EUROPE'S TOTAL DEFENSE EXPENDITURE GOAL IS $14 BILLION

(Chart) You will remember that yesterday Mr. Wood showed you this chart showing the total of actions that have to be taken by governments of a financial nature as a result of the Lisbon plan of action. The crucial element among these actions is that the European countries put up, through their own constitutional processes, just under $14 billion worth of their local currencies for the purpose of paying for the manpower, construction, maintenance, and other costs of getting an Army, a Navy and an Air Force in Europe put together, making the money to cover those costs really available.

General Olmsted yesterday mentioned the importance of the European contribution and the fact that the end item program was really based on certain assumptions as to the force build-up in Europe. That force build-up obviously hinges, as it does in every democratic country, on the appropriation of funds by Congresses and Parliaments. So that as a result of the Lisbon plan of action, during our_fiscal year and we have corrected the figures to relate to our fiscal year even though their fiscal years are, some of them, on a calendar year basis, some of them start in April, some of them start in July as ours does but during a period corresponding to our fiscal year 1953 they will need to get very close to the $14 billion mark on their own defense expenditures.

Just to remind you of the logic of this presentation, the 3.8 billion is the obligational authority that is requested in this legislation for end items to go to Europe; 2.8 of it would be the end items coming from this country and a billion is the estimate of the amount of end items within this total that would be bought by the Defense Department in Europe and delivered to the NATO forces. The 1.4 billion is for this group of countries, which you will remember is NATO plus Germany but minus Greece and Turkey, because Greece and Turkey were not in the process of working on these figures early enough before Lisbon to become part of the so-called Lisbon plan of action. The 1.4 billion is a necessary ingredient, the crucial ingredient from our standpoint, in making possible this defense expenditure of close to $14 billion.

Senator SMITH of New Jersey. Mr. Cleveland, this is not a secret document in any way? Will that chart appear in the report of the committee?

Mr. WOOD. Senator Smith, it can well do so.

It is in this book of charts that we made available to the members of the committee. Senator SMITH of New Jersey. Have I seen that?

Mr. WOOD. I believe you have, sir.

Senator SMITH of New Jersey. I would like to have that.
Mr. Wood. It is this book of charts. It is on page 7.

Senator GREEN. Have those been circulated?

Mr. Wood. They have been placed before the members of the committee.

Dr. WILCOX. The members have had them. Whether they kept them or not I don't know.

Senator WILEY. What is the breakdown on the 1.4?
Senator SMITH of New Jersey. That is the defense support.

Mr. CLEVELAND. The 1.4 is the defense support; that is, commodities, materials, machinery, from this country.

Mr. Wood. The breakdown by countries is shown on a list that has been given you.

Senator GREEN. You may proceed.

COMPUTATION OF THE $14 BILLION DEFENSE EXPENDITUure for EUROPE

Mr. CLEVELAND. Just to tie down what this European defense expenditure consists of, we prepared this chart of the main elements in defense expenditure in Europe. The biggest element up to now, this dark column, is the 1950-51 story, the middle one is the 1951-52, the present fiscal year, and the final one is the next fiscal year. Up to now personnel expenditures have been the biggest element in defense costs, and they have to go up as the forces are put together, as more people are recruited into the forces, as they lengthen the terms of service, and so forth. But after they get to a certain point they are able, as we project in 1953, to increase their production of major matériel faster than the other costs need to go up once you get a certain base laid. This is the situation that we expect to happen next year, given the amount of defense support that has been projected here and which would make it possible for the total of European defense expenditures to equal in fiscal 1953 about $14 billion.

The 1953 value of major matériel production in Europe is broken down here by nine sub-categories, which include as the biggest elements $740 million worth of aircraft and parts and airframes and so forth, and $765 million worth of transportation and various types of vehicles other than combat vehicles, plus $280 million worth of combat vehicles. Those are the two biggest single categories in the European end of the production program.

They also produce ammunition and explosives, artillery, some ships and harbor craft, and a whole miscellany of other materials, including spare parts and including increasingly some spares for the American type equipment that is being delivered to them under the program that General Olmsted has described.

Senator SMITH of New Jersey. Let me ask you: Are those figures there just the European defense expenditures?

Mr. CLEVELAND. These are the European defense expenditures. Senator SMITH of New Jersey. Not ours? We have nothing to do with that?

Mr. CLEVELAND. We have quite a lot to do with it, but they are European defense expenditures. They are the breakdown of this column here. The 1953 segment of this chart is the breakdown of the 13.9 billion that is shown on the other.

Senator GREEN. Who furnished those figures?

Mr. CLEVELAND. Those are figures that have been worked out in two ways, Senator Green. First of all they are the product of considerable work bilaterally with the countries on the part of the military assistance advisory groups and the MSA missions in each capital in Europe, working with the Defense Department and to some extent with the Finance Department of each government.

TRANSLATION OF PROGRAM INTO DOLLARS

Senator GREEN. These are all translated into American dollars? Mr. CLEVELAND. These are all translated at the current exchange rate into American dollars.

