## Foreword

Seldom before have the needs of the nation so called for principled, clearly reasoned analysis of national problems and fresh programs to meet them.

In these papers the Critical Issues Council seeks to provide American citizens with an honest evaluation of matters of vital concern to the Republic; to offer evidence instead of emotion, purpose in place of polemic, and to follow criticism with positive proposals.

The members of the Critical Issues Council are Republican-oriented citizens with broad experience, insight and proficiency in domestic and international affairs. Their positions are not those of any elected official or group, nor does every member of the Council or Republican Citizens Committee necessarily subscribe to all the views expressed. The Council endorses its papers as a substantial contribution to public awareness of current critical issues and to the presentation of positive solutions.

1

## Summary

The Panama crisis is the predictable result of an explosive situation that has been building openly for many years. It should now be clear that further concessions at this time will not in themselves end our difficulties in Panama. Only by reconciling the basic differences in interest between the two nations through a mutually acceptable and long-range policy can we hope to find a lasting solution to the Panamanian problem.

A heritage of malice and misunderstanding makes the problems even more formidable. Most citizens and too many of our leaders believe that the United States has complete sovereignty in the Canal Zone. Panamanians, on the other hand, believe that the United States is exploiting their only national asset and is making vast sums of money from it. The United States not only has never made a penny of profit, but it actually subsidizes the operation of the Canal to the extent of about $6 million yearly. The treaty of 1903, which permitted the United States to build the Panama Canal, makes clear that titular sovereignty remains with Panama.

Any realistic approach to the Panamanian problem must begin with the recognition that the construction of a new sea level canal within 25 years is imperative; earlier construction is preferable. Disputes over sovereignty, wage scales and profits are all attendant upon the inescapable need for a new canal.

Since the best site for a new canal appears to be Panama, it is clearly in the best interests of the United States and Panama to settle the current difficulties and to begin building the good relations which would assure the successful construction and operation of a new sea level canal in Panama.

Once this is recognized, the United States and Panama should formulate a realistic, sustainable long-range policy and should amend the existing treaties to incorporate the following:

1. Canal improvements costing approximately $75 million should be made promptly to assure the continued operation of the Panama Canal for another 25 years.

2. Canal tolls should be raised by 30 percent and Panama's annuity (now $1,930,000) should be increased to $15 million.

3. During the period preceding a completely new treaty, the Canal Company should repay the existing

2

$400 million debt to the American taxpayers. This can be accomplished by allocating a portion of the income from a toll increase and the $16 million normally spent in recent years on Canal improvements.

4. To the degree that it is possible without hampering the operation of the Canal, the United States should rotate its civilian personnel in the Canal Zone.

5. Panamanians should be trained as rapidly as possible to fill the higher-paying positions in the Canal operation and to handle the complicated technical operation of the Canal.

6. The United States should make clear to Panama that when reforms promised under the Alliance for Progress are carried out, United States aid will be available in substantial amounts to improve Panama's agricultural and industrial capacity, and in general raise the living standards of the masses.

7. The two governments should agree to negotiate within 25 years a new treaty which will specify how a sea level canal is to be financed, constructed, and operated.

Apart from treaty revisions, our ambassador should be given full authority to speak for the United States in Panama. The Governor of the Canal Zone should be forbidden to negotiate with Panamanian officials on major issues.

The leaders of the United States and Panama must keep in mind that a primary goal is to maintain the Panama Canal for about another 25 years, and then to replace it with a new sea level canal. Misunderstandings or stubbornness or false nationalistic pride must not divert us from this goal. Panama must consider carefully its actions during the next 25 years and must assess the future realistically. If the two nations can join together in solving the problems that have plagued them for half a century, there is every likelihood that a new **Panama canal** will be built and it will symbolize **inter-American cooperation and progress**.

3

Panama: A Realistic Appraisal

If there is any Latin American nation with which the United States should have exemplary relations, it is surely Panama. The Canal which we built there at great expense and sacrifice is of vital economic and strategic importance to the United States and of great economic importance to Panama, this hemisphere and the world. For half a century, we have maintained the Canal as an efficient world trade route, as much for the benefit of other nations as for our own. Panama's periodic complaints notwithstanding, the Canal has been the most important single factor in the development of the Isthmus.

Panama should occupy a unique and intimate position in United States foreign affairs. Its importance is far out of proportion to its size. Both the United States and Panama have had compelling reasons for wanting to be on the best of terms with each other. But relations between the two nations have deteriorated steadily over the years. In August, 1963, our Ambassador to Panama, Joseph S. Farland, resigned his post to protest both the misuse of foreign aid funds and the Administration's indifference to the basic problems in United States-Panamanian relations—an indifference which was increasing Panamanian hostility toward the United States. Upon his departure, Ambassador Farland, one of the most popular United States ambassadors in Panamanian history, was invited neither to the White House nor before the House Foreign Affairs Committee to express his concern about Panama. He was not even given customary de-briefing by the State Department. Washington's course of drift continued and five months after Ambassador Farland's resignation, when the riots broke out in Panama, no new United States ambassador had been appointed.

However, the mishandling and neglect in the last year, which culminated in the January riots, 25 deaths, and hundreds of injuries, merely inflamed an already smoldering situation. Indeed, the roots of the present crisis are embedded in a 61-year failure of Panama and the United States to build the good will and genuine understanding essential to a fruitful partnership.

Panama today is demanding a new treaty which would at once increase substantially the income it receives from Canal traffic and would ultimately establish its complete sovereignty over the Canal Zone. The United States, on the other hand, can not yield to pressure alone and insists upon maintaining the complete jurisdiction in the Canal Zone granted to it by treaty.

4

How is it that in all of these years of living and working together the United States and Panama have been unable to resolve their differences and build a harmonious relationship? The answer to this question should suggest a course for future action.

President Johnson recently said of the Panamanian problem that "No purpose is served by rehashing either recent or ancient events." But the complex situation must be viewed in its historical context.

## THE ROOTS OF THE PROBLEM

The difficulties in Panama did not begin with the violence that erupted there on January 9, 1964. That conflict was the predictable result of an explosive situation that has been building openly for many years. In fact, our troubles in Panama began with the Hay-Bunau Varilla Treaty of 1903, which permitted the construction of the Canal and granted the United States "in perpetuity the use, occupation, and control of a zone of land" across the Isthmus "as if it were sovereign." This treaty, signed almost immediately after Panama had won its independence from Colombia through United States intervention, virtually made Panama a protectorate of the United States.

After signing the 1903 treaty, Panamanians had second thoughts and trouble began. From that time forward there has been a fundamental difference of interests between Panama and the United States. Our primary aim has been to operate as efficiently as possible an international waterway of economic and strategic significance. Convinced that Panama could not do this, and that we could do so only if we were free of all external interference, we have insisted on complete jurisdiction in the Canal Zone and complete control of the Canal itself. But Panama has viewed the Canal as its greatest national resource and has sought to extract greater advantage from it. Convinced that the United States has been exploiting and profiting from this national asset, Panama has claimed sovereignty over the Zone and has vigorously insisted on an increasing share of the benefits.

The crux of the problem in Panama is this "fundamental difference of interests." The difficulties that have arisen over the years have developed because each nation has vigorously pursued its own interest without sufficient regard for the other's, and because the two nations failed to recognize that their interests were not as mutually exclusive as they appeared to be. Some of the specific points of dispute—such as the displaying of the Panamanian flag in the Zone, equal wage scales for Panamanians and Americans, and the existence of com-

5

supply. The Administration deserves credit for continuing efforts in this direction that were initiated in 1959. It should be possible to reduce eventually the balance of payments cost of all forms of aid to less than 20 percent of the total outlay.

We must insist with our Allies that their aid efforts be stepped up. Some of them give a larger share of their income than the United States does, some of them give on generous terms. But almost all fall short of what their present wealth would allow in combined volume of aid and generosity of terms.

### IMPROVING THE INTERNATIONAL FINANCIAL SYSTEM

Our number one priority must be to cure our balance of payments deficit. On no account must we give grounds for the suspicion that we are seeking to avoid this basic necessity by seeking unlimited credit facilities or by tampering with the gold value of the dollar. The Administration should reject emphatically proposals of that sort made in the so-called Brookings Report sponsored by the President's Council of Economic Advisers.

At the same time, improvements in the international financial system are in order. These should be negotiated with the clear understanding that they will not be used to patch up our balance of payments situation.

**Present efforts to establish credit facilities with foreign central banks and Treasuries should be continued and expanded.** They can form an important part of the international financial system of the future. They do not adequately make use, however, of the true credit potential of the United States. Since private American investors are acquiring foreign assets at a rate of several billion dollars annually, it would be perfectly sound credit practice for the United States to do some long term borrowing in the capital markets of foreign countries. This would spare foreign countries the inflationary expansion of their currencies that now occurs when they finance our deficit by acquiring dollars.

Such operations could not be large, because capital markets abroad are too narrow to accommodate large scale borrowing. The Treasury moreover may have to be authorized to pay interest rates in excess of the statutory 4¼ percent ceiling that applies to its present domestic bond issues. Despite these difficulties, some easing of our payments problem could legitimately be sought by this route, particularly from countries where we have troop expenditures. The Treasury's present efforts to induce foreign countries to broaden their capital markets are helpful in this context.

We should work toward an increase in the resources of the International Monetary Fund. At the same time,

15

the credit facilities offered by the Fund should be cautiously liberalized. The United States should not be hesitant to draw upon the Fund when necessary.

The possibility of strengthening the international financial system in other ways should be explored. Other countries should accept the burden of letting their currency serve as international reserves. At present, only the United States dollar and the pound sterling accept this responsibility. We must arrive at an agreement with the major countries to hold gold and foreign currencies in specified ratios in their reserves. This would safeguard the dollar against sudden large conversion into gold, although it might also impose upon the United States an obligation to pay out more gold. Finally, thought should be given to allowing dollars and other currencies to be deposited with the IMF, subject to safeguards clearly spelled out. This would endow the dollars so deposited with a gold guarantee and would protect the United States against demands for their conversion into gold.

These are highly technical devices that need to be elaborated by experts. Their practical consequences for the balance of payments and the dollar, and therewith for production and employment in the United States, would nevertheless be great.

## Conclusions

The details of the balance of payments are complex, as financial matters always are. The principles are very simple. We have been spending abroad far more than we have been taking in. No country, no business, no family can go on doing this indefinitely. At some point, a halt must be called if financial disaster is to be avoided.

The methods of forestalling disaster are simple, though they are not easy. This statement has endeavored to spell them out. We can increase our receipts, and we can reduce our expenditures. We can borrow if we do it on a sound basis. To increase our receipts is much the best way, but in all probability we shall have to act on more than one front. What we cannot afford to do is to let matters drift. After six years of deficits, our gold has been sharply reduced and dollar holdings of foreigners are high. At long last, the balance of payments must have top priority. If we are prepared to give it that, we can cure it.

Originally Published, May 21, 1964

16

# APPENDIX

## U.S. Balance of Payments, 1963
(in millions of dollars)

### Receipts

<table><tbody><tr><td><strong>Exports</strong></td><td></td></tr><tr><td>Merchandise</td><td style="text-align: right;">21,902</td></tr><tr><td>Military sales</td><td style="text-align: right;">632</td></tr><tr><td><strong>Income on investments</strong></td><td></td></tr><tr><td>Government</td><td style="text-align: right;">498</td></tr><tr><td>Private</td><td style="text-align: right;">4,067</td></tr><tr><td>Income from various services</td><td style="text-align: right;">4,504</td></tr><tr><td>Foreign investment in the United States</td><td style="text-align: right;">392</td></tr><tr><td>Repayment of foreign loans</td><td style="text-align: right;">974</td></tr><tr><td>U.S. Government borrowing</td><td style="text-align: right;">1,112</td></tr><tr><td><strong>Total receipts</strong></td><td style="text-align: right; border-top: 1px solid black;">34,081</td></tr></tbody></table>

### Expenditures

<table><tbody><tr><td>Imports</td><td style="text-align: right;">16,962</td></tr><tr><td><strong>Private foreign investment</strong></td><td></td></tr><tr><td>Direct and long term</td><td style="text-align: right;">3,440</td></tr><tr><td>Short term</td><td style="text-align: right;">642</td></tr><tr><td>Military expenditures</td><td style="text-align: right;">2,880</td></tr><tr><td>Foreign aid</td><td style="text-align: right;">4,532</td></tr><tr><td>Other (including tourism)</td><td style="text-align: right;">7,088</td></tr><tr><td>Errors and unrecorded transactions</td><td style="text-align: right;">495</td></tr><tr><td><strong>Total expenditures</strong></td><td style="text-align: right; border-top: 1px solid black;">36,039</td></tr><tr><td>Apparent deficit</td><td style="text-align: right;">1,958</td></tr><tr><td><strong>Special financial transactions designed to reduce the deficit:</strong></td><td></td></tr><tr><td>Nonscheduled receipts on government loans</td><td style="text-align: right;">325</td></tr><tr><td>Advances on military exports</td><td style="text-align: right;">359</td></tr><tr><td>Government borrowing</td><td style="text-align: right;">659</td></tr><tr><td><strong>Effective deficit</strong></td><td style="text-align: right; border-top: 1px solid black;">3,301</td></tr></tbody></table>

Source: U.S. Department of Commerce, Survey of Current Business, March 1964.

CDE 72

## REPUBLICAN
CITIZENS

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## REPUBLICAN
CITIZENS
COMMITTEE
of The United States

### BOARD OF TRUSTEES

DWIGHT D. EISENHOWER
Honorary Chairman

GEORGE C. S. BENSON
California

JAMES B. BLACK, JR.
California

H. BOESCHENSTEIN
Ohio

WILLARD BROWN
Ohio

ARTHUR F. BURNS
New York

ALBERT L. COLE
New York

JAMES S. COPLEY
California

J. E. CORETTE
Montana

BROWNLEE CURREY
New York

J. DOYLE DEWITT
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Oregon

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MRS. OSWALD B. LORD
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New Jersey

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JAMES L. MURPHY
California

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Colorado

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WILLIAM H. PETERSON
New Jersey

SAMUEL R. PIERCE, JR.
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RAYMOND PITCAIRN
Pennsylvania

RAYMOND PLANK
Minnesota

HOMER M. PRESTON
California

GORDON W. REED
Connecticut

JAMES REYNOLDS
California

CHARLES S. RHYNE
Washington, D.C.

WILLIAM E. ROBINSON
Connecticut

ROBNEY W. ROOD
California

ROBERT A. ROWAN
California

S. M. RUMBOUGH, JR.
New York

L. R. SCHILLING
Ohio

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South Carolina

MAURICE STANS
California

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Virginia

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AUSTIN TOBIN, JR.
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Michigan

HUGH WALLACE
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JAMES C. WORTHY
Illinois

### Republican Citizens Committee

## CRITICAL ISSUES PAPER NO. 7

# AMERICA'S
SPACE PROGRAM:
AN APPRAISAL

Published by the

CRITICAL ISSUES
COUNCIL

Sponsored by

REPUBLICAN
CITIZENS

COMMITTEE OF THE
UNITED STATES

## CRITICAL ISSUES
COUNCIL

MILTON S. EISENHOWER, Chairman

ROBERT B. ANDERSON

ELLIOTT V. BELL

ARLEIGH A. BURKE

ARTHUR F. BURNS

ALBERT L. COLE

JAMES H. DOUGLAS

MARION B. FOLSOM

THOMAS S. GATES

T. KEITH GLENNAN

OVEITA CULP HOBBY

WALTER H. JUDD

MARY P. LORD

CLARE BOOTH LUCE

DEANE W. MALOTT

JAMES P. MITCHELL

LOUIS N. NORSTAD

DON PAARLBERG

C. WREDE PETERSMEYER

SAMUEL R. PIERCE, JR.

CHARLES S. RHYNE

RAYMOND J. SAULNIER

LEWIS L. STRAUS

WALTER N. THAYER

HENRY C. WALLICH

JAMES M. CLARE, JR.
Assistant to the Chairman

### Sponsored by
**REPUBLICAN**
**CITIZENS**
**Committee of the**
**UNITED STATES**

## Foreword

Other papers in this series include:

1. Panama: A Realistic Appraisal

2. A Free & Prosperous Agriculture

3. The Atlantic Alliance

4. Republicans and Civil Rights

5. Cuba: An Effective Policy

6. Balance of Payments

Copyright Republican Citizens Committee of the United States 1964.

(Lc)

## America's Space Program: An Appraisal

The basic objective of the United States space program should be the exploration and, ultimately, the utilization of space for peaceful purposes. Our program should seek to add to man's knowledge and understanding, to extend his mastery of nature, and to put this knowledge, understanding and mastery to work for the benefit of mankind.

In pursuing this objective we should take every opportunity to enlist the cooperation and participation of other nations, in accordance with their degrees of interest, technical competence and resources. The exploration of our universe is a goal too vast, too hazardous, too costly, and too important to all mankind to be financed and conducted by one country alone, and least of all in an atmosphere of unfriendly competition.

Today, however, we must also be fully responsive to those military needs which can be served best by the development of capabilities in space. Under present world conditions we must be certain that we avail ourselves of opportunities to strengthen our military capabilities whenever this can be done by appropriate application of space technology.

These two areas of activity within our national space program are recognized clearly in the Space Act of 1958. Our continuing task is to coordinate these civilian and military activities in space so that there is achieved an effective and economical national program in which both elements are strong and mutually supporting.

Soundly conceived military space programs must be based on the expectation of accomplishing military objectives most effectively by utilizing the space environment. Their future, like that for non-military purposes, is dependent upon scientific research and analysis of observational space missions. We strongly support the continuing development of space systems for military reconnaissance, communications, meteorology and navigational aids. Vigorous programs are necessary also to explore the potentialities of satellite inspection and ballistic missile defense. In certain of these activities and for other future military requirements, the need exists for determining man's ability to operate effectively, performing important and useful tasks over extended periods of time, in the harsh environment of space. To achieve this objective, the development of manned orbiting laboratories should be pursued.

We are aware of no compelling argument thus far for the development and deploying of weapons in space.

It is important to recognize that the significance of developments in weapons technology, as in other fields, seldom can be anticipated. But, for example, today and in the foreseeable future there seems to be no military need for putting nuclear weapons in orbit.

With respect to the civilian space effort we would urge a re-examination of objectives and of the pace at which various elements of this program are carried forward.

By a series of intelligently conceived and brilliantly engineered experimental and observational devices this country has attained leadership in the scope and detail of its fundamental scientific findings and analyses concerning the outer atmosphere and the space environment of the earth. The prestige thus acquired among nations has a considerably higher value than we have apparently realized.

Of special significance is the fact that this accumulating knowledge and understanding is bound to lead to identification of facts and phenomena to exploit for both civilian and military uses, many times in ways which we cannot yet predict. Moreover, such a background is invaluable for the attainment of maximum capability in the conception and performance of space vehicles, its instrumentation, and the protection and effectiveness of their passengers.

For these reasons it is our considered opinion that research directed toward knowledge and understanding of our space environment and man's capabilities in its pursuit should have highest priority. Therefore, determined and continuing emphasis upon the scientific and engineering aspects of space exploration is of paramount importance. If we fail to follow this course, we run a serious risk of losing our present leadership in scientific discovery and knowledge, and with it the initiative for the exploration of space and its useful exploitation.

The present lunar program is not regarded as primarily scientific in its objective. Admittedly a project of considerable human interest, it is chiefly a prestige item, intended to win the man-to-moon race. Indeed, if this race is not won, or if a premature attempt involves loss of life, its prestige value largely vanishes.

This fact, coupled with the setting of a dead-line date, necessarily gives the lunar landing project the character of a "crash" program. This is increasingly true when the schedule slips, as is bound to happen in an undertaking of this novelty and complexity. Crash programs are notoriously expensive, wasteful and prone to premature execution.

