which they may be used for military purposes, and so forth, because that is a matter of agreement with the country at the time you make the sale.

Mr. HARDY. Except at that time you don't stipulate the use, do you? Do you agree you are going to agree, or do you stipulate?

Mr. OHLY. Well, you stipulate whether it is going to be used for military purposes or for economic loans or for United States uses in triangular trade transactions. The law itself stipulates the uses to which you can put this local currency and, at the time of the sale, a decision is made, and an agreement is reached with the country as to the proportion of the total local currency that will go into each one of those categories.

Mr. HARDY. Well, I think you see the problem that I am posing, and I don't think we are going to be able to get an answer that any of us can tie down right here. The thing that bothers me is that some of these commodity programs are pretty substantial programs.

Now, I recall getting into one to some considerable extent before I became chairman of this committee. It seems to me that it is important that we consider whether or not we need so much dollar aid in terms of projects or grants or what not in the light of the local currencies that are generated under these programs. The problem is, how do we find out the consideration which has been given to these local currencies. Is it all a matter of judgment, and if so, at what level is that judgment applied? And how do we know actually whether anybody even paid any attention to it at all?

Mr. OHLY. Well, can I tell you the process that we go through very briefly?

Mr. HARDY. Well, I would like to have it, but we had better have that process outlined as a submission for the record, too, because we have to go to the floor.

Mr. REDDAN. You see the things I am concerned with.

Mr. OHLY. I think it is a very real problem. I really think we have done a pretty good job within the limits of human estimates.

Mr. HARDY. I am thinking of it both as an administrative problem which ICA has to confront, and a problem which the Congress also has to be concerned with in making its appropriations and providing the funds.

And I would like to know how you approach it and how you satisfy yourself that it is realistically taken into account. I wish you would give me a little memorandum on that.

Mr. OHLY. We would be delighted to, Mr. Chairman.

Mr. REDDAN. Mr. Ohly, in that connection, I would like to refer to the letter of November 8, 1956, which Mr. Hollister sent out to various heads of divisions in ICA, in which he expressed the same concern that the chairman has just expressed.

On page 7 of that letter, under "Special emphasis on certain problems," it states this:

In preparing the program to be submitted, and in the submissions themselves where appropriate, I wish special attention to be given to two problems that greatly concern me. The first problem relates to the extent to which Public Law 480 transactions, or the local currencies derived therefrom, are really taken into account in developing our aid proposals. I want to be sure that they are fully and realistically taken into account in preparing the fiscal year 1958 programs, and at the hearings I will wish to learn why in some countries where large Public Law 480 programs are operative it is not possible to limit increases

in, to reduce, or further to reduce, our Mutual Security program. The second problem relates to the size of the pipeline in a number of countries.

That is the end of the quotation.

This was in 1956. Do you know what steps were taken to assure Mr. Hollister that those funds were being realistically taken into account?

Mr. OHLY. Well, these were instructions that went out to everybody involved in preparing the 1958 presentation for consideration at the Bureau of the Budget stage. The submissions which came in indicated that the matter had been gone into very thoroughly. Of course, this same subject had been covered in the earlier instructions which had gone out to the field in August. Missions had been asked to go into this question and had been given all sorts of assumptions and guidelines as a basis for doing so.

Mr. REDDAN. I have just one other question, Mr. Ohly, which relates to the heading "Other Information," in the final page of the GAO memorandum, and refers to the information similar to that which is presented in the section 513 report.

GAO suggests that information similar to that which is reported pursuant to section 513 of the Mutual Security Act might well be submitted to Congress in connection with the budget presentation. Do you know of any reasons why that could not be done?

Mr. OHLY. Well, I think it could be done, but I am not sure that it would add anything additional to the section 513 reports which they already have available. There will probably be a section 513 report just about the time that our program submission goes up to Congress. Mr. REDDAN. Yes; but they are not collated with your budget presentation.

Mr. OHLY. No; it would be rather difficult to do it, I think, as a mechanical proposition. The two documents read together tell the story. I would be glad to have someone persuade me that some other way of treating it would be better, but I don't see the advantage of doing it that way.

What do you think, Mr. Murphy? Do you have any observations? Mr. MURPHY. I agree with that.

Mr. OHLY. Well, section 513 of the Mutual Security Act, Mr. Chairman, requires that we report to the principal committees that act on our program, with respect to major changes which are made in the programs as we presented them to Congress. It also requires us to report Presidential transfers and certain other Presidential determinations.

Mr. REDDAN. Mr. Chairman, could we ask ICA to give us a submission on that portion of the Comptroller General's report on obligating bases which refers to their recommendations to Congress, for a division between the plannable and the unplannable or the unforeseeable?

Mr. HARDY. I meant to get back to that in our discussion here. I think that maybe it is important that we have clearly ICA's point of view in connection with it.

