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	FOREIGN RELATIONS OF THE UNITED STATES 1964-1968 Volume XVII Eastern Europe Department of State Washington, DC
10. Special Memorandum Prepared in the Central Intelligence Agency/1/ No. 10-65 Washington, February 18, 1965. /1/Source: Johnson Library, National Security File, Country File, Eastern Europe. Secret. Prepared by the Office of National Estimates. SUBJECT Prospects for Independence in Eastern Europe Since the publication of our last estimate on the subject (NIE 12-64, "Changing Patterns in Eastern Europe," dated 22 July 1964),/2/ the trend toward independence in Eastern Europe has survived the overthrow of Khrushchev and has continued to gather momentum./3/ In the paper that follows, we bring this story up to date and extend our judgments as to its likely outcome. /2/Document 7. /3/Nikita S. Khrushchev was removed from his post of Chairman of the Council of Ministers of the Soviet Union on October 15. Aleksei N. Kosygin replaced him; Leonid I. Brezhnev replaced him as First Secretary of the Central Committee of the Communist Party. SUMMARY Soviet control of Eastern Europe is gradually being whittled away. Changes within the USSR itself, a surge of Eastern European nationalism, a general disenchantment with traditional forms of Marxist economics and harsh Soviet-style politics, and the growing attraction of the West have all combined to give the states of Eastern Europe both the incentive and the opportunity for striking out on their own. Rumania, the most daring exemplar of the new trends, has made especially telling use of the force of nationalism and is fast approaching a degree of independence comparable to that enjoyed by Yugoslavia. Others--except for East Germany and perhaps Bulgaria--in their own way are likely over the long term to follow suit. The Soviets, for their part, will find it difficult to arrest the process, and though crises are an ever-present danger, we believe that these countries will be able successfully to assert their own national interests gradually and without provoking Soviet intervention. In ways unforeseen by both the Soviet Union and the West, communism is taking firmer root in Eastern Europe, but it is a truly national communism which is doing so. It is, in fact, much closer to the traditional interests of the individual countries involved and much more remote from the interests and the ambitions of the USSR. I. Introduction 1. Twenty years after the end of the war and the occupation of Eastern Europe by Soviet armies, Stalin's empire has begun to show signs of considerable disarray. Unlike the first national defection from the Bloc, Yugoslavia in 1948, and the violent eruptions in Hungary in 1956, the current process of withdrawal from Soviet dominance is gradual and unspectacular. It lacks the drama of sudden political upheavals, and thus does not challenge the USSR with provocative acts sufficient to justify armed intervention. It lacks the finality of a complete severance of the bonds between protectorate and overlord, and thus it is sometimes difficult to know precisely where relations stand and in what direction they are likely to go. But it does not lack for a potential fully as meaningful as that inherent in previous, more vivid crises in Soviet-Eastern European relations. II. General Trends A. Factors Leading to Change 2. The states of Eastern Europe remain generally within the Soviet sphere of influence, and each is affected--though not in equal degree--by the policies and interests of Moscow. But these countries now move in increasingly eccentric orbits around the center, and their responses to Soviet demands and their abilities to pursue their own national interests vary widely from state to state. 3. Khrushchev's decisions to de-Stalinize and to improve relations with Tito's Yugoslavia were probably the prime movers in this process. The rulers of these countries soon found that without Stalin, his apparatus of terror, and his awesome mystique, they could no longer reign in the grand and arbitrary manner of Stalin. Even more important, the Soviets themselves discovered that, without Stalin, they could no longer operate at will within his empire. Stalin had been able to appoint the Satellite leaders, purge them at will, and control all the vital levers of power within each state. Not so his successors. 4. Gradually, perhaps so slowly as to defy even Moscow's awareness of what was taking place, Soviet means of control were whittled away, both by happenstance and by design. The Soviets could not stop Gomulka's accession to power in Poland, and, having failed in this, they could not reassert their dominance over his party. It was much the same story for a time in Hungary, where the appointment of Gero to succeed Rakosi was intended to insure continued Soviet dominance but led in fact to the opposite. 5. There was some reconsolidation in the years which immediately followed the Hungarian Revolution, but this was a transitory phenomenon which rested as much on the dispositions of the Satellite parties themselves--especially their fears of insurrection--as on the actual instruments of Soviet power. But Moscow had apparently forgotten its lesson, for its crude attempts in 1961 to bring a Soviet faction to power in Albania met with complete, humiliating failure. 6. It fell to the Rumanians to recognize and exploit the new situation. They saw the opportunity, had the motive, and gathered the means. The opportunity was the Sino-Soviet dispute and the USSR's growing warmness toward the West; the means were both economic (oil and corn and timber) and political (a unified leadership); and the motive was nationalism and the desire of the regime to seize this fervor to bolster its own position. 7. In addition to these reasons underlying change in Eastern Europe--the surge of nationalism, evolution in the USSR--are a number of factors that grew of their own accord within the area itself. In economics, adversity in effect bred diversity. The slowdown in growth and other severe shortcomings in the economies of most of these states led to a reexamination of the Soviet way of doing things and to a new look at the tenets of the doctrine which underlay the entire economic scheme of things in each of these countries. 8. It soon occurred to everyone but the most hard bitten and doctrinaire that Soviet methods were obsolete, especially for the more industrialized countries. It was then easy to exaggerate the degree to which these economies had been exploited by the Soviets and to blame current miseries on past Soviet sins. It was also found that Marxism-Leninism was simply inadequate to show the East Europeans the way out of their troubles, and that the Soviet Union was unwilling to devote sufficient resources to bail them out. The East Europeans therefore had to turn elsewhere. They looked at the Yugoslav system, which was a strange, though functioning, amalgam of socialist ownership, state direction, and a market mechanism. They also turned to the West, sometimes only for the tools of better planning and management, but in some cases to seek radical ways of changing the economic system. 9. Here the great successes of the Germans and the French and the faraway technological spectacular of the US told them that, far from collapsing from its own crises, the capitalist world was booming as never before. The Eastern Europeans travelled to the West and sought information and help, and they encouraged visitations of Western economic officials and businessmen to their own plants. Homegrown economists began to do without the shibboleths of Marxism and abandoned the jargon as well. In its place they began to talk among themselves, and then to party functionaries, about interest charges on capital, the market, supply and demand, and even the role of profits. 10. While the official outlook was thus being transformed, the popular mood was growing more restive. Years of doing without--of poor housing, starchy diets, few consumer goods--and of hard work for low pay had begun to take their toll. The very gradual improvements in living standards merely whetted appetites for more, and soon public discontent transmitted itself to the leaderships in general and to reform-minded elements within the leaderships in particular. Clearly, if labor were to perform as asked and if the people as a whole were to cooperate at all with the regime's programs, improvements had to be made. And to allow such improvements, the economies themselves had to become stronger and grow faster. 