Thus, the manned lunar landing project represents a challenge, to be sure, but we do not believe that the

hoped-for psychological or propaganda advantages call for the present efforts to meet a publicized dead-line, currently stated as prior to 1970. We find no reason to believe that putting men on the moon could contribute to our military strength. We see no evidence that urgent defense objectives warrant a crash program or that a meeting of deadlines such as 1970 serves any significant national objective. We urge, therefore, that such a dead-line be dropped. Also, the lunar program should not be allowed to divert funds from fundamental scientific research in the environment of space.

We do believe in the value of a manned lunar landing as an essential experimental step in consideration of possible future plans for landing on a neighboring planet. Such a prospect would be of extraordinary scientific and human interest.

Accordingly, we recommend a replanning of the present program to provide for a more orderly, yet aggressively pursued, step-by-step development. Such a program would include:

1) after careful appraisal of existing programs, the continued development of launch vehicle systems necessary to meet the revised program objectives;

2) instrumented exploration of the lunar surface and the acquisition of detailed knowledge of the immediate lunar environment;

3) the acquisition of sufficient knowledge about the environment of space, and particularly of lunisolar space, to permit with confidence the undertaking of manned flight to the vicinity of the moon and ultimately manned lunar landings;

4) joint collaboration between the civilian and military programs in the use of manned orbiting laboratories in an exhaustive effort to study the capabilities of man in space;

5) continued negotiation with other nations toward cooperation and participation in a world-wide collaborative effort in space exploration and its exploitation for the benefit of all mankind.

We stress the importance of the United States continuing to maintain its present superiority in instrumented space exploration. The decisive leadership which we have in this area should be extended to the lunar program. We believe that our investment in space will not realize an adequate return if the Soviet Union achieves a succession of successful, instrumented flights, or a manned scientific orbiting laboratory, which, at the time, are beyond our capabilities. We emphasize further that such instrumented flights are necessary not only to provide valuable scientific information but also data

vitally important to the undertaking of manned flight in a successful lunar program. To be more specific, we are concerned lest the United States may find itself in a position where only the Soviet Union may have available, as a result of its instrumented or other flight programs, the information essential to the prosecution of a successful program of manned lunar exploration.

Much has been said of the importance of the space program to civilian industry through the "spin-off" of new techniques and new processes which may result in the development of new or improved products and, in some instances, new industries. We believe that such benefits have been much exaggerated. Certainly, "spin-off" or industrial "fall-out" will not be greater because the space program is paced by a manned lunar landing objective arbitrarily based for political, psychological or propaganda purposes. Indeed, a more orderly and moderately paced program should produce as much and probably more in the way of by-products as more opportunity becomes available for the exercise of sound management and the making of decisions based in many instances on the availability of more complete data.

An orderly progression, pursued aggressively but without undue haste, would permit the achievement of a sounder program for manned lunar exploration at annual expenditure rates lower than those now committed or proposed. We believe it is urgent that such reorientation and re-planning be done now before irrevocable commitments are made to a less soundly conceived and more costly program than is necessary.

Efforts should be continued to encourage cooperative programs with other nations, including the Soviet Union, with as free and complete interchange of scientific and technological data as is practicable. Realism suggests that true joint operation of highly complex, costly and technologically intricate programs may be difficult of accomplishment, but continuing emphasis upon progress in this direction should well repay the effort.

Finally we stress the need to count the cost in manpower when making decisions about great space programs which require thousands of skilled personnel, especially scientists, engineers and technicians, all in short supply. By attracting too much of our best innovating talent into one field such as space exploration, we are likely to rob other areas of industry, science and education of the high-level talent they need.

Originally Published May 28, 1964

1

2

3

72

4

Foreword

In these papers the Critical Issues Coun-
cil seeks to provide American citizens with
an honest evaluation of matters of vital
concern to the Republic; to offer evidence
instead of emotion, purpose in place of
polemic, and to follow criticism with posi-
tive proposals.

The members of the Critical Issues Coun-
cil are Republican-oriented citizens with
broad experience, insight and proficiency in
domestic and international affairs. Their
positions are not those of any elected
official or group, nor does every member
of the Council or Republican Citizens Com-
mittee necessarily subscribe to all the views
expressed. The Council endorses its papers
as a substantial contribution to public aware-
ness of current critical issues and to the
presentation of positive solutions.

3. The Atlantic Alliance

5. Cuba: An Effective Policy

6. Balance of Payments

7. America's Space Program

1

Summary

America's foreign economic aid program is today in serious trouble. Without fundamental changes this essential program will still be floundering five years hence, if indeed the American people by then have not scrapped it in disgust.

What is under attack is unselective aid; aid given
according to no defined principles; aid used as a crutch
rather than a foundation for self-help in the developing
nations. We have yet to come to grips with the heart
of the problem—the failure, waste and ineffectiveness
arising out of the use of aid for short-run political purposes; the lack of firm principles to guide decisions on
whom and how to aid; inadequate attention to personnel; and indecisive administration.

The United States must discontinue the use of
foreign aid as a multi-purpose gadget to be taken out
of the kit as found convenient—a kind of bribe or
bludgeon to accomplish any and all kinds of foreign
policy purposes.

The President should have a special fund from which to advance "short-range political objectives" in foreign countries. This fund should be labeled for what it is and not be confused with the economic and technical assistance directed toward what we believe is foreign aid's appropriate role of achieving constructive longer-range purposes.

The main purpose of foreign aid is to strengthen the will and capacity of newly developing countries to maintain independence and to develop by peaceful means with increasing individual freedom, provided they themselves are so determined. This purpose conflicts with the policy of using aid to influence every country wobbling on the border-line between freedom and Communism.

What is needed is a reshaping of the program based
on a clear definition of the fundamentals of foreign
aid and a clear recognition of the shift that has oc-
curred from recovery in the developed countries to
development in the emerging nations.

To help decide what countries to aid, the following
criteria should be established:

1) Limit U. S. aid to those countries that demonstrate by action as well as word a determination to achieve development in ways that preserve their national independence, maintain peace, expand individual freedom, and base their government on the consent of the

2

people. This means limiting economic assistance to countries that have made up their minds on fundamental directions.

In cases where **economic** aid cannot be justified, the United States might still grant **technical** aid to foster concepts and attitudes inherent in the philosophy of freedom.

2) Economic aid would only be granted to those countries which would undertake the self-help measures essential to the effective utilization of American aid.

3) The recipient country must positively encourage the private sector of its economy, although the United States should not necessarily be opposed to some government ownership. Far more important than where a country stands at the moment, in its reliance on private enterprise, is the direction in which it is headed.

The following principles should guide decisions on what kind of aid to grant a country:

1) Tailor aid to where the country is at the time. Vast differences in the problems and stage of development in the emerging countries make it imperative that aid programs be tailored to the needs and capabilities of the country at the particular time. This means not undertaking unessential projects. It means a creative effort to help countries concentrate on those projects most needed in its particular situation.

2) Greater attention should be given to overcoming psychological factors, such as inherited attitudes, values, and customs, which can make development slow and difficult.

3) Emphasize education, health, and agriculture.

4) Limit U. S. bi-lateral economic assistance to building up the primary factors affecting development. This would include supporting facilities such as power, transportation, communications, and, where appropriate, housing and rural reform designed to strengthen the foundations of the people's well-being.

The main thrust of industrial development, however, the productive enterprises in their many ramifications, would be financed from the country's own resources, from private foreign investment, and from international lending agencies.

With respect to the program's administration, we should recognize that the frequent reorganizations of the Agency for International Development (AID), with the resulting poorly defined and shifting lines of responsibility and authority, as a major cause for the

3

high rate of turnover in personnel and the difficulty
of obtaining competent career employees.

To improve administration of the program, the
following recommendations should be instituted:

1) Make AID more genuinely responsible for its
day-to-day operating decisions, within a framework of
clearly defined policy and mission as set by the State
Department and under the overall control of the
American ambassador in the field.

2) Better training and orientation for personnel,
comparable to that given Military Assistance Advisory
Groups.

3) Undertake a systematic evaluation of outstanding
successes and failures in the handling of personal re-
lations between AID and host country officials, using
the authority under section 241, Title V of recent
foreign assistance acts.

In the end, however, a resolution of the controversy
over foreign aid depends on the quality of political
leadership exerted in its behalf. Aid has few con-
stituents, and few politicians ready to fight for it. More
important, there are few ready to educate for it. A
wide, sustained, educational effort should be promoted
to bring the aid story to more people.

4

The Future of Foreign Aid

America's foreign economic aid program, which has
known controversy since its inception, is in an especially
serious crisis today.

On balance, the aid program has been a solid success
in achieving its primary purpose of helping to keep the
free world free. No country with leaders sincerely dedicated to national independence—and to which we have given well-conceived aid, moral support, and sound advisory assistance—has fallen to Communist imperialism.

Yet, criticism mounts. Some call flatly for an end to
the whole program, uncertain whether aid now serves
America's vital interests. There is confusion, frustration,
and a sense of fatigue.

What causes lie behind today's controversy regarding
economic foreign aid, and explain the criticism? Criticism of aid arises in part from failures and waste due to ill-conceived projects, mistakes in planning, blunders in execution. Endless administrative reshuffling has robbed the program of consistent direction and undermined the morale of its personnel. **But, more important, what is under attack is unselective aid; aid given according to no defined principles; and aid used as a crutch rather than a foundation for self-help in the developing nations.**

Repeated and sincere efforts have been made to
improve the program. One device has been a long series
of investigating committees and commissions. Another
favorite, employed four times in recent years, has been
to reshuffle the organization and structure of the foreign
aid agency. Tougher field administration is frequently
advanced as a cure-all.

The fact that criticism continues despite these efforts
indicates some deep, unresolved difficulty. We have yet
to come to grips with the heart of the problem—the
failure, waste and ineffectiveness arising out of the use
of aid for short-run political purposes; the lack of firm
principles to guide decisions on whom and how to aid;
inadequate attention to the selection and development
of personnel, oriented and trained to their complex
task; and indecisive administration made worse by
poorly defined and constantly shifting lines of responsibility and authority.

What is needed is a reshaping of the program based
on a clear definition of:

(1) the broad purposes which foreign aid is expected
to advance;

5

(2) the criteria to be applied in selecting countries to aid;

(3) the guiding principles which should govern the makeup of specific individual programs;

(4) the approaches and arrangements necessary drastically to improve the program's administration.

These need not only to be more sharply defined; they need also to be consistently applied, and made clear both at home and abroad. Effective individual programs, streamlined for the long-range task in newly developing countries, is the ultimate aim. But it is with fundamentals that we must start. Unless these are defined in terms making sense in today's situation, and foreign aid's substance and administration overhauled to conform, five years hence this essential program will still be floundering, if indeed the American people by then will not have scrapped it in frustration and disgust.

Any reshaping of foreign aid must at the outset take fuller account of the basic shift that has occurred from recovery in the developed countries of Europe to development in the emerging countries of Asia, Africa, the Middle East and Latin America. This has been an important and sound shift. The substance and administration of this program must be put within the framework of a sound and convincing philosophy and approach, adapted to the new circumstances and tasks.

## THE PURPOSE OF AID

Foreign aid often is spoken of as a "tool of United States foreign policy." But it is a selective tool. Fundamentally, its purpose is to help build conditions aimed at a peaceful resolution of today's struggle with international Communism and, with this, to help shape a certain kind of world community. In their essence, such purposes are political.

**We believe, however, that a policy should be established, and firmly adhered to, not to use foreign aid for merely short-run political purposes.** Such short run purposes include using aid in the hope of encouraging or enlarging cracks in the solidarity of international Communism, as the aid previously given to Yugoslavia. Another example is "to keep a foot in the door," or "to provide an alternative to Communist-bloc aid," as in Cambodia. Aid also should not be given in the hope that it will win to the free world governments still on the fence.

The effect has been to give an impression that, as a "tool of United States foreign policy," foreign aid is a multi-purpose gadget to be taken out of the kit as found convenient—a kind of bribe or bludgeon to accomplish any and all kinds of foreign policy purposes. This has

6

led to confusion regarding its real purposes, and helped
defeat them.

This is not to say the United States should abandon
efforts to achieve short-range political objectives. It is
to say that "foreign aid" should not be used for such
purposes. In cases where short run financial assistance
is deemed in the national interest, the money should
be made available out of a special emergency fund at
the disposal of the President, appropriated for that
specific purpose. This fund should be labeled for what
it is and accounted for annually by the President to the
Congress. It should not be confused with economic and
technical assistance directed toward what we believe
is foreign aid's appropriate role in achieving construc-
tive longer-range purposes.

To Strengthen Independence and Development Under Freedom

The first main purpose of aid is to strengthen the
will and capacity of newly developing countries—which
themselves are so determined—to maintain their na-
tional independence and, by peaceful means, to make
sound accelerating progress toward national strength
and dignity with increasing individual freedom.

The phrase "which themselves are so determined"
conflicts with the policy of using aid to influence every
country wobbling on the borderline, and is a cardinal
point in the theory of aid we advocate.

In countries that are so determined, the major role
of economic and technical assistance should be to help
advance economic and social progress, and improve
the well-being of people—the conditions making inde-
pendence and freedom possible. In a few countries eco-
nomic assistance also continues to be necessary to help
stabilize economies endangered by expenditures for
large military forces maintained to counter Communist
aggression—as in Korea, Pakistan and Vietnam.

In all such situations our aid helps both to erect a
barrier against Communism's aggressive advance, and
to build the kind of foundations in the emerging coun-
tries which will improve prospects for achieving the
kind of world in which free people would like to live.
When aid given to strengthen independence and freedom
is successful, both results are achieved.

To Advance the Free Alternative to Communism

The second purpose of aid should be to advance the
free alternative to Communism as the most certain
means of gaining these results. The soundness of the
free alternative has been demonstrated in our own
experience. Our forefathers came to this country not to
get government to do things for them but to get a
chance to do things for themselves. They devised a

7

system whereby people control government instead of
government controlling people. It worked. It released
the creative capacities previously unrecognized in all
sorts of people from all races, climes, and countries. It
led to an unprecedented outburst of creative energy,
imagination, effort, production and progress.

Yet, we have not sought by all feasible means to push
the validity of our vision, our experience, our deepest
beliefs. Not yet have we set ourselves, vigorously and
with imagination, to the task of making clear what we
are for. What the world needs most from us is not our
wealth, but the secret of our wealth.

The application to economic and technical aid is
clear: the full potential for sustained accelerating growth
by the developing countries will never be realized with-
out a release of the energies of the people, an employ-
ment of the people's initiative, and the active participa-
tion of a whole people in all sectors of the nation's
development. If so directed, technical assistance can
help foster ideas and institutions leading to such a
release in the vital economic sector. Economic assist-
ance can help make a tangible demonstration of the
benefits of progress under freedom applied to the peo-
ple's common problems, in terms they understand. This
is a grassroots way to broaden and strengthen the
foundations for freedom and democratic government.

## Mutuality in National Interests and Purposes

The above major purposes have properly been stated
in terms of our own national interests and foreign policy
goals. But foreign aid is not based on interests and ob-
jectives of the United States alone. In actual operation
aid is assistance to sovereign foreign powers for pro-
grams which they themselves carry out. Giving and
receiving aid thus involves cooperation, on a voluntary
agreed basis.

In any such cooperative venture both sides are likely
to have certain national interests and objectives not
shared by the other. Cooperation takes place around the
mid-ground where interests overlap, and the two parties
hold objectives in common. A sound and effective aid
program is possible only when it rests on a solid basis
of concurrent national interests and purposes, mutually
understood and agreed upon.

Being clear about this is important because, other-
wise, an improper emphasis only on United States
national interests and purposes enables insistent nation-
alism in some countries, fanned by subversive agents,
to create the false impression that we provide aid only
to serve U. S. interests. We feel it imperative, therefore,
that the basic principle of mutuality in these programs

8

be once more brought to the fore in the philosophy of foreign aid, and be reflected in every phase of its operation.

## CRITERIA DETERMINING WHAT COUNTRIES TO AID

Our first criterion is a requirement that the prospective host country demonstrate, by action as well as proclamation, a determination to achieve its long-range development in ways that preserve its national independence, maintain and foster international peace, expand individual freedom, and base its government upon the consent of the people through means appropriate to its own institutions.

**This means limiting economic assistance to countries that have made up their minds on fundamental directions.** If such assistance is to advance its broader purposes effectively, it must be tied to a positive decision in the host country establishing the general ideological route along which it intends to travel in pursuing its national destiny.

Adopting this criterion would not exclude holding out the prospect of aid should the country take action fulfilling the necessary conditions. It would exclude giving aid outright in the mere hope of such action. The requirement that development be conducted in a manner that "maintains and fosters international peace" would make ineligible for aid any country which, after the criterion had been established, embarked on actions disrupting world peace and thereby began to destroy the conditions necessary for achieving mutually agreed upon purposes of the aid.

It is imperative, however, that we distinguish clearly between hostility and mere differences of opinion, or even sharp clashes of view on particular matters. The proposed criteria do not include a requirement that the country have an identity of opinion with the United States on all points of foreign policy. The country's direction must be clear; but, in pursuing basic objectives on which there is agreement, differences in judgment will always be found on individual points of foreign policy. Moreover, our own judgment may not always be right. Besides, we stand for independence, and in exercising independence countries must be free to seek their own way through the perplexities of today's situations, in a manner they believe serves their own interests. We are trying to build free nations, not to make satellites. It is Communism that demands subservience.

We also would emphasize the significance attached to words such as "increasing" and "direction," used throughout this paper. We recognize that, until firmer foundations have been laid, democracy and freedom

9

in the Western sense can in most cases be expected only gradually, and by degrees. It is the overall direction of the nation's development that must be the determinant. Where freedom may appear vulnerable, U. S. aid should be directed to building those institutions—such as education—which are likely to encourage and strengthen the nation's will to freedom.

In cases where **economic aid** cannot be justified under our proposed criterion, it often may be in the U. S. interest to grant certain kinds of **technical aid**. Unknown young men of today may be leaders in a new regime tomorrow. It is important that we not ignore a nation completely just because of disagreement with its current leadership. There will be instances where it may be practical through **technical aid** to foster among individuals the concepts and attitudes inherent in the philosophy of freedom which our aid is intended to promote.

## Commitment to Development

The second proposed criterion would require that the host country desire U. S. aid enough to undertake on its own behalf the self-help measures essential both to effective use of aid in a particular project, and to achievement of the broader mutual purposes toward which the larger program of aid may be directed.

Aid intelligently applied can stimulate and strengthen economic progress in a country; often it can be the critical component making success in an undertaking possible. But aid is no substitute for what a country can and ought to do of itself. **Accelerating progress in national development starts when the government and people of a country settle down seriously to taking responsibility for themselves.**

Among self-help actions commonly emphasized is the essential one that the host country make sound use of all its own resources. This point is especially important because financial aid, used for economically sound purposes, might make it possible for a country to shift an equivalent amount to some profligate or even destructive use. Where a nation uses aid as a substitute for its own resources, rather than as a supplement to them, U. S. assistance should be stopped.

Also essential, and insufficiently emphasized, is the supplemental action by the country frequently needed to help achieve the goal of specific projects. One example was insistence that sound rate structures be established in Korea as the condition necessary to justify our aid for electric power and transportation.

Achieving agreed goals when an exceptionally ambitious and costly aid program is involved may require action on broader economic and social measures, such as the modernization and effective administration of

10

tax systems, land reform, and the formulation of devel-
opment programs incorporating use of the country's
own and all other available resources. Action taken on
such measures by the Republic of China has been an
indispensible factor behind the striking progress achieved
on Taiwan. Failure to get adequate action on such meas-
ures in Latin America has been a major reason for the
disappointing results thus far achieved under the Alli-
ance for Progress.

Domestic Private Enterprise

The third criterion we propose is a requirement that
prospective recipients of aid positively encourage the
private sector of the country's economy.

Year after year, the question of public ownership
versus private enterprise in the developing countries
has been warmly debated. Interest in this debate has
centered largely on the importance of attracting and
protecting foreign private investments. Sound foreign
private investment is clearly in the long-range economic
interest of the United States. It is even more in the
interest of developing nations as an important source
of capital and of technical and managerial skills. In
most nations foreign private investment can become a
much more helpful influence in speeding development
than it has been.

