BACKGROUND GUIDANCE
On 1st March, 1949 the U.S. Ambassador communicated to the Secretary of State for Foreign Affairs a memorandum setting out the general concept for a military assistance programme for Western Europe. The basic idea as described in this memorandum was that the U.S. Administration, on receipt of a request for military assistance from the Western Union countries, would present to Congress a programme of military assistance for the year ending 30th June, 1950, permitting:
(a) The transfer of certain finished military arms and equipment from U.S. stocks or production to the Western Union countries; and
(b) A sum of dollars to be available to cover necessary dollar costs of agreed specific proposals involving additional military programmes, including production, in the Western Union countries.
It was stated in the memorandum that a request for military assistance by the European countries would be construed as an acceptance of the validity of the principles of "self-help" and "mutual aid" and the obligations they entail including that of reciprocal assistance to the United States.
First indications of the U.S. Government's calculations
2. In discussing this memorandum with the Secretary of State on 1st March the U. S. Ambassador outlined the main points in the general concept behind the U.S. proposals and certain tentative dollar figures were mentioned for the two categories (a) and (b) above, though at the request of Mr. Douglas they were not recorded. On the following day, however, at a meeting with the Prime Minister and other Ministers of H.M. Government Mr. Douglas gave a preliminary estimate of the financial calculations for the year ending 30th June, 1950 on which the U.S. Government were working. These were as follows: --
(a) Equipment from U.S. sources to the value of $850 million to $1,000 million.
(b) Expenditure by Western Union countries of the equivalent of $325 million, of which the U.S. would contribute from $115 to $165 million.
3. In regard to (a) it was explained by the Ambassador that the figures were misleading in the sense that they were not an accurate measure of the amount of equipment which would be provided. The greater part would come out of surplus stocks, which were valued at about 10% of their original value. As to (b) it will be seen that according to the Ambassador's figures the "necessary dollar costs" in the Western Union programme were expected to amount to between 35% and 50% of the total cost.
4. After this meeting, at which it was agreed on the side of H.M. Government that the proposals were acceptable to the U.K. as a basis for discussion with other Western Union countries, the U.S. Government laid their proposals before the French, Belgian, Netherlands, and Luxembourg Governments in a memorandum handed by Mr. Harriman to the individual Governments of the Five Powers on 3rd March. On 6th and 7th March the Brussels Treaty Finance and Economic Committee met American representatives who once again gave tentative and personal estimates of the aid which might be available, namely: --
(a) That the amount available from surplus war stocks would at a rough guess be about $1,000 million, mostly priced at as little as 10% of the original cost; and
(b) That for a programme of the equivalent of between $300 and $350 million of new production in Western Europe Congress might be asked to contribute between $100 and $150 million.
The Brussels Treaty Powers' request for aid.
5. The Brussels Treaty Powers then examined the proposals in greater detail and reached the estimate that without detriment to economic recovery the five countries combined could undertake additional production in 1949/50 of about $200 million and in 1950/51 of about $400 million at the rates of exchange prevailing in March and April 1949. The "necessary dollar costs" of these programmes were difficult to estimate precisely. In the case of the U.K. the raw materials and machine tools needed for any increased production programme represented, it was thought, about one-third of the total cost. Belgium, on the other hand, had the necessary indigenous raw materials. On an average, therefore, it was estimated that materials and machine tools involving dollar expenditure might represent 15% of the total Western Union cost, or very much less than had been suggested in the earlier conversation.
6. The five Governments made their request for U.S. military assistance in their note of 5th April, in which they accepted the principles of self- help, mutual aid and common action in defence against an armed attack. This note contained also the statement that "the military strength of the participating powers should be developed without endangering economic recovery and the attainment of economic viability, which should accordingly have priority." The annex attached to the note showed that the Five Powers envisaged, at the rates of exchange prevailing in March and April 1949, a total two-year production programme of $600 million, divided into $200 million for the first year and $400 million for the second. The U.K. offered a contribution of $105 million for the first year and $210 for the second year. It was calculated by H.M. Government at the time when they made this offer that the dollar element in their programme would amount to about 25%.
The programme as now revised.