11. These changes in attitude led, though at a varying pace, to efforts to reform the economies, to make them more responsive to popular demands, and to get them on the move again. Doctrine inevitably suffered in the process. It was as if, beginning with the economy, ideology were being chipped away piece by piece. But quite clearly, Marxism-Leninism was never meant to be applied--or even believed in--as a selective philosophy. It may change, but it is intended to be a coherent doctrine not subject to the erosion of its fundamentals. 12. Encouraged by Khrushchev's "revisionism", by the sanctioning of the Yugoslav "road to socialism," and by the split between the USSR and China, changes were made in Eastern Europe which only a few years before would have been quite unthinkable. Some of these innovations were solely political in concept, such as the Hungarian regime's public judgment that those not actively against it would henceforth be considered for it. Some were mainly economic, though with political implications, such as the spirited debate over economics waged in official publications, especially in Czechoslovakia and Bulgaria. And some were purely economic in origin, but even here--as is the case with the turn toward "market socialism" in Czechoslovakia--there will be important political repercussions. 13. Changes in economic thought and in ideology were paralleled by a relaxation of political controls and a generally more permissive attitude on the part of the regimes. The knock on the door in the early morning was done away with, conversation became considerably freer, and barriers against the intrusion of Western ideas into the closed societies were penetrated, sometimes with official encouragement, sometimes despite official discouragement. European culture--books, plays, movies--received widespread distribution in most of the area. The move toward European unity appealed to many in Eastern Europe who saw in it a way of escaping Soviet domination. Intellectual ferment once more became widespread and authors began again to write of contemporary problems with more realism than socialism. Such "radical" and antitotalitarian authors as Franz Kafka were taken off the index everywhere except in East Germany, and the population at large was exposed to Western radio broadcasts without jamming. All in all, the life of the average man became both more comfortable and freer; if the regimes were looked upon with no less contempt, they could nonetheless be suffered without the overriding anxiety and fear produced by the Stalinist insistence on absolute conformity. B. The Levers of Soviet Power 14. The Soviet ability to help chart the course of history in Eastern Europe rests ultimately on its proximity and the preponderance of its military power. The USSR's invasion of Hungary in 1956 demonstrated forcefully for all of Eastern Europe this ultimate means of Soviet control. But military power has traditionally been used by the Soviets in quite another sense, as a prop for the local regimes against trouble at home or threats from abroad. But time and international change have tended to diminish the value of the Soviet protective umbrella for the individual East European regimes. Only in the ultimate sense of survival under the threat of an actual invasion from the West or internal insurrection which cannot be handled by local forces do these regimes look to the USSR for support. Even in these instances, the situation has changed appreciably, for the West no longer professes a policy of rollback and "liberation" and the people no longer consider revolt to be a feasible or even desirable course of action. 15. After the initial period of occupation and the establishment of lines of control, Stalin did not depend heavily on the USSR's military power. Rather, he relied principally on his direct control of the indigenous parties and their leaders. These organizations and these men were almost wholly dependent on the USSR for their very existence; certainly they had few local strengths and few resources with which to confront the USSR. But this situation has since changed radically. After some twenty years in power, these regimes have been able to one degree or another to build up indigenous sources of strength. A good deal of their power now rests on the local parties themselves. 16. Thus Moscow's influence on these parties now depends not on direct control but on indirect influence. It may persuade and bribe, but it can no longer merely issue instructions with any degree of confidence that they will be followed. As the first governing Communist party in history and as the fount of Communist wisdom, it commands considerable respect and some degree of loyalty from its former client parties. Certainly it will be listened to, if not obeyed, and in at least one respect, the Sino-Soviet dispute has increased Soviet prestige and mellowed Soviet doctrine--almost all the Eastern European countries are horrified by the Chinese version of the ideology. Otherwise, however, this reservoir of respect and loyalty has been diminished by the acts of the Soviets themselves, their juggling of doctrine, their denunciation of Stalin and his works, their inability to provide firm leadership to the international movement, and, most recently their overthrow and criticism of Khrushchev. 17. Soviet foreign policies form another means of guiding Eastern European destinies. Soviet policy toward Germany, for example, conforms well with the fears, aspirations, and prejudices of many of the Eastern European governments and peoples, especially those that suffered most acutely during World War II. Further, to the extent that disputes erupt between these states, Moscow plays an influential role in its capacity as adjudicator and referee. It can use traditional hostilities between them for its own purposes and, by siding with one country or another, can use these enmities to barter and to threaten. The Rumanians, for example, are convinced that the Soviets have privately encouraged Hungary to agitate over Rumania's policies in Transylvania. 18. In more general terms, the size, prestige, and awesome political and economic power of the USSR provide it with still another lever, distinct from that provided by sheer military strength. As has always been the case in relations between large and small states, the power of the larger can be used as a form of pressure against the smaller. This is particularly useful in seeking to curb policies which are specifically hostile in intent, and thus helps to define the limits of independent action for the smaller states; it constitutes a barrier of sorts against radical forms of defiance. 19. Finally, the Soviets maintain a method of influencing Eastern Europe through a variety of economic devices. But, if they have learned their lessons, they must realize that the use of economic pressure frequently has disappointing results; Yugoslavia, Communist China, and Albania failed to succumb to it--indeed, they actually accelerated their anti-Soviet policies as a direct consequence of its use. Nonetheless, the Soviets almost certainly consider it one of the major weapons in their arsenal. The Eastern European states depend for close to half their total trade on the Soviet Union, and most of them certainly realize that their industrial exports have little demand in the West. 20. Most of these countries are seeking to reduce this dependence on the USSR. They are trying to improve the quality and the mix of their export trade, attempting vigorously to expand exchanges with the West, and seeking out Western credits with which to improve domestic performance. It is not inconceivable that, with time and luck, they could materially reduce their dependence on the USSR and at least develop a potential for trade with other states should the need suddenly arise. III. Country Survey: The Spectrum of Sovereignty 21. While for most purposes the countries of Eastern Europe should not be considered as a whole, should be examined in the light of their diversity, in one important way they may now be viewed in terms of their collective impact. From the point of view of Moscow, and in terms of their influence on Soviet policies, these states can be seen as an autonomous political force. Increasingly over the past several years, and with Rumania showing the way, the course of political action and the direction of political pressure in this area now runs from East to West. These countries are gradually chipping away at Soviet dominance, asserting individual national interests, and turning increasingly to the West as an alternative to Soviet dominance. 