC can do the same elsewhere. The role of the Federal Republic can be fairly broad, especially since it is unencumbered by a recent history of colonialism.

As colonial arrangements were dissolved, the Under Secretary continued, power vacuums were created in many parts of the world. The Federal Republic has considerable freedom of movement throughout the less developed regions which certain other countries possess to a considerably less extent. The question remains, however, just who will do what, where.

It is the U.S. view that the DAC can play an especially useful role in this regard. The DAC is still in a very early stage of development. We think it can be improved upon and made a more useful instrumentality for achieving this type of coordination.

Minister Scheel replied that the Federal Republic is willing and anxious to coordinate its foreign aid policies and operations with other donor countries. The DAC seems to him also to be the best instrumentality for doing this, but he must agree that the DAC is in need of improvement. We have to consider DAC's future very carefully. For example, the DAC should be called in at an early stage to help plan development programs for LDC's and to decide upon assistance arrangements. The World Bank and the DAC need to cooperate very closely.

Minister Scheel then went on to say that the whole matter of coordination and of reaching decisions about the sharing of responsibilities for development assistance is taken very seriously by the German Government. The Federal Republic may appear particularly sensitive about its role at times--it is a new participant in the foreign aid field and needs to gain experience. The Federal Republic does not intend to escape from its responsibilities, but there are a great many problems to work out concerning the best means of coordinating our activities.

Africa

Minister Scheel said he was somewhat concerned regarding our approach to Africa. The Federal Republic feels that, despite the language and ideological barriers which tend to come between Africa and the West, impulses exist which can lead to desirable relationships between these two areas. The nations of the Atlantic Community must take advantage of these impulses, Scheel declared, and help determine future developments on the African continent. This work cannot be left in the hands of international organizations. For one thing, we do not know what the goals of these international organizations may be. We must make our own approaches--only in that way will we know they are being made in pursuance of the goals we establish.

The U.S. and the Federal Republic, the Minister said, have no special relationships with particular African countries such as other European powers have. U.S. and FRG interests will be served by African economic development. It has been his observation that the more stable African countries are those which are more pluralist in structure, especially in industrial structure. Single industry economies are the least stable. To become economically sovereign the African countries must expand their relations with many other partners.

The Minister went on to say that Africa is in need of a long-term trade and development plan. Such a plan should be worked out as soon as the UK joins the EEC.

Attitudes Toward Private Investment and Property

Minister Scheel expressed the view that the availability of large-scale public capital may be having an adverse effect on the flow of private capital. Public capital should supplement, not replace private capital, Scheel said. The terms assigned to public loans are so much more advantageous to the borrower, however, that enormous efforts are made to obtain such funds and the possibility of securing private financing is often neglected. Furthermore, countries that have an unfriendly attitude toward private foreign capital seem to feel they can discourage the inflow of such investments and make up the loss by appealing for foreign aid. Scheel described situations of this kind as intolerable.

The Under Secretary said that he made a similar point in his speech the week before to the IBRD, and added that actions against foreign capital also tend to discourage domestic private investment. The U.S., Mr. Ball explained, does not intend to infringe upon the sovereignty of any LDC, but if an LDC is intent upon following a policy of this sort it must face the consequences.

Minister Scheel and the Under Secretary agreed that economic development would be fostered by a freer flow of capital. Mr. Ball pointed out that internal savings are insufficient to finance economic development programs in the LDC's. These countries are dependent today upon foreign investment capital much in the same way the U.S. was during its early period of development.

We are not infringing on the sovereignty of the LDC's, Mr. Ball added, if we tell these countries that we have no intention of sending public capital into their economics to do the job that domestic or foreign private capital can be induced to perform. In the past, declared the Under Secretary, we were overly reluctant to make this clear. In the future we should say it, and say it uncategorically.

During the first half of this year, the Under Secretary pointed out, there was a net outflow of private capital from Latin America. A development of this sort tends to defeat the economic development efforts being made with public funds.

Minister Scheel pointed out that the Federal Republic recently has refused to grant guarantees for investments in Brazil and India because these countries have refused to enter into agreements with the FRG for the protection of private capital. The Federal Republic would like to see an international agreement concluded on private property protection, but, said the Minister, the U.S. has appeared very reserved to this idea.

Mr. Ball pointed out that the U.S. aid legislation requires us to terminate assistance to countries that expropriate private property without adequate compensation. The Under Secretary concluded by saying that the United States has not taken a doctrinaire position on the advisability of an international agreement such as described by the Minister.

