D. THE ROLE OF EPU IN THE FUTURE

It is expected that EPU will continue to serve as the mechanism for clearing and settling intra-European payments arising from commercial and other normal transactions. Recently EPU has played a useful role in the common defense effort by serving as the mechanism for handling payments for military equipment and materials transferred between European countries.

The EPU agreement stipulates that OEEC undertake a general review of EPU operations by June 30, 1952, in order to decide upon the future of EPU. The EPU Managing Board is now engaged on this project. Member govern

ments appear to be unanimously in favor of a continued, effective EPU. Present indications are that no major revision is contemplated. Two points appear to be of particular interest to the Europeans. They feel that the powers and responsibilities of the Managing Board should be increased. The United States Government agrees wholeheartedly on this first point. They also feel that in order to be strong and flexible, and to inspire more confidence, EPU needs an increase in its convertible assets. While such an improvement in the liquidity of EPU appears to the United States Government to be very desirable on its own merits, the real problem is of course how and where to find the gold and dollars necessary for this purpose. Since, in its judgment there are competing and more critical needs for any dollars that Congress may see fit to authorize and to appropriate for Europe, the United States Government does not at present envisage a direct dollar contribution to the European Payments Union. The United States representative on the EPU Managing Board has communicated this United States position to the Managing Board.

EPU settlement of cumulative net deficits and surpluses for each country, July 1950March 1952

Existing resources are bilateral pre-EPU claims which their holders may use currently as a means of settlement as long as they are in cumulative deficit.

Initial credit balances are EPU grants that were allotted by the United States to deficit countries in fiscal year 1951. Initial debit balances are grants to EPU by conditional aid recipients in fiscal year 1951. When Austria and Greece are debtors of the Union, their quotas shall be deemed to be zero up to 30th June 1952.

NOTE. The gold and dollar holdings of EPU will be $338.5 million as of Apr. 16, 1952.

(The following memorandum has been submitted by the Mutual Security Agency for inclusion in the record in reply to a request made by the Honorable James G. Fulton.)

UNITED KINGDOM TRADE WITH EASTERN EUROPE

Trade data shows that during each of the past 3 years the value of imports received by the United Kingdom from Russia and other Eastern European countries has exceeded the value of the exports sold to them. Through this trade the United Kingdom has received important supplies of timber and grain as well as paper-making materials, meat, and other items. These imports comprise a large enough portion of total United Kingdom imports of these items to make replacement of these sources of supply extremely difficult in the world today. For instance, in the category of coarse grains, imports from Russia in 1951 amounted to over 25 percent of total United Kingdom imports of this item. The reduced supplies of meat and coarse grain available from Argentina and the postwar balance of payments difficulties and shortage of dollars has meant that supplies from Russia and Eastern Europe were essential to the economy of the United Kingdom. This has been consistently true even though the United Kingdom has pressed hard to expand its domestic meat production. Shortage of physical resources, such as timber, has limited investment and delayed much needed housing construction.

The United Kingdom already obtains what it can of these goods from other participating countries and from other nondollar areas. If this trade with Russia and Eastern Europe were eliminated, it is not clear that the total could be made up altogether, but it is certain that there would be increased requirements on dollar area sources, greater pressure on Western Hemisphere availabilities, and dollar costs would rise. The adverse balance of payments position and the heavy loss of reserves since the summer of 1951 have meant that the United Kingdom has already taken strenuous economy measures to husband its scarce dollar resources to be able to provide essential goods for the economy and to support the defense program. Lack of the needed imports would adversely affect the level of activity in the United Kingdom and react unfavorably upon the defense program. Further drawings on the reduced reserves could not be expected when the United Kingdom and the whole Commonwealth have agreed on the urgent necessity to halt the drain and restore confidence in sterling as essential to solvency and survival. If dollar imports had to be substituted for Eastern European supplies to the extent Western Hemisphere availabilities might allow, the United Kingdom would need more dollar aid to finance vital defense supporting importIt is clear that the net result would substantially affect United States interests. The total value of the trade with Eastern Europe has increased since 1949, but there have been substantial increases in the general price level since then. Although the value of imports from Eastern Europe has increased in 1951, the major share of the increase is the increased supply of timber products from Finland. Although the value of exports to Yugoslavia and Finland of goods produced in the United Kingdom rose in 1951, such exports to Russia declined by 70 percent and to other Eastern European satellites by almost 15 percent. The rate at the end of the year was considerably below the rate for the whole year The value of machinery and parts exports to all of Eastern Europe fell by onethird in 1951.

Exports of British-produced goods of highly strategic importance to the Soviet bloc are, of course, carefully limited by "security" controls as well as by the demands of British defense program. The increase in receipts from the trade with Russia reflects the increase in the value of reexports of goods produced in other parts of the sterling area. Shipments of these goods during 1951 reflect the sharo rise in prices of these commodities which reached a peak in the first half of 1951. Receipt of Soviet supplies hinges on Russian ability to spend sterling earnings from sales to the United Kingdom, especially on such sterling commodities as wool and rubber.