22. Nationalism is now a strong factor throughout the area, most of it strongly laced with anti-Russianism, and it must appear to many of these leaderships to be an attractive prelude or even alternative to genuine liberalization. It is finely calculated to maximize popular support for otherwise highly unpopular governments; by itself, liberalization appears quite unable to do a comparable job. Indeed, unless its economy is able to sustain fairly consistent and impressive rises in the standard of living--as is nowhere the case in this area--the regime which embarks on liberalization runs the risk of actually increasing popular discontent by allowing its more vocal expression. 23. It may be that some of these regimes--Bulgaria comes immediately to mind--are so compromised and conditioned by their history of abject subservience to the Soviets, or so blinded by the myths of their ideology, that they will not be able to introduce a policy designed to appeal to nationalistic sentiments. But others will surely see the benefits of such a course, especially in terms of their own interests and positions of power, and will be strongly tempted to travel the Rumanian road. [Here follow paragraphs 24-50 (pages 13-28), a country-by-country survey.] IV. The Outlook A. The Growing Trend 51. It is not possible to predict the specifics of future change in Eastern Europe. These will be the result of individual choice, the consequence of events yet to come, the product of factors and movements essentially unpredictable, and, of course, the policies and actions of the great powers. But of this we are sure--there will be change, and it may come faster than we had generally anticipated and in ways we do not expect. We have learned from experience--from, for example, Albania and Rumania--to be wary of generalizations about this area. As time goes by and as the trend toward independence in Eastern Europe gathers momentum, diversity will increase and chances for the unexpected may grow apace. 52. The initiative of political movement in Eastern Europe now rests largely with these states themselves, rather than with the USSR. Each of these states, with the exception of East Germany, is led by a group of men and a political institution which now depend for their very existence primarily on domestic sources of strength and domestic attitudes and traditions. In several states, communism is perhaps taking firm root, but in a way quite unforeseen in both Moscow and the West. It is a variety of national communism which has established itself in Rumania and bids fair to do so elsewhere. 53. We would not expect these regimes to become national Communist in character on similar schedules, in equal degree, or in identical form. Common to them, however, would be full control over domestic policies and a meaningful degree of independence in foreign affairs. Their allegiance to Marxism-Leninism would probably vary but at least in some this would be a question of public image rather than true adherence to doctrine. Some might retain a fairly unified and disciplined one-party structure; others, though operating through only one party, might see the development of important and diverse political forces within a Communist party framework and the gradual growth of extra-party and even popular influences. Nowhere, however, would we anticipate the development of a genuine multi-party system, though almost certainly pressure for this would grow. In the last analysis, each regime would determine for itself what in fact constituted "socialism" and each regime would remain "communist" so long as it declared itself to be so. 54. As its efforts to convert CEMA into a Soviet-dominated supranational force would seem to testify, the USSR is almost foredoomed to failure when it does seek to innovate and expand its controls. Moreover, the failure of Soviet initiatives tends to produce a chain reaction, for each instance of successful Eastern European opposition contains within it the seeds of even stronger resistance for the next round. The USSR thus is forced to choose between making concessions, following more permissive policies, or finding itself more and more in the position of a power seeking to restrain change rather than trying, as it once did, to impose it. In a sense then, each of these regimes can choose the time, the place, and the issue with which to apply pressure on Moscow. And nothing now seems more inevitable than a gradually increasing interest in and desire for greater independence on the part of most or all of these countries. The replacement of the present, aging leaderships with younger, more vigorous, and probably less doctrinaire officials is much more likely to hasten this process than to retard it. 55. It is thus possible, as it has been in the past, to discern the general outlines of this trend and to ascertain its direction. The movement is not of its own accord toward the West, nor does it appear necessarily to be heading toward Westernized concepts of democracy. Rather, these states are acting in what they conceive to be their own national interests, and they look to the West principally in order to strengthen precisely those interests. True, this in many instances has the effect of moving them away from the East and in this manner toward the West. It is also true that most of these states looked westward before they were forced by Moscow to about face. And a few of these countries, notably Czechoslovakia, to a lesser extent Hungary and Poland, had at least some tradition of democracy before they were compelled to surrender to communism. But, while they may move only partway toward the West and its ideas, from the perspective of Moscow the trend is highly dangerous. This was the great fear of Moscow during the Hungarian Revolution; it was genuinely concerned that Hungary would rejoin the West of its own accord, whether the West desired it or not, and, ultimately, it was this fear that led Moscow to intervene militarily. The same concern could bring about a repetition of that event. 56. For the most part we do not foresee crises in Eastern Europe. These regimes are likely to move with relative caution, to test and probe for Soviet reactions before adopting new policies of their own, and, in general, to avoid acts which might provoke the Soviets into intervention. But this does not mean that precipitous Soviet action can be ruled out of the question. The Soviets could fear the overthrow of an Eastern European regime, or its submission to non-Communist forces, and intervene to forestall it. They could, in addition, badly misjudge a given situation, see threats to their vital interests where in fact none existed, or become overly frightened about specific events and move accordingly. Or it is always possible that a change in the Soviet leadership could lead to a determination to restore Soviet hegemony in Eastern Europe through whatever means proved necessary. For their part, the Eastern European regimes might provoke severe Soviet moves by capitulating to strong popular pressures and pursuing nationalistic policies overtly and virulently hostile to the USSR and Soviet interests. They could also miscalculate Soviet responses to specific moves and provoke Moscow without actually meaning to do so. 57. It may be that it is already too late to speak of the relations between Moscow and the Eastern European states in terms of the formal instruments of Soviet hegemony. The Cominform is long gone; CEMA functions, but not well. 58. Concerning the Warsaw Pact, two distinct trends are visible. The USSR has seen fit to provide these countries with at least the potential for more independent military action. The Eastern Europeans have, in fact, assumed greater control over their own forces, a trend consonant with developments in the political sphere. On the other hand, the Soviets seem to be placing greater reliance on the Eastern European forces in the formulation of their military strategy. It may be that the Soviets no longer look upon the Pact as an important means to ensure political control but primarily as a more or less conventional military alliance, dominated, of course, by the supplier of arms, Moscow. If so, it would certainly accord with the Soviet effort to improve the military capabilities of these forces. 