7. The production programme was subsequently worked out in detail by the Western Union Supply Organization. At a later stage it was again reviewed in order to take account of the change in the sterling-dollar exchange rate on 19th September, 1949. The dollar element in the programme remained unchanged but the estimate of domestic productive effort for each country, as expressed in dollars, had to be revised. As a result, the U.K. share of the programme when finally reviewed in October, 1949, after the Mutual Defense Assistance Act had passed into law, was expressed as equivalent of $228 million instead of the $315 million estimate of 15th March. But in terms of domestic productive effort the value of the U.K. share in the programme, as revised in October, stands at £81 million compared with £79 million on 15th March. The dollar element in the revised programme, as now worked out in detail, is at most $25 million, or 11% compared with the estimate of 25% in the programme as provisionally drawn up in March.
The U.K. will proceed with its share of the Western Union programme.
8. H.M. Government regard themselves as committed to their share of the Western Union programme of additional munitions production. They have agreed that the programme should be reviewed by the Atlantic Pact Organisation to ensure that it is integrated with the plans for Atlantic Defense; but, subject to that review, H.M. Government propose to place the orders and to enter forthwith into the financial commitments required to implement their share of the programme.
9. This commitment by His Majesty's Government, amounting £81 million, includes the following items on which agreement in principle by the Brussels Treaty allies has long since been approved: --
(a) Provision of aircraft and equipment to the French Air Force valued at about £9 million, ($36 million at the old rate) for which no payment will be received so long as France remains a debtor country in relation to the U.K. in the intra-European Payments Scheme. Production for these aircraft and equipment was in fact not delayed pending formal commencement of the programme and up to the end of this calendar year about £3.5 million ($14 million at the old rate) worth of material will have been delivered to France, including 120 jet aircraft.
(b) Provision of aircraft and equipment for the Belgian and Netherlands Air Forces broadly estimated at £5 million ($20 million at the old rate) which it is intended to supply on re-payment. Here also some deliveries are already being made.
Other U.K. contribution to Western Defence.
10. In this connexion attention may be drawn to the heavy contributions which H.M.G. have already made to Western defence, quite apart from the additional production programme referred to in the above paragraph. The figures given below are converted from pounds to dollars at the rate of exchange prevailing before 18th September 1949, because the expenditures were almost all completed before devaluation of the pound. The following is a summary:-
a. Since the end of the war equipment to the total value of some £250 million ($1,000 million) has been transferred by this country to Atlantic Pact countries and in addition His Majesty's Government have lent ships to the value of £8 million approximately ($32 million) and have in the current year offered further surplus and reserve equipment to Western Union nations to the value of about £20 million ($80 million). They have received (or are receiving) payment in one form or another for everything which they have transferred, but the price charged was substantially reduced where the equipment was surplus or where it was a bulk transaction. In particular, under the Hartemann Agreement, during the years 1946 - 1949 H.M. Government supplied £18 million worth ($72 million) of aircraft and equipment to the French Air Force at the price of only £3 million ($12 million).
(b) Apart from the specific assistance to Atlantic Pact countries and from the additional expenditure on the approved Western Union production programme, H.M. Government have undertaken since August, 1948 additional defensive measures largely, though not exclusively, for the defence of Western Europe at a cost of not less than £55 million ($220 million) in 1948-49 and 1949-50. These expenditures were for increasing the production capacity in the U.K. of jet aircraft, anti-aircraft ammunition and tanks and for re-fitting anti-submarine craft.
(c) Between the end of the war in Europe and the Agreement of the 22nd May, 1947, assistance to Greece in the form of loans, equipment and mission maintenance amounted to at least £68 million ($272 million). Under the 1947 agreement the U.S. Government took over financial responsibility for supplies to the Greek army and air forces, but H.M.G. has continued to incur expenditure on the British Military Mission as well as on the maintenance of the British forces in Greece which are now being withdrawn.