In addition to controls on direct exports, the United Kingdom now requires export licenses to be obtained for strategic goods which enter British ports in bond, instead of being introduced into the economy. These requirements are understood to constitute an effective method of controlling transshipments.

NOTE.-Import figures include the costs of insurance and freight. Freight charges increased substantially in 1951.

(The following memorandum has been supplied by the Mutual Security Agency for inclusion in the record:)

JUSTIFICATION FOR $27 MILLION BASIC MATERIALS PRODUCTION AND SUPPORT PROGRAM UNDER TITLE I

The Defense Materials Procurement Agency (DMPA) is actively engaged in promoting, in the United States and abroad, the development and procurement of minerals and other primary commodities in which the United States is in short supply.

Aid to basic materials production and procurement, under the Mutual Security Program in fiscal 1953, will be directed toward two additional objectives: (a) Increasing the output of critical raw materials for European use; and (b) developing or improving transport and port facilities, power installations, and other auxiliary services vital to a sustained expansion in the production and export of basic materials required in both Europe and the United States. Such auxiliary projects are an essential part of the effort to increase the accessibility, production, processing, and transportation of such basic materials. A $27 million fund has been specially earmarked for the carrying out of these aims in the title I area, supplementing as needed much larger investments from metropolitan and local sources and from public and private agencies abroad.

In planning for the use of this fund, consideration has been given to a wide range of illustrative projects in the dependent overseas territories and in continental Europe. A list of these projects, many of which have been discussed in a preliminary way with the European governments concerned, is attached hereto. Preliminary cost estimates are not yet available for all of the projects listed but tentative data received to date indicates that the total costs of the projects shown for the area of continental Europe, when received, will probably approach $100 million (equivalent) and that those contemplated in the overseas territories would involve expenditures equivalent to nearly $200 million.

It is expected that to the extent that these and similar projects are, on further investigation, found to be practicable and of sufficiently high priority to warrant the necessary allocation of resources, they will be financed mainly by public and private agencies in Europe and the territories, and that the external loan assistance required will be derived, to the extent feasible, from such agencies as the international Bank for Reconstruction and Development, the Export-Import Bank. and the Defense Materials Procurement Agency, as well as from private investment sources in the United States and elsewhere. The $27 million will constitute a special resource to be drawn upon in cases where further supplemental aid, through loans or grants, is clearly necessary in order to speed the completion of specific projects which are designed to increase, as promptly as possible, the availability of urgently needed raw materials.

Past experience has demonstrated that such a fund can be used not only for the provision of supplementary aid, at critical points, to vital projects, but, also as a means of stimulating the use of other public and private resources on a much larger scale, for the enhancing of materials production and availability. Without such expansion the defense production programs as well as the civilian economies of the NATO countries would be crippled.

Decisions with respect to the specific projects to be aided in the metropoles and the overseas territories will be made only after careful analysis of: The technical merits of individual projects as they are submitted, their relative urgency and importance to the defense effort, and the demonstrable need for supplementary financing, through loans or grants, from mutual security resources. ILLUSTRATIVE BASIC MATERIALS PRODUCTION AND SUPPORT PROJECTS, FISCAL 1952-53, IN THE DEPENDENT OVERSEAS TERRITORIES

Projects

A. In south-central Africa:

1. Pafuri rail link.

2. Benguela, railroad improvements.

3. Port of Lobito, installations..

4. Revue-Beira, power transmission line,
Mozambique.

5. Mineral exploration and development, An-
gola and Mozambique.

6. Mabubas power station expansion..

Materials affected

Chrome, copper, wolfram, lead, zinc, asbestos coal.

Manganese, uranium, cobalt, copper, cadmiam, zinc.

Manganese, uranium, cobalt, copper, cadmium, zinc.

Chrome, copper, asbestos.

Manganese, copper, beryl, graphite, tin, wal-
framite, manazite, and coal.
Manganese.

7. Biopio power station and transmission line.. Copper, cadmium, zinc, manganese, uranium,

8. Ruzizi Valley power station..

B. In North Africa:

1. Port of Memours, improvement, Algeria..
2. Port of Casablanca, expansion.

3. Moroccan electric power expansion.

4. Food production, French North Africa..

C. In other African territories:

1. Abidjan railroad and port improvements,
French West Africa.

2. Road and trail construction, Niger territory,
French West Africa.

3. Road and bridge improvement, Madagascar.
4. Transportation and water surveys, Maure-
tania, French West Africa.

5. Palm oil production, French Equatorial
Africa, Dohemy, Camaroons.

6. Awaso-Berekum rail extension, Gold Coast..
7. Dunkwa-Awaso rail improvements, Gold
Coast.

8. Kampala-Kilembe rail link, Uganda..

9. Road and bridge improvement, Gabon,
French Equatorial Africa.

10. Rice production increase, Niger Valley,
French West Africa.

D. In non-African territories:

1. Nepui port and road improvements, New
Caledonia.

cobalt.