59. In any case, the Rumanians seem to have cast a dubious eye on the value of the Pact to Rumanian purposes, have publicly deplored all military pacts as anachronistic, and have privately informed US authorities that Rumanian troops will defend only Rumania. They have also privately indicated that, left to their own devices, they would pull out of the Pact. It is probable that the Rumanians are bent on reducing their role within this organization to a purely formal level. 60. But these countries remain under firm, one-party Communist control, as Hungary did not, and, in the last analysis, they can remain at least nominal allies of the USSR so long as they remain avowedly Communist. It is for the Soviet Union to decide whether this is enough. In the event that one or more of these states severed even that one last tie, military intervention would be the only avenue open to the USSR to enforce its will on the defecting country. Whether this would then be judged a feasible course of action, whether the gains in Eastern Europe would balance the risks and losses elsewhere in the world, only Moscow could decide. And Moscow is not good at solving this sort of dilemma. B. Soviet Policy 61. Moscow has sought in fits and starts, and for the most part ineffectually, to arrest the drive for independence in Eastern Europe. For one thing, the USSR does not fully understand the emotional force of nationalism and thus can frame no clear policy to combat it. For another, the Soviets have themselves facilitated the process by a general loosening of policies toward the area, aided and abetted by their moves against China and toward the West. We believe that, unless the Soviets are willing to resort to military intervention, the momentum of this movement toward independence will gather force and become highly contagious. 62. The USSR sees Eastern Europe as vital to its strategic needs. Not only does it provide a forward area for defense and offense, it serves generally as a buffer zone between the Soviet Union and West Germany and the other "hostile" status of Western Europe. The USSR also sees in Eastern Europe a vindication of Communist doctrine, a proof of the inevitable advance of socialism; conversely, it would view the defection of any of these states as a refutation of that doctrine. Finally, the USSR sees Eastern Europe as an integral part of its empire, a source of actual and potential economic, political, and military support. 63. All three of these concepts are, of course, subject to change. The strategic consideration is perhaps the least susceptible to modification, but even here the facts of the nuclear-missile age render the concept considerably less valid than it once was. Nonetheless, long after strategic factors make the area relatively useless for the defense of the homeland, Soviet thinking is likely to reflect more or less traditional military concepts of Eastern Europe's value to the USSR. 64. Greater change may take place in the area of doctrine. The evolution set off by de-Stalinization, and further shaped by the Sino-Soviet conflict, has already altered the concept of a monolithic bloc. As the Eastern Europeans increasingly depart from Soviet practice, as Yugoslavia is welcomed to the club, and as the Soviet definition of "socialism" is further diluted both by domestic changes and by the inclusion of more and more countries, such as the UAR, into the "progressive" camp, the requirements of the doctrine for the individual Eastern European states become vaguer and more permissive. What will constitute a loyal member of the bloc in terms of ideology a decade hence can be but dimly perceived. 65. Inevitably, this sort of ideological erosion will also have an effect on the Soviet concept of empire. The dreams of a tightly knit organism following a single economic plan, with national boundaries turning into unimportant anachronisms, have surely faded. If this is indeed the way in which the USSR's attitudes and policies toward Eastern Europe are likely to evolve in time, it will be difficult to define the Bloc in the usual way, i.e., as a Bloc. Organizations like CEMA and the Warsaw Pact might be retained only on the basis of a genuine partnership and only to the extent that they served some specifically worthwhile purpose, something comparable, for example, to the European steel community. Or they might become moribund, be scrapped, and then superseded either by a series of bilateral treaties or by an amorphous regional pact of only symbolic import. Some of these states might form various regional associations with each other and even with non-Communist neighbors. Under all such arrangements as these, each member state would be largely free to pursue its own interests at will, presumably so long as these did not involve policies actively hostile toward one another. 66. If the USSR were to recognize clearly the trends in Eastern Europe and to initiate forward-looking policies which sought to encourage and to influence the process, the formation of a harmonious Soviet-East Europe alliance would be greatly eased. The history of their relations to date, however, does not suggest that the Soviets are likely to do this. The Soviets will find it hard to accept a loose confederation of sovereign countries bound together in traditional ways of alliance and cooperation. This strikes at the Russian sense of great-power status, and herein lie numerous possibilities for ill timed Muscovite heavy-handedness. They are apt to fight the problem as they have in the past, hoping to halt or at least delay the process through a variety of small measures and perhaps large threats, ultimately discovering that they must give in with as much salvaged grace as possible. This, of course, usually has the opposite effect from that intended; not only does it incur the ill will of these countries, which does not surprise Moscow, but it also frequently stimulates further efforts to increase sovereignty, and to Moscow this apparently does come as something of a shock. C. Eastern European Attitudes Toward Specific Soviet Policies 67. The Eastern European states are not enthusiastic supporters of many facets of Soviet foreign policy. Except when internal exigencies require it, for example, most of these regimes are reluctant to express full-throated Communist hostility toward the West. On the contrary, because of burgeoning hopes for expanded economic relations with the advanced Western countries, the Eastern European countries would like to improve their relations with the West. Rumania, Hungary, and Czechoslovakia have made this intention quite clear in recent months. So long as the USSR's own policy includes an element of détente, it will be difficult for the Soviets to restrain Eastern European movement toward the West. Should Moscow reverse itself, it could expect resistance on the part of its allies, a factor to be taken into account in the formation of Soviet policy. 68. In the Sino-Soviet dispute, the Eastern European states sympathize with the Soviet doctrinal position and some of them, such as Czechoslovakia and East Germany, have been quick to commit themselves publicly to the Soviet side. But Poland has sought to soften the dispute and has counseled the USSR to act cautiously, and Rumania has gone even farther and publicly dissociated itself from the Soviet point of view. In general, the Eastern European regimes have been given added leverage with the USSR because of the dispute and, though none would favor a Chinese victory, or even important Soviet concessions, they welcome the increased maneuverability they have been granted by default and are probably not anxious for a final settlement of the problem. 69. In yet another area of Soviet policy, the East European states are important contributors to the Soviet bloc's program of economic and military aid to underdeveloped nations, adding some $1.9 billion to the Soviet total of $7.4 billion. Czechoslovakia and Poland play by far the most important role--the Czechoslovak program is much larger per capita than the Soviet--but the other countries also participate. At its inception, these states had no choice but to carry out the Soviet will, and they often were used to promote strictly Soviet interests. There are signs, however, that the Eastern European aid programs now are being managed in a way that is more consistent with national interests. Recently, these states have participated only rarely in Soviet economic programs, relying instead on bilateral arrangements, and have almost stopped extending military aid. 70. The Eastern European states, except Yugoslavia, have few national political interests in the underdeveloped countries, and they have far less interest in expanding their economic relations with these countries than with the industrial West. Moreover, there is widespread popular resentment of the aid programs in Eastern Europe. Nevertheless, these programs probably will continue, even in the absence of Soviet domination, because some prospective economic benefits are expected from them. By extending credits on liberal terms the East European states gain access for their manufactured goods to markets that might not otherwise be available and to new sources of goods and raw materials. The main exception to this general rule may be aid to Cuba, where some subsidies may be involved and where prospects for repayment of credits are dubious. 