Looking toward the longer range future, however,
it is clear that the critical emphasis should be placed on
private enterprise within a host country itself if its
economy is to derive the great benefits possible from
harnessing the initiative and financial resources of its
own citizens. In India, for example, it is the private
sector of the economy that has proven itself the most
dynamic, but it has been inhibited from realizing its
full potential by the government's oppressive controls
and licensing procedures. The further freeing of the
private sector is clearly called for.

In our approach to private enterprise we do not
believe the United States, in giving aid, must always
oppose all government ownership and control of eco-
nomic enterprises. In our own country government
investment has played its role along with private. Fur-
thermore, systems found effective in the United States
are not thereby necessarily the best under all circum-
stances; economic and other demands may dictate differ-
ent patterns. In some countries, private enterprise does
not connote the socially responsible system into which
capitalism has grown in the West, but an exploitative
type experienced under colonialism or feudal systems
in the past, too little concerned with human values,
with the well being of the worker and his essential role

11

in the development process, and with the nation's general welfare.

Accordingly, we are convinced that far more important than where a country stands at the moment, in its reliance on private enterprise, is the direction in which it is headed. Essential is a firm decision by the country to give positive encouragement to widespread and direct participation by the people in economic development through responsible private economic initiative, whatever government investment it also may undertake. What is needed most is to establish a direction and start a movement, growing out of a conviction regarding the indispensable contribution that can come from the initiative and resources of the country's own people.

The soundness of this position is strikingly illustrated in the remarkable industrial development of Japan over the last century. Launched during the latter part of the eighteen hundreds, with a great deal of government help, this development from the beginning had the benefit of a vigorous private sector, which the government encouraged. Today, the overwhelming bulk of Japan's economic enterprise is in private hands, constituting the main thrust behind the nation's amazing economic progress. One consequence has been that Japan's private industries have themselves attracted an enormous amount of foreign private investment including numerous contracts with foreign firms to provide technical and managerial help.

## GUIDING PRINCIPLES ON WHAT KIND OF AID TO GIVE

### Tailor Aid to Where the Country Is at the Time

Each country selected for U. S. aid deserves to be considered more or less independently, in the light of factors peculiar to itself. Central in our growing knowledge of the emerging countries is the fundamental fact that all are in the process of a revolutionary transition from traditional societies into the modern world, radiatively altering every aspect of their national life. However, there are vast differences in background and stage of development, and these make it imperative that aid programs be carefully tailored to the needs and capabilities of the country at the particular time.

This means, on the one hand, not to undertake unessential projects, nor those which the country is unable to use effectively. Abiding by this rule will reduce disappointment, frustration and waste. It means, on the other hand, a creative effort to help the country concentrate on those projects most needed in its particular situation to remove impediments and advance development soundly at a growing pace.

12

Greater Attention to Psychological Factors

As a second guiding principle we propose a more
thorough search for effective means of overcoming the
powerful influence of psychological factors, inherited
from the past, often making development slow and
difficult. An example is the distrust of the United States
sometimes found in Latin America which prevents full
cooperation. Even more fundamental impediments are
the rudimentary concepts of public service and the
public servant, the acceptance of standards that tolerate
corruption, and the failure of a country to take respon-
sibility for adequate corrective measures. Where these
factors exist, generally they trace to attitudes, values and
customs persisting from past history or the traditional
culture. Until modified they exert a powerful influence
shaping decision and action on matters determining
how rapidly a country is to progress.

The problem is complex; and we recognize that as a
practical matter, it has only one solution, namely, to
man the aid program with personnel of sufficient under-
standing to grasp the importance of these factors, and
trained to give them effect through concrete application
in the daily work.

One specific form of action to meet the problem is
to give greater conscious attention in aid programs to
implanting and encouraging sound concepts in the
minds of thinking citizens in host countries. We pres-
ently are grievously underestimating the effort and the
influence of intellectuals in emerging nations upon the
course of their nation's history. Their ideas, inevitably,
will help powerfully to shape the political, economic
and social systems that rise as change crumbles the
old. We forget the impact on our own revolutionary
period of the thinking of men such as John Adams,
Thomas Jefferson and contributors to the **Federalist
Papers**.

An example of the problem is the development of
democracy in government, of concern to the United
States and certain to remain an issue in many develop-
ing countries for decades to come. If we are seriously to
entertain hope that the emerging countries, so shallowly
rooted in democratic soil, will eventually establish en-
during governments based on democratic principles,
then now is the time to help them construct the nec-
essary foundations.

Private U. S. foundations should be encouraged to
expand in this field, particulary where American gov-
ernment aid may not be a suitable instrument. Large
scale gifts of books to schools and universities, the
endowment of university chairs and centers for the
study of Western thought, and the encouragement of

13

research are just a few of the ways through which sensitive help may be given to individuals and institutions seeking to articulate an intellectual basis for their nation's development under freedom, suited to their own culture.

## Emphasis on Education, Health and Agriculture

Our third proposed guiding principle is that United States assistance should include strong emphasis on education, health, and agriculture. People must see progress in all these fields if they are to have hope, and if there is to be sound sustained economic and social growth. All directly affect the human factor, recognized increasingly as the key to development in the emerging nations.

**Education** is often hailed as the great answer to the need for building up effectiveness in people, and its role cannot be overemphasized. Yet, development lags seriously in Korea, for example, despite a 90% literacy rate and many colleges and universities bulging with students. Accordingly, the educational objectives we encourage in emerging countries need reexamination. The deep-lying problems of countries in transition require that education be concerned with more than professional competence and technical skills. Education must be related effectively to the whole range of problems in countries going through the dynamic process of building a nation. Such a task requires not only specialists, but citizens imbued with the ideas, values and attitudes necessary for progress in a modern world if it is to move in the free direction.

Assistance also must continue strong emphasis on **health**. Programs need to be extended to the rural as well as the urban areas.

Our proposal that **agriculture** be particularly emphasized stems from its many-sided contribution to economic development and human well-being. In total its varied contributions are so essential that satisfactory economic development seldom takes place without vigorous development in the agricultural sector. An additional consideration, significant in many countries, is that evidence of economic and social progress among the rural masses is essential to internal stability and success in thwarting attempts at subversion.

Meeting the varied demands on agriculture, however, requires action going well beyond technical programs along standard lines, vital as these are. Needed, in effect, is a broad agricultural and rural program providing the motive as well as the knowledge and means for farmers to act. Such a program would provide effective extension arrangements, getting improvements into

14

use on farms, channels for marketing to advantage, farmer-controlled farmer organizations, adequate irrigation, just land tenure arrangements, and credit at reasonable interest rates. Reference already has been made to the importance also of good health and education.

An outstandingly successful agricultural and rural program, incorporating many of these features, has been developed on Taiwan, aided through the Joint Commission on Rural Reconstruction (JCRR). This program, and some of the more successful programs in community development ought to be studied for their lessons in this field, so all-important in many of the developing countries.

### Limit the Scope of Bi-lateral United States Economic Aid for Development

As a fourth guiding principle, it is proposed that U. S. bi-lateral development assistance be limited to primary functions of production and growth. This represents a significant change in the basic structure of development aid given in U. S. programs.

Under this concept aid loans for capital investment to advance industrial development would be available only for supporting facilities such as power, transportation and communications, possibly extended in special cases to include the manufacture of certain basic items essential to general economic progress, such as cement and fertilizer.

Where needed to achieve mutually-held objectives, as in the Alliance for Progress, economic aid also would be available for projects strengthening the foundations necessary for the people's well-being, such as housing, rural reform, and malaria control.

The main thrust of industrial development—the productive enterprises in their many ramifications, and the supporting facilities as soon as development becomes self-sustaining—would be financed from capital supplied by the country's own citizens and public funds, from foreign private investment, from the Export-Import Bank, from such international lending agencies as the International Bank for Reconstruction and Development (the World Bank), its soft-loan counterpart, the International Development Association (IDA), and the Inter-American Development Bank.

Limiting U. S. bi-lateral involvement in this way would separate U. S. aid from the incalculable cost of development going on and on. Combined with technical assistance it would concentrate the aid we do give on the crucial foundations vitally affecting the rate of progress and final success of the development effort,

15

and on the ideas, attitudes and institutions influencing
the nature of the political, economic and social systems
adopted ultimately.

Of the greatest importance, the proposed shift in aid
emphasis would put the rate of development squarely up
to the country itself—its economy will grow or not
grow depending on the vigor it shows in encouraging
savings and investment by its own citizens, in attract-
ing foreign investors, in securing help from countries
other than the United States, and in meeting conditions
for multi-lateral loans.

Moreover, aid from sources other than the U. S.
government often can achieve U. S. policy objectives
better than U. S. aid itself, especially in encouraging
domestic private enterprise as described earlier. It has
been learned from experience that frequently there is
less resentment and resistance from an underdeveloped
nation when the World Bank, for example, rather than
AID, conditions a loan on a specific government con-
cession to private enterprise. If the proposed shift in
developmental aid is to be effected, greater U. S. as-
sistance to appropriate multi-lateral agencies may well
be necessary. Special assistance may be needed for
agencies like the Inter-American Development Bank and
the International Development Association (IDA) which
lend to developing nations at low rates and extended
repayment terms appropriate to their financial position.

In many countries, almost the first essential in prep-
aration for investment is a comprehensive survey of
the country's natural resources and the training of
leaders and managers able to carry out sound develop-
ment projects—the particular function which the UN
Special Fund was set up to perform.

Under this proposed guiding principle, an expanded
role in encouraging the growth of domestic private
enterprise is also anticipated for American private in-
vestment, which may deserve greater encouragement.
The United States government might find that with
various financial incentives American companies abroad
can assist nationals in the development of new busi-
nesses (transportation or the manufacture of supplies
are examples) related to that of the U. S. company
itself. In this way an enlarged entrepreneurial class
could be stimulated, with all the ramifying good effects
on the stability and outlook of the nation's government
and prospects for still further U. S. private investment.

We are convinced that, if the proposed shift were
adopted, progress would be greater, ultimate success
more assured, and the total cost of aid substantially
less.

16

IMPROVING PROGRAM ADMINISTRATION

Probably no section of the federal bureaucracy has been as frequently and thoroughly scrutinized, with so little resultant satisfaction on the part of anyone involved, as the Agency for International Development and its predecessors. Three administrations have reorganized the aid agency seven times in 15 years. Six committees of Congress have authority to oversee aid operations, exercising it yearly, and several other committees periodically review aspects of the program.

Nor has U. S. aid lacked for special official studies: eight Presidential Committees, four Congressional studies and three intra-Administration studies have reported since 1948.

Many useful proposals have come from such committees, but the result of constant reshuffling of AID departments has caused confusion among employees and indirectly has been a major factor in the high rate of turnover, especially in top positions. Also, inasmuch as aid is described officially as a "temporary" program, and even some friends of aid speak hopefully of its termination in "five or ten years," it is difficult to obtain career employees, talented men and women for whom AID is more than a one or two year diversion or a stepping-stone to permanent employment. Critics of AID who speak of its "incompetents" fail to appreciate the relationship between these factors and the quality of personnel. Improvements in matters of administration are urgently called for.

One improvement we propose is that the Agency for International Development be made more genuinely responsible for its day-to-day operations, within a framework of clearly-defined policies and assigned missions just as the Pentagon has authority for the operation of military assistance programs within its own defined framework. On first thought this might seem to encourage the bad situation often found where AID is going in one direction and the State Department in another. On the contrary, we believe it should help correct such situations. The Ambassador must always have control over all United States activities in a country. It is to prevent conflicts, overlapping, and confusion in operations that each agency should perform its own and only its own functions within the policy framework set by the State Department and under the overall control of the Ambassador in the field.

Another improvement bears on the frequent failure to achieve constructive cooperation between the legislative and executive branches of the government on aid matters. At times it has appeared that some in each branch regard the other as the main enemy to be

17

overcome or outflanked. Yet both desire only what will best serve the nation. Complete frankness by executive agencies in reporting on past projects and in presenting new requests is absolutely essential if Congressional confidence is to be restored. The world situation with which this program deals is too dangerous for anything less than full candor in a common search for measures and methods that will make the program succeed. The surest way to save money is to make the program more successful.

But it is in field missions where aid ultimately succeeds or fails; and particularly vital to success is wisdom and sensitivity on the part of American aid administrators in handling relationships with officials of the host country. This matter is of central importance because a large part of the responsibilities of the aid administrator has to do with encouraging host country planning and operations, rather than operations which he conducts directly. Yet, on this crucial matter administrators in the field are left largely to their own devices, without benefit of guiding principles. Toward formulating these, a systematic evaluation of outstanding successes and failures in the handling of relationships should be undertaken, using authority provided by Congress under Section 241, Title V of recent foreign assistance acts.

High professional qualifications in personnel of aid missions abroad also are essential, and will become increasingly so. But their attitudes and the approach they use in carrying out assignments have proven equally essential to success, and a common cause of failure. Understanding of the country, earnestness and zeal, a sympathetic interest in the country's rightful aspirations, and a sensitivity to the niceties involved in personal relations often make all the difference. Exclusiveness and arrogance have cost us friends, and weakened rather than strengthened self-help.

One major reason for the dissatisfaction expressed with performance of personnel overseas is that they have not been given orientation in time or depth, comparable for example, with that given officers assigned to Military Assistance Advisory Groups and volunteers for the Peace Corps. We strongly recommend this in AID as a means of providing the vital "extra" that is essential, in combination with the other administrative measures proposed above that are needed at the same time to secure the requisite competence.

## A CHALLENGE FOR LEADERSHIP

A resolution of the controversy over aid depends in the end on the quality of the political leadership exerted in its behalf. Aid has no United States constituents and few politicians ready to fight for it. More im-

18

important, there are few ready to educate for it. Presidential leadership has been lacking in this respect in recent years. Seldom has the White House consulted on legislative content and strategy with various aid supporters in Congress, and almost never with the Republicans among them. Only when a vote was hours from the floor were there appeals for help.

As key aid supporters are not properly consulted by AID or the White House, the public is not properly informed. A broadside call for support is issued through the headlines, of course, but if aid is to have not only the superficial support of citizens but also their deeper understanding and commitment, a wide, sustained, educational effort should be promoted to bring the aid story to more people.

This means that the aid enterprise deserves and must have strong leadership from the White House. When one considers the world in which aid was started as a crash program, without precedent or experience to guide it, its overall accomplishments have been extraordinary. Too great praise cannot be given many of its pioneers in the field for their imagination and devotion. It is inexcusable that their government in Washington even at this late date has failed to get its foreign aid house in order. Adopting the approach proposed in this paper, we believe, would go far toward achieving this end and establishing the program on a basis which would command increasing confidence and support.

But the plain fact remains that there is no quick, easy or cheap way to resolve those problems in the present world situation to which foreign aid relates. Rather, the outlook ahead is for a long hard pull. The struggle which aid is intended to help win is certain to continue, possibly for the balance of this century.

We believe that, in the face of the worldwide threat of Communist aggression and subversion, whatever demonstrably increases the ability of peaceful nations to maintain their independence and to improve the well-being of their people increases the security and well-being of the United States.

Our decision lies between two alternatives: we can permit world events to take a course engineered by the Communists, and then deal as we can with the almost certain consequence of growing instability, violence and despair. Or, we can undertake, through all available means and in bold cooperation with others, to influence events toward the expansion of justice, prosperity and freedom throughout the world.

First published June 5, 1964

19

## REPUBLICAN
CITIZENS

### Committee of the
UNITED STATES

Foreword

1

SUMMARY

Few issues affect the citizen more directly than questions of fiscal policy. The amount and way taxes are levied, how the government spends these taxes, and whether expenditures are matched by revenues, all affect the prosperity of every American by their impact on jobs and income. In short, how fiscal problems are handled is the keystone of the whole structure of domestic public policy.

In considering the Kennedy-Johnson approach to fiscal policy several developments stand out. Most important is the administration's shift to a federal budget theory which advocates a balanced budget only in periods of full employment. This new concept rests on the questionable assumption that unemployment, such as now exists, is caused primarily by a lack of sufficient demand in the economy. To stimulate demand the theory calls for large-scale expenditure increases or tax reduction, or some combination of both.

As a result, this administration's fiscal history has been marked by large, uninterrupted annual expenditure increases, coupled with tax reduction. From fiscal 1961 through fiscal 1964, inclusive, annual increases in administrative budget spending averaged four times as large as in the previous eight years of the Eisenhower administration. Over the same period requests for new obligatory authority increased by $23 billion, while the public debt rose by $18 billion.

Despite the recent appearances of "economy," the outlook for fiscal 1965 is for further expenditure increases. The 1965 budget is in a class by itself with respect to "budgeteering," and administrative budget expenditures may well rise by $2 billion rather than fall by $1 billion as officially projected by the administration.

Coupled with this expenditure upsurge was the administration's decision to concentrate in calendar year 1964 the stimulative effect of the recent tax cut, rather than spreading out the benefits over three years as originally proposed. This decision, particularly at a time when the economy was already growing at a good rate, runs the serious risk of precipitating cost and price increases and creating troublesome imbalances in the economy. Moreover, by its decision on the tax cut the administration has decreased the availability of fiscal measures to help offset any economic downturn that might develop in the near future.

There is also the risk that price and cost increases might trigger off a whole battery of hastily improvised

2

direct controls over wages and prices. The 1962 steel price episode and the recent announcement of an "early warning system" to watch for unwarranted price and wage increases point in this direction.

Ultimately, however, the administration's approach must be judged on its success in accomplishing its primary purpose, namely the achievement of lasting full employment. While vigorous economic growth certainly will generate additional employment, it has become increasingly clear that large amounts of unemployment are due to inadequate productive capabilities, relative to employment costs, of those who have the most difficulty in finding jobs. A more permanent solution to the unemployment problem might be greater emphasis on selective job training and counseling programs designed to aid those with inadequate school background and work skills.

Whether the administration's theory proves successful or not, three important fiscal policy questions remain to be answered. First, can taxes be further reduced? It should be possible to reduce taxes every year, as the economy grows and the tax system produces additional revenue, if the federal budget is kept reasonably close to balance and if the tendency to increase federal spending is restrained. Despite the many unfilled public needs, a line by line analysis of the federal budget suggests that some sizeable expenditure cuts are possible without sacrificing essential national purposes.

Second, what kind of tax reduction would serve the nation best? We should work toward reductions in the general level and progressivity of individual and corporate income tax rates. Also steps should be taken to eliminate those excise taxes, originally imposed as emergency measures, and to remove the needless complexities that remain in the tax law.

Third, do we have the right distribution of federal expenditures? Entirely apart from the level of federal spending is the question of the distribution of expenditures among various programs. For example, would not the nation be better off with less spent on the space program and more spent on education? To help in such an evaluation, an independent, bipartisan Citizens Advisory Budget Committee should be formed to make recommendations on federal spending priorities and to suggest ways of improving the federal budget-making and accounting process, so that a citizen can truly tell where his federal government stands, and where it is heading.

3

# Fiscal Policy for National Strength And Prosperity

## FISCAL POLICY AND THE CITIZEN

Few economic policy issues affect the citizen more deeply than those with which this paper is concerned:

- the amount of personal and business income that governments—federal, state and local—take in taxes, and how taxes are levied;

- the amount that government spends, and what it spends on;

- whether spending is matched by taxes, and how government deficits are financed.

How government handles these matters affects the prosperity of every American and of the nation as a whole by its impact on jobs and incomes. It also affects the welfare and security of the citizen through its impact on prices and thus on the value of the dollar. More than that, fiscal policies are crucial to the nation's basic strength through their impact on the relationship between government and the individual and on the vitality of the enterprise system on which our national economic strength depends. In short, how fiscal problems are handled is the keystone of the whole structure of public policy.

Fiscal issues are considered in this paper, first, by reviewing the history of spending and of tax policy during the Kennedy-Johnson administration to date; then by pointing out the major risks involved in the administration's handling of fiscal problems; and, finally, by a discussion of the leading fiscal policy questions that remain unsettled. The object is to put forward a constructive point of view, in the Republican tradition, on economic problems that are among the most important facing Americans today.