(The information requested follows:)

INTERNATIONAL COOPERATION ADMINISTRATION RESPONSE TO GENERAL ACCOUNTING OFFICE PROPOSAL FOR SEPARATION OF PLANNABLE PROGRAMS FROM UNFORESEEABLE ACTIVITIES

The General Accounting Office, in its report dated June 10, 1955, and entitled "Report on Study of Obligating Bases and Related Administrative Practices— Foreign Operations Administration" in effect made the following recommendation: That Congress should revise the Mutual Security Act of 1954 so as to provide a contingency fund which might be used by the President to meet new requirements that arise during the course of any fiscal year and which were contingent or unforeseen at the time that appropriations for that year were requested of the Congress. The report further indicated that a revision of the Mutual Security Act "along the lines proposed above would lessen and possibly obviate the need for the transfer authority contained in section 501 of the act, and broad authority for the use of funds permitted by other provisions thereof, and should enable more specific delineation of the planable activities for which funds are authorized."

Nearly 3 months before this report was made, to be precise, on April 20, 1955, the President of the United States, in his special message to the Congress with respect to the fiscal year 1956 mutual security program, had specifically recommended the establishment of a worldwide contingency fund of $100 million. In the succeeding weeks, numerous executive branch witnesses had testified in support of such a fund, and on June 2, 1955, a week before the General Accounting Office report was submitted, the Senate had passed and the House of Representatives was considering, a bill which would establish such a contingency fund. Thus, to be explicit, the actions recommended by the General Accounting Office had been largely taken before these recommendations were made public.

The problem dealt with in the report of the Comptroller General is one that has been a central problem of the mutual security program since its inception and which will continue to be a central problem as long as, in this highly dynamic world, the mutual security program if it is properly to fulfill its purpose, must be capable, without serious disruption of important going programs, of meeting the most urgent of the large number of important requirements for mutual security assistance which must be met during a fiscal year but which only become firm, or first develop, subsequent to the time of the congressional presentation covering that year.

American foreign policy, and the mutual security program as one of its primary instruments, must contend with, and be responsive to, continuously changing world conditions. Events of the past 5 years have demonstrated conclusively that one cannot foretell, and specifically prepare for, the many new situations which will develop in any succeeding 12- to 18-month period and which, in terms of vital United States interests, will call for some form of mutual security assistance. Experience has also proved that the ability of the United States to react quickly to many of these situations, by extending prompt and adequate assistance has been of considerable significance in terms of American security. Reference to actual experience during fiscal years 1955, 1956, and 1957 will bring this out most clearly.

There are at least three basic types of requirements with which the mutual security program must deal and for which specific advance provision cannot be made. They are:

A. Requirements which are contingent at the time of congressional presentation First, there are those requirements which are recognized as potential at the time the program for a succeeding fiscal year is developed but which, as of that time, are not sufficiently definite in terms of necessity, size and nature to justify the inclusion of an identifiable allowance therefor, in the illustrative program presented to the Congress. At any given time, potential requirements of this kind will be substantial, and one can be sure, based on past experience, that some of them will subsequently become actual requirements demanding prompt action. One can be equally sure that others will never become firm. However, one cannot foretell into which of these two classes any one of the specific potential requirements will finally fall, nor, in most instances, the precise size or character it might take. The best one can do is to make an educated judgment as to the proportion of all contingent claims that may eventually become firm and require explicit recognition in the aid program.

B. Requirements which are wholly unforeseen at the time of congressional presentation

Second, there are those requirements which are not foreseen at the time the annual program is presented to Congress but which appear after the fiscal year has commenced. This class of requirements includes those that result from natural disasters, those that reflect unforeseeable Soviet actions, those which flow from political or economical developments in a country of critical importance to the United States, and those which are simply the products of human fallibility in forecasting the shape of things to come. They include, but are by no means limited to, requirements that one would ordinarily class as "emergency" in nature. They also include the requirements presented by those occasional, suddenly, emergent opportunities to seize the initiative and to undertake measures abroad which are likely to strengthen the fabric of the free world, if, but only if, they are undertaken immediately or shortly after the opportunity appears. C. Increases in the cost of meeting requirements which are firm at the time of the congressional presentation

Third, there are those new requirements which reflect an increase in the cost of carrying out a program which was actually planned, and proposed to the Congress, for the fiscal year in question.

It is impossible to give an exact figure for the total new requirements of the foregoing types which have had to be met in any given fiscal year. However, new requirements of this type amounted in the aggregate to nearly threequarters of a billion dollars in fiscal year 1954 (a substantial portion accounted for by the massive allocation of resources to support operations in Indochina), more than $400 million in fiscal year 1955, and more than $250 million in fiscal year 1956. While it is too early to make a comparable final estimate for fiscal year 1957, it is probable that contingent and unforeseen requirements that will have to be met will be significantly higher than in fiscal year 1956.

There is no reason to believe that the same kinds of factors which have operated in previous fiscal years to create new requirements will not continue to be operative in future fiscal years and create new requirements of a comparable total magnitude, to be met during the course of those years. In fact, (a) problems incident to the revision of the aid program, (b) the continuing unsettled situation in the Middle East, and (c) the explosive situation in Eastern Europe, and (d) the continuing efforts of the Soviet bloc to penetrate and to subvert, through political and expanding economic measures, nations in Africa, the Middle East, South Asia, and the Far East, make the possibility of such new requirements in the future greater than ever before.

