Foreign Relations of the United States, 1950, National Security Affairs; Foreign Economic Policy, Volume I

Department of State Committee Files, Lot 122, Box 15559

Memorandum by the Secretary of State to the President ¹

confidential

[Washington,] February 16, 1950.

The problem I should like to submit for your consideration is how to develop an Administration policy and program for adjusting the balance of payments of the United States.

The time is rapidly approaching when the Government and the people of the United States must make critical and far-reaching decisions of policy affecting our economic relationships with the rest of the world.

These decisions have to do with the future course of the foreign trade and financial transactions of the United States. The specific problems involved are economic, but the broad policy decisions as to the directions in which their solution should be sought, and the speed with which we act on these decisions, will affect the political and security interests of the United States throughout the world as well as our domestic prosperity.

It is the understanding of Congress and the people that the European Recovery Program will be brought to a close in 1952. It is expected that unless vigorous steps are taken, the reduction and eventual termination of extraordinary foreign assistance in accordance with present plans will create economic problems at home and abroad of increasing severity. If this is allowed to happen, United States exports, including the key commodities on which our most efficient agricultural and manufacturing industries are heavily dependent, will be sharply reduced, with serious repercussions on our domestic economy. European countries, and friendly areas in the Far East and elsewhere, will be unable to obtain basic necessities which we now supply, to an extent that will threaten their political stability.

We are now exporting about $16 billions of goods and services. We are importing only $10 billions of goods and services. Of the difference of about $6 billions, $5 billions is being paid for by foreign assistance. In short, about a third of our exports is being financed by grants. At the end of ERP, European production will have been restored and substantial recovery achieved. This will be a tremendous accomplishment. But the problem of payment for American goods and services will remain. The countries of the free world will still require from us a volume of exports which they will not be able to pay for if their exports to the United States remain at present levels. Put in its simplest terms, the problem is this: as ERP is reduced, and after its termination in 1952, how can Europe and other areas of the world obtain the dollars necessary to pay for a high level of United States exports, which is essential both to their own basic needs and to the well-being of the United States economy? This is the problem of the “dollar gap” in world trade.

In answering this problem basic policy decisions will be required with reference to:

1) The level of American exports which we regard as vital to our political, economic and security interests.

2) The degree to which the United States should be prepared to increase its imports of goods and services.

3) The role of foreign assistance.

4) The contribution of public and private foreign investment to the foreign trade problem.

The economic strength of the free nations of the world, and the preservation of their hope for economic progress, are among the strongest forces that can be brought to bear against Soviet communist aggression. Our present economic policies are designed in the long run to build this strength and provide this hope. Existing plans are inadequate to meet the needs of the present situation. If nothing else is done, the efforts being made through the United Nations, the North Atlantic Pact, European Recovery Program,² Point Four and the ITO will be jeopardized. The political consequence will be a substantial shift of power from the democratic to the Soviet sphere. This possibility gives real urgency to the problem of the dollar gap.

I suggest, therefore, that the Administration needs soon to affirm that the importance to the United States of a successful economic system among the free nations is so great that the United States is determined to do its full part to achieve it—even if this involves adjustments and sacrifices by particular economic groups in the United States in the interest of the nation as a whole—even if it requires some modification of current domestic policies—and even if it requires more time than was orginally contemplated by the Foreign Assistance Act of 1948. The imagination and energy with which the United States develops and carries through a program of action will stem directly from this affirmation and determination.

I believe that the new pattern of our economic relations must be developed before the end of the ERP period. The immediate necessity is the determination of the broad lines of policy, the development of a program of specific measures to achieve the purposes set forth in such a policy, and the assignment of responsibility within the government for implementing the program. Simultaneously, the problem, the policy and the program must be explained to the people, and ways must be found to enlist public interest and support.

The problem of the dollar gap requires a far higher degree of coordination between our domestic and foreign economic policies than heretofore. It is of such importance and size that I believe the whole machinery of government must be brought into play if we are to achieve success in solving it. Therefore, your personal direction is needed, not only at the initiation of this program, but throughout its development and implementation. In order that such direction should not claim too much of your time, I recommend that you consider using one of your staff assistants to assist you in directing and coordinating the Administration program to adjust the balance of payments of the United States.