## FISCAL HISTORY OF THE KENNEDY-JOHNSON ADMINISTRATION, 1961-1964

### A Four-Year Expenditure Upsurge

The fiscal history of the Kennedy-Johnson administration, from its start to this date, has been marked by very large and uninterrupted annual increases in spending. In January 1961, the outgoing administration had estimated that budget expenditures in the fiscal year 1961, a fiscal period at that time half completed, would total $78.9 billion. When the fiscal year was over, however, less than six months after the new administration had taken office, the spending total had reached $81.5 billion. Part of this $2.6 billion increase was attributed to an underestimation of expenditures by

4

the outgoing administration; but the new administra-
tion's capacity for accelerating expenditures was
decisively demonstrated when spending in the fiscal
year 1962 increased by $6.3 billion, reaching a total
of $87.8 billion. This was a one-year increase four and
one-half times larger than the average annual increase
of expenditures in the eight years of the Eisenhower
administration. What is more, it set a rate of annual
increments to spending that has since been maintained.
From fiscal 1961 through fiscal 1964, inclusive, annual
increases in administrative budget spending averaged
four times as large as in the previous eight fiscal years.
Using the most recent (May 22, 1964) estimates of
administrative budget expenditures, spending will have
risen by the end of the current fiscal year to $98.3,
from $76.5 billion in fiscal 1960, an increase of $21.8
billion. Over the same period, requests for new obliga-
tional authority (NOA), which are requests made by
the Executive branch to the Congress for authority to
spend in a given fiscal year or later, will have risen, as
reported in the January 1964 budget, from $79.6 to
$102.6 billion, an increase of $23 billion. In the process,
deficits of $25.4 billion will have been incurred in the
administrative budget. As of May 1, 1964 the public
debt was $308 billion, up from $290 billion at the end
of 1960, and by the end of May 1964 steps were being
taken at the administration's request to raise the statu-
tory public debt ceiling to $324 billion.

Tax Measures in 1961-62; The Investment Tax
Credit and Liberalization of Depreciation Rules

During the early period of the Kennedy-Johnson administration it was repeatedly asserted that the precarious position of the United States balance of international payments, which deteriorated rapidly toward the end of 1961 following an improvement earlier in the year, limited the use of **monetary policy** as a means of spurring the economy and dictated that reliance be placed largely on **fiscal measures**. Whatever the implication of this point of view, it must be noted that it did not prevent the money supply from being expanded in 1961 while there was little use of tax policy in this early period as a means of stimulating the economy.

Reliance was placed on increases in spending. An
opportunity to make proposals for tax adjustments
was passed up on February 2, 1961, when the adminis-
tration submitted to the Congress a list of proposals
to help promote recovery from the short-lived 1960-61
recession, by that time virtually ended. All the message
said on tax policy was that "reform" suggestions would
be submitted later and they would involve no net

5

revenue loss. The one specific reform mentioned, and a pertinent one in the situation, was an investment tax incentive to encourage businesses to increase their expenditures for the expansion and modernization of productive facilities. Not until April 20, 1961, was the actual proposal for the investment tax incentive put forward. This was accompanied by proposals for so-called "loophole closing," calculated to raise enough revenue to offset what would be lost through the investment tax incentive. Even then, no draft legislation was submitted by the administration.

In the absence of a draft of legislation, the language of a highly complex and controversial piece of tax law had to be worked out in Congress. Final action on the measure was not taken until October 16, 1962, a year and a half after the proposal was first made. Furthermore, the investment tax incentive adopted by Congress was more sensible than what the administration had suggested; the administration's proposals for structural reforms, which were widely viewed from the beginning as of dubious merit, were either altered basically or rejected by the Congress. The whole package as finally enacted involved a substantial net revenue loss, whereas the administration had made a particular point of stressing that there should be none. All the same, the measure was warmly accepted by the administration and is repeatedly referred to as one of its outstanding legislative successes.

Simultaneously with the administration's 1962 efforts to obtain an investment tax incentive, two additional steps were taken in the fiscal policy area: one proved out in practice; the other came to nothing. The step that was successful carried forward the initiative began under the Eisenhower administration to bring the rules of the Internal Revenue Service regarding the tax treatment of depreciation into line with the practices of tax examiners and, further, to liberalize these rules where desirable. This was particularly useful in restoring the confidence of business, which had been badly shaken early in 1962 by the steel price episode.

The step that failed was a presidential request for standby discretionary authority to make temporary cuts in taxes, subject to later congressional veto, as anti-recessionary measures.

### Mid-1962: Concern Over a Lagging Economy

Questions concerning the effectiveness of the administration's economic policies began to multiply in mid-1962 as the economy failed to register satisfactory advances. Although the administration had taken a distinctly cheerful view of the economic outlook as the year began, not many months passed before the re-

6

coverage threatened to "run out of steam." Despite large annual increases in expenditures, large budgetary deficits and expansive monetary and credit policies, the unemployment rate did not fall below 5.5 percent, a level significantly higher than had prevailed in 1959-60. Doubtless, the economy was adversely affected at the time—we need only recall the sharp decline of stock prices—by the offensive launched by the President and practically the entire Executive branch against what was officially regarded as an unwarranted increase in the price of steel. As activity lagged, serious thought was given by the administration to the advisability of requesting an emergency tax cut. However, congressional reservations regarding such a move and an improvement in the economic indicators in the late summer of 1962 caused the administration to defer any proposals for tax changes until the following year. In lieu of an emergency tax cut, a comprehensive program of longer-term tax reduction and reform was promised for the next (January 1963) session of Congress.

The January 1963 Proposals: Large-Scale Tax Reductions
Paralleled by Continued Large Spending Increases

The next phase of the Kennedy-Johnson administra-
tion's fiscal history can be summarized as an attempt,
unsuccessful as it turned out, to persuade Congress
simultaneously to (i) authorize tax reductions and an
assortment of structural tax reforms spread over three
years which, when fully effective, were estimated to
involve a net revenue loss of $10.3 billion annually;
and (ii) increase administrative budget expenditures in
the upcoming fiscal year by $4.5 billion.

Two factors seem to have been important to the
administration in making these policy proposals. First,
its thinking on budgetary policy underwent a critically
important shift from 1961. Evidence of a change ap-
peared first in the Economic Report of January 1962
when the concept of a "full employment budget" was
introduced. Up until this time the view that the budget
should be balanced over the cycle, had been prominent
in President Kennedy's messages. According to the
new concept, a budget balance should be achieved only
when the economy reached full employment. Indeed, a
surplus achieved before that point would, according to
this view, impose a "drag" on the economy. Considering
that the unemployment rate in early 1962 was 5.5 per-
cent or over and that there was, according to adminis-
tration statements, a gap of $30 billion or more between
the economy's actual production and its potential out-
put, a tax reduction or an expenditure increase, or some
combination of the two aggregating to a substantial
sum, was clearly indicated by the new fiscal theory,

7

even though there was already a budgetary deficit of well over $5 billion. The year 1962 passed, however, without any determined attempt on the part of the administration to implement their new concept of budget planning, though it must have been important in shaping the budgetary plan of "tax cut plus expenditure increase" which was put forward in January 1963.

The second factor that appears to have led the administration to propose a combination of large-scale tax reduction and large-scale expenditure increase was that the cheerful view of the economy it had taken a year earlier had been transformed by January 1963 into a gloomy forecast. The economy was described in the January 1963 Economic Report as affected by "persistent sluggishness." Failing altogether to observe the economic upsurge that was underway at the time, the Economic Report asserted that "nowhere are there visible spontaneous forces of sufficient strength to put an end to the period of slow growth." Also, failing to acknowledge that the administration was recommending a very large increase in federal expenditures, the Report expressed the view that "the only way out" was through **immediate** large-scale tax reduction and reform.

As it turned out, the administration misjudged both the receptivity of the Congress and the country to its fiscal policy proposals and the outlook for the economy. Opposition developed at once to the suggestion that taxes be cut and expenditures increased simultaneously. Doubts as to the wisdom of such a policy were based in large part on the fact that the budget was already in deficit and the dollar was under increasing pressure from abroad. Questions were raised in Congress about a fiscal plan that seemed to hold out no prospect of budgetary balance until 1970 or later, even on the assumption that the economy would operate uninterruptedly at a good rate. Staunch but responsible supporters of tax reduction coupled their advocacy of lower rates with pleas for, or insistence upon, expenditure control. And there was no mistaking the fact that, warnings against mythological thinking and puritanical prejudices to the contrary, popular support for a program of simultaneous cuts in taxes and increases in spending was entirely lacking.

Nor was the administration's plan to administer a massive fiscal stimulus to the economy in 1963 aided by the fact that business activity, rather than proving to be sluggish as had been officially forecast, moved up briskly. The administration had projected a Gross National Product (GNP) of $578 billion in calendar 1963 on the assumption that the tax cut would be enacted promptly. Actually, GNP reached $585 billion without

8

benefit of tax reduction and even though administrative budget expenditures in fiscal 1963 fell short of original projections by $1.7 billion.

## The Decision to Concentrate the Tax Cut Stimulus In 1964 and the Move to Restrain Expenditures

The major impact of congressional and public reservations concerning the 1963 fiscal plan was to force the administration to make certain moves in the direction of expenditure restraint. The first such move was taken in an August 19, 1963, letter from President Kennedy to the chairman of the Committee on Ways and Means of the House of Representatives. The letter stated that "... tax reduction must ... be accompanied by the exercise of an even-tighter rein on Federal expenditures, limiting outlays to only those expenditures which meet strict criteria of national need." Congressional concern over a policy of increasing expenditures simultaneously with reduction of taxes was expressed in the declaration section of the House-passed tax bill and ultimately in the Revenue Act of 1964. It was stated there that increased revenues, resulting from such economic stimulus as the tax cut provided, should be used first to balance the government's administrative budget and then to reduce the national debt. It was also stated that all reasonable means should be taken to restrain spending.

Following the President's tragic death in November 1963, and before the tax reduction measure was passed by Congress, a move that is widely regarded as having been the key to the tax bill's final passage was made. President Johnson put forward a budget for the fiscal year 1965 which suggested that the four-year upsurge in expenditures had been ended and that expenditures in fiscal 1965 would be reduced below spending in fiscal 1964. The new budget called for expenditures in fiscal 1965 of $97.9 billion—$500 million below the amount at that time estimated for fiscal 1964. Subsequently, on May 22, 1964, these budget expenditure estimates were revised, projecting spending for fiscal 1965 at $97.3 billion—a full $1 billion below a revised spending estimate of $98.3 billion for fiscal 1964.

**Whether spending will in fact be restrained is crucial in the present circumstances, for two reasons.** First, the Johnson administration decided early in 1964 on a critically important change in its handling of tax reduction. Briefly, what had started out in January 1963 as a three-stage tax reduction aggregating when fully effective to $10.3 billion a year became, through the Revenue Act enacted February 26, 1964, virtually a one-stage tax reduction (**as far as its stimulus is concerned**) involving a net revenue loss currently estimated

9

officially to come to $11.6 billion. In other words, a
massive tax reduction **stimulus** that first was planned to
be spread over three years was concentrated, at the
administration's insistence, almost entirely in calendar
1964. A tax reduction of this size, concentrated so
heavily at a time when the economy was already ad-
vancing of its own momentum, involves a risk of
"overheating" the economy; a risk that must not be
intensified by further increases in government spending.

Second, we shall see at a later point that effective
expenditure restraint by the federal government is
crucial to the prospect for additional tax reduction in
the years ahead, a prospect on which Americans have
every right to count and on which they should insist.

What then is the evidence on the outlook for ex-
penditure restraint?

How Much Restraint Is There?

Evidence on this question is found in four different
sets of budgetary and financial accounts: the conven-
tional budget, on which the administration currently
focusses most attention but which the late President
Kennedy explicitly downgraded; the cash consolidated
statement, which encompasses trust fund operations as
well as conventional budget outlays; the federal sector
of the income and product accounts, which President
Kennedy rated highest in significance and properly
described as a measure of the federal government's
drain on the economy's resources; and, finally, requests
for new obligational authority (NOA), which include
requests to spend in the current and subsequent fiscal
years.

Figures for all of these accounts are given every
year in the January budget message but they may be
revised subsequently, and usually are. The situation is
confusing this year, however. A revision of the ad-
ministrative budget for the fiscal years 1964 and 1965
was issued by the White House on May 22, 1964, but
to this date (June 12, 1964) no revisions have been
issued for the other accounts despite the fact that one
set cannot be revised without at least suggesting that
changes are needed in the others. Unsatisfactory as this
is in the present case, there is no alternative but to use
figures that are available.

The January 1964 budget message estimated that
administrative budget expenditures would be $500 mil-
lion lower in fiscal 1965 than in fiscal 1964. In the
May 22, 1964, White House statement, on the other
hand, the estimate of expenditure reduction was raised
to $1 billion. Using the unrevised January 1964 figures
for the other accounts, total cash payments to the public
(cash consolidated statement) will remain unchanged

10

(107)

and government purchases of goods and services (federal sector of the income and product accounts) will rise by $2.4 billion. Requests for new obligatory authority (NOA) were reported in January 1964 to be $1.3 billion higher in fiscal 1965 than in fiscal 1964, but what is even more significant as an indication of likely future increases in federal spending is the fact that they exceeded the expenditures projected for that year by nearly $6 billion.

It is not surprising that the expenditure restraint appears greatest in the administrative budget, in view of its make-up and character or compared with the other accounts. But this suggestion of restraint can be misleading. Like all budgets, the administrative budget for fiscal 1965 is a mixture; it contains projected increases in spending and projected reductions. To make a realistic judgment on the chances of achieving an overall reduction, one must compare the "reality" and character of the projected reductions with the "reality" of the projected increases.

There can be little doubt about the reality of the recommended increases in spending. As detailed in the January 1964 budget message, these included the following: pay raises of over $680 million for military and civilian personnel under legislation already enacted; $250 million for the attack on poverty, a figure already raised substantially; $286 million of additional aid for education under new and existing programs; an additional $86 million for the youth employment program; an increase of $189 million for the manpower development and training program; an increase of close to $360 million for urban renewal, public housing and other home financing and related programs; $55 million for additional Corps of Engineers construction; an additional $408 million for the "operation and maintenance" section of the Defense Department's budget and another $198 million for its "revolving and management funds;" an additional $590 million for space activities; and $400 million for increased interest payments on the public debt. These and all of the other projected increases, taken together, totalled to just over $4.5 billion.

In contrast to these projected expenditure increases, which seem certain to be fully realized if not exceeded, many of the projected spending reductions are either of doubtful practicability or are produced by what appear to be merely bookkeeping devices. A $1 billion reduction in the cost of agricultural programs is based partly on the assumption that new legislation will greatly reduce federal outlays in this area—a dubious prospect even in January 1964—and partly on the expectation

11

that a decline in wheat prices will make it possible to administer such programs as PL 480 at greatly reduced costs.

Other "savings" would be accomplished by offsetting against expenditures monies which formerly were taken directly into Treasury receipts, which improves the look of the expenditure side of the budget but only at the expense of the receipts side; by transferring certain expenditures to special trust accounts, which improves the look of the conventional administrative budget but only at the expense of the cash consolidated statement; and by placing in fiscal 1964 certain outlays that might well have been placed in fiscal 1965, which improves the look of the fiscal 1965 accounts but only at the expense of fiscal 1964.

Finally—and quantitatively most important of all— the fiscal 1965 budget becomes an "economy" budget by projecting sales of government-held loans in the amount of $2.3 billion, an increase of $700 million over the sales anticipated in fiscal 1964. Since the proceeds of such sales are treated as an offset to amounts disbursed in new lending, the result of the increase is to reduce the figure of net budget expenditures for the fiscal year 1965, relative to the figure for 1964, by $700 million. It should be said at once that this way of handling sales of governmental assets is not a departure from previous budgetary accounting practice. However, in view of the rapidly increasing importance of federal credit programs in the budget, existing practice might well be changed to count sales proceeds as receipts. But quite apart from this, there is ground for doubting the likelihood of selling loans in the volume projected.

Three conclusions are suggested by the above. The first is that such expenditure restraint as there is in the fiscal 1965 budget may well prove temporary. This is the unmistakable evidence of the figures on requests for new spending authority (NOA). The second is that such restraint as is accomplished in the near-run will probably prove to be appreciably less than the accounts suggest. Administrative budget expenditures may well rise by $2 billion in fiscal 1965 rather than fall by $1 billion. These conclusions underline the importance of continuing vigilance by citizens with regard to the level of federal spending.

The third conclusion derives from the first two. A halt should be called to the dressing-up of federal budget accounts for "image" purposes. The only defense that has been made of these practices is that every administration has used them. Whatever the merits of this assertion, the fiscal 1965 budget is in a class by itself as regards "budgeteering." What it sug-

12

gests more than anything else is the need for a code
of federal accounting to be adhered to by all.

RETROSPECT

Three features stand out in this history. The first is
the radical shift in the administration's approach to
fiscal policy problems. Starting from a more or less
traditional point of view, it has made its way to a
budget concept which, no matter how high the rate of
economic growth may be, calls for large-scale tax
reduction or large-scale expenditure increases, or some
combination of the two, so long as full employment
has not been reached. This budget concept rests on a
particular theory of the causes of the unemployment
that persists in the American economy even after pro-
longed expansion. The theory is that residual unemploy-
ment is due to an inadequacy of aggregate demand and
the proposal is that it can be cured, on a permanent
basis, by a fiscally-produced expansion of demand. The
outcome of the fiscal policy is unlikely to be any better
than the theory of unemployment on which it is based.
A good improvement in the unemployment rate was
registered for May 1964 but there is no assurance that
this will last and, in any case, the rate continues well
above the levels reached in 1955-57.

The second feature that stands out in the history is
the rather loose connection between the administration's
legislative program and the course of economic events.
As it happens, the administration's views of the eco-
nomic outlook have been, at least until 1964, more or
less out of phase with the economy. In 1961 a gloomy
view was being taken precisely as the economy was
turning into recovery. Actually, the natural recupera-
tive forces of the economy rather than anything done
by the administration produced the recovery. In early
1962 enthusiasm was the rule, but by midsummer a
case for an emergency tax cut was being developed.
Again, the economy picked up before any special fiscal
policy actions were taken. In January 1963 the ad-
ministration's views turned to the blue side again,
missing the notable economic upsurge that marked
that year. Official exhortation to hasten tax reduction
was ineffective, but the economy expanded all the same.
Finally, 1964 presents a combination of official op-
timism and a policy which concentrates the stimulative
impact of tax reduction just when the economy is show-
ing unusual upward momentum.

The third feature that is salient in the administration's
fiscal history is the lack of consistency and absence of
any sign of a guiding principle in its fiscal program. At
one time it was enthusiastic about tax reforms, bent on
accomplishing them without net revenue loss. At an-

13

other time it was enthusiastic for large, across-the-board tax reduction, with no patience for tax reform. At one time it espoused a balanced budget. At all times, until this election year, there was enthusiasm for ever-larger spending. And there is the contest just now coming to the surface which involves enthusiasts within the administration for large-scale spending increases who see the recent tax reduction as an obstacle in their path. The entire performance, typically described as a "pragmatic" approach, appears to have been heavily affected by a concern for political consideration.

## RISKS IN THE ADMINISTRATION'S FISCAL POLICY

Ultimately, the administration's fiscal program will have to be judged on its success, or lack of success, in accomplishing what is its primary purpose, namely, to achieve full employment. The administration has been quite explicit in setting unemployment reduction as the standard by which its fiscal measures will stand or fall; a lasting not merely a temporary improvement must be the standard for judgment, however. A five percent unemployment rate has been set for achievement by the end of 1964, but no date has been specified for reaching the four percent level which must be attained and held if significant improvement is to be made over, say, the 1957 level of 4.3 percent.