(d) Before the question of the military assistance programme had been raised, H.M. Government had already incurred costs amounting to £131,000 ($524,000) in 1948/49 in respect of the secretariats of the Military Committee and Military Supply Board of the Brussels Treaty and British personnel in the Commanders-in-Chief Organisation, together with accommodation, communications, transportation etc. charges on their account. The original estimates for 1949/50 amounted to £400,000 ($1,600,000), but this figure will be exceeded as there have subsequently been increases in staffs and extra accommodation has been provided. These figures take no account of expenditure which may be incurred in connexion with the construction of headquarters in France.
11. In short at a rough calculation it may be said that since the end of the war the U.K. has contributed or is contributing to the general purposes of Western defence directly or indirectly, by gift, loan or sale, no less than £401 � million or $1,606 million, made up as follows:
Transfer of equipment (mostly Against repayment) £250 million ($1,000 milllion at the rate of exchange prevailing at the time)
Loan of ships £8 " ($32 " ")
Further surplus equipment to Western Union countries £20 " ($80 " ")
Aid to Greece £68 " ($272 " ")
Additional defence measures '48-50 £55 " ($220 " ")
Brussels Treaty Costs £ .5 " ($2 " ") £402.5 " ($1606 " at the rate of exchange prevailing at the time In addition to the above, the U.K. is contributing the additional production programme of £81.5 million ($228 million at the new rate of exchange) which is largely being devoted to the rearmament not of the U.K., but of France, Belgium, Luxembourg and the Netherlands. It will be appreciated that a large proportion of the expenditures mentioned above, totaling £482 � million ($1834 at the appropriate rates of exchange) represents entirely unrequited contributions to Western defences.
12. It is relevant to remark in this connexion that the French additional programme, amounting to about £47 million in value ($188 million) is devoted entirely to the production of equipment for the French forces and that the same applies to the programmes of the Netherlands and Belgium, except that they are collaborating in the production of Meteor aircraft on a strict barter basis, the Netherlands making airframes and Belgium making engines. It is therefore true to say that the United Kingdom is the only nation of Western Union which, in the sphere of defence production, is making a substantial effort to assist her allies by the provision of equipment. This country is of course the only one of the five nations (with the possible exception of Belgium) in a position to furnish such aid. United Kingdom efforts to assist other countries in equipping their forces should be viewed therefore in relation to the total defence expenditure of each nation, which constitutes a truer measure of comparative effort in the common cause. A schedule is attached comparing the defence expenditure of the principal Atlantic Pact countries which, though naturally subject to a wide margin of error, represents the best estimate which can be compiled from available data.
Diminished value of Mutual Aid to the U.K. economy.
13. It will be recognized that in the light of the Mutual Defense Assistance Act as passed into law, the value of mutual aid to the U.K. economy is much less than H.M. Government had expected when they undertook their share of the additional munitions production for Western Union. In essence H.M. Government have agreed to divert to extra munitions production £81 million of their economic resources which would otherwise have been available to promote economic recovery. In agreeing to do this they expected dollar aid on a scale that would substantially compensate them for the resources so diverted and thus counteract the adverse effect on the U.K. economy. That expectation has not been borne out by events. The position is worked out in more detail below, but in summary it is as follows:- First, as regards dollar aid, the most the U.K. can get is $25 million or 11%, instead of the expected 25%, and there would apparently have to be a drastic revision of the conditions attached to such aid before they can expect to obtain even this amount. Secondly, aid in kind, while of great value from the military standpoint, does not compensate the economy for resources diverted to additional munitions production. Thirdly, H. M. Government are expected, according to the terms of the draft bilateral agreement now submitted to them, to add to their contribution to Mutual Assistance by undertaking reciprocal obligations on an undefined scale.
Dollar Aid
14. Under the Mutual Defense Assistance Act as passed by Congress, this form of aid can be given by the provision of any services, or by the procurement from any source of equipment, materials and services. The Act specifically excludes the provision of dollar aid by way of direct or indirect compensation for the loss of dollar earning capacity resulting from the diversion of effort to armaments production. Thus the Act, by its definition of the form in which this aid can be given, has necessarily limited the amount of assistance that can be claimed.