Senator GREEN. Were the prices fixed in foreign countries first and then translated into American dollars by us?

Mr. CLEVELAND. These are the estimates, in most cases by the governments themselves and as looked at and screened by our country people, the MSA and MAAG country people in the field, expressed in foreign currency and then converted by us to the standard denomination of United States dollars.

Senator GREEN. General Gruenther testified that General Eisenhower did not deal in currencies or money; that he dealt in material which would be bought with them. They did not give any testimony as to that. They said no, they had asked for so much of this and so much of that, and it was for the Pentagon to determine what the money involved was.

Mr. CLEVELAND. So far as the United States end items are concerned, the United States military assistance matériel that is sent over, the costs on that of course are worked out in the Pentagon under the procurement arrangements that have been described by General Olmsted. The European procurement of matériel, for example the procurement of airframes or the procurement of combat vehicles, the actual procurement, is done by the procurement srevice of the French defense establishment, the procurement service of the Italian defense establishment, and so on. They make the determination. They are ultimately the people who are expert on how much a combat vehicle bought from Fiat actually costs.

Senator GREEN. Of course in the bill we are considering it is given in sums of money and not in the amount of matériel. How do you reconcile that with the statement that these sums of money were determined in collaboration with foreign governments and determined in their currency, and how did we fix our sums of money on the amount of matériel to be furnished?

Mr. CLEVELAND. Well, what that chart shows is what the Europeans spend their defense budgets on, their $14 billion. This, of course, does not show the raw materials and commodities that are bought with the $1.4 billion of defense support from the United States. Senator GREEN. Take country X. Country X wanted so many tanks and so many airplanes and so many guns and so forth. Who fixed the amount of money to correspond to that?

Mr. CLEVELAND. The estimates of what it costs the French defense establishment to recruit and train and put in the field so many men and maintain them, do the the military construction work that underlies them, and the military matériel that goes with that force, are made by the French defense establishment itself.

Senator GREEN. What do you mean, what defense establishment, the United States Defense Establishment?

Mr. CLEVELAND. No, the French Defense Ministry, and the French Defense Ministry then submits to the French Ministry of Finance a detailed budget broken down, of course, in a whole lot more detail than this, on the basis of which the Finance Ministry makes the kind of judgments that the Budget Bureau does here.

Senator GREEN. It would depend a good deal on where it was bought, wouldn't it, how much it cost? It would depend on whether it would be in the United States or France. Was that determined at the same time?

Mr. CLEVELAND. They determine what they can buy. The French Ministry, for example, determines what it can buy in France and what it can buy in other parts of Europe. And they then come out with a deficiency that is not purchasable in Europe, and which they request as military assistance.

That request, then, goes through the multiple screenings that General Olmsted mentioned yesterday.

Senator GREEN. After that is determined, that is determined by this Government in the last analysis?

Mr. CLEVELAND. What we put in is determined by this Government. Senator GREEN. And then that is the first time that the amount in American dollars is fixed?

Mr. CLEVELAND. That is the first time that the amount of assistance in American dollars is fixed, but for purposes of analyzing what the Europeans themselves are doing with their own defense budgets we have converted all of their currencies, their francs and their lire and their kroner and their pounds, into United States dollars, for purposes of showing a comparable chart, so you won't be adding up apples and oranges and bananas.

Senator GREEN. Then am I right in understanding that they decide how much is needed of any one kind of matériel (this is for the foreign government) and then it is divided into fractions, so much that could be procured abroad, so much of it would have to be procured in the United States, and they fix the value of what is to be bought abroad and turn it over to us and we fix the value on what is to be bought in the United States, and then after that the foreign exchange is translated into American dollars and added to the value of what we have determined must be bought in the United States, is that right?

Mr. CLEVELAND. That is right, and that is how you get expressed in United States dollars a total balance sheet of what they are doing and what we are doing and what the whole thing adds up to.

Senator GREEN. I am glad to get it clear on the record. Thank you.

ACHIEVEMENT OF GOALS DEPEND ON ESSENTIAL IMPORTS

Mr. CLEVELAND. Now, you will remember that I mentioned yesterday the importance of this prime limiting factor of the inability of the European governments to pay for all of the imports that they need in order to make the plan come true. I would like to show you just one more picture to illustrate that point.

In order to make the Lisbon plan of action come true, and to make these defense expenditures possible, and to keep their economies growing, it is going to be necessary for them to import a whole range of materials, of course. They are highly industrialized economies. They require some food and a lot of industrial raw materials from abroad. The important thing to note about this increase in defense expenditures from year to year, the increase from about 7.5 billion last year for this group of countries to about $11 billion this year10.9 or so- -to about 13.9 or 14 billion next year, the year that we are talking about, fiscal year '53, is that that increase is achievable only with a growth in the total national product of those countries. That total product, which back in fiscal year 1950 was around $115 billion for