71. Soviet policy toward West Germany may also be at issue between Moscow and some Eastern European regimes. Despite their apprehension and dislike of the Germans, the East Europeans are particularly anxious to expand their economic relations with West Germany and see no good reason why the unresolved question of Berlin should be imposed on them as a hindrance to the development of closer ties. Indeed, the willingness of some of these regimes to sign so-called Berlin clauses as a pre-condition for trade agreements demonstrates their unwillingness to allow the interests of East Germany to intrude. Given a continuation of the West German policy of increasing its presence in Eastern Europe, and of such arrangements as are now under negotiation between Bonn and Warsaw for the establishment of joint industrial enterprises on Polish soil, we consider the expansion of Eastern European-West German ties to be almost certain, and we would expect hostility to diminish. D. Impact of the Soviet Political Scene 72. The removal of Khrushchev from power destroyed one of the strongest surviving political links between the USSR and the countries of Eastern Europe. Khrushchev was careful to cultivate good relations with all the Satellite leaders, replacing the iron will and discipline (and contempt) of Stalin with personal force and camaraderie, persuasion, and occasional threats. He developed particularly close working relationships with both Kadar and Gomulka, swallowed his dislike of Ulbricht and cajoled him into cooperation, kept the strings taut on Zhivkov in Bulgaria, and in general treated the Eastern European leaders as fellow politicians in the Bloc club. He even introduced Tito into membership. 73. One result was the sour reaction of these leaders to his downfall. Gomulka, Kadar, Novotny, and even Ulbricht publicly indicated their displeasure by praising Khrushchev when it was quite clearly the Soviet intention only to criticize him. Mainly, we suppose, these leaders were concerned about reactions within their own parties, but we do not discount some genuine attachment to Khrushchev, approval of his policies, and concern and uncertainty over those of the new leaders. In any case, we know of no personal ties between the Eastern European leaders and Khrushchev's successors, and we do not expect any single Soviet leader to gain the stature Khrushchev once enjoyed for some time to come. 74. It seems likely that most or all of these leaders will now take the opportunity afforded by the new situation in the USSR to press their own national interests and to make their voices heard in Moscow. Gheorghiu-Dej has already begun to assert Rumania's interests more vigorously than ever and others will probably follow suit. In any event, should Moscow seek to restore tighter controls over these leaders, it is likely to meet with greater resistance than ever. Only Ulbricht among them was in the top spot at the time of Stalin's death; thus the others have either worked successfully for their own autonomy and are by now accustomed to running the affairs of their own parties, or have worked only in an atmosphere of relative Soviet permissiveness. They are surely aware that the new Soviet leaders have no more means at their disposal--and probably fewer--for enforcing Eastern European conformity than Khrushchev had. 75. They are also acutely sensitive to the general political scene in Moscow and are almost certainly convinced that the present collective arrangement is inherently unstable. They will probably be reluctant to support one faction or the other until the outcome of such instability becomes clear, and they will be equally averse to committing themselves to policy except in a very general way. Some in Eastern Europe--probably the weaker elements--may identify themselves with one Soviet faction or the other and seek political support therefrom, but the chances of this do not seem as great as they once were, for example, in Hungary where Nagy clearly identified himself with Malenkov, Rakosi with Khrushchev. For their part, the Soviets, so long as they remain locked in a struggle for power, are unlikely to formulate new and coherent policies for the area, and disputes on this issue are likely to arise. Decisions needed in a crisis may thus be hard to obtain. As with foreign policies in general, Soviet interests in Eastern Europe might be better served by one-man leadership. 76. Of equal import is the question just where and when the USSR can now count on these states for support. Matters have already reached the stage where Moscow cannot assume in advance that its particular policies will receive automatic approval from Eastern Europe; in order to be sure, the Soviets must sound out these governments in advance. They must wheedle and cajole in instances where support is withheld, and in cases where even this fails, they must either alter or abandon their tack or proceed alone. This is particularly true in issues related to the Sino-Soviet dispute, where Rumania has declared its full neutrality and other states, most notably Poland, have exhibited a reluctance to adopt the Soviet line. But to a lesser degree it also applies to Soviet policy toward the West; the President's state of the union message, for example, was blistered in Moscow but praised in some East European capitals. We think the trend is clear: the East European states are no longer willing to adopt as their own whatever foreign policies the USSR sees fit to advance. Before giving their full support, most of these states seem to wish to subject such policies to critical examination in the light of their own burgeoning national interests. For the Board of National Estimates: Abbot Smith Acting Chairman   11. Editorial Note On March 9, 1965, President Johnson appointed a special committee on U.S. trade relations with Eastern European countries and the Soviet Union, under the chairmanship of J. Irwin Miller, Chairman of the Board of Cummins Engine Co. Documentation on the activities of the Miller Committee is printed in Foreign Relations, 1964-1968, volume IX. The "Miller Report," formally entitled Special Committee on U.S. Relations with East European Countries and the Soviet Union, Report to the President (Washington, 1965), was released by the White House on May 6.   12. Paper Prepared in the Department of State/1/ Washington, undated. /1/Source: Department of State, Central Files, POL 1 EUR E-US. Secret. The source text bears no drafting information, but the paper was transmitted as an attachment to a June 5 memorandum from Read to Bundy. NSAM 304/2/ ACTION PROGRAM FOR US RELATIONS WITH EAST EUROPE /2/Document 4. Policy Considerations We believe that the quiet revolution now in progress in the East European countries will continue and gather momentum in the years ahead. The current changes in East Europe are characterized by four important features varying in degree from one country to another: (1) internal liberalization; (2) establishment of a certain degree of national independence from Soviet control; (3) pragmatic innovations designed to cope with pressing economic problems; and (4) progress in reassociation with the West. Our basic purpose in building bridges to East Europe is to facilitate and sustain these changes. We seek thereby progress toward the realization of our ultimate objective in East Europe, that is: the establishment of conditions under which the people of each country may determine its own society; and where each country may enjoy national independence, security, and a normal relationship with all other countries. This will mean the final dismantling of the Iron Curtain and the free association of East Europe and the West. It will entail the establishment of a viable relationship between the East European