15. A more serious limitation, however, is provided by the terms of the draft Bilateral Agreement and by the procurement procedures under that Agreement as so far notified to H.M. Government. Unless these conditions and procedures are drastically revised it seems probable that the U.K. will in fact be unable to obtain any assistance at all. The points in mind are as follows:-
(1) The dollar materials that are being used in the U.K. munitions production programme are part of our total supplies of these materials from dollar sources which are financed under E.C. Aid. This element accounts for some $20 million in the total maximum U.K. claim of $25 million. This part of the claim could only succeed if the U.S. Government could find means of compensating the U.K. economy by the purchase, with dollars under the Mutual Defense Act, of further materials over and above the materials financed by E.C. Aid to replace the E.C. materials which have been diverted to additional munitions production, and thus to reduce the future demands upon our E.C.A. and other dollar resources. (2) It appears likely that most of the dollar materials in the U.K. programme are procurable from European but hard currency sources for which we should have to pay gold. It will be necessary to disregard the existence of this alternative source of supply if the dollar aid is to be realised.Aid in Kind
16. There remains the aid in kind, i.e. finished equipment that can be made available under the Mutual Defense Assistance Act. The U.K. may expect to receive under this head 70 B-29 aircraft. The value of this aid from the standpoint of the common defence is fully appreciated. But it cannot of course be regarded in any way as replacing the resources diverted from the promotion of our economic recovery to the extra munitions production programme. Nor will the receipt of these aircraft enable H.M. Government to make any corresponding reduction in their armaments budget. On the contrary, it is likely to lead to some increase in defence expenditure owing to additional costs in maintenance and ground organisation.
Reciprocal Facilities
17. Article I(1) of the draft Bilateral Agreement provides, in accordance with the Mutual Defense Assistance Act, that each Government shall make available to the other "such equipment, materials, services or other military assistance as the Government furnishing such assistance may authorise". It is appreciated that this Article as it stands would not involve receiving Governments in any specific commitment to provide reciprocal assistance on any given scale. But H.M. Government would not think it right to enter into any general commitment to provide reciprocal assistance without reaching beforehand a clear understanding about the scale on which they for their part would authorise such assistance, and they accordingly see grave objections of principle to any Article on these lines. H.M. Government are already providing without charge for accommodation and other services for the U.S. Air Force in England at an estimated cost of about £1 million a year for current expenses excluding capital costs.
18. The position of H.M. Government is that their share of the Western Union production programme, combined with the reciprocal facilities which they are already providing, represents the limit to their contribution to mutual assistance. They cannot afford any further diversion of domestic resources to non-productive military effort.
Administrative Expenses
19. It follows that H.M. Government would also be obliged to scrutinize with the greatest care the commitments into which they might be expected to enter on account of United States administrative expenditure under Article V of the Draft Bilateral Agreement. It is appreciated that the sums which the U.S. authorities have in mind are not large, but it must be pointed out that in the case of military aid no "counterpart funds" arise from which these administrative expenditures of the U.S. Government could be met. Any funds provided for this purpose would therefore have to be voted by, and accounted for, to Parliament and this is bound to raise difficult questions of principle.
Control over transfers of equipment
20. A further serious difficulty arises in connexion with Article I, paragraphs 2, 3 and 4 of the draft Agreement, which deal with the use and disposal of equipment, materials and services supplied under the Mutual Defense Assistance Act. H.M. Government are of course perfectly in accord with the general proposition that such equipment etc. shall be used to further the purposes of Atlantic defence, and shall not be disposed of to other Governments without agreement, but they could not accept the restrictions proposed in the draft agreement. These restrictions, apart from being insufficiently defined and probably unworkable in practice, would apparently lead to a degree of supervision and control over the whole armaments industry and export trade of this country which neither H.M. Government nor Parliament could possibly agree to. In particular H.M. Government would be obliged to have regard to the fulfillment of their commitments (in some cases treaty commitments) to the Commonwealth and foreign countries which rely on the U.K. for their military supplies.
21. In addition to the major points indicated above on which the draft Agreement is unacceptable to the United Kingdom, there are a number of other points which would need either to be substantially modified or to be made the subject of separate Agreements. In particular, Article II, relating to United States stockpiling, and Article IV, relating to reciprocal arrangements regarding patents, would require close examination and appear somewhat out of place in the context of the Mutual Defense Agreement.