The merit of vigorous economic growth as a generator of additional job opportunities is unquestionable; nevertheless, it has become increasingly clear that large amounts of unemployment in the American economy are due not so much to a sluggishness in economic growth as to inadequate productive capabilities, relative to employment costs, on the part of those who have most difficulty finding jobs. Inadequate school background and lack of skills and work experience are increasingly being recognized as major causes of the unemployment that remains to plague our economy even during good times. Besides, we need to face up to the problem of discrimination as it affects unemployment and to the reluctance of unemployed workers in depressed areas to move where jobs are more plentiful.

The cost of large selective programs of job training, counseling and placement designed to correct structural unemployment would be high, without a doubt. But these costs would be low compared to that of a tax reduction program which is estimated to involve a revenue loss of $11.6 billion. What is more, the administration's fiscal policy exposes the economy to grave risks while giving little real assurance of solving on a lasting basis the unemployment problem to which it is principally, if not exclusively, directed.

14

What, more specifically, are these risks?

## The Acceleration of Cost and Price Increases

The first is that the stimulative effect of the tax cut, which is being combined with an easy money policy, will accelerate cost and price increases.

On this the administration has taken a consistently complacent point of view. It has argued that the economy is operating far below its full potential and that the increase in demand which the tax cut is expected to promote will produce no significant danger of general cost and price increases. Evidence is mounting, however, to the contrary. Both governmental and private surveys have shown that large parts of the American economy are operating at what is for all practical purposes a full utilization of productive capacity. And the fact that the unemployment rate for married men, which has been declining since early 1961, was under 3 percent when the tax bill was enacted suggests that the economy is a good deal closer to practical full employment than the administration believes. Clearly, the evidence suggests that large-scale tax reduction under circumstances such as currently prevail does, indeed, risk starting another upward spiral of costs and prices.

## The Extension of Direct Controls Over Wages and Prices

The second risk relates to the first, namely, that an acceleration of cost and price increases would trigger off a whole battery of hastily improvised direct controls over wages and prices. The 1962 steel price episode and the recent announcement that an "early warning system" has been established to watch for "unwarranted" price and wage increases point in this direction. Obviously, what is at risk here is free collective bargaining and free market pricing.

## Creating Imbalances in the Economy by a Spurt of Expansionism

The administration's decision to concentrate the tax cut stimulus in calendar 1964, instead of spreading it out, also risks creating imbalances in the economy. Unsustainable surges of business investment expenditures and of consumer durable goods purchases are the most likely possibilities. In either of these cases, the correction which would inevitably follow could result in a general downturn of the economy.

It was repeatedly stated by the administration that a tax cut would be "insurance against recession." To extend the analogy, the risk is that the insurance may prove to be a term policy. The economy can be made to expand by forced draft methods, either by spending or by tax reduction, or by both; but there is no assurance that an expansion created in this manner will be sustained. The danger of a downturn remains. More-

15

over, the more sudden and jerky the impact of an expansionist policy, as in the concentration of the tax cut's stimulus in calendar 1964, the greater the danger of a subsequent downturn.

## Impairing Our Revenue-Gathering Capability and Our Capacity to Use Fiscal Measures Against Recessions

Finally, by using the tax system as a means for attempting to correct an unemployment situation which may, on any lasting basis, be largely indifferent to this remedy, the administration—unless truly effective restraint is exercised on expenditure—has seriously undermined the federal government's capability to match spending with tax revenues. Further, the recent large tax cut has lessened the availability of fiscal measures for use in a constructive counterattack against recession, when they may be sorely needed.

The threat which large revenue losses would have on the federal government's ability to carry needed expenditure programs on a noninflationary basis cannot be dismissed. Neither can one dismiss its threat to the availability of our anti-recession weaponry. In present circumstances we would enter a recession, if one were to occur in the near future, with a very large deficit in being and a larger one in prospect. It is doubtful that Congress would enact an emergency-type tax reduction under such conditions and so soon after a massive tax cut had failed to fulfill the administration's fiscal theories. And no one can place much reliance on the effectiveness of attempting to counter recession by speeding up expenditures on public works.

Hopefully the fiscal experiment will turn out favorably. But it need not have been conducted as it was. A more prudent timing of the tax cut and a more selective approach to the unemployment problem would almost certainly have yielded more lasting results without equivalent risks.

## AFTER THE TAX CUT: REMAINING QUESTIONS OF FISCAL POLICY

What about fiscal policies in the months and years ahead? What are the problems and the opportunities?

Answers to these questions will depend in large part on whether the 1964 tax reduction succeeds or fails. The criteria of success are clear: growth sustained at a high rate, with reasonable stability of prices; appreciable and lasting reductions in unemployment; and the federal budget balanced, or moved to some close approximation of balance, as full employment is approached.

As noted, failure would involve serious problems. Even if the experiment does succeed there will be important questions of fiscal policy to be faced. Among these, three stand out prominently:

16

(1) Can taxes be further reduced?

(2) What kind of tax reduction would serve the nation best?

(3) Do we have the right distribution of expenditures?

Can Taxes Be Further Reduced?

The answer to this question is "Yes." In the first place, when the economy is advancing at a good rate, and the budget is in balance or reasonably close to balance, taxes can be cut at any time, and safely, if comparable reductions are made in expenditures. More than that, with the budget balanced and with national income growing steadily, tax rates can be cut every year as the economy's expansion produces additional tax receipts, provided that spending increases are kept within allowable limits.

Consider the first of these two possibilities, namely, tax cuts made possible by expenditure reductions. Are these really feasible?

The answer to this question is "Yes," too, despite the defeatism commonly expressed on the subject. There is an impressive body of informed, responsible opinion, based on line-by-line analyses of the budget, to the effect that large cuts are feasible without sacrificing essential national purposes. Furthermore, the feasibility of budget cuts was proven by the fact that new obliterative authority for fiscal 1964 was reduced, primarily by congressional action, by $5.3 billion below the request submitted by the President in January 1963. It should go without saying that the possibilities for expenditure reduction are not inexhaustible; all the same, there is much that could be done.

There are many important public needs still unfilled, but it must be recognized that not all projects have the same priority. Yet every attempt to defeat economy moves in government seems to rest on the assumption that every government program is equally essential and can only be removed from the budget at national peril! The Republican position has absolutely no place for this point of view, which is uninformed and essentially nonrational.

The second of the two possibilities for tax reduction derives from the fact that tax receipts increase as the economy grows. Indeed, collections may increase more than proportionately with national income.

How large an annual increase in revenues can be expected is not easy to estimate. The administration has placed the figure at $5 to $6 billion. Even higher estimates have been made privately. These added government revenues are a kind of "growth dividend" that comes with vigorous, sustained expansion. The question is: How should they be used, if they are achieved?

17

There are three options:

(1) Cut taxes every year by the amount of the revenue increase.

(2) Increase expenditures by the amount of the increase in tax collections.

(3) Let added revenues accrue as a surplus in the budget, thus reducing the public debt and releasing funds for private investment.

It is possible, of course, to use combinations of these three, but no combination adding to more than the increase in revenues can be adopted without creating a deficit or enlarging one that already exists. And if the economy is operating at or close to full employment, a deficit would be unacceptable even under the administration's concept of a full employment budget. Consistent with this limitation, some part of the increase in revenues should be allotted to tax reduction.

## What Kind of Tax Reduction Would Serve the Nation Best?

It is possible, of course, that economic circumstances in the years ahead may at some time require emergency-type tax reduction to prevent the onset of economic recession or to reverse a downturn already underway. Hopefully, this will not be the case. If it should be, it is to be hoped also that the needed measures can be taken without harmful side effects. Obviously, everyone wishes to avoid recession. But beyond that, emergency tax changes made under the pressure of recession would not necessarily improve the tax structure. Certainly the taxes added to raise revenues during war emergencies have not done so. What we should strive for are changes that will improve the tax structure and give promise of lasting benefit.

Top priority in such a program of tax reduction and reform should be given to cuts that will enhance the enterprise economy's capacity for creating jobs and improving incomes. As we have seen, a good rate of growth sustained over an extended period itself creates opportunities for further tax reduction. Tax reduction of this kind provides an opportunity to build success on success.

Clearly, the tax changes that would be most effective in promoting growth are those that would strengthen incentives and promote larger savings and capital formation. To this end, we should work toward a generally lower level of rates for the individual income tax and toward a less steeply graduated schedule of rates. We should also lower further the rates at which corporate earnings are taxed. Tax reduction along these lines would enhance the vigor and job-creating ability of

18

our whole enterprise system. They would give an especially powerful boost to new and small businesses, whose ability to grow and create jobs depends mainly on their capacity to earn and to retain income, and on the availability to them of capital supplied directly by individuals.

Another self-imposed shackle on growth, and thus a deterrent to the creation of jobs, is the double taxation of distributed corporate income. Repeal of the four percent dividend tax credit as one of the so-called "reforms" of the Revenue Act of 1964 was a backward step, only partially corrected by raising the dividend exclusion to $100. Actually, more, not less, allowances should be given to the individual for taxes already paid at the corporate level.

Additional goals should be kept in mind as opportunities for tax reduction are found. We should strive to eliminate at least those excise taxes that were introduced years ago as emergency measures. The taxation of capital gains deserves to be restudied, too, with an eye to encouraging thrift and investment. At the same time, possible abuses of present opportunities for converting income into capital gains should be reexamined. Further, there are elements of inequity and complexity in the tax system that should be removed. Agreement on what constitutes an inequity, like agreement on what constitutes an undesirable complication in the tax laws or a "loophole," is not easily reached; but one thing is sure: a general lowering of tax rates and a less steeply graduated schedule of rates would help materially in meeting all of these problems.

To the extent that progress is made in these directions we will also have moved forward toward another objective, namely, a federal tax system which gives greater scope to the revenue-collecting activities of state and local governments and which leaves as much income as possible in the hands of individuals and business concerns for investment or consumption as they see best.

Achieving tax reduction objectives, however, will depend on continuing attention by citizens to federal spending policies. Ultimately, more government means more taxes and any effort to keep the federal tax burden from rising above its present high level, or to reduce it appreciably, is essentially a problem of controlling the tendency of federal spending to increase.

## Spending Priorities: Do We Have the Right Distribution of Expenditures?

Entirely apart from the question whether federal spending is too high or too low, and apart also from the question of how the increment to tax receipts that comes with economic growth should be used, is the

19

question whether we have the right distribution of ex-
penditures in the federal budget as it stands.

This question is bound to excite controversy but it
is nevertheless vitally important that it be opened up
for discussion. For example, is the present heavy ac-
cent on "space" warranted? Would not the nation bene-
fit by a shift to education or related earthbound pro-
grams of some of the $5.3 billion requested for "space
research and technology" in fiscal 1965? To cite a
second example, should the budget provide for as much
as $8.5 billion of loan disbursements and $1 billion of
administrative budget expenditures under federal credit
programs, a number of which are serving credit needs
in open competition with private lending institutions?
Would not some part of these funds be better spent if
directed to programs designed to improve the skills
of individuals finding it difficult to obtain employment,
or to help finance a more vigorous attack on such prob-
lems as crime and juvenile delinquency? Questions
may well be posed about other programs—about agri-
culture, for example. What is needed is a means by
which the system of priorities reflected in the budget
can be regularly put under scrutiny by all parties at
interest.

The Executive branch has ample opportunity to study
spending priorities every time it submits a budget.
Whether the budget as enacted represents the views of
the Legislative branch on the relative importance of
different programs is another matter. Congressional
action on the budget is taken piecemeal and without
explicit study of its structure as a whole. Consideration
should be given by Congress to adopting means for
correcting this situation. But beyond this, a systematic
effort should be made, outside the pressures surrounding
governmental activities, to obtain a citizen's evaluation
of spending priorities. To obtain such an evaluation
should be one of the tasks of an independent, bipartisan
Citizens Advisory Budget Committee. The Committee
should be charged also with responsibility for preparing
recommendations for expenditure reduction, for ways
to improve the federal government's budget-making pro-
cess, and for ways to present the budget so as to meet
the citizen's need for a meaningful and understandable
account of where his federal government stands, fiscally,
and where it is heading.

Conclusions

I.

More intensive interest by citizens in federal expen-
diture policy is imperative given the present volume of

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federal spending, the rate at which it has been growing recently, and the indications that the current interest in "economy" may prove to be temporary. A constructive move toward making this interest effective would be the creation of an independent, bipartisan Citizens Advisory Budget Committee. Its tasks should include the following:

(1) To make recommendations for expenditure reduction and for a distribution of expenditures among various federal programs to better represent the citizen's concept of what our spending priorities should be.

(2) To make recommendations for improving the federal government's budget-making process, in particular for enabling Congress to look at the budget as a whole rather than merely on a piecemeal basis.

(3) To recommend methods of budget presentation which would put an end to the dressing-up of budget accounts for "image" purposes.

## II.

The administration's decision to concentrate the stimulative effect of the tax reduction in 1964, when the economy was already advancing at a good rate, runs the risk of precipitating cost and price increases and creating potentially troublesome imbalances in the economy. Moreover, this decision may have gravely impaired the revenue-gathering capability of the federal government, a capability which is essential to the noninflationary conduct of needed government programs—defense and nondefense. The concentration of the tax cut in 1964 has also limited the availability of fiscal measures for helping to offset any economic downturn that may develop in the near future.

## III.

The administration has placed undue reliance on across-the-board tax reduction as a means of eliminating the unemployment that remains in the American economy even during periods of generally good times. Vigorous economic growth is, of course, essential to the creation of new job opportunities, but there is an urgent need, also, for greater emphasis on selective measures of job training, counseling and placement to match those who are unemployed with job opportunities that already exist. The administration's approach to unemployment may not provide any appreciable and lasting solution to the unemployment problem to which it is mainly if not exclusively directed.

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#### IV.

If the federal budget were kept reasonably close to balance and the tendency for federal spending to increase were restrained, it should be possible to reduce tax rates every year as the economy grows and the tax system produces additional revenue. Systematic provision should be made now for the regular, year-by-year division of these additional tax revenues among tax reduction, increased support for essential federal programs, and debt retirement.

#### V.

Top priority should be given to changes in the tax laws that will enhance the enterprise economy's capability for creating jobs and increasing incomes. To this end we should be planning now for regular annual reductions in the general level and progressivity of the individual income tax rates and for a lowering of the tax rates applicable to corporate earnings. In addition, steps to eliminate those excise taxes that were introduced as emergency measures should be taken as promptly as possible, along with steps to remove the inequities and needless complexities that remain in the tax law.

#### VI.

Progress along these lines would, of course, be vastly facilitated and speeded by the maintenance of a good rate of economic growth. But no rate of economic growth will suffice as a basis for constructive, noninflationary tax reduction if efforts are not made to eliminate unnecessary federal spending and prevent unwarranted expenditure increases.

First Published June 12, 1964

22

Additional copies available at cost
from Republican Citizens Commit-
tee—15¢ each; 100 copies or more
—10¢ each.

23

## Foreword

3. The Atlantic Alliance

5. Cuba: An Effective Policy

6. Balance of Payments

7. America's Space Program

8. Foreign Aid

9. Fiscal Policy

SUMMARY

Respect for American resolve in the Far East has been dangerously eroded. Over recent years our pose appears to have been one of timidity, fear of further involvement, and quest for popularity in place of respect. Frequent wavering in our stance, as in Vietnam, has undercut our position in the Far East till it now hangs in precarious balance. Allies doubt that they can depend upon us, enemies are convinced we are a "paper tiger" in the Far East, neutrals believe that the United States is headed for disastrous defeat, and most free countries in Asia view our policies with dismay.

The United States has expended more than $8 billion in Southeast Asia since the Korean War and an equal sum elsewhere in the Far East. American troops have been deployed in the Western Pacific for a decade and a half, and untold numbers of American civilians have devoted their skills toward the social and economic improvement of the area. Why, despite these efforts, has our position in the Far East eroded so rapidly? Here are a few reasons:

* We have backed away from commitment of the very forces we helped to create for dealing with Communist aggression.

* Seemingly forgetting the lessons of history, we have pressured allies against action in response to Communist provocations and pressured strongly anti-Communist leaders to accept coalition governments with Communists.

* We have failed to condemn armed agression when committed by neutralists and have frequently rewarded them with our military and economic aid even at the cost of cutting support to our allies.

* We have failed to relate events in the Far East to each other or to understand the close interdependence which the Chinese Communists threat provides for the whole area. We have not related tactical situations, such as that in Vietnam, to the over-all Communist strategy of protracted struggle.

* Our own planning has remained remarkably defensive, perhaps best symbolized by the new term used by the Administration in the last two years, "counter-insurgency," which itself implies a defensive dealing with insurgency only after it has arisen.

In this dangerous situation two major facts eclipse all others in importance: the threat of Communist China and the inescapable involvement of the United States if this area of the world is to remain free of Communist domination. It should now be clear that if the security of the Western Pacific is to be assured, the

2

United States must take the lead in developing an over-all strategy to cope with Communist aggression.

To develop a framework for strengthening the position of the United States and allied countries in the Far East, and to assure the peace and security of this part of the world, the following actions should be taken:

* The President, backed by Congressional Resolution, should take the initiative to make clear our determination to maintain peace, stability, and security in the Far East and Southeast Asia and our firm intent not to allow the political or military security of the nations there to be jeopardized from outside their borders.

* To back up such a policy statement, the United States should undertake deployment of substantial armed forces near threatened areas—similar to the dispatch of marines to Thailand in 1962—establishment of an effective naval presence in the Southwest Pacific area, and the regular holding of joint maneuvers with allied powers.

* Embark on a comprehensive program to induce other countries in the area to help provide economic and political support to the government of the Republic of Vietnam to make quite clear United States determination to make that government internally secure and viable.

* Revitalization, or if necessary, reconstitution of United States relations with those powers with the will, commitment, and area involvement to guarantee effective joint planning and action against Chinese Communist imperialism.

* Inauguration of a regular series of meetings, at the ministerial level, of regional leaders for developing programs of mutual defense, economic development, trade, and the training of political and administrative personnel.

* Increased emphasis on long-range development and planning for regional economic progress and defense, to include, in addition to the SEATO powers, other nations and territories threatened by Communist imperialism.

For more than three years, lack of strategic purpose and planning by the United States has resulted in loss of prestige in the Far East. As our position has eroded, so the price of restoring our credibility has escalated. The United States must now either re-establish its credibility or face the possibility of Chinese Communist totalitarian hegemony over the whole area. Such a new policy direction cannot wait; the stakes are too high and the pressure of time makes delay unacceptable.

3

The United States Position in
The Far East

It can only be with deep foreboding that we survey the position of the United States in the Far East in 1964. Respect for American resolve—built at great sacrifice in Korea from 1950 to 1953 and by unwavering firmness during the Taiwan•Straits crises of 1955 and 1958—has been eroded dangerously. Over recent years our pose appears to have been one of timidity, fear of further involvement, and quest for popularity in place of respect. Our policies and actions seem schizophrenic, as we seek to compromise with Communist aggression in some countries of the area while trying to promote active defense in others. Frequent wavering in our stance, as in Vietnam, has undercut our position in the entire Far East to the point that it now hangs in precarious balance. Allies doubt that they can depend on us, enemies are convinced that we are a "paper tiger" in the Far East, neutrals believe that the United States is headed for disastrous defeat, and most free countries in the Far East view our policies with dismay. In short, the United States has been losing credibility in its constancy of purpose and in the effectiveness of its power, particularly in situations of limited warfare. As our credibility erodes, the cost and danger of re-storing it escalates.

Thoughtful Americans want to know why our resources and lives are given to fight Communism in Vietnam, yet efforts are made to prevent action against Communist insurgents in Laos, and why the most powerful nation in the world cannot make its voice heard with sufficient strength to stop the flow of supplies to Viet Cong forces through supposedly neutral states. Americans are not told what our stakes are in the Far East, what our strategy is, or how we plan to win.

I. THE FAR EASTERN CRISIS

A survey of current United States problems and policies in the Far East must begin with attention to two major facts which eclipse all others in importance: the threat presented by Communist China and the inescapable involvement of the United States.

