expenditures, as of the end of 1953, was running at about the rate of $5 billion per year. Against this total should be credited the current increase of foreign gold and dollar reserves which is running at a rate of over $2 billion per year. There is thus a concealed dollar gap of some $2 billion to $3 billion annually, which would be increased if there were a change in the economic situation, such as a recession here or a deterioration in Western Europe's terms of trade. On the other hand, it should be recognized that major parts of our "extraordinary" expenditures abroad are connected with our defense effort, and that the Western European countries' own defense programs affect adversely their trade position, by increasing their essential imports and by absorbing resources that would otherwise be available for expanding their exports.

Surveying the postwar experience as a whole, the Commission believes, as already stated, that much remains to be done to achieve a dependable international balance. It believes that the problem must be attacked on many fronts and that too much dependence should not be placed on any one line of attack. There is no single or simple solution. The final solution will probably depend even more upon the efforts of other countries than upon our own. It will involve their continuing internal efforts to achieve sound and strong economies and their external efforts to correct their international imbalance.

This report, however, is primarily concerned with the steps that this country can take toward solving the world's dollar problem, steps that will be consistent with our own political, economic, and security interests. Or, to employ the language of the statute under which this Commission was organized, this report must deal with the enlargement of international trade in a manner consistent with a sound domestic economy.

FOREIGN AID AND TECHNICAL ASSISTANCE

The dollar problem has its source in basic maladjustments within the international economy that were caused by World War II and the following political disturbances. Our large foreign aid programs, which were directed toward the rapid restoration of economic and political stability within the free world, and the rebuilding of the military strength of our allies, dealt with these maladjustments on an emergency basis only.

That period has passed. The fundamental causes of the world's economic problems must now be analyzed, and solutions sought in the fields of investment, trade, and foreign exchange policies.

Before these other fields can be surveyed intelligently, however, our foreign aid must be reviewed, and its future role determined.

ECONOMIC AND MILITARY AID

From the end of the war through June 1953, United States expenditures in the form of grants and loans to other countries amounted to $41.7 billion after taking into account loan repayments and other

returns. Of this, $33 billion was economic aid and $8.7 billion military aid. In addition, on June 30, 1953, $7.9 billion of mutual security funds had been obligated but not spent, and $0.9 billion of Export-Import Bank funds were committed to various countries but not disbursed. Since fiscal 1949 economic aid has been declining, and since fiscal 1951 military aid has been increasing. A further $7.3 billion has been made available for all purposes for fiscal 1954, of which $5.3 billion or 73 percent is military aid, and $2 billion or 27 percent is economic aid. (See table.)1

Had such aid not been given, friendly countries would have been forced to restrict their purchases of American goods and services to such a degree that economic and political chaos might well have ensued abroad. With the additional resources which American aid placed at their disposal, they were able to maintain politically tolerable levels of consumption; to carry out programs of reconstruction and development needed to restore their overall levels of production, and gradually to reduce their dependence on our assistance; and after June 1950, to speed up their rearmament programs in the interests of the common defense of the free world. In many countries the most important economic objectives for which American economic aid has been extended in the past have been achieved, or nearly so.

The Commission is reluctant to make suggestions that would affect programs now in operation, or commitments already made. We note, however, that the $7.3 billion available now for present programs and commitments will be spent over a period of years. In planning future programs based on future appropriations the following comments and recommendations are offered.

The Commission recommends that economic aid on a grant basis should be terminated as soon as possible. No further aid is justified unless it contributes to the security of the United States. Our security involves defense against communist aggression or infiltration here and all over the free world. The greatest expenditures are now for military defense, but our security must take into account many political and economic considerations. The security of the United States is bound up with that of the free world.

The United States is now giving economic aid to several countries which do not have the economic capacity to maintain the military effort that is deemed essential by the NATO Council and by our Government to deter aggression. Among these countries are Greece, Turkey, Spain, and Yugoslavia in Europe, and Indochina and Formosa in the Far East. It is also extending very large scale economic aid to France to enable France to increase its military effort to bring the war in Indochina to a successful conclusion, and small amounts to the United Kingdom, Italy, and Germany (Berlin) for special

1 The table entitled "Foreign Aid Made Available for Fiscal Year 1954" which appears on page 7 of the report is not reprinted here.

purposes. This aid has been given the new name of "defense support" or "mutual defense financing." The distinction between military and economic aid is blurred by the use of such terms in a way which the Commission believes is undesirable. Though "defense support" is defended first and foremost as a means of preventing an undesirable reduction in the defense effort, it also serves all the economic ends which have been advanced in justification of economic aid in the past. It is a form of economic aid and should be so denominated. General support is also being given to the economies of our European allies, including the United Kingdom, through offshore procurement-that is, the purchase of military items in a foreign country for transfer to the same country or to other foreign countries as military aid. The Commission recognizes that, from an economic point of view, offshore procurement has certain advantages as compared to grant aid such as was given under the European Recovery Program. If so administered as to encourage an increase of productive capacity on a competitive basis, it may be a step toward a solution of Europe's remaining dollar problem. The primary purpose of offshore procurement, however, is military. For the military purpose of offshore procurement to be served effectively, the Commission recommends that contracts for the production of military equipment be placed abroad on the basis of the considerations of cost, availability, and quality of the items purchased that govern effective procurement policy at home, or on broad strategic judgments concerning the character and location of the military production base on which the success of the joint defense effort depends. The offshore procurement program should not be used as a form of general economic aid.