Given the certainty that new requirements of the foregoing types will develop and need to be met in the course of future fiscal years, the question is what represents the best method or methods of preparing to deal with them, and whether a reserve fund of the type discussed in the General Accounting Office Report should constitute an essential element in an intelligent approach to this problem.

There are four principal ways in which it is possible to meet such new requirements as they emerge. They are:

(1) Congressional action.-To seek supplemental authorizations and appropriations-an alternative which may be necessary and desirable if a new requirement is very large but which does not usually represent a practical answer for the large number of smaller and typical new requirements that must be met in the ordinary conduct of the program.

(2) The use of savings.-To apply, if such exist, savings derived from previously planned program, using Presidential transfer authority, if necessary, to move such savings from one appropriation account to another.

(3) The diviresion of funds from other programs. To divert funds from previously planned programs of lower priority, using Presidential transfer authority, if necessary, to move such funds from one appropriation account to another. This is the technique by which, prior to fiscal year 1956, new requirements were met except when there were program savings adequate to cover them. While this method forces continual review of the necessity for, the costs of, and the real priorities among programs it also requires the sacrifice of programs which, though of lesser urgency, were sufficiently important to justify the appropriation initially. This procedure is also less satisfactory because it introduces uncertainty into the planning and programing processes, not only of the United States, but also, and frequently with much more far-reaching consequences of a military, political, psychological, or economic character, of the country from whose program the fund diversion is made. It detracts from, and

makes more difficult, the kind of long-range planning of military buildups or economic development which should increasingly constitute an important element of the mutual security program. These are, of course, among the points made in the General Accounting Office report and the considerations which motivated the prior executive branch recommendation for a contingency fund. (4) Reserve fund.-To have a special reserve fund, such as the special Presidential fund established in fiscal year 1956, and continued in fiscal 1957, pursuant to section 8 (a) of the Mutual Security Act of 1955 and section 8 (c) of the Mutual Securtiy Act of 1956, or such as the special fund proposed for fiscal year 1958.

The problem is the extent to which, and the manner in which, each of the foregoing techniques should be employed to give the mutual security program the kind of flexibility needed to meet urgent new requirements as they arise. Supplemental legislation and appropriations do not ordinarily provide a practical answer. Similarly, savings in going or planned programs are unlikely to be adequate. The reduction or postponement of other planned programs has all the disadvantages noted above in (3). It is obvious, therefore, that there is a need for a special contingency fund of the kind referred to in (4) above which will make it possible to meet some of the new requirements without unduly and unwisely wrecking other planned programs which it is in the United States national security interest to carry out. However, it is equally obvious, given the size of contingent and unforeseen requirements which have had to be met in prior fiscal years, and which it seems certain will have to be met in future fiscal years, that it would be unwise, impractical, and probably congressionally unacceptable, to establish a separate contingency fund, over and above all planned programs, that would be large enough to meet all urgent new requirements. Moreover, as indicated in (3) above, there are decided advantages, so long as total funds available for Mutual Security are limited, to requiring a continual reexamination of program priorities in the light of new developments and with the objective, in spite of administrative inconvenience and delays that may be entailed, of substituting new, higher priorty activities that may develop for previously planned programs which, though important and urgent, are less important and urgent.

For the foregoing reasons, the executive branch, while repeatedly supporting a contingency fund, has also felt that other forms of flexibility were indispensable, including the transfer provisions of section 501 of the Mutual Security Act of 1954, as amended, and the practice of presenting illustrative programs that are subject to subsequent adjustment. This position was clearly stated by the President in the following language in the same message in which he first proposed the $100 million contingency fund:

"I recommend continuance of the authority in the present Mutual Security Act to meet unexpected events by transfer of funds, appropriated for one geographic area or purpose, to another geographic area or purpose. Experience in recent years has demonstrated that flexible authority is highly desirable to move with dispatch to meet new circumstances, to overcome new dangers, or to capitalize upon favorable developments."

Mr. MURPHY. Mr. Chairman, I am glad that an opportunity presents itself on this point, because I was worried about the testimony on that item on the first day. It sounded to me, as a listener, very much as a cause and effect operation; GAO made its recommendation under its June report and Congress appropriated a hundred million dollars the following month. It completely omitted mention that in April of that year the executive branch recommended-made such a recommendation to the Foreign Affairs Committee before such a report was available, and I believe the action of the Foreign Affairs Committee and the Congress probably grew out of the President's recommendation made in the first week of April that year more so than the GAO report on June 10.

But we had recognized the problem GAO had mentioned, the fact that frequently we were caused to disrupt the going program to find money to meet emergencies and asked Congress if they wouldn't give us a contingency fund which would make that kind of action un

necessary.

Mr. HARDY. I think all of us would subscribe to the idea of a contingency fund and to flexibility, but I am concerned about making the