REPORT BY GEN. THOMAS T. HANDY, UNITED STATES ARMY, UNITED STATES MILITARY REPRESENTATIVE FOR MILITARY ASSISTANCE IN EUROPE ON UNITED STATES MILITARY ORGANIZATION AND PROCEDURES FOR MILITARY ASSISTANCE IN WESTERN EUROPE AND ON THE MILITARY DEFENSIVE POSTURE IN WESTERN EUROPE AND THE EFFECT OF UNITED STATES MILITARY ASSISTANCE THEREON

1. Introduction

As United States military representative for military assistance in Europe, I am responsible to the Secretary of Defense and the Joint Chiefs of Staff for the military aspects of United States military-assistance programs in the European North Atlantic Treaty (NAT) area. This report outlines briefly the United States military organization and procedures for discharge of this responsibility and presents my evaluation of the progress which has been made toward an adequate military defensive posture in Western Europe and of the part which the Mutus Security Program (MSP) and its predecessor, the Mutual Defense Assistance Program (MDAP), has played in this effort. My evaluation is based upon infor

mation obtained by personal contact with numerous European officials; through my activities as a member of the Joint Chiefs of Staff Joint Representatives, Europe; in connection with my duties as the Defense Department member of the European Coordinating Committee; and from periodic reports made to me by the Joint American Military Advisory Group, Europe (JAMAG).

2. United States military organization for military assistance

(a) Responsible to me, and maintaining day-to-day contact with the planning and implementation of the military aspects of United States military assistance, is the Director of JAMAG, who with his staff, is located in London. His principal military assistance functions are those of equipment (end items or matériel) and training programing and implementation, and of providing military policy and operational direction for the Military Assistance Advisory Groups (MAAG's), which are under my military command and which are stationed in the European NAT countries. The JAMAG joint (Army, Navy, Air Force) staff works very, closely with the other United States regional agencies and coordinates the military portion of the program with the Office of the United States Deputy Representative, North Atlantic Council, for political aspects; the Office of the Special Representative for the Mutual Security Agency, for economic aspects; and the Office of the United States Representative, North Atlantic Defense Production Board, for matters relating to European production.

(b) The MAAG is the military element of the United States country team which also includes the Embassy and the Mutual Security Agency (MSA) Mission. Each MAAG is likewise a joint organization. It carries out the military portion of the program, and is responsible for equipment and training programing and implementation, for requisitioning, and for receiving and turning over equipment. It also renders guidance and assistance to country authorities in appropriate military fields and keeps under constant surveillance the ability of the country to receive, store, maintain, and operate matériel. The MAAG works in close coordination with its State Department and Mutual Security Agency counterparts, especially in matters related to indigenous military production.

3. Relationship of United States military organization with SHAPE

Entirely separate and distinct from this United States military organization is the international military command agency, Supreme Headquarters, Allied Powers-Europe (SHAPE), with its subordinate commands. We recognize that close coordination must exist between the United States agencies responsible for the military assistance program and the SHAPE organization. The need for such coordination has gradually increased as SHAPE's plans and operations have developed. Because of the international nature of his position, however, the Supreme Allied Commander, Europe (SACEUR) has naturally not desired to assume responsibility for what is strictly a United States program. On the other hand, he has properly made known to us, through his United States element and on the basis of his force requirements and his plans for the build-up and employment of those forces, his views as to priorities for allocation and delivery of equipment. This information is taken into full consideration by JAMAG and the MAAG's in both planning and implementing equipment and training programs. To this end, close informal working liaison has been developed between JAMAG and the United States element in SHAPE, and between the MAAG's and the United States elements in appropriate subordinate NATO commands. Actual programing and implementation are, however, entirely United States matters, and final responsibilities and decisions rest with the United States.

4. Military situation existing prior to initiation of program

(a) Before I explain how this United States military organization for military assistance in Western Europe operates and outline what it has done so far, I think that it would be useful to sketch briefly the military situation in that area before the program was initiated. First, it must be remembered that most of our European Allies suffered seriously during World War II in losses of manpower, resources, and productive means. Moreover, with the exception of the United Kingdom and Portugal, their military services were wrecked and their military equipment largely destroved. Our allies, therefore, had a very poor foundation upon which to reconstruct their military forces. On the matériel side, they were forced to begin their rebuilding with odds and ends of equipment which were salvaged after the German surrender, or were acquired subsequently from the United States, the United Kingdom, and various other sources. the personnel side, they were faced with a shortage of officers and of NCO's since relatively few had been trained since quite early in the war.

On