Our foreign aid programs up to the present have been carried on by a combination of grants, loans, and guaranties, with overwhelming emphasis on grants which have been decreasing for economic purposes and increasing for military purposes. At present, as the need for economic aid for postwar recovery disappears, demands are increasing for general economic aid unconnected with recovery from war or preparation for defense. Underdeveloped areas are claiming a right to economic aid from the United States, in proposals in the United Nations and the Interparliamentary Union. We recognize no such right.

In Europe, with the exceptions previously mentioned, there now appears to be no need for further economic aid in the form of grants. This is a source of satisfaction to our European allies who are as anxious as we are to terminate the giver and receiver relationship.

In other sections of this report the Commission recommends steps that should be taken to assist underdeveloped countries in obtaining an adequate flow of capital from the United States without resort to grants-in-aid. In cases where our security is importantly involved, the Commission believes that moderate grants-in-aid may serve the national interest of the United States.

The Commission recommends further that where support is needed to maintain military forces or to conduct military operations connected

with our own security beyond the economic capacity of a country to sustain, grants should be made, not loans.

In other cases where substantial economic aid is necessary in the interest of the United States but cannot be obtained from private or international sources, loans should be made, not grants.

TECHNICAL ASSISTANCE

The Commission does not include within economic aid what is often called "technical assistance."

The United States is now engaged in bilateral programs of technical cooperation in 38 countries for which about $120 million has been made available this year. These programs are undertaken only at the request of the host government. They are operated on a sharethe-cost basis and they are intended eventually to be taken over completely by the host governments. The United States also participates in the United Nations Expanded Program of Technical Assistance, operating on a budget of about $21 million to which it contributes about 60 percent, and in the smaller program of the Organization of American States.

All these are essentially programs of education and training in the knowledge and techniques required for economic development, including the administrative skills needed to create and manage institutions which are indispensable for such development.

The Commission recommends that within the limits imposed by congressional appropriations, the need for selecting only sound projects, the availability of trained technicians, and good administration, the technical cooperation program be pressed forward vigorously. It need not and should not become a "big money" program and should not involve capital investments.

The Commission also recommends that the United States continue its support of the United Nations Expanded Technical Assistance Program and the small program of the Organization of American States, through which the technical skills of many countries can be better mobilized and some dependent area and regional problems can be more effectively approached than through bilaterial programs.

The Commission attaches special importance to the strengthening of the technical assistance work of the United Nations. It believes, however, that no country should contribute as much as 60 percent of the financing of this worldwide cooperative effort. It believes that some expansion of this program would be desirable, but that the United States percentage share in the cost should be reduced.

The Commission wishes to stress the great potential importance of the technical assistance programs in contributing to improved standards of living in countries with half the world population, in counteracting communist influence, and in helping to solve the problems of trade and investment dealt with elsewhere in this report.

Such

All American military, economic, and technical aid to other countries is rooted in the national interest of the United States. aid is acceptable to other countries only if it also serves their national interests. The fundamental basis on which all foreign aid operations should rest, therefore, is mutual interest. Mutual interest cannot be created by pressure and can be destroyed by coercion. Foreign aid, therefore, should not become an instrument of coercion, and the fixing of conditions on which it is extended should be limited by this principle.

UNITED STATES FOREIGN INVESTMENT

In considering the enlargement of international trade in a manner consistent with a sound domestic economy, and our foreign economic policy, no subject could be more urgent than an examination of the problems having to do with the flow of investment capital to those areas in the free world where it is most needed.

Fortunately, the economic welfare of the United States would itself be directly promoted by an increased movement abroad of sound investment by United States nationals and corporations. Such a flow, if well conceived and directed, would not only contribute to an increase in international trade, but would assist in the maintenance of high levels of economic activity and employment within our own country. It can increase our national income by taking advantage of opportunities for more profitable investment. It can aid in the development abroad of primary resources to meet the ever-increasing civilian and defense needs of the United States and the free world. And, since private United States investment usually carries with it management and technical skills, it can contribute strongly to the economic development of foreign countries.

Such an increased flow of private investment abroad can also assist in attaining United States foreign policy objectives through strengthening the economy of the free world, and can reduce the burden of military aid by increasing productivity abroad.

During the period 1948-52, United States private long-term investment abroad increased at an average annual rate of $1.5 billion. Of this total, additions to holdings of foreign securities by private individuals and financial institutions accounted for only $200 million per year, mostly in investments in Canada or in securities of the International Bank for Reconstruction and Development. The remaining $1.3 billion per year was about equally divided between net new direct investments abroad of American corporations and reinvestment of earnings from their foreign operations.

During the same period, the value of United States Government foreign loans outstanding increased at an average annual rate of $500 million. Repayments on old loans now nearly equal new lending. Disbursements by the International Bank averaged $139 million per year during the period.

United States investment abroad has not increased as rapidly as