The Chinese Communist Threat

For fifteen years the totalitarian regime of Mao Tse-tung in mainland China has been the central threat to stability and peace in the Far East. Its large military forces and its policies of aggression have threatened the security of surrounding nations. The Chinese Communists are convinced that through economic disruption, insurgency, loss of morale, and outright ag-

4

regression they can bring about a Communist victory and
 the exclusion of Western influence. Mao Tse-tung is
 the leading advocate of the efficacy of armed violence
to attain political objectives.

Military victory in China and successful employment
of force around China's borders from Korea to India
have inspired the Chinese Communists to proclaim an
"inevitable victory" for their cause. This is a tre-
mendously important point in gaining an understanding
of the present situation in Asia where the concept
of **face** means so much. The rulers of Peking insist
that China is destined to resume its ancient position
as the power in the Far East, and they urge surrounding
states to make their peace with the Mao regime as
quickly as possible on Chinese terms.

In the framework of their world view and their doc-
trine of historic inevitability the Chinese Communists
have pursued policies that have been as consistent as
they have been open. Their top spokesmen have made
clear an intention to reassert the suzerainty which
formerly put surrounding countries in the position of
tribute bearers to the Celestial Court. The policies of
the Mao regime toward its neighbors, particularly
Japan and India, leave no doubt of its intention to
dictate the course of events in Asia. The parallels with
the policies of the ultra-nationalists in Japan in the
1930's, including militarism, racism, fanaticism and a
doctrine of infallibility are only too clear.

Peking has utilized its mass, proximity and man-
power, as well as its doctrine of inevitability, to drive
wedges between those who are allied against Com-
munism in the Far East. Against one country it adopts
an attitude of truculent hostility while toward another
it turns on the smile of peaceful coexistence. It argues
that America and other Western powers are fair
weather friends, destined to retreat from involvement
in Asia, and not to be relied upon. Each small con-
cession won, each occasion of wavering on the part
of the non-Communist forces in Asia, is quickly played
upon by Peking as a further evidence of preordained
victory for its cause.

Mao Tse-tung's Communist regime is committed to
a doctrine of protracted struggle and war. This pro-
vides a strategic perspective within which it can accept
temporary compromises and tactical changes in line,
but the central concept of inevitable violence remains
basic and constant. Communist China attempts to main-
tain the initiative by an aggressive approach; it seeks
to intimidate the smaller powers; it threatens long-range
hostility against those who would resist its ambitious

5

demands; and it exploits unwarranted fears of China's size and great population by stressing its willingness to sustain great loss of human life. Peking warns that resistance to its demands will result in protracted and costly conflict in which the numerical superiority of the Chinese will prove decisive.

This strategy enables the Chinese Communists to embark on calculated periods of tension and relaxation in which concessions can be won by intransigence or feigned reasonableness; dissatisfactions can be exploited, and divisions can be created within the alliances of opponents. Piecemeal reactions of the non-Communist countries have proved ineffective, and Peking's forces seem destined for continued advance until confronted with an effective counter-strategy which can force them to realize the futility of their hegemonic ambitions.

The threat of Communist China has, of course, been enhanced by other factors of instability. The intense local nationalisms, which helped to precipitate Europe's withdrawal from her former international role following World War II, disrupted smoothly working economic and trade patterns and resulted in the loss of experienced personnel and functioning organizations before native replacements could be trained. In consequence, many nationalist leaders failed to fulfill promises they made to their people of a better life after independence. Their policies of self-sufficiency, which further encourage disruption, isolation and inflation, promote the very chaos the Communists can exploit. The slow process of nation-building has been constantly disrupted by Chinese Communist pressures. Instability has tended to lend attraction to totalitarian prescriptions, and this in turn has reinforced the influence of Communist China.

## United States Involvement

The other side of the coin of the Chinese Communist threat is the inescapable role which the United States must assume if this area of the world is to remain free from Communist domination. Our involvement as a Pacific power was demonstrated in World War II and in the Korean War. Chinese Communist imperialism today, however, makes the relationship of the Far East to United States security far more intimate than ever before. Withdrawal from commitments we have made in the Western Pacific might well undermine our position throughout the world.

In the immediate post-World War II period the United States attempted to disengage from its position as a military power in the Western Pacific. But Communist aggression in Korea brought prompt abandonment of such policies and reassumption of the responsi-

6

abilities necessary to check Communist advances in the Far East. We moved wisely and quickly to commit our full diplomatic and military power. We signed bilateral pacts with the Philippines, Korea, Japan, and the Republic of China, and we entered into the multilateral ANZUS and SEATO treaties. Major military and economic aid, the establishment of formidable bases, the building of indigenous military forces, and the stationing of United States military detachments in the area all offered convincing demonstration that we were committed to defend the security of free peoples in the Far East. Such policies and actions did much to restore confidence in the United States, and when Mao Tse-tung tested American will in the first off-shore islands crisis of 1955, it was not found wanting.

The high point in our determination to oppose Chinese expansion came in 1958, when Red Chinese forces launched an all-out bombardment of the Nationalist-held islands of Quemoy and Matsu. During that second off-shore island crisis, Secretary of State Dulles warned Peking that aggression against Taiwan would result in a three-front war—referring also to Korea and Vietnam. This was as close as the United States came to developing a strategic concept for dealing with the centralized threat from Communist China. It is now clear, however, that if the security in the Western Pacific is to be assured, the United States must further develop an over-all strategy to cope with Chinese Communist aggression.

Meanwhile, our problems in the Far East have increased because of the explicit Chinese Communist purpose to “drive the American imperialists out of the Western Pacific.” Mao Tse-tung has made a “hate-America” policy a consistent feature of his diplomacy and actions. The intensity of the hate campaign has been designed both for domestic purposes and to scare the smaller powers away from close relations with the United States and toward neutralism for fear of incurring Chinese wrath.

Peking could not fail to observe the division which the crisis of 1958 created within the United States and between us and some of our European allies, not to mention the consternation in many of the neutralist countries. It has continued to challenge and test the resolve of the United States with an actively antagistic program, including organized propaganda and demonstrations, and a stepped-up program of guerrilla violence in Southeast Asia. The response of the United States can only be one of continued firmness, and hopefully, the development of a strategy to counter Peking's policies.

7

## II. A DISMAL RECORD

When the new Administration came into office in January 1961, the Chinese Communist hard line and attendant violence took on major proportions. Once again the United States was required to establish credibility for its commitment to the security of free peoples against Communist threats in Asia.

In a major foreign policy speech of the 1960 presidential campaign the Democratic candidate objected to our being "preoccupied with only responding to Communism instead of also advancing freedom. We are," he maintained, "reacting too late in the cold war crisis where the cause of freedom is in serious trouble." Peace, he said, requires "more than talk, more than experience, more than effort. It also requires foresight." He called for action before a Communist threat reached serious proportions and plans for dealing with developments before they eventuate.

The Chinese Communists were quick to test the resolve of the new Administration. Unfortunately, however, our commitment in the Far East has appeared uncertain and our position there is now dangerously weak.

### Laos

The first major challenge came when the Pathet Lao Communists intensified their military action. On March 23, 1961, President Kennedy reported to the American people the seriousness of the Communist threat to Laos, and called attention to the number of Soviet planes which, in violation of signed agreements, were dropping supplies to the Pathet Lao. Laos was made a "test-case" for future Soviet-American relations. In the complex subsequent developments, certain items stand out:

1. When the SEATO Council met in April 1961, the Asian members urged common military action. The Philippines offered armed forces. Pakistan even designated the troops to be moved to the threatened country. The United States backed away in the face of British and French pressure.

2. Soviet planes continued to fly supplies to the Pathet Lao rebels, and we pressured Prince Boun Oum to cease fighting the Communists and form a coalition government with them, eventually cutting off aid to his government in order to force it out of power, a fact over which that government complained bitterly.

3. American allies in the Far East were disturbed by our pressures on the Laotian government. Prince Boun Oum, head of the government—which the

8

the United States joined in labeling "right-wing"— toured the Far East in early 1962 seeking support against United States pressures. The President of the Philippines told him:

"It is unfortunate that you and those who follow your leadership have not been given the full support of those who are leading the global struggle for human dignity and freedom . . . Support for the neutralists in preference to those, like you, who are openly committed to freedom is a species of sophistry that can only weaken the defense of the free world and delay at such horrible cost the ultimate victory which free men are fighting for."

4. In 1962 Assistant Secretary of State Harriman continued pressure on Laotian leaders to accept our solution for a neutral Laos. He proposed that Communist leaders be taken into the government and was so insistent that the anti-Communist General Phoumi was reported to have told him, "You know, Governor Harriman, we in Laos have many years' experience with colonial rule. But we were never spoken to in quite that fashion in colonial times."

5. By July 23, 1962, we had forced Laotian leaders to sign, and we ourselves had signed, a 14-nation Protocol and Declaration of Neutrality for Laos, based on a Soviet "troika" proposal similar to that which we were at the same time resisting in the United Nations. The ink was not dry when the Communists began to violate the agreement. It is difficult to understand why the United States, after long experience with Communist duplicity, would sign an agreement without built-in guarantees of enforcement.

The denouement is clear. The agreement on Laos did not work from its inception. Polish representatives on the three-nation International Commission for Supervision and Control have blocked effective implementation of many provisions. The Administration maintains that the Soviets are sincere in their wish to carry through the agreement, but has been unable to secure effective Soviet cooperation to do so and cannot explain the actions of the Polish representative.

In 1963 Communist forces felt strong enough to begin further operations for the elimination of the neutralists. The United States then pressured the **neutrals** not to fight, in order that the neutrality of Laos might be maintained! There has been no inspection of Pathet-Lao-held areas, and Communist guerrillas in neighboring South Vietnam continue to receive assistance through Laotian territory. Communist China has

9

completed a road into Pathet Lao areas. The government of Laos is threatened with collapse.

Once the American President had made an issue of Laos, any retreat from our commitment only undermined the morale of our allies in the Far East and encouraged further Communist blandishment. Deployment of SEATO forces to Thailand on a volunteer basis in the spring of 1961 would have been more effective than was the movement of marines in 1962. The United States could have informed the Soviet Union and other Communist countries that aircraft flying military supplies to the Pathet Lao would be intercepted and shot down.

American will was tested and found wanting in Laos. The country remains in turmoil with little prospect for stable neutrality. Had our policies taken into account the strategic interrelations of the countries of Southeast Asia and their intimate link to the central threat of Communist China, we would not have signed an agreement which failed to provide guarantees backed by armed sanctions against the violation of neutrality for Laos by Communists supporting insurgency in Vietnam.

## Vietnam

If the performance in Laos left much to be desired, the story in South Vietnam, partially in consequence, has been even more dismal. The two cases symbolize the schizophrenia of United States policy in Southeast Asia. For policy purposes, Vietnam was artificially separated from other areas, and while Ambassador Harriman was directed to achieve a political settlement at all costs in Laos, General Maxwell D. Taylor was instructed to bring about a military decision over the Viet Cong forces in the Republic of Vietnam. Since 1954, the United States had successfully helped preserve the independence of South Vietnam, and there had been encouraging growth in strength. The Kennedy Administration rightly decided to continue our support —indeed, to increase it in view of an intensification of Communist pressures. Initial progress was encouraging. Government authority and services were restored to the people in nearly all provinces, schools were reopened, and economic advances were made. South Vietnamese armed forces were strengthened, and by 1963 some of the Viet Cong forces were turning themselves over to the Vietnamese Government in response to an amnesty program.

Meanwhile, however, the infiltration of North Vietnamese Communist cadres and supplies continued. Political intrigue and plotting against the government

10

had been going on ever since President Diem took the helm in 1954, but by the summer of 1963, the enemies of the Diem government hit upon the religious persecution issue. Supported by an American press largely critical of the Diem government, aided by many emotional Vietnamese themselves and by the errors and growing estrangement of the Diem government from its own people, a few politically motivated Buddhist agitators managed to convince the American public and government that the religious issue was crucial.

Encouragement from Washington helped precipitate the overthrow of the government of Ngo Dinh Diem and his assassination, before there was a well-prepared alternate government to move into the void. The results are plain. After two changes of government, and the loss of momentum, the Viet Cong are growing in strength, much of the Vietnamese economy and countryside are controlled by Communists, desertions from the Vietnamese forces have doubled, American casualties have mounted, and agitation and plotting against the present regime continues. Many people in that troubled land, bewildered by American vacillation and tired of suffering, have begun to accept the thesis that a Communist victory is inevitable. Communist forces now violate both Laotian and Cambodian borders with impunity, while the United States plaintively protests in seeming impotence.

Vietnam has now become the focal point for testing the commitment of the United States to its allies in the Far East. The struggle against the Viet Cong must be understood for what it is: a war forced upon the Vietnamese people from Communist-dominated areas of North Vietnam and mainland China. Contrary to the view frequently expressed by the Administration, the major answer to Communist insurgency in Vietnam has lain beyond its borders, yet American leaders have given little indication they have an over-all strategic concept with which to defeat this Communist aggression.

The direction and supplying of the Viet Cong from outside the borders of Vietnam remains a key problem, requiring decisions which the Administration has continually postponed. Given more than three years' failure of our will, and our readiness to compromise in Laos, Vietnamese can with warrant ask their American allies "How can we win?"

## West New Guinea

Perhaps equally indicative of American retreat from responsibility in the Far East was our attitude toward Indonesian expansion into West New Guinea. We pre-

11

vented Dutch planes supplying their own forces there from landing at American bases, and, in a manner which made Australian leaders speak of a Far Eastern "Munich," we urged the Dutch to continue negotiating the Bunker Agreement at the very moment when Indonesian paratroopers were dropping into the disputed territory. Under the agreement, finally signed in August, 1962, West New Guinea was turned over to the Indonesian government on May 1, 1963, after an interim UN rule and with the specific provision that, after a period of years, a plebiscite would be held permitting the Papuan natives to determine whether they wished to remain under Indonesian rule. Exactly two weeks after the Indonesians assumed full control, their Minister of Information Abdulgani indicated that his government had no intention of honoring the agreement. He said his ministry would "kill any attempt to separate West Irian [New Guinea] from Indonesia. In other words, we must eliminate the referendum, or legal separation which is wrapped up in the right of self-determination." There was hardly a whisper of protest from Washington.

The United States could have stopped immediately all aid to Sukarno and applied severe economic sanctions, including pressures on Indonesia's trading partners, to force the cessation of Djakarta's military action against West New Guinea. To pressure our allies to continue to negotiate in face of overt military action only further undermined our position in related areas and convinced the Chinese Communists that the American "paper tiger" could be blandished into further concessions.

## The Sino-Indian Conflict

Yet another example of faliure to engage in effective forward planning involved the Chinese Communist attack on the Indian frontier in October 1962. Instead of utilizing the occasion to exert maximum influence on India to come to agreement with our ally, Pakistan, over the disputed Kashmir, we hastily rushed military aid to India. Then after committing ourselves, we suggested a new round of talks on the Kashmir. Too little attention was given to the multilateral implications of Peking's combination military-diplomatic power play. Negotiations to define the border between China and Pakistani-held areas of the Kashmir had opened in Peking exactly one week before Chinese Communist forces struck. Obviously military aid to a major country threatened by Chinese Communist aggression was desirable, but Washington could have acted with more caution and deliberation in order to

12

push for a settlement of the Kashmir dispute in accordance with the recommendations of the United Nations.

Indian forces would have made a better showing if they had not been mainly deployed against Pakistan. Pakistan was partially dislodged from its pivotal position as a member of both CENTO and SEATO, and cohesion within SEATO was further undermined. United States military supplies arrived too late to affect events on the Sino-Indian frontier. Smaller nations in the Far East observed the defeat administered to India at the moment we were proving ourselves unable to cope with insurgency in Laos and Vietnam, and Mao Tse-tung's strategy convinced some more leaders in the Far East that his is the future. This was a far cry from the planning and foresight the Administration had promised in 1961.

## Other Areas

To the above dismal story of military assistance to Vietnam and India neutralized by diplomatic schizophrenia in Laos, Pakistan, and Indonesia can be added other mistakes in the Far East which indicate continuing lack of well-formulated plans for building defenses against the threat of Communist China:

1. Despite extensive aid to Indonesia, our mediation has proven ineffectual in deterring Sukarno from his collision course with Malaysia. Sanctions have not been mentioned, nor has the Administration given the new Malaysian state the expressions of firm support it deserves.

2. There has been a continuing failure to take into consideration our strategic links with Australia and New Zealand and the relation of their security to developments in Indonesia and to our own position in the Far East.

3. Inadequate attention has been given to the Republic of the Philippines which can only look with wonder at the multi-billion dollar United States commitment to India.

4. In the Far East there has been little indication of United States initiative to take advantage of the Sino-Soviet quarrel, to exploit Soviet revelations of Chinese Communist ambitions in such areas as Japan, or to use Peking's exposures of Soviet actions to discredit Moscow-supported front groups.

5. Little consideration has been given to the important part which Japan must assume in building the economic and political defenses for the Free World in the Far East.

13

## Some Main Points

In contrast with the era when the Eisenhower Administration moved imaginatively and decisively toward a regional defense in the Western Pacific and developed interrelated treaty arrangements to deal with the central threat of Communist China, there has been in the past three years a singular absence of creative diplomacy and a failure to develop a strategic perspective in this critical world area.

Leaders in Asia, particularly in the smaller states under the shadow of Chinese Communist power, are especially sensitive to change. Many who have looked to the United States for support are now unsure of answers to some important questions. They want to know if the United States is the force of the future, whether we are a dependable ally, whether we can help them with pressing problems, and whether we have the will to help defend them in the face of adversity.

The United States has expended more than $8 billion in Southeast Asia since the Korean War and an equal sum elsewhere in the Far East. American troops have been deployed in the Western Pacific for a decade and a half, and untold numbers of American civilians have devoted their skills toward the social and economic improvement of the area. Why, despite these efforts, has our position in the Far East eroded so rapidly? A few reasons deserve repetition:

1. We have backed away from commitment of the very forces we helped to create for dealing with Communist aggression.

2. Seemingly forgetting the lessons of history, we have pressured allies against action in response to Communist provocations and pressured strongly anti-Communist leaders to accept coalition governments with Communists.

3. We have failed to condemn armed aggression when committed by neutralists and have frequently rewarded them with our military and economic aid even at the cost of cutting support to our allies.

4. We have failed to relate events in the Far East to each other or to understand the close interdependence which the Chinese Communists threat provides for the whole area. We have not related tactical situations, such as that in Vietnam, to the over-all Communist strategy of protracted struggle.

5. Our own planning has remained remarkably defensive, perhaps best symbolized by the new term used by the Administration in the last two years, "counter-insurgency," which itself implies a defensive dealing with insurgency only after it has arisen.

14

New policies are manifestly required, changes must be made, and initiative must be taken if the influence of the United States is to be restored in the Far East. Yet despite the lateness of the hour, there has been no indication of a new course. It is difficult to determine whether the Administration is simply allowing a drift in policy or following a policy of drift.

### III. WHAT CAN BE DONE

#### Making Our Commitment Clear

The United States must, first of all, make clear our determination to sustain the security of the Far Eastern area as a whole and discard the tendency to treat the separate countries in isolation. The United States is a Pacific power and international security in the Far East is a vital interest of this nation.

Making clear the commitment of the United States could involve such policies and actions as the following:

1. A new initiative by the President, backed by Congressional Resolution, making unmistakable our determination to maintain peace, stability, and security in the Far East and Southeast Asia and our firm intent not to allow the political or military security of the nations there to be jeopardized from outside their borders.

2. To back up such a policy statement, the United States should undertake deployment of substantial armed forces near threatened areas—similar to the dispatch of marines to Thailand in 1962—establishment of an effective naval presence in the Southwest Pacific area, and the regular holding of joint maneuvers with allied powers.

3. Embark on a comprehensive program to induce other countries to help provide economic and political support to the government of the Republic of Vietnam to make quite clear United States determination to make that government internally secure and viable.