154. Memorandum From the President's Deputy Special Assistant for National Security Affairs (Kaysen) to President Kennedy

//Source: Kennedy Library, President's Office File, Staff Memoranda, Kaysen. Confidential.

Washington, November 16, 1962.

Mr. President:

I should like to put in my 2# worth on the choice of a new Director of AID./1/ I know that Dave Bell is not eager to take the job, and his reluctance is a factor that naturally must weigh heavily with you. I wish to argue for appointing him despite it. AID is the major positive instrument of our foreign policy; it needs the best man we can get.

/1/Fowler Hamilton submitted his resignation as AID Administrator on November 10, and he left office on December 7.

I think I know enough about the AID program and its problems, and I know Dave Bell well enough to make my observations of some value.

As I see it, there are three central tasks in the job:

a. To comprehend the purpose of the whole spectrum of aid activities and relate them to the broader purposes of our foreign policy, and to articulate this relation in a meaningful way, both for the agency itself and for the rest of the government;

b. To take a firm grasp on the managerial and administrative problems of the agency;

c. To provide Congress with an understandable rationale for aid expenditures, and to show immediately by argument and then by performance that there is some relation between spending money and achieving our objectives.

The three tasks are strongly interrelated. One reason for declining Congressional confidence in foreign aid is the lack of understandable purpose in the program. A succession of administrators has failed to produce a comprehensible account of the national interests served by foreign aid and how the programs they are defending will achieve them. This, in turn, has reflected the difficulty of explaining what they themselves do not understand. Our new emphasis in economic development is important, but economic development as such is only part of what we are doing in AID, and the promotion of economic development in every country of the world is not of equal interest to the United States. Generalized blanket explanations of the desirability of progress are poor justifications for particular programs. If AID is organized, operated, understood and explained only as a large collection of individual projects spread over 80 countries, its vulnerability to criticism will remain high.

Dave Bell combines better than anyone in sight the qualifications for doing all three tasks. His previous training and experience have given him both a deep understanding of what foreign aid can and cannot do, and direct practical experience of how it does what it can do. His work within the government has demonstrated his administrative and managerial talents. The difficult double task of relating the conception and design of our aid program to the rest of our foreign policy, and at the same time meeting the radically different operating requirements of running an aid program can be done better by someone who has seen both parts of the task from the inside, as Dave has.

I cannot, of course, speak to the question of Dave's persuasive powers with the Congress from first-hand knowledge. He is not a novice: he now has had two years of experience in dealing with appropriations committees. My second-hand understanding is that he has won their respect, as he has won the respect and confidence of everybody in the Executive Branch with whom he deals.

The combination of experience and training that Dave brings to the job is such that there would be almost no start-up time involved in his taking over the management of the enterprise. He knows most of the top people and, what is more important, he knows and understands the problems. My own observation of Fowler Hamilton is that, for all his intellectual gifts, he never really did achieve a clear understanding of what he was trying to do. Finally, Dave has the physical and moral energy and drive needed for one of the most demanding and difficult jobs in the government./2/

CK

/2/President Kennedy appointed David E. Bell to succeed Hamilton as AID Administrator on November 28. Bell took the oath of office on December 21. His confirmation hearing on January 22, 1963, is in Nominations of Christian A. Herter, William T. Gossett, and David E. Bell: Hearing Before the Committee on Foreign Relations, United States Senate, Eighty- eighth Congress, First Session (Washington, 1963). His appointment was approved by the Senate Foreign Relations Committee on January 23 and confirmed by the Senate on February 19. Kermit Gordon succeeded Bell as Director of the Bureau of the Budget.

155. Memorandum of Conversation

//Source: Department of State, Secretary's Memoranda of Conversation: Lot 65 D 330. Limited Official Use. Drafted by Barnett and approved in S on November 29.

New York, November 20, 1962.

SUBJECT

Secretary's Discussion of Population Problems with Foundation Executives

PARTICIPANTS

Secretary of State

Mr. John D. Rockefeller, III, Rockefeller Foundation

Dr. Leona Baumgartner, Assistant Administrator for Human Resources and Social Development--AID

R.W. Barnett, E/ES

List of other Participants Attached./1/

/1/Not printed.

On November 20 at 5 PM, Mr. John D. Rockefeller 3rd was host at a meeting where Secretary Rusk talked about population problems to about 30 executives of American foundations. The meeting was held at the Studio Apartment of the Radio City Music Hall, 61 West 50th Street, New York City, N.Y.