countries and the Soviet Union consistent with the security of both. To weave the fabric of reassociation with East Europe is to lower barriers, strengthen ties and broaden relations with the countries of that area. We seek to promote and influence the evolution of Communism in the area and to obtain the agreement and positive cooperation of Communist governments in spheres of mutual interest. We must focus and rearticulate our policy in keeping with the developing East European situation. We must also closely relate our moves in East Europe to the solution of the German problem and the achievement of a durable relationship with the Soviet Union. Our policies for achieving West European unity, East European evolution and secure peace with the Soviet Union must move forward together. There are two great needs: a. One is coordination--of US policies toward the various parts of Europe; among Western countries in building relationships with East Europe; within the Executive agencies; and among the Executive Branch, the Congress and the American public. b. The other is further tools for the purpose--in legislative authority giving the Executive Branch greater means and flexibility to influence developments in the European Communist countries. Recommendations The Department recommends a comprehensive program of: (1) actions affecting East Europe as a whole; (2) actions to achieve a common Western approach; (3) steps in multilateral associations; and (4) country initiatives. The program includes actions that can be taken now as well as measures that will put us in a better position to take advantage of opportunities as they emerge in the various countries of East Europe. Timing and priority are shown in specific cases. I. Actions Affecting East Europe as a Whole Since this paper is concerned with East Europe (as well as the Soviet Union), it does not cover East Germany and none of the recommendations are intended to apply to East Germany. 1. Extension of Official Relations We should prepare the way for fresh initiatives in East Europe by clearing up certain outstanding issues. Specifically: a. Negotiations of claims settlements. (Country Programs for Czechoslovakia and Hungary)/3/ /3/The Tabs and Country Programs are not printed. b. Removal on a reciprocal basis of travel restrictions and limitations on the size of diplomatic staffs. (Tab A) c. Settlement of specific consular problems and conclusion of consular conventions. (Country Programs) d. Opening of Consulates in USSR, Poland and Czechoslovakia. (Country Programs) 2. Negotiating New Bilateral Agreements We can support such initiatives by entering into commercial agreements with individual European Communist countries on the basis of a mutual exchange of benefits. Such agreements need not be limited to trade. They should be used as an opportunity to resolve outstanding problems in matters concerning trade, such as: the protection of industrial property (Tab B), settlement of commercial disputes, and expansion of trade and tourism opportunities. Such agreements could also be related to the settlement of financial claims and consular problems. They can be used as a means of bringing US relations with an individual country under regular review and consultation procedures. We can move in this direction through bilateral negotiation on the pattern of the Rumanian talks in 1964. For this purpose, we must be prepared to liberalize our export licensing practices and to guarantee commercial credits as part of the process of broadening relations with an individual country. If we are to expand trade with these countries on a sound basis and maintain forward momentum in our relations with them, it will be necessary for the US to grant most-favored-nation tariff treatment where the situation warrants. 3. Shipping (Tab C) a. We should gradually admit ships of the European Communist countries to an increasing number of US ports. b. We should partially and gradually relax surveillance of Polish and other East European ships in US ports insofar as US security arrangements will permit. c. We should scrupulously treat commercial transactions with the European Communist countries outside US preferential shipping requirements. d. We should not apply the preferential shipping requirements of PR 73-17 to transactions involving Export Import Bank guarantees of commercial bank credit of 5 years maturity or less. 4. Civil Aviation (Tab D) We should adopt a new course in this field by: a. Fostering the exchange of aviation officials and technicians with selected East European countries. b. Seeking to obtain rights, unilateral if possible, but through reciprocal agreements if necessary, for US air carriers to serve selected East European points. c. Relaxing current barriers to sales of US civil aircraft and aviation equipment to East European countries and within security limitations encouraging such sales. d. Supporting applications from individual East European countries for adherence to the Chicago Convention and urging East European countries to apply the ICAO standards. 5. Facilitation of Travel We should encourage the flow of tourist travel both ways by civil aviation links, by establishment of tourist offices where appropriate and by a more expeditious procedure for issuing visas to temporary visitors from East European countries. The last proposal (Tab E) would also facilitate the conduct of official relations with the East European states since many of the visitors have official status. The Agencies involved should reduce drastically the time required to complete the prescribed security name checks on applicants. 6. Humanitarian Assistance (Tab F) We should be in a position to respond promptly and effectively to disaster situations and other requirements for humanitarian assistance in East Europe. Present authority to provide food assistance for needy persons through voluntary agencies is adequate. However, we have only limited authority to meet disaster situations in East Europe. We should also be able to cover on a selective basis longer term requirements for rehabilitation and reconstruction after the immediate emergency. 7. Bridges of Ideas (Tab G) a. We should systematically expand our programs of cultural exchanges and exchanges of persons with East Europe. We should also seek a better balance by arranging more exchanges in the arts, humanities and social sciences. We require more funds, both public and private, for these purposes. b. We specifically propose: --to increase grants and scholarships; --to promote the export of US publications, television and motion picture films; --to establish additional libraries in our diplomatic missions, US cultural centers and reading rooms; --to distribute cultural and scientific bulletins as well as an America magazine in the local language; --to assist East European countries to improve the teaching of English in their schools and universities and where possible to establish chairs of American studies. (Country Programs) c. We have concluded a Fulbright agreement with Yugoslavia. We should be prepared at the right time to conclude Fulbright agreements with Poland and Rumania if those countries are ready to undertake the standard obligations under such agreements. 8. Arms Control (Tab H) In the absence of a basic European political settlement, efforts to develop understanding with East Europe in the field of arms control and disarmament should be focused on: a. Persuading East European leaders and people of the peaceful purposes and defensive posture of the US, the Federal Republic and other Allies, especially as concerns the MLF and Allied nuclear strategy as well as Bonn's policy toward East Europe. b. Limited steps of a "bridge-building" character within the arms control and disarmament framework including: (1) greater contact with individual East European delegations at the ENDC and UNGA for exchange of views; (2) the welcoming and careful consideration of East European initiatives such as the Gomulka plan even if they are inadequate; (3) visits of US experts to East Europe for presentation of US positions or possible exchange of visits of specialists; (4) exchange of documents and provision of US research studies; (5) increased public information activities including if possible placement of articles on US disarmament policy in East European publications. 