The staff assistant should be familiar with the techniques—such as those developed in the NSC—by which the President’s leadership can be supported both by staff assistance and by a flexible system of consultation with Cabinet Members and other agency heads. Such a person, therefore, assisted as necessary by officers detailed from other agencies, would afford an appropriate instrument for insuring Presidential direction and control without encroaching upon the line relationship of the agency heads to the President, and for insuring integrated and cooperative effort throughout the Executive Branch.

1) I suggest, therefore, that at some convenient time in the near future you devote a Cabinet meeting to this matter and invite the attendance of the staff assistant, designated by you, together with the ECA Administrator, the Chairman of the Council of Economic Advisors and the Director of the Bureau of the Budget.

a) That you present the attached paper³ to them as a statement of the problem and of possible courses of action.

b) That you express your wish to receive coordinated advice on the basic policy decisions involved and your desire to have the heads of the departments and agencies in a cooperative effort develop programs whereby the policies decided may be implemented.

c) That you assume personal leadership of this whole “campaign” to close the dollar gap, and explain to them your reasons for so doing.

d) That you announce you have asked your designated staff official to serve as your principal coordinating assistant for this problem, and that whenever advisable he should recommend to you additional meetings with the appropriate officials, and (on your behalf) make arrangements for such meetings.

2) That you ask the heads of the agencies concerned^* to meet with your staff assistant and thereafter to work with his coordinating guidance in order to insure the fulfillment of assignment and the continuance of your leadership, in the formulation of policy recommendations to you. To do this the group should:

a) Isolate the issues and then formulate recommendations for you on the basic substantive policy decisions to be made (principally regarding imports, foreign assistance and foreign investment).

b) Prepare an outline of the specific economic areas within which action needs to be taken to carry out the basic policy decisions (e.g., the fields of tariff policy, agricultural policy, shipping, travel, etc.).

c) Make recommendations concerning the formation of a Public Advisory Committee to advise the President on possible solutions of the “dollar gap” problem.

d) Recommend a program for explaining to the Congress and the American public the substance and the significance of the “dollar gap” problem—a program which would impress upon them the policy alternatives which must be frankly faced.

In order to provide personnel necessary for the staff assistant to perform his functions, the heads of agencies concerned should be prepared to designate high level officials from their organizations as required and requested by the staff assistant.

3) That you ask your staff assistant to recommend to you what agencies should be given primary responsibilities for implementation of parts of the total problem in accordance with the broad policies laid down, and to recommend to those agencies the interdepartmental coordinating machinery most appropriate in each instance. There already exist interdepartmental councils and committees such as the NAC and the Trade Agreements Committee which are immediately available for working effectively on various aspects of the total problem. Consideration is also being given to the establishment in the near future of a specialized Trade and Commodity Policy Committee to coordinate policy with respect to the tariff and to quotas and trade barriers generally. In addition to these instruments, your staff assistant will probably find that ad hoc groups, given proper assignments, could most appropriately concentrate on many of the individual problems which will arise.

I believe that the Executive Branch organization described in this memorandum satisfactorily combines flexibility, Presidential direction, and respect for line relationships with the capabilities of an experienced staff assistant who has your confidence and who has the skill required to stimulate and maintain teamwork among the responsible agencies.

Dean Acheson

1. Signed on February 16 by Secretary Acheson and transmitted to the President via the Director of the Bureau of the Budget on February 21. In his memorandum of February 20 to the Budget Director (Pace), the Secretary of State said:

   “I attach herewith a memorandum for the President proposing an Administration program for adjusting the balance of payments of the United States.

   “I have discussed this memorandum with the Secretary of the Treasury who has indicated his concurrence and with the President who asked that it be submitted to him through you.” (Lot 122, Box 15559, “DDG Working Papers”, Doc. DDG D–2, March 7, 1950)

2. Documentation on these matters is found in the relevant volumes of this series.
3. Infra.
4. Those listed in (1) above except the Postmaster General and the Attorney General (who will be consulted as legal questions arise). [Footnote in the source text.]