When our commitment to the security of the Far East as a whole is clear, it follows that each policy decision must deal effectively with the Chinese Communist threat at all points. Obviously we cannot have a purpose which is less than to effect abandonment of those actions, policies, and aims which make current Communist operations incompatible with national independence, military security, political order or economic and social development in the Far East.

15

Developing a Strategic Perspective

Given the vital relationship of the Far East to United
States security, it is time to consider our involvement
there within the framework of an affirmative strategy.
The time to move toward the adoption of a strategic
plan to check the Chinese Communist bid for hegemony
and put a halt to Peking's export of revolutionary
violence is now. Adoption of a strategic goal can move
United States policy in the direction of correctly
appraisuing political, economic, and military interrela-
tionships and understanding the mutuality of needs
in the Far Eastern area, thus carrying forward the
process which the Eisenhower Administration began
at the time of the 1958 Taiwan Straits crisis.

Perhaps even more important, the acceptance of the
need for a strategic approach to our whole foreign
policy in the Far East could help the United States in-
fluence future leadership within the individual countries.
In the framework of their strategy, the Communist have
been able to create and utilize tightly-knit, indigenous
political organizations such as Western policy-makers
have not had available. This brings out clearly the miss-
ing dimension in our capabilities: namely, the absence
of friendly, well-organized, and powerful political
movements, with independent appeal to wide interests
of the native populations.

The thousands of students who come to the United
States from the Far East, for example, have seldom
been organized or given a sense of identification with a
movement for the development of their own countries,
linked to the cause of the 'Free World—a movement
to which they maintain their commitment as they rise
to positions of influence. A strategic perspective requires
planning not for months or years, but for decades. Its
absence to date has contributed to our failure to develop
a forward look regarding the organization of the per-
sonnel with whom we shall have to deal in the future.

Development of a strategic framework for strengthen-
ing the position of the United States and allied countries
in the Far East would include such measures as the
following:

1. Revitalization, or if necessary, reconstitution of United States relations with those powers with the will, commitment, and area involvement to guarantee effective joint planning and action against Chinese Communist imperialism.

2. Inauguration of a regular series of meetings, at the ministerial level, of regional leaders for developing programs of mutual defense, economic develop-

16

3. Increased emphasis on long-range development and planning for regional economic progress and defense, to include, in addition to the SEATO powers, other nations and territories threatened by Communist imperialism.

4. To take advantage of the Sino-Soviet dispute and Soviet revelations of Peking's commitment to violence and war, the United States should initiate from the highest levels an exposure of Peking's strategy in order to encourage the building of mutual defenses in the threatened areas.

## Coordination of Arms of Policy

Closely linked to the need for a strategy is the necessity to coordinate arms of policy. In 1963, there were sixteen separate departments and agencies of the Government with direct major concern in foreign affairs, and another twenty with some responsibility.

In an attempt to establish some coordination among these many groups, President Truman set up the Psychological Strategy Board in 1950. While well conceived, inter-departmental and inter-service jealousies were never ironed out. The Psychological Strategy Board proved its value, however, in a limited number of instances, such as evolving the "voluntary repatriation" formula for Korea. It never had, though, either the power or the commitment on the part of high officials to make its work effective.

In an effort to improve the situation, in September 1953, President Eisenhower replaced the Psychological Strategy Board with the Operations Coordinating Board. It served as a channel of communications among government agencies operating abroad, and it provided some of the necessary staff work for the National Security Council. One of President Kennedy's first administrative changes was to abolish the Operations Coordinating Board, and most of the staff functions for the National Security Council were not even adequately located elsewhere. There is, therefore, no agency of the United States Government capable of long-range strategic planning and coordination so clearly necessary for marshalling our resources to meet the Chinese Communist threat in the Far East. Further, when Vietnam and Laos were being treated under separate policies in the early part of the present Administration, the National Security Council was itself being given only perfunctory functions and had little opportunity for consistent staff work or strategic planning.

17

Aside from the development of short-range "task forces" on special problems, the major concept developed by the present Administration has been the coordination of the work of various agencies within specific countries under the rubric of "the country team." But the country team concept, while necessary for efficient United States operations within a given country abroad, can hardly be expected to make up for the lack of coordination in Washington. The country team concept has led to playing down the regional and world interrelationships that have proved critical in the Far East.

Perhaps in the field of economic power the need to coordinate the operations of various agencies stands out most clearly. Our economic aid contributions and trade relations in the Far East are seldom approached in terms of long-range strategic goals. The great economic power of the United States has seldom been used to back up national interest through sanctions or threat of sanctions. Resources have frequently been squandered, almost as if on the assumption that any problem can be solved if enough money is spent.

A major step to be taken immediately, therefore, is the restoration of the full functions of the National Security Council together with the re-creation of a Strategic Planning and Coordinating Board with the power and the mandate to enable the National Security Council to clarify procedures, and to bring to bear the full range of our capabilities in world affairs. Under current organization, the Policy Planning Council of the Department of State is wholly inadequate for the task; its powers are limited and it lacks representation of other agency viewpoints.

## Development and Employment of Competent Personnel

We also require a clearly enunciated program for developing a national reservoir of trained language and area specialists for all of the countries and areas of the Far East. In this important field there has not been the advance planning or the imaginative effort promised. This may in part be a reflection of the Administration's inability to clarify its own concept of the extent to which the Far East is and will remain **vital** to our national security. Although there has come an important, if tardy, realization of the role of military civic action and the constructive part which armed forces can and do play in nation-building, programs now being developed have had little backstopping with area specialists. The long-range challenge to United States security in the Far East calls for just as imaginative and far-reaching a program for training area experts as was developed during World War II.

18

Indeed, there has been inadequate application of existing expertise on the subject of Communist China, its strategy and its tactics on the Asian scene. Many top assignments have gone to inadequately equipped persons. Though it is not entirely surprising that the United States has been lacking in well trained personnel for Far Eastern areas, this does not condone present inadequate attention to programs for developing the specialists on which the various branches of the Government can draw or the lack of full utilization of present expertise.

## Relating the Far East to the World

Just as in the Far East our policies toward individual countries and sub-regions cannot be separated, so too, our policies around the world bear a relationship to each other. For more than three years, lack of strategic purpose and planning by the United States has resulted in loss of prestige, and not just in the Far East. As our position has eroded, so the price of restoring our credibility has increased. In the Far East the United States must now either re-establish its credibility or face the possibility of Chinese Communist totalitarian hegemony over the whole area. Necessary policy decisions will be difficult, and the risks will be great. The test is now before us: Vietnam and Laos must be made secure for the development of free institutions, and a large part of the answer to their problem of security lies beyond their borders. A demonstration of our willingness to repulse the Communist threat and re-establish faith in ourselves as a formidable foe and successful ally is now a "must."

The outcome of the test in the Far East, however, will be determined in part by our performance elsewhere. Our credibility in Vietnam is linked, for example, to the manner in which we handle Communist subversion and indirect aggression from Castro's Cuba in this hemisphere. Vietnamese, Koreans, or Thais are unlikely to evince great faith in the destiny of the United States if we prove ourselves incapable of dealing with Communist Cuba. More than a little, too, depends on how we perform in relation to the Soviet Union. Are we capable of evolving policies which take into account the dangers as well as the opportunities presented by the quarrel between Moscow and Peking?

Throughout the world, but particularly in the Far East where the Communist China threat looms large, the United States, as leader of the Free World forces, will have to face up to the conclusions that the Communist view of a decent world order is incompatible with ours. We are called upon to develop a strategy to check Communist imperialism. This means a willingness

19

to make a commitment and stick to it, the development of an ability at strategic planning, the coordination of arms of policy, and attention to and long-range development of expertise. In the Far East such a new policy direction cannot wait. The stakes are too high and the pressure of time makes delay unacceptable.

First Published, June 18, 1964

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## REPUBLICAN
CITIZENS

72

## Foreword

3. The Atlantic Alliance

5. Cuba: An Effective Policy

6. Balance of Payments

7. America's Space Program

8. Foreign Aid

9. Fiscal Policy

10. Far Eastern Policy

Resources and the Future: Energy

Our economy, which is based upon the employment of energy in its various forms, has in recent decades demonstrated a rapid growth in energy requirements.

At the present time, most of our energy is derived from fossil fuels in which the accumulated solar radiation has been stored by plant and animal life over countless millenia. These are the deposits of coal, petroleum and natural gas. While they are finite in amount, exhaustion is not an imminent peril and, in the case of coal, is very far off indeed. We are holding our own (use vs. new finds) in petroleum, although it might be argued that in time we may have to reduce usage for stationary energy sources to provide reserves for automotive and aircraft purposes. Any shortage and accompanying price increase might, however, stimulate the production of liquid fuel in large quantities from coal. Therefore, no case for urgency can be made with respect to the short term supply of fossil fuels.

Energy derived from falling water and converted into the form of electricity has been developed in the United States to about the practical limit of its economic and geographic possibilities as will be discussed in more detail later.

The waves, tides, winds, and direct solar radiation all are possible sources of useful energy, but all are either undependable, diffuse, inefficient, low-grade, or locality-limited. They represent an insignificant part of the presently-consumed energy (other than solar radiation in the production of crops), and hence they will not be discussed.

The fuel cell, an interesting development, is not a new source of energy, but a fuel use promising higher efficiency. Present high temperature steam plants approach 40 per cent thermal efficiency, a very great improvement over the past thirty years. Fuel cells may be developed eventually to operate at greater efficiencies than this, but, to be significant, the capital cost per installed kilowatt would have to be lower. At present the contrary appears more likely.

Finally, we have nuclear-powered generators of electricity. Only twenty-two years have elapsed since the first controlled fission chain reaction, and only ten years since the first plant to produce electrical energy for civilian consumption from nuclear fission was initiated (Shippingport). In view of the striking and continuous reduction in the installed cost per kilowatt of capacity and in the production costs per kilowatt hour —to the point where in several parts of the United States nuclear plants are today competitive with con-

1

Conventional coal-fired plants—it is not unreasonable to expect further reduction in the cost of electricity from atomic fission. Nuclear power plants will be competing, of course, with more efficient steam plants burning coal. In 1920, it required 3 pounds of coal to produce 1 kilowatt hour; in 1940, 1.4 pounds; and in 1960, only .7 of a pound. Thus, in the last forty years, the amount of electricity which could be generated by the same amount of coal has more than tripled. Continued improvement at this rate can hardly be expected, however, whereas nuclear technology is at its beginnings.

Atomic power from the fusion of the nuclei of light elements is a development with vast and revolutionary potentials for the future. Whether the necessary breakthrough in technology is imminent or far distant is unpredictable. Most authorities agree that the principle is theoretically feasible.

## THE RECORD

1. **Dams for Energy and Reclamation.** In 1902, Republicans established the Bureau of Reclamation and vigorously carried out Federal reclamation of arid lands. Of major reclamation projects today, some two-thirds were created by Republican Administrations. These include the gigantic multiple-purpose Hoover Dam, on the Colorado River. Republicans approved and were engaged in the final stages of engineering plans for the Grand Coulee Dam on the Columbia River and Central Valley of California developments, when the Democratic Administration took over in 1933. The Grand Coulee, key to the whole Bonneville Power Authority, is the largest dam in that hydroelectric complex.

2. **Water and Power for the Southwest.** The Glen Canyon and Flaming Gorge Dams brought forward the Colorado River Storage Projects under the Eisenhower Administration. This enormous project, one of the most extensive water programs for arid areas yet undertaken by man, will not be completed until after the year 2000.

3. **Power on the Niagara.** Pursuant to the Treaty of 1950 and the subsequent statute, licensing arrangements were made with the New York State Power Authority for developing the electrical resources of the Niagara River and were consummated by the Eisenhower Administration. This source supplies power for New York and much of New England.

4. **Oil as an Energy Source is Conserved.** In 1924, Republicans established the Oil Conservation Board; and, in 1929, oil beneath the free public lands was withdrawn from private entry. The same year a Republican Administration initiated the major interstate compact

2

for conservation of oil, which has since come into being
among 21 states.

5. Petroleum on the Continental Shelf. Our vast new development of petroleum on the continental oceanic shelf of the United States was initiated and methods for its supervision established under the Eisenhower Administration.

6. Self-liquidation Policy for Public Works. A Republican Administration established the policy of Federal loans for self-liquidating public works, then financially not feasible by private capital or state funds. Diverting the Colorado River water supply to the Los Angeles area is an instance. Those loans made by a Republican Administration are repayable to the Federal Government.

7. Water and Energy from the Mississippi into the Rockies. The so-called Frying Pan Project on the Arkansas and Red Rivers, while finally authorized in 1962, was engineered by the Eisenhower Administration and repeatedly proposed to Democratic Congresses without avail. This enormous project will assist all Southcentral states from the Mississippi to the Colorado Rockies.

8. Atomic Energy. The Eisenhower Administration made historic contributions toward effective use of atomic energy for peaceful purposes. In 1953, it proposed the establishment of the International Atomic Energy Agency. The Republican Congress of 1954 amended the Atomic Energy Act liberating the development of this great new power source from the heavy hand of Government monopoly. The Administration emphasized the uses of the atom in medicine, industry, agriculture, and especially the generation of electricity. The first reactors for commercial civilian power date from the Eisenhower Administration.

## DISCUSSION AND RECOMMENDATIONS

The wise production and use of electrical energy calls for sound working relationships between private enterprise and Government. While public oversight is necessary it must not paralyze private initiative. It is this unique relationship of public to private endeavor which has helped make our country the stronghold of freedom. This relationship is delicate, and judgments on its precise applications can vary among men of good will. For example, the extent of Federal support for TVA financing is an open question among many citizens of each party. So too, in a free society, one man's yardstick can be another man's goad—depending upon who wields it. For these reasons, this paper will deal with clear-cut actions, facts and issues. It will not overstress the realm of judgmental hairsplitting.

3

(L)

Our objective is not an indictment of Democratic policy as a whole. We recognize that within both parties there is room for difference of opinion on the responsibilities of the public and private sectors in the generation, transmission and distribution of energy— and the relationships of each to the other. We seek, therefore, only to make reasonable criticisms and to emphasize constructive recommendations for the solution of energy problems which the Nation faces.

With respect to some of the key electrical energy questions today facing our people, we think the present and previous Democratic Administrations have been deficient, through action in some cases, inaction in others. Moreover, Democratic Congresses, from 1955 to the present, have been unwilling to accept a number of the constructive approaches which we propose.

Fourteen specific subject areas merit discussion:

1. Improvements in Energy Technology. Vast technological developments have recently occurred in the efficiency of electrical generation plants, but the Federal government seems inadequately aware of the facts. New steam plants, especially those using coal, generate electricity by the most advanced methods. This is of vital importance in the coal-producing Appalachian area, where attention is now focused on the poverty problem. Private industry has initiated a technological revolution in the generation of electrical power; and new methods of transmission now permit electricity to be sent over long distances with negligible line losses.

By the strategic placement of generating plants (e.g., at the coal mine pit-heads), by improved methods of mining and distilling coal, and by enormously increased efficiency of generation, tremendous savings to consumers are possible. Yet the Administration continues to place heavy emphasis on what appear to be economically questionable hydroelectric projects and on providing subsidized REA loans to build small steam generators, many of which are unnecessary.

Small plants are relatively inefficient producers. Studies made eight years ago clearly demonstrate that the cost of producing electricity by steam varies significantly with the size of the generating plant employed. For example, a 25,000 kw. plant will produce power for 13.6 mills per kwh., a 100,000 kw. plant can produce it for 9.3 mills, a 200,000 kw. plant for 8.3 mills, a 400,000 kw. plant for 7.7 mills, and a 1,000,000 kw. plant for 7.4 mills. Thus, a 1,000,000 kw. plant can produce power at a little more than half the cost involved in a 25,000 kw. plant.

The amount of heat required to produce a kilowatt hour has declined significantly. In 1926, it was 23,600

4

BTU per kwh.; in 1962, it was only 10,493. The portion of power produced by steam rose from 62.6 per cent in 1926 to 79.7 per cent in 1962. During this same period, the average cost of electricity for residential use fell from 7.00 cents per kwh. to 2.41 cents.

This technological revolution is pertinent to the question of power hydro-electrically produced, especially on marginal Federal projects, for the kilowatt hour costs on some of these planned projects are high to start with.

### RECOMMENDATION NO. 1

We recommend a detailed study of the relative efficiency of methods for generating electrical power within the United States and the development of a new and constructive Federal power policy which will give due consideration to the demonstrated achievements of private industry in this area of power cost reduction.

## 2. The Scarcity of Economically Feasible Hydro-electric Projects.
For all practical purposes, the United States is virtually running out of feasible hydroelectric projects—that is, projects which are economically competitive when compared to power generation by the new processes mentioned above. One example is the Knowles Dam project in Montana; the electrical generation costs are expected to run from 10 to 20 mills per kwh. Another example is the Devils Jumps Dam project on a tributary of the Cumberland River in Tennessee and Kentucky on which the cost would approximate 12 mills per kwh., computed on a comparable basis with privately-financed plants and normal amortization. (Compare these with the new steam generation cost of 7.4 mills per kwh. for large installations.)

While these projects doubtless have agricultural, recreational or aesthetic benefits, their over-all economic advantages in electrical generation are marginal, and they can be justified only by placing exaggerated emphasis on criteria other than cost. It would be possible to build dams in every river in the United States for hydroelectric purposes and justify them, if the standards are loose enough. This characteristic taints the economic justifications for proposed hydroelectric projects on which the taxpayers' dollars may be imprudently expended.

### RECOMMENDATION NO. 2

We recommend that the study mentioned in No. 1 be completed and the criteria therein developed in judging the economic justification as well as the feasibility of hydroelectric projects before contracts are let on pending proposals.

5

3. **Standards for Determining the Feasibility of Justifying Multiple-purpose Projects.** The present Administration has rewritten the standards for justifying new multiple-purpose hydroelectric projects, thus permitting justification for marginal projects such as those described above.

The previous standards for justifying multiple-purpose hydroelectric projects had been in existence for a decade; and were far from stringent. Yet, in 1962, the Administration felt it necessary—presumably in order to open the gate for more projects—to draw up a new set of standards. The old standards were loosened by extending the period of projecting costs and benefits (the cost-benefit ratio) from 50 years to 100 years.

Extending the standards to apply 100 years hence raises obvious questions. It is no more possible today to foresee conditions in 2064 than it would have been to project 100 years forward in 1764 or 1864. Technological and population changes are certain to render any 100 year projection completely obsolete. Furthermore, since Federal Power Commission licenses to private concerns are limited to a maximum of 50 years, a private company cannot even calculate on a 100-year amortization, and there is thus a built-in discrimination against private capital.

### RECOMMENDATION NO. 3

We recommend that the present standards for justifying multiple-purpose projects be discarded in favor of a new and realistic set of criteria. We recognize that certain elements, such as recreation, navigation or flood control, are not readily susceptible to so-called "user charges"; nor can such benefits be estimated with accuracy under present standards. But the present procedure which often compares the "cost" of apples with the "benefits" of bananas is so loose that almost any project can be "justified."

4. **A Nationwide Electrical Transmission Grid.** Congress has never authorized an electrical transmission grid across the Nation. Yet, segment by segment, Federal agencies appear to be working to accomplish this. The proposed 900-mile high voltage interconnection between the Bonneville area and the Hoover Dam is one example.

If the Congress wishes to authorize a nationwide transmission grid, or a series of regional grids, we believe it should say so. Certainly this objective should not be accomplished by bureaucratic subterfuge, or in unplanned bits and pieces.

6

RECOMMENDATION NO. 4

The Congress should express a national policy on high-voltage, cross-country transmission grids for electrical energy to be adhered to by all Federal agencies.

5. Executive Differences with the Views of the Federal Power Commission. The Democratic Members of the Federal Power Commission are appointees of the Democratic Administration, yet the Executive branch often works at cross purposes with the recommendations of the Commission. This seems to us unfortunate. There should be unified Federal policy on the development of the Nation's electrical energy resources, worked out on an impartial basis. The Department of the Interior, as owner of land or as a special pleader, should not set the policies.