Mr. Rockefeller introduced the Secretary. He said that he found grounds for discouragement in the growing magnitude and complexity of the population problem, and grounds for encouragement in the apparent growth of responsible interest in achieving some kind of an understanding of its nature, and willingness to explore possible solutions. He said that he believed that private foundations and the government had much to gain from exchanging views on this matter, and expressed his gratitude that the Secretary had consented to participate in a meeting for that purpose.

The Secretary said that the relationship of population trends to possibilities for improved economic and social welfare was, of course, important. He would be influenced by several prejudices, he said, as he proceeded to discuss the problem with the particular audience he was facing.

First, as a former member of the community of foundation executives,/2/ he would feel particularly sensitive about the impropriety of anyone in government intruding upon the trust which they bore as executives of private foundations.

/2/Secretary Rusk was President of the Rockefeller Foundation 1952 - 1960.

Second, problems posed by population trends were urgent, but other problems were urgent too. He would make no effort to influence foundations' decisions on priorities of urgency.

Third, he was skeptical about the need at this stage of coordination of work in this field. The need was initiation and an expansion of activity in which "everybody could pitch in".

The Secretary said that something like an "explosion" of interest in population problems seemed to be taking place. He believed that the government had had something to do with this. For example, over the last three or four years, there had been a shift from short to longer term planning of programs to meet the needs of aid-receiving countries. This change in approach brought to the fore, for many countries, the importance of taking into account demographic trends.

It had been said that five countries in the world now have population policies. It was likely that other countries will be wanting to follow suit.

The Secretary considered the obvious increase in United Nations interest in the population problem to be a reflection of its members' growing concern with the matter; the UN seemed to be moving now from activities of a purely informational character to "action" programs, i.e. technical assistance.

United States internal political considerations, the Secretary said, are not really central to the US Government's formulation of ways to act effectively on the population problem. This was not to say, he observed, that population policy was not a sensitive issue. It was. However, it was a sensitive issue in other countries as well, and sensitivities were involved in countries' dealings with each other. The heart of the matter lay in the fact that for quite a few countries rates of population growth seemed to cancel prospects for improvement of economic and social welfare, despite intensive efforts to promote economic development by savings and foreign aid. Economic development is, the Secretary said, a terrifying challenge for native leaders of these countries. Many of them had argued that the growth of strength and prosperity in their countries was frustrated by colonial administrators. With this authority now removed, native leaders must make headway in proving their capacity to show economic and social progress, or be swept aside in favor of others who are promising that they have the capacity to do so by other means. The Secretary declared his continued conviction that less-developed countries can achieve success with free institutions but he recognized that failures could cause resort to alternatives.

Addressing himself specifically to what government and foundations can do in this situation, the Secretary dwelt first upon the role of government. Government can help to create and keep alive continuing interest in the relation of population changes to economic and social development. If asked for information, advice, or assistance on population problems, the government can respond to requests. The government can keep in contact with private organizations. It can do more research of its own. The Secretary's own guess was that the National Institutes of Health would be doing more research. Government needs, however, he said, the stimulus of ideas, and it needs the research which private organizations produce. Government cannot and should not crusade.

If and when a foundation develops an interest in the population problem, it should decide for itself which of its phases it is best equipped to take hold of. Foundation experience over the past thirty years or so can cast some light on possible fields of practical activity. There remains much room for expansion of old activity and exploration of new. The Government is not "overwhelmed" by the difficulties which are sometimes associated with the political sensitivities about this problem; there are needed things to be done by both government and private organizations. We need not fear doing them.

The Secretary then threw the meeting open for general discussion. In response to questions from the audience:

He replied to Mr. Rockefeller's inquiry about how "communication" might be improved among all those interested in population problems by saying that he hoped that there could emerge a number of centers of information where a pooling of knowledge and of reports about general activities could have some influence on decisions. Dr. Baumgartner (AID Assistant Administrator for Human Resources and Social Development) expressed the hope that her office in AID could, over time, serve as another point of contact.

Responding to a question by Mr. Kenneth Thompson (Rockefeller Foundation) about the possibility of "Luke" Battle calling a regional conference for Africa, Mr. Barnett (E/ES) summarized the present activities of the economic commissions for Asia and the Far East, Latin America and, specifically, Africa. He observed that it was the Department's view that often effective results were produced when population problems were talked about multilaterally amongst countries with common political, economic, cultural and religious problems. It was desirable, whenever possible, to eliminate the national imprint from information and advice about population problems, and particularly so in Latin America.