9. Articulation of Policy The President's "bridge-building" speech in 1964 and his reference to the subject in the State of the Union speech as well as the Secretary's earlier speech on "Why We Treat Different Communist Countries Differently" have been of great benefit in explaining to the American people the US approach to East Europe and in helping to build support at home for a positive policy./4/ Such authoritative statements on our purposes in East Europe in relation to our policies in West Europe, especially Germany, and toward the Soviet Union are essential in order to make clear to all parts of Europe the design of our policy and the interrelationship of its parts. The US should continue to enunciate, and build support for, our policy through such presentations on opportune occasions. /4/Regarding the President's "bridge building" speech, see Document 4. For text of the State of the Union address, January 4, 1965, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1965, Book I, pp. 1-9. For text of Secretary Rusk's September 14, 1964, speech before the Economic Club of Detroit, see Department of State Bulletin, October 5, 1964, pp. 463-468. 10. New Legislation (Tab I) In the field of trade, our greatest need is for the President to have discretionary authority to grant most-favored-nation tariff treatment where he believes it is in the national interest. With this authority, the US could negotiate commercial agreements with individual European Communist countries that would enable us to make maximum use of trade as a means of broadening our relations with these countries and influencing the evolution of their societies. As a further means of facilitating trade relations with European Communist countries, the legislation should also clarify the existing authority for the Export-Import Bank to guarantee commercial export credits. In separate legislation, we should propose an amendment of the Battle Act which would permit greater flexibility in the use of our PL 480/5/ funds in Poland to support US programs and trends there to our advantage. The present PL 480 legislation should be amended to remove the five-year limitation on Title IV sales to Poland. (Poland Country Program) /5/For text of P.L. 480, the Agricultural Trade Development and Assistance Act, enacted July 10, 1954, see 68 Stat. 454. The Battle Act (the Mutual Defense Control Act of 1951; P.L. 213) provided for the suspension of U.S. economic aid to nations supplying strategic materials to Communist nations; 65 Stat. 644. To meet disaster situations in East Europe, we should seek to amend the Foreign Assistance Act so as to give the President authority to provide emergency famine relief and other forms of humanitarian assistance. II. Actions Toward Achieving a Common Western Approach We should strengthen our effort to develop a common Western approach to East Europe: (1) to increase the possibilities of realizing our policy objectives in the area; and (2) to insure that the drawing together of East and West Europe occurs in association with, not to the exclusion of, the US. We should: 1. Cooperate closely with the Federal Republic in the evolution of Western policies toward East Europe without permitting Bonn a veto on such policies. 2. Work with Bonn and other West European governments as appropriate in promoting understanding and a better relationship between the Federal Republic and the East European countries especially (a) by discouraging public pronouncements by Bonn officials on claims to the "lost territories" or Germany's 1937 frontiers in the East; (b) by encouraging the FRG to consider undertaking discussions with the Poles looking toward a definitive understanding, in advance of a German peace treaty, on the ultimate boundary between Poland and a unified Germany; and (c) by supporting any disposition shown by the FRG to modify or by-pass the Hallstein Doctrine insofar as it serves to impede the development of Bonn's relations with East Europe. 3. Cooperate with the FRG and other Western states in ways to increase the differences between the GDR and East Europe and to make the reunification of Germany more acceptable to the latter. 4. Consult with West European states on how relations of the West with East Europe, especially with Poland, can be utilized to build bridges from there on to the Soviet Union. 5. Concert with NATO members on utilizing developing opportunities to bring selected East European states into a feasible working relationship with certain multilateral organizations. 6. Seek in NATO a closer coordination of trade and credit policies toward East Europe. 7. Begin a systematic exchange of views with the EEC Commission on East-West relations. 8. Explore the possibilities of quadripartite consultations on policies toward East Europe and of periodic meetings of Western officials responsible for dealing with East Europe. 9. Explore the suggestion made by West Berlin's Governing Mayor Willy Brandt in a New York City speech in June 1964, when he declared that the West should propose "common projects" to the peoples of East Europe, such as joint construction of continental highways, waterways, etc. III. Actions in Multilateral Organizations We should make more active use of specialized multilateral organizations to influence the evolution of East European countries and to enlarge the area of peaceful engagement between them and the West. Individual East European countries are becoming increasingly interested in full membership, partial membership, or observer status in multilateral organizations composed wholly or almost wholly of non-Communist countries. They are also likely to seek various types of links with the supranational European Communities. We should seek to utilize this interest, examining each opportunity on a case-by-case basis and responding appropriately to specific overtures from East European countries. We must balance the risk that entry of East European countries could dilute the operational effectiveness of the organization concerned against the gain in advancing our goal of reassociation of the East European countries with the West. [Here follow action recommendations on specific organizations.] IV. Country Initiatives The principal features of the attached country programs are: 1. Albania (Tab M) Albania presents the most unpromising situation of any East European state. The only immediately practical move is to relax restrictions on the travel of Americans to Albania. When and if there is any possibility, we should try to open a channel of communication to the Albanians. 2. Bulgaria (Tab N) In spite of setbacks and difficulties since the Georgiev spy case at the end of 1963, there are some signs of movement at the present time. We should continue efforts to improve the atmosphere and content of bilateral relations through efforts to negotiate a consular convention, the encouragement of trade, with credit contingent on political amelioration, and the expansion of cultural exchanges and the exchange of visits. 3. Czechoslovakia (Tab O) Czechoslovakia may provide us one of our more attractive opportunities but a broad advance in our relations depends upon signing an economic and financial agreement. We should decide, as soon as prospects for an East-West Trade Act are clarified, whether to proceed with the economic and financial agreement already initialed or to reopen the negotiations with the Czechs looking toward a larger amount of compensation for US claimants. Measures should be taken to encourage trade, cultural exchanges and exchanges of visits as opportunities appear. The negotiation of a consular convention should be undertaken at an early date. 4. Hungary (Tab P) New possibilities are opening up in Hungary. The first requisite is to move forward in the normalization of our relations by discussions to resolve outstanding economic, financial, consular and other problems. 5. Poland (Tab Q) The most immediate step is to conclude the consular convention now in process of negotiation. The reciprocal establishment of consulates should follow. We should advance further in putting our economic relations with Poland on a purely commercial basis, expand our trade, and broaden our cultural exchanges. 6. Rumania (Tab R) Our proposals are principally concerned with measures to follow up and consolidate the results of the negotiations of 1964 with the Rumanians, which significantly extended Rumanian relations with the US and helped to enlarge the basis of Rumanian independence. If we are to continue this forward movement it will be necessary soon to be able to accord Rumania most-favored-nation tariff treatment. 