VIL Part Played by United States Aid in

Israel's Financial Recovery

As stated previously, Israel might have encountered the gravest difficulty without United States aid. Its creditors were pressing hard, and large suppliers were making inquiries with respect to the size and type of United States aid before accepting orders. Ships with cargoes of food were being diverted when payments could not be met. A total of $65 million of United States grant aid has been in the form of cash disbursements to Israel to meet short-term maturing obligations which could neither be refunded nor extended. Approximately $17 million was expended in this way in fiscal 1952, $31 million in fiscal 1953, and $17 million in fiscal 1954. These payments in general were made to cover purchases of food, fuel, and industrial raw materials; a minor amount for liquidation of obligations for industrial equipment and spare parts. In each case the expenditures were documented, and were for eligible items which would have been financed in any event. It is believed that this type of aid, unorthodox as it might be, was required at the time is was granted.

It is pointed out, however, that this in effect meant that aid dollars were expended for purchases made by Israel in excess of its financial capabilities at the time of purchase, and which had not received prior United States approval.

The financing directly affected Israel's short-term debt. This debt otherwise would have been considerably higher at the time of Israel's refunding operation in late 1953 and might have jeopardized its sucAt that time it amounted to about $75 million. More important, the debt by force of circumstances had to be reduced; loans were in effect being called and the banks were not accepting additional Israel paper.

cess.

FOA reports that this short-term debt, and the handling of it by meeting maturing obligations with grant-aid funds, was perhaps the most important point of friction between the United States mission in Israel and that Government from the beginning of aid until the fall of 1953. While under the circumstances the United States mission recognized that Israel had to be bailed out, it exerted the strongest pressure not only to make certain that Israel imported nothing that was not actually required, but that adequate foreign-exchange controls were set up to assume that the country knew on a daily basis exactly where it stood with respect to its foreign-exchange requirements and availabilities. It also wanted to make certain that there

would be no unpleasant surprises such as had occurred in the fall of 1951 when the first crisis arose. The government at that time was faced with meeting letters of credit and other commitments which it did not even know existed. The commitments had been made by the Ministry of Defense and other Israel officials on their own responsibility and without immediately reporting them.

It was not until late in the calendar year 1953, however, that FOA made it clear to Israel that the $17 million in cash which was promised at that time would end such emergency help. Israel had requested of the United States a long-term loan to refund the short-term debt. FOA refused and said that the refunding should be carried out with the aid of the United States Jewish community. That is the way it was accomplished. The FOA advance was to tide Israel over until funds from the refunding operation began to flow in.

In addition to its normal annual contribution of around $40 million, the Jewish Community of the United States was asked to pledge at least another year's contribution. The communities in each city negotiated bank loans with United States financial institutions, based on the credit of and endorsed by the leaders of the community, repayable over a 5-year period from the proceeds of the pledges. The United States banks advanced the full amount of the loan upon execution of the loan agreements. It was understood that United Jewish Appeal contribution for the next 5 years would be reduced each year by the annual amounts pledged by the members of the respective Jewish Communities to the United States banks. In this way, in addition to the usual $40 million contribution, Israel received in the first quarter of calendar year 1954 almost $60 million, which is used to pay off a portion of the short-term debt and to build up a foreign exchange reserve. This was a tremendously successful operation but it obviously will have to be paid for. Future contributions from private United States Jewish sources will be reduced by about 20 percent annually for the next 5 years. The advantages, however, greatly outweigh this disadvantage, and it is believed that the flow of German reparations over this period, and Israel's own better foreign trade situation, will partially offset this future reduction in foreign exchange receipts.

It might well be asked why this successful refinancing operation was not undertaken sooner.

It was not until early in 1953 that the new system began to work properly, and it was shortly thereafter that TCA was transferred to FOA. The latter, supported by the Department of State, took the strong position which resulted in the refinancing operation. Whether the setting up of these controls should have taken so long, and why TCA did not take a stronger position earlier, are questions that can't be answered from a desk in Washington. Action was taken, however,

almost immediately after transfer of the TCA operations to the Foreign Operations Administration in the fall of 1953.

Until the refunding operation was accomplished the first priority of business of the United States aid program in Israel was to meet an acute financial situation. Had this not been done, the ultimate consequences would have been unforeseeable; but it is certain that nothing could have been purchased on credit, and the whole economy of the country would have been seriously disrupted. The cost of repairing the damage would have far exceeded anything contemplated or possible through United States aid. The chances of internal disturbances and external aggression (and it is the policy of the United States to prevent the latter) would have been great.

VIII. The United States Dollar Aid

Program Summarized

There is attached as exhibit 1 a summary of the United States Economic Aid Program to Israel from its inception through fiscal 1954. The program for the first two years emphasized the importance of food and agricultural development. There was a change in direction in fiscal 1954. In 1952 and 1953, however, of total economic assistance of $133 million, $58 million or 43.6 percent was for food for human consumption; $12.1 million or 9 percent was for fodder, fertilizer, etc.; and $14.6 million or 11 percent for direct agricultural development. Thus, a total of $84.7 million or 63.6 percent of the total went for food and the means to produce it. This does not take into account part of the raw materials imports that were processed in Israel and thus indirectly went into the agricultural program.

1952

The United States Mission to Israel did not really begin to operate until early in 1952, and then only with a very limited staff. The 1952 program generally followed the recommendations of the 1951 field team.

It was estimated in the field team report that it would immediately require a minimum of $15 million to pay off Israel's overdue obligations in order to restore the credit of the State. This $15 million was to be used to pay off commitments for raw materials and fuel which could not be met. This was given first priority. Next in importance was food for human consumption, for which $25 million was recommended. Increased agricultural production was allotted $15 million, power $5.3 million, spare parts for transport and industry $3.2 million, and technical assistance $1.5 million.

Actually about $17 million had to be used to pay off past due obligations. The total amount required for food for human consumption was $35 million, or about 55 percent of the total 1952 program. Commodities to increase agricultural production, such as fodder, fertilizers, seeds, and pesticides comprised about $7.5 million, or slightly less than 12 percent of the program. Raw materials and semifinished manufactured goods (spare parts), for which together $18 million was recommended, actually were financed to the extent of about $17 million, or 262 percent of the program. Approximately $3.5 million or 52 percent went for power, and only $0.5 million or less

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