The Secretary stressed the importance for Americans to respond to requests of other countries where population problems were concerned. The US should not advocate specific solutions, and the US Government officially must make clear that any programs which other countries may, by their own decisions, consider to be desirable are, in fact, their own. He mentioned risks of misunderstanding and possible future recrimination which could flow from deviation from these rules. Population, he said, is not a general problem. It is a problem in specific countries and within those countries in specific localities. Factual information should be assembled and scrutinized case by case. The Secretary deplored the use of slogans to cover blanket solutions of problems. He deplored, by way of illustration, the uncritical advocates of undifferentiated "land reform" and said that population problems did not lend themselves to uniform solutions any more than land problems.

The Secretary warned his audience particularly of the risk of promising too much to countries which may have asked for help. The awakening of excessive expectations and then their disappointment could set back progress in this field for 20 - 30 years, he said. Dr. Baumgartner strongly reaffirmed the Secretary's warning not to promise too much.

President Heald, of the Ford Foundation, expressed satisfaction at the good relationship which had been established between his foundation and the Department. Mr. Lamont duPont Copeland spoke about the desirability of American efforts to bring the population problem to the attention of "thought" leaders of foreign countries.

Mr. Kenneth Thompson, of the Rockefeller Foundation, expressed some doubt that the US political problem was not a greater impediment to activity in the field of population problems than the Secretary had suggested. At the Secretary's request, Mr. Barnett referred to the interest of the National Catholic Welfare Conference in expansion of research on human fertility; Mr. Barnett referred to Pope Pius XII's approval of the "rhythm method" as a technique of family regulation and the Pope's declared hope that science could make that method more secure. There was Roman Catholic interest in other aspects of the demographic problem. There might be wider areas of agreement than was commonly supposed.

Dr. Baumgartner, speaking personally, said that during a trip last year through the Far East she had observed the difference between frank discussion of medical information on all other subjects and reluctance to talk about techniques of family regulation. She wanted to see this ended, and held out hope that it soon would be.

The Secretary told his audience that he was certain that there would be a continuing and increasing interest in the population problem.

At six p.m. the meeting was adjourned in order to listen to the President's televised press conference./3/

/3/For text, see Public Papers of the Presidents of the United States: John F. Kennedy, 1962, pp. 830 - 838.

156. Editorial Note

The Ministerial Council of the Organization for Economic Cooperation and Development (OECD) met in Paris November 27 - 28, 1962. Under Secretary of State George W. Ball headed the U.S. Delegation, and John M. Leddy, who succeeded John W. Tuthill as U.S. Representative to the OECD effective November 5, served as Alternative Representative. Fowler Hamilton was also a member of the U.S. Delegation. For telegraphic summaries of the Ministers' discussions on development assist-ance (Cedto 505 from Paris, November 28) and trade and aid (Cedto 507 from Paris, November 28), see the Supplement.

The communique issued at the end of the meeting included accept-ance of the conclusions of the first annual review of the foreign assistance policies of the members of the Development Assistance Committee. It also "recognized the need for further concerted action to increase the volume and effectiveness of aid to developing countries and to relate it more closely to the development efforts of the benefitting countries themselves." For text of the communique, November 28, see Department of State Bulletin, December 24, 1962, pages 979 - 980. On the same day, the Council also passed a resolution on the coordination of trade and aid; it is printed ibid., pages 980 - 981. Documentation on U.S. preparations for and participation in the OECD Ministerial Council meeting is in Department of State, Central Files 374.800 and 800.0000.

157. Telegram From the Department of State to the Mission to the Organization for Economic Cooperation and Development

//Source: Department of State, Central Files, 374.800/12 - 2662. Official Use Only; Priority; Verbatim Text. Drafted by R. Palmer (AID/IDOS); cleared by 12 officers from AID, State, and Treasury; and approved by Coffin. Repeated to all other DAC capitals.

Washington, December 26, 1962, 7:25 p.m.

412. Consider following principles on terms of aid as basic to meeting development needs of developing countries and achieving greater equity in aid contributions of DAC members. Believe they represent significant step forward but are sufficiently moderate to permit agreement by DAC members. Request you make text available to Secretariat and delegations promptly and urge most serious consideration by capitals with view to incorporation in recommendations of WP on terms. London should provide copy informally to Pliatzky,/1/ WP Chairman. Assume text will be on agenda January meeting of WP. Statement of principles below does not represent or imply any change in existing US lending policies.