An example of harmful policy conflict is the effort of the Interior Department to prevent private industry from developing the High Mountain Sheep Dam in Idaho. The Federal Power Commission evidently held a contrary view. In substance, the Federal Power Commission found it necessary to disagree with the Interior Department for trying to spend public funds when private resources were available to achieve approximately the same purposes.

RECOMMENDATION NO. 5

The policies for Federal development, transmission and distribution of electrical energy and the rates charged to the consumer therefor should be decided primarily by a bipartisan Federal Power Commission. It is detrimental to the public interest that the viewpoints of the Federal Power Commission and the Interior Department should be uncoordinated. This subject should have the prompt attention of the Congress.

6. Uncertainties Facing Private Industry as the Present Federal 50-year Hydroelectric Licenses Come Up for Renewal. Many existing important hydroelectric plants operated by private industry are under 50-year licenses, some of which will come up for renewal by 1970. Private industry is in a dilemma concerning further investments in the generation, transmission, and distribution facilities, because of uncertainty over license renewal. This uncertainty is a deterrent to new industries which might locate in areas where they could contribute to employment and local prosperity.

7

RECOMMENDATION NO. 6

The Congress should promptly establish a Federal policy on such license renewals, and this policy should not discriminate against private industry over government ownership.

7. **Veto Power on the Dispatch of Electrical Transmission Lines on Public Lands.** Since the Eisenhower Administration left office, the Interior Department has sought to establish control over the terms, conditions and uses of electrical power transmitted by lines across land owned by the Federal Government. The Federal Power Commission has taken issue with this position of the Executive Branch. We believe the Federal Power Commission is right in its contentions.

In the 17 Western States the supervision of vast public lands by the Interior Department results in virtual control over all aspects of long-distance transmission of electrical energy. The extent of Federal ownership of Western land is frequently not realized. The chart below indicates the percentage of land owned by the Federal government in five states:

<table><tr><td>Nevada</td><td>85.5%</td></tr><tr><td>Utah</td><td>68.4</td></tr><tr><td>Oregon</td><td>51.9</td></tr><tr><td>Idaho</td><td>64.6</td></tr><tr><td>Wyoming</td><td>48.2</td></tr></table>

Since the Interior Department administers the land, private companies, which may wish to transmit power over any large area in the West, are in a position (under the Interior Department's indicated policies) where they can operate only by submitting to conditions imposed not by the Federal Power Commission but by the Department of the Interior.

RECOMMENDATION NO. 7

We recommend that the Federal Power Commission, free of dictation by the Interior Department, deal with the private transmission of power in the public-land States. The Interior Department should not have veto power in such matters.

8. **The Lack of Adequate Hydrological Studies.** It has now been more than a decade since the first Hoover Commission strongly recommended that more Federal emphasis be placed on obtaining better hydrological data in the United States. The Eisenhower Administration, through the President's Advisory Committee on Water Resources Policy (PACWRP), made strides in this direction. Since 1961, this effort has received inadequate encouragement.

8

The recent, outstanding study of the Task Force on Coordinated Water Resources Research of the Federal Council for Science and Technology has made a valuable contribution to the Nation in this respect, but the recommendations of the study have not been implemented. The Task Force, under its distinguished Chairman, Dr. Roger Revelle of the University of California, was concerned with water primarily for its use by human and industrial consumers. However, the recommendations for better hydrological information apply in a parallel way to the need for more information in this area in connection with the generation of hydroelectric energy.

### RECOMMENDATION NO. 8

We endorse the proposals of the Revelle Task Force, since obtaining more data about water will apply to its usefulness in generating electrical energy. We believe the Federal system for obtaining hydrological data should be materially expanded and the agencies involved better coordinated.

## 9. Coordination Among Federal Agencies.
Under the Eisenhower Administration, a significant step forward was taken in coordinating the numerous Federal agencies concerned with generating electrical power, through the creation of PACWRP (see above).

Under PACWRP, policy differences were greatly reduced, in marked contrast to the problem of the Missouri River during the late forties, when it became necessary to organize an ad hoc coordinating group for the Missouri River Basin alone. The so-called Pick-Sloan Plan for the Missouri River Basin was then developed and hailed as evidence that Federal agencies could work together and reconcile the views of two organizations with different objectives. In this instance, one was concerned primarily with flood control and navigation, the other mainly with irrigation. There was not enough water in the Missouri Basin to supply all needs, and bureaucratic compromise could not alter that fact. Yet, the Pick-Sloan Plan demonstrated a need which was met in considerable degree in the Eisenhower Administration, though nothing since has been done along this line.

### RECOMMENDATION NO. 9

The President should insist upon coordination among Executive agencies concerned with generating and transmitting electrical energy.

9

10. The New Emphasis in REA on Transmission and Generation Facilities. The Norris-Rayburn Act, establishing the Rural Electrification Administration (the REA), was approved by Congress in 1936, with the announced purpose to bring the advantages of electricity to rural areas. A "rural area" was defined as any portion of the Nation which was not included within the boundaries of a city, village or borough with a population of more than 1,500 persons. This definition of area is now construed to cover much of "suburbia" or "outer suburbia."

Senator George Norris of Nebraska, author of the Act, convinced the Congress that the law was needed to make electricity available to farms and at reasonable prices. The private power industry had naturally concentrated where the need per capita was greatest and where the demand would make the financing of facilities feasible.

It is amazing to realize that only four decades before the enactment of the Norris-Rayburn Act virtually all of the United States was lighted and fueled by coal, gas, kerosene, and the like. The private electrical generating industry rose during the first three decades of the twentieth century from insignificant beginnings into the most important industry in the United States.

Like all of our dynamic fields, the electrical power industry had severe "growing pains." It did not have enough trained people to service the entire United States; and high population-density-areas were stressed. Private industry serviced major rural areas where the load was adequate, such as Central New York State, with its power requirements for dairying, and California, with its irrigation pumping needs. But, the general farming area was not so served in 1936 when the REA was created. Senator Norris correctly pointed out that this was because adequate "loads" did not exist in most rural areas.

In 1936, 89 per cent of all farms were without central service electricity. In 1964, the situation has completely reversed itself; 98 per cent of all American farms are electrified through central station service, and most of the remaining 2 per cent could be so serviced readily. In this respect, we believe the REA has realized its purpose.

In recent years, however, the REA has placed major emphasis on the building of transmission and generation facilities and on supplying electrical energy to "suburbia" and "outer suburbia." This was not the purpose of the Norris-Rayburn Act. Now that nearly all of the farm population has been supplied with electricity, the REA, as is the common experience with

10

bureaucracies, has sought ways of perpetuating and expanding itself. In the few years since the Eisenhower Administration left office, borrowings from the REA to set up facilities for generation and transmission of electrical energy have greatly increased and the trend is sharply upwards.

If rural areas are lacking in generation and transmission facilities, they should by all means have them, but we believe it unwise to finance such facilities with federal funds where adequate and existing private facilities already exist. Numerous examples bear out this point; for instance, the Patuxent area of Maryland and in Southern Indiana. In both cases, taxpayers' money was unnecessary since private facilities were available. These recent policies of the REA are not the purposes of the law as expressed by its original Congressional sponsors.

### RECOMMENDATION NO. 10

We recommend that the Congress by resolution or the President by Executive Order establish a competent objective body to review the original purposes and present activities of the REA. Farmers are entitled to reasonably-priced electrical power, but we do not believe that long-term money borrowed by the United States at about 4 per cent and then reloaned through the REA at 2 per cent should be used to promote competition with private citizens. Efficient private producers have proven that they can provide electricity at low cost to the consumer even against competition taking advantage of the artificially low interest rates of REA loans.

11. New Steam-generating Plants of the REA . . . By-passing Congress. As mentioned in item No. 10, the REA appears to have changed its emphasis from servicing farmers to the generation and transmission of electrical energy for consumers not engaged in agriculture. One aspect of this is certainly open to question. On repeated occasions, the Congress has refused to appropriate funds for steam-generating plants as supplements to Federal hydroelectric power projects because private facilities were available. The Congress was obviously unmindful of the fact that hydroelectric power is often sporadic, depending upon rainfall, and that therefore hydroelectric power usually needs to be supplemented with standby steam-generated power. The questionable point is that REA loans have been made apparently to build steam plants for which the Congress had refused to grant funds. Here are examples:

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1. **1962—Colorado-Ute Cooperative.** The REA provided $21,602,000 toward financing a 150,000 kw. steam plant to "firm up" power from the Colorado River Storage Project.

2. **1962—Basin Electric Power Cooperative.** A $36,-600,000 loan was made to build a 200,000 kw. steam plant, most of the power from which will be disposed of to "firm up" Missouri Basin power.

3. **1963—Upshur Rural Electric Cooperative.** A REA loan of $9,170,000 was made to build a 33,000 kw. steam plant and transmission lines. The Southwestern Power Authority will buy most of the power and lease the transmission lines.

RECOMMENDATION NO. 11

The Congress should, by suitable legislation, restrain the REA from financing the construction of steam plant power-generating facilities as supplements to hydroelectric projects in cases where the Congress itself has refused to appropriate funds specifically for such facilities.

12. **Comparable Rates.** Consumers located where they may buy power from Federal projects usually obtain it at a price well below its true cost of production. This is unfair to power consumers who are not so fortunately situated, yet who pay taxes to subsidize the power for others. This inequity to taxpayers and to privately-owned utilities is a consequence of several factors.

First, Federal power projects are usually tax-exempt. Consumers of electricity supplied by investor-owned electric companies must bear through their electric bills a significant tax burden. In most instances, this amounts to about 23 to 25 per cent of the cost of electricity, yet those who obtain their power from Federal projects, in most instances, do not have to pay such taxes.

Second, rates charged to consumers for power from most Federal projects are intended by law to return interest on the unamortized power investment at only 3 per cent or less per year. Since it costs the Federal government about 4 per cent to borrow money of a comparable maturity, the result is a subsidy given a few power consumers at the expense of many others.

The Comptroller General of the United States, an agency of Congress, found that the Missouri Basin power projects, from their inception to the end of fiscal 1960, had lost a total of $51,778,000. The Southwestern Power Administration and its appended power projects, from its inception in 1944 through 1961, had

12

lost $50,105,000. The Columbia River Power System, on its power operations, had lost $53,320,000 from 1958 through 1963. The Southeastern Power Administration, on its power operations from 1955 through 1960, had lost $20,400,000. The sum of these losses was a gift to the users of this power, paid for by taxes collected from citizens in other areas.

Thus, the General Accounting Office has found that major Federal power projects in general do not charge rates sufficient to cover the modest interest charges imposed on them.

### RECOMMENDATION NO. 12

The rates charged to users of Federal power should be adjusted so that the users of such power do not receive an unfair advantage as opposed to those who do not receive their power from Federally-subsidized projects.

## 13. The Fossil Energy Source Materials.

**Coal.** In terms of tonnage, the coal industry is unique in that it has remained relatively static for years. In 1962, the use was as follows: industry 24%; coke 20%; electricity 48%; retail 8%; remainder, ammonia and other special chemicals. Recent U.S. production of coal is 440,000,000 tons per annum (1962), about one-seventh of the world production. Coal and natural gas are almost perfectly competitive for the cost of electricity production, about 25 cents per million BTU, averaged over the U.S. (local factors favor one over the other of course). Oil is about one-third higher in cost.

Coal reserves are calculated on the assumption that 50% of the known quantities in the ground are "recoverable," depending on technology and economic demand. On the basis of this 50%, the present reserves in the U. S. are 83 x 10¹⁰ tons. At 1962 rates, we are then mining 0.05% per annum. In other words, at ten times the present rate of use and with no new finds, we have a 200-year supply—i.e., no case can be made for an imminent shortage of coal.

**Natural Gas.** Probably one of the fastest growing areas of energy source is natural gas, which is increasing at 5% per annum. In 1962, a total of 13.9 x 10¹² cubic feet were sold. In 1960, the breakdown was 6.5 x 10¹² industrial, 4.1 x 10¹² residential and commercial, and 1.8 x 10¹² field (i.e., losses, etc.)

In the year 1961, proven reserves (economically and technically recoverable) were 275 x 10¹² cubic feet. Under present use rates, this is a 20-year supply but both use rates and new finds are increasing so rapidly that this figure does not have much meaning, as is also true in the coal industry.

13

**Petroleum.** In 1962, the petroleum use picture was:

<table><tr><td>Gasoline</td><td>1.6 x 10<sup>9</sup> bbls.</td></tr><tr><td>Distillate</td><td>74 x 10<sup>7</sup> bbls.</td></tr><tr><td>Residual</td><td>5.6 x 10<sup>7</sup> bbls.</td></tr><tr><td>Kerosene</td><td>16 x 10<sup>7</sup> bbls. (mostly jet fuel)</td></tr><tr><td>Other</td><td>74 x 10<sup>7</sup> bbls. including losses, export, etc.</td></tr></table>

The total demand was 3.8 x 10⁹ bbls. and the world supply was 8.8 x 10⁹ bbls. so that U.S. use runs around 40%. Net U.S. imports are around 70 x 10⁷ bbls. per year or less than 8% of use.

The present U.S. proven reserves (under present technology and price structure) are 31.4 x 10⁹ bbls.

It is generally believed that large reserves of both oil and gas probably lie elsewhere awaiting discovery on this Continent and on the coastal shelf.

If an equitable relationship of imports to domestic production is maintained, these energy resources should remain adequate for the foreseeable future. The Eisenhower Administration worked out such a policy of balanced relationships in 1959.

## RECOMMENDATION NO. 13

The Federal Government should maintain a constant surveillance over primary sources of energy and revise its import or other regulations whenever necessary to maintain exploration, adequate supplies and equitable prices.

**14. Atomic Energy.** As previously noted, the Eisenhower Administration gave particular encouragement to the peaceful uses of atomic energy, and notable successes were achieved. The first nuclear reactor to produce electrical energy for commercial use was initiated during the Eisenhower Administration and built at Shippingport, Pennsylvania, with large contributions from private industry.

The cost per kilowatt hour of electrical energy derived from the fission of uranium, which was estimated at three to ten times the cost of conventional power in 1954, had been reduced by the ingenuity of American scientists and engineers until at the end of the Eisenhower Administration plants were under construction whose output was competitive with steam-generating plants in the same areas of the Nation.

Thus, while no early exhaustion of fossil fuels appears to threaten us, and while technology is continually reducing the cost of electrical energy derived from fossil fuels, the remarkable strides in the reduction of power costs from nuclear energy will stimulate a healthy

14

competition to make electricity still cheaper for consumers.

An important research project in the area of nuclear power development is the theoretical feasibility of producing electrical energy from the fusion of light elements such as hydrogen and deuterium. This project, research upon which was meagerly supported until 1953, was given the encouragement of needed appropriations beginning in that year. Very great progress has been made since, but a breakthrough in technology is yet to be achieved. Both the British and Soviet Governments are now believed to have come abreast of our former position of leadership in this area of research. The British effort is said to exceed ours, whereas the Soviet effort is reported to be 200 percent greater than ours.

The significance of power from fusion, if it can be achieved, is (a) the fuel supply is unlimited since it exists in all bodies of water, and (b) the cost of power so produced would be a fraction of present power costs. We understand that this line of research in our own laboratories has been reduced both in priority and support. We believe this to be shortsighted.

## RECOMMENDATION NO. 14

We recommend a new review of the peaceful uses of atomic energy to determine the areas in which research can be effectively and increasingly supported and to restore the sense of urgency which seems to have yielded to the more glamorous and costly demands of space exploration.

First Published June 26, 1964

15

## REPUBLICAN
CITIZENS

72

[Y]

April 9, 1964

TO: THE GOVERNOR

FROM: Henry A. Kissinger

SUBJECT: Panama: Proposals of the Republican Citizens Committee's Critical Issues Council

On April 8, 1964, the Republican Citizens Committee's Critical Issues Council*, headed by Dr. Milton Eisenhower, recommended a program to deal with the immediate and long-range problems in Panama.

**Recommended NAR Position:** Support of this program.

**The Council's proposed program:** The program is based on the assumption that a new sea level canal will be, and should be, constructed within 25 years; and that such a canal will be built through Panama.

1. The U.S. should agree to complete Canal improvements costing a total of $75 million, thus enabling the Canal to handle most traffic for another 25 years or more.

- The U.S. has spent nearly half this sum on the required improvements and hence should complete them within the next two years.

2. The Canal tolls should be raised by 30% and Panama's annuity (now $1.9 million) should be increased to $15 million.

- In view of the fact that Canal tolls have not been raised since the Canal was opened, an increase is justified.

- A 30% increase would raise income by about $20 million a year now, and more as traffic increased. This would enable the U.S. to make the proposed increases annuity to Panama.

* Other members: Elliott Bell, Arleigh Burke, Arthur Burns, Albert Cole, James H. Douglas, Marion Folsom, Thomas Gates, T. Keith Glennan, Oveta Culp Hobby, Walter Judd, Mary Lord, Clare Boothe Luce, Dean Mallot, James Mitchell, Lauris Norstad, Don Paarlberg, C. Wrede Petersmeyer, Samuel R. Pierce, Jr., Charles Rhyne, Raymond Saulnier, Lewis L. Strauss, Walter N. Thayer, Henry Wallich.

- 2 -

3. The Canal Company should begin a program to amortize the $460 million debt to the U.S. taxpayers.

-- This can be accomplished in a 25-year period by allocating a portion of the income from the toll increase and, after the Canal improvements indicated in (1) above have been completed, assigning to the amortization account the $16 million spent annually in recent years on Canal improvements.

4. To the degree that it is possible without hampering the operation of the Canal, the U.S. should rotate its civilian personnel in the Canal Zone.

5. The present program to train Panamanians for more responsible and higher paying positions in the Canal operation should be intensified. Insofar as possible, the U.S. should rapidly train Panamanians to handle the technical operating tasks on the Canal.

6. The U.S. should agree that if Panama will vigorously and promptly pursue the reforms agreed to in the Act of Bogota of 1960 and the Charter of Punta del Este of 1961, the U.S. will undertake a very generous aid program within the Alliance for Progress to improve Panama's economic and social condition.

7. If the foregoing changes are mutually acceptable, the U.S. and Panama should agree that a wholly new treaty, replacing all existing ones, will be negotiated in good faith not later than 25 years hence or sooner by mutual consent. Such a treaty would establish the conditions under which a new sea level canal would be built and operated.

8. Apart from treaty amendments, after the U.S. has appointed an ambassador, he should be given sole authority to speak for the U.S. in Panama.

-- The U.S. desperately needs a single voice in Panama, and it should be the voice of the Ambassador, speaking for the President of the U.S. The governor of the Canal Zone should confine his activities to the administration of the Zone and the operation of the Canal; if his presence in negotiations with Panama is needed he should serve only as a technical advisor to the Ambassador.

The Panama Coca-Cola Bottling Company

COSTA COLADA

PANAMA, R. P.

APRIVADO A: 005-

March 5, 1964

The Honorable Nelson A. Rockefeller
Governor of New York State
Governor Hamilton
Albany, New York

Dear Nelson:

I just read in the paper today a statement, attributed
to you, to the effect that the U. S. should propose to
Panama a Treaty similar to the one Colombia turned down in
1903.

I am very glad to see that you are trying to offer sug-
gestions for a solution to the extremely serious situation
that exists between our two countries, and I am懷en to
write you because I think your publicly expressed opinion
can be of tremendous value to bring a solution about.

The perpetuity clause is definitely one of the main
points that must be eliminated, and I cannot quarrel with a
suggestion that a new treaty be made for 99 years simply be-
cause I am thinking more in terms of 49.

However, I fail to understand why you would want to tie
your proposal to a treaty that Colombia rejected in 1903. No
one in Panama can "look forward to with hope" to what was not
good enough for Colombia in 1903.

In effect, the Hay-Herran Treaty, the document Colombia
turned down, has a clause that gives the U. S. a unilateral
option for renewal periods that have just as endless an im-
plication as the "monopoly in perpetuity" contained in the
Panama Treaty.