Conclusions
22. H.M. Government therefore reach the following conclusions in regard to the programme of military assistance as it now stands:
(1) The value of aid receivable by the United Kingdom under the Mutual Defense Assistance Act falls below the aid which H.M. Government expected to receive when they entered on their share of the Western Union defence programme.
(2) The United Kingdom contribution to the Western Union defence programme involves the diversion to munitions production of £81 million of resources which would otherwise have been available to promote economic recovery. It is the intention of H.M.G. to implement their share of the Western Union programme whatever the outcome of their claim for aid under the Mutual Defence Assistance Act.
(3) H.M.G. have since the war provided assistance to friendly nations to a total of $1606 million, of which a large proportion (over half) was in the form of gifts, loans or other unrequited assistance. They are also undertaking an expensive additional production programme on behalf of their Western Union partners. No other country except the U.S.A. has made or is contemplating making a comparable contribution. Taken in conjunction with the very costly normal defence budgets in the post-war years, which though primarily for the defence of the United Kingdom and its overseas territories also contribute to the security of free countries throughout the world, the proportion of their economic resources which H.M.G. have devoted to armaments and defence has certainly reached the limit of what is prudent
(4) The U.S. draft of the proposed Bilateral Agreement calls for reciprocal aid from H.M.G. to an amount and over a period which is undefined. The terms on which aid is offered do not meet the reasonable requirements of the U.K. situation. It is therefore impossible for H.M.G. to negotiate for an agreement based on the existing draft, or to accept aid on the terms offered. In particular:-
(a) There is considerable room for doubt whether the U.S. dollar aid towards the additional U.K. production programme (estimated at a maximum of $25 million) would in effect be additional to E.C. aid, and will in fact be made available.
(b) It also seems possible that the U.K. bids for aid would be disqualified on the ground that they were made in respect of dollar materials which might be acquired from European hard currency sources.
(c) Having regard to the size of the contribution already made to mutual assistance by the U.K. in their share of the additional production programme, H.M. Government should not be expected, under any agreement of this kind, to furnish reciprocal facilities over and above those that they are already providing to the U.S. Air Force.
(d) Article I of the draft Bilateral Agreement postulates an unacceptable element of control over the provision by the U.K. of munitions, equipment and stores to Commonwealth and foreign countries within or without the Atlantic Treaty Organisation.
(e) The question of payments for U.S. administrative expenditures presents serious parliamentary and other difficulties.
(f) Certain other difficulties also arise from the draft Bilateral Agreement, especially in regard to stockpiling and patent arrangements.
ANNEX II
| (a) | (b) | (c) | (d) | (e) | (f) | (g) |
|---|---|---|---|---|---|---|
| Country | Population in millions (1948) | Net National income at factor cost in £million | Total Government expenditire in £million (Note 1) | Military expenditure in £million (same year) | Military expenditure expressed as a percentage of national income. | Military expenditure expressed as a percentage of total government expenditure. |
| U.S.A | 146 | £ 56,550 m | £ 10,875 m | £ 3,567 m | 6.3% | 33% |
| CANADA | 13 | £ 3,160 | £ 595 m | £ 105m | 3.3% | 18% |
| U.K. | 50 | £ 9,890 m | £ 3,308 m | £ 760 m | 7.7% | 23% |
| FRANCE | 41 | £ 4,875 m | £ 2,180 m | £ 448 m | 9.0% | 20.5% |
| BELGIUM | 8.5 | £ 1,425 m | £ 435 m | £ 29 m | 2.0 % | 6.6 % |
| NETHER-LANDS | 10 | £ 1,195 m | £ 375 m | £ 80 m | 6.7% | 21% |
Note 1. Total Governemnt expenditure is given for the following financial years:
U.S.A. July 1949 to June 1950
Canada, U.K. April 1949 to March 1950
REMAINDER January 1949 to December 1949
NOTE: 1. Total Government expenditure is given for the following financial years:
U.S.A. July 1949 to June 1950 Canada, U.K. April 1949 to March 1950 Remainder January 1949 to December 1949