/1/Leo Pliatzky.

"I. Introduction

The major OECD/DAC objective of furthering the growth of developing countries requires recognition of the long-term need of most of these countries for net capital inflows over a period of years. Apart from a few developing countries with exceptional foreign exchange earning capacity and prospects, the present and prospective debt-servicing capacity for some years to come of these countries is not adequate to permit the whole or major part of capital inflows commensurate with their development needs and self-help efforts to be provided on commercial credit terms. If development needs are financed mainly or largely on commercial or other insufficiently liberal terms, therefore, many developing countries will assume debt burdens that are excessive and others will add further to debt burdens that are already too great.

The consequences of excessive debt burden are: creditors are periodically required to roll over or consolidate debt as emergency meas-ures; reasonable and desirable development objectives may have to be abandoned; developing countries are encouraged to adopt lax attitudes towards debt repayment obligations; business confidence may be impaired with a possible resultant decline in private foreign investment; where creditors do not supplement debt rollovers with adequate aid on liberal terms, other donors of grant aid or loans on terms comparable to IDA terms are placed in the politically awkward and economically unjustifiable position of servicing, in effect, the credits on short term, with high interest or insufficient grace periods of the original lenders.

Accordingly, in recognition of these problems, several principles and specific actions are proposed below for DAC consideration and adoption.

II. General principles

1. Terms of governmental aid (including grants and loans) should take account of the limited debt-servicing capacity of the developing country, including its present and expected future capacity for effectively using domestic and external capital and the importance of its having available an adequate share of its current and prospective foreign exchange earnings for critical imports.

2. In the case of loans to borrowing enterprises, members should recognize the proper role of interest rates in the allocation of resources within the developing country and provide for interest rates (as well as repayment periods) to the ultimate domestic borrowing enterprise appropriate for the nature of that enterprise. Where the appropriate repayment terms to the lending country, as indicated by recipient country's debt-servicing capacity, differ from the appropriate terms for the enterprise, the donor should make an arrangement to provide for meeting both criteria. (A two-step loan procedure is one way; another which has been suggested by some governments would be to accompany loans on terms appropriate to the project with grant aid to permit debt-service by the government without excessive burden.)

3. Terms of aid should be sufficiently liberal as to allow the needed margin of debt-servicing capacity of the developing country for accepting financing from foreign private sources and international institutions.

4. Terms of aid of each donor should be sufficiently liberal to ensure normally a continuing net positive flow of capital from all external sources combined into individual developing countries.

5. Donors should pay special attention to the heavy debt burden effect of short term exporter credits and avoid overloading recipient countries. In particular, in order to diminish the likelihood of payments crises in receiving countries, donors extending official or guarantied private short term exporter credits should not reduce the level of such credits outstanding without replacement by at least a balancing amount of aid on liberal terms; and in recognition of the need for capital on liberal terms within limited availabilities of external financing, any increases in amounts of such export credits which a donor may provide above present levels outstanding should normally be accompanied by at least a balancing amount of new aid on very liberal terms.

6. The IDA, the U.S., and some other countries have made significant progress toward achieving the above goals. Other countries in order to make their capital assistance program compatible with an equitable sharing of the costs of development aid among all DAC members should move rapidly in this direction.

III. Specific actions

1. Terms of aid of members of consortia, coordinating groups, and consultative groups should be discussed in these groupings with a view to achieving consistency with the foregoing principles as measured by effective repayment terms, taking into account loans, grants, and exporter credits.

2. The amounts and debt-servicing burden of exporter credits should also be discussed in consortia, coordinating groups and consultative groups.

3. The OECD Secretariat should make arrangements for continuing review of debt servicing burdens of developing countries and report periodically to DAC on specific countries that are approaching or already beyond a limit of debt that is reasonable in view of all relevant considerations. The cooperation of the IBRD should be invited.

4. DAC members should agree to discuss the debt-servicing problem of any developing country reported by this review as approaching a reasonable limit, and recommend course of action for donors.

5. Every donor should seek funding authority for significant proportion of its aid effort to be on very liberal terms consistent with the foregoing principles (including provision for grants or loans on terms comparable to IDA terms).

6. DAC should ask Secretariat, in collaboration, as appropriate, with IBRD, or other institution to undertake study of relevant indicators of debt-servicing capacity with view to recommending debt-burden measurement indicators."

Rusk

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[End of Section 8]

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