ADDITIONAL NOTES
1. NOTE ON PARAGRAPH 13 OF "Background Guidance".
As was stated in paras. 2 to 4 of the "Background Guidance", an indication was given to H.M.G., though admittedly only on a tentative and personal basis, that the U.S.G. might contribute between 35% and 50% of the total cost of the additional production programme to be undertaken by the Western Union Powers. Over the two-year period during which the programme is to be carried out, this would have meant a dollar contribution by U.S.A. to the U.K. effort of between 115 million dollars and 165 million dollars at the rate of exchange prevailing in April 1949. It was subsequently estimated that the dollar cost of the additional production programme might be about 25% of the total cost, i.e. 57 million dollars out of the U.K. total of $228 million at the new rate of exchange. In essence H.M.G. agreed to divert to extra munitions production economic resources producing goods valued at £81 million pounds which would otherwise have been available to promote economic recovery. In deciding to do this, they hoped for dollar aid on a scale that would substantially compensate them for the resources so diverted and thus counteract the adverse effect on U.K. Economy. It was therefore on the assumption that the U.K. would receive military assistance in the form of dollar aid to the order of about 50-60 million dollars during the two-year period that H.M.G. felt able to undertake the additional production programme. It is clear from the terms of the Mutual Defense Assistance Act as passed into law that the value of U.S. Dollar aid to the U.K. economy is likely to be much less than H.M.G. had hoped when they undertook their share of the additional munitions production for Western Union. Since the Act specifically excludes the provision of dollar aid to compensate directly or indirectly for the loss of dollar earning capacity resulting from the diversion of economic effort to armaments production, the most that the U.K. can get is payment for the machine tools and raw materials which are needed for the additional production programme and which can only be obtained for dollars. These are only likely to amount to 11% of the total cost or 25 million dollars over the two-year period. Under the terms of the Act and of the U.S. draft Bilateral Agreement, even this amount can only be provided in the form of actual machine tools or raw materials purchased in the U.S.A. The funds cannot apparently be used to compensate the U.K. for raw materials already taken from its stocks to get the additional production programme going. These stocks in part consisted of raw materials purchased with E.R.P. dollars and it would require further dollar expenditure to bring them up to their former level. It appears from the terms of the Act and of the U.S. draft Bilateral Agreement that this expenditure in making up the U.K. stocks would have to fall on the U.K. E.R.P. allocation or on other U.K. dollar resources and not on its share of military assistance funds.
2. NOTE ON PARAGRAPH 15 (1) OF "Background Guidance".
The dollar materials that are being used in the U.K. additional munitions production programme are part of our total stocks of these materials. These stocks have in part been built up from dollar sources, financed either from U.K. gold and dollar reserves or by E.C. Aid. H.M.G. had hoped to recoup itself for this use of dollar materials, entailing expenditure either of free dollars or of E.C. aid, by the purchase with dollars provided by the U.S. Government under the Mutual Defense Assistance Act, of further materials to replace the dollar materials which have been diverted to additional munitions production. This would rebuild U.K. stocks to their previous level without asking further demands upon our E.C.A. and other dollar resources for materials for non-productive military expenditures which do not contribute to U.K. economic recovery. This method of compensating the U.K. economy and of assisting H.M.G., by a relatively small dollar contribution, to provide a very substantial amount of assistance to their partners in the North Atlantic Treaty, appears to be ruled out by the terms of the U.S. legislation and of the U.S. draft of the proposed Bilateral Agreement.
3. NOTE ON PARAGRAPH 15 (2) OF "Background Guidance"
It appears likely that most of the dollar materials required for the U.K. additional production programme might be procurable from certain European countries. H.M.G. have been given to understand that the U.S. Government would not feel able to supply such materials under the Mutual Defense Assistance Act if they were in fact obtainable from other European countries which have signed the North Atlantic Treaty and participate in O.E.E.C. H.M.G. feel bound to point out that their financial arrangements with the other European countries, which could furnish such materials, include a provision to pay gold when the U.K. adverse balance reaches a certain figure, and that, according to the present and foreseeable trend of their payments to such countries, purchase of the materials from such countries would therefore involve a reduction in the U.K. gold and dollar reserves. Such a reduction in the reserves for this purpose would militate against the United Kingdom's prospects of economic recovery.