7. Yugoslavia (Tab S) Of most importance are: (1) US action to permit sales of military spare parts from Government stocks to Yugoslavia; (2) the continuation of PL 480 and EXIM Bank programs so long as these may be necessary; (3) exchanges of high-level visits; and (4) the implementation of the Fulbright agreement concluded in November 1964. 8. Soviet Union (Tab T) While the Soviet Union is not formally a part of East Europe we include a program for it since movement there is related to movement in East Europe. Proposed steps in this bilateral program include: ratification of the consular convention, reciprocal establishment of consulates, signing and implementation of the civil air agreement, exchanges of military visits, cooperation in desalination, implementation and expansion of the cooperative program in outer space activities, improvement of seismic data exchange, negotiations on outstanding economic issues, and expansion and improvement of exchanges as a whole.   13. National Intelligence Estimate/1/ NIE 12-65 Washington, August 26, 1965. /1/Source: Central Intelligence Agency, Job 79-R01012A, ODDI Registry. Secret; Controlled Dissemination. According to a note on the cover sheet, the CIA, the intelligence organizations of the Departments of State and Defense, and the NSA participated in the preparation of the estimate. This estimate was submitted by the Director of Central Intelligence, and concurred in by the members of the U.S. Intelligence Board. The representatives of the AEC and the Assistant Director of the FBI abstained on the grounds that the subject was outside their jurisdiction. EASTERN EUROPE AND THE WARSAW PACT The Problem To estimate the significance of the Warsaw Pact as a military alliance, the military capabilities of the non-Soviet members/2/ and probable trends over the next five years or so. /2/The active East European members of the Warsaw Pact are Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Rumania. The military capabilities of Albania, which has not actively participated since 1961, and Yugoslavia, never a member, are considered in an annex. Soviet strategic concepts with respect to a war in Europe and the relevant Soviet forces will be discussed in the forthcoming NIE 11-14-65, "Capabilities of Soviet General Purpose Forces." [Footnote in the source text. NIE 11-14-65 is ibid.] Conclusions A. For years little more than a paper organization, the Warsaw Pact has become an important element in Soviet European policy and military planning. In the early 1960s, the USSR moved to establish a new military relationship with the countries of Eastern Europe, to improve their military capabilities and to tighten the Pact as a military organization. Of late, the East European countries have manifested in varying degrees an increasing independence of the USSR in their political and economic policies. The loosening of Soviet controls in Eastern Europe has increased the importance of the Pact to the USSR as an institutional tie. For their part the East European countries see the Pact as an assurance that the Soviets will continue to underwrite their regimes and to safeguard existing boundaries. (Paras. 1-8) B. Improvements over the past five years have made East European military forces a more useful adjunct to Soviet military power. We estimate that 35 of the 63 East European line divisions, varying considerably in quality, could be deployed within a few days. East European air defense systems are coordinated with each other and with the Soviet air defense organization. With 125 SAM sites and 2,400 fighter aircraft these systems afford a fair defense throughout the area. While we believe that the Soviets will not give East European forces nuclear weapons in peacetime, in the event of war these weapons would probably be made available under strict Soviet control. (Paras. 23, 29, 31-34) C. The Soviets will probably continue their efforts to strengthen the Warsaw Pact. The growing independence of Eastern Europe, however, will make it difficult to obtain agreement on specific courses of action. Changes in NATO will influence developments in the Warsaw alliance; in particular, any substantial increase in the role of West Germany would strengthen the special relationship among East Germany, Poland, Czechoslovakia, and the USSR. Rumania will probably seek to minimize its participation in the Pact, but we do not believe that it will attempt formally to withdraw. (Paras. 43-45) D. In a crisis situation threatening general war, we believe that the East European regimes would attempt to exert a moderating influence on Soviet policy. If the USSR ordered mobilization, their responses would probably differ, ranging from immediate compliance by the East Germans to recalcitrance on the part of the Rumanians. In the event of armed conflict, we believe that the East European armed forces could be relied upon to take part, at least initially, in military operations in conjunction with Soviet forces. (Paras. 9-11) [Here follows the 10-page Discussion section of the estimate.]   14. Memorandum of Conversation/1/ Washington, October 1, 1965. /1/Source: Department of State, Central Files, FT EUR E-US. Confidential. Drafted by Jenkins. SUBJECT Defense Department Views on Trade with Eastern European Countries PARTICIPANTS The Secretary of the Department of Defense, Robert S. McNamara The Ambassador Designate to Poland, John A. Gronouski Mr. Kenneth Roberts, OSD/ISA Mr. Arthur W. Barber, Deputy Assistant Secretary of Defense for Arms Control, OSD/ISA Mr. Walter E. Jenkins, Jr., Officer in Charge of Polish Affairs In the course of a conversation with Defense Secretary Robert S. McNamara on October 1, 1965, Postmaster General John A. Gronouski, our Ambassador-Designate to Poland, inquired about the attitude of the Defense Department regarding U.S. trade with Eastern European countries. Secretary McNamara stated that the Defense Department completely favored such trade. Noting that in the past most of such trade with Poland had been in agricultural products, the Postmaster General asked whether the attitude Secretary McNamara had expressed also extended to industrial items, including those of heavy-industry items, which have been coming up for consideration recently. Secretary McNamara assured Ambassador-Designate Gronouski that it did and indicated that the only exception would be highly technical strategic products and equipment.   15. National Security Action Memorandum No. 352/1/ Washington, July 8, 1966. /1/Source: Department of State, Central Files, POL HUNG-US. No classification marking. A copy was sent to Secretary Rusk. TO The Secretary of the Treasury The Secretary of Defense The Attorney General The Secretary of Agriculture The Secretary of Commerce The Secretary of Labor The Secretary of Health, Education and Welfare The Special Representative for Trade Negotiations The Administrator, Agency for International Development The Director, Bureau of the Budget The Chairman, Council of Economic Advisers The Special Assistant to the President for Science and Technology The Chairman, Export-Import Bank SUBJECT Bridge Building The President has instructed that--in consultation with our Allies--we actively develop areas of peaceful cooperation with the nations of Eastern Europe and the Soviet Union. He has asked the Secretary of State to examine and propose to him specific actions the Government might take. These actions will be designed to help create an environment in which peaceful settlement of the division of Germany and of Europe will become possible. In addition to the arguments for and against each action, the recommendations to the President should propose appropriate steps for implementation, Congressional consultation, and the like./2/ /2/In an address before the National Conference of Editorial Writers in New York on October 7, the President called for better relations with the Communist nations of Eastern Europe; for text of his address, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1966, Book II, pp. 1125-1130. The President has asked that you give your strong personal support to the Secretary of State in carrying out this assignment. W.W. Rostow   16. Memorandum of Conversation/1/ SecDel/MC/57 New York, October 5, 1966, 10:30 a.m. /1/Source: Department of State, Central Files, POL 1 ALB. Confidential. No drafting information appears on the source text, which was approved in S on November 9. The conversation was held at the U.S. Mission. SECRETARY'S DELEGATION TO THE TWENTY-FIRST SESSION OF THE UNITED NATIONS GENERAL ASSEMBLY New York, September-October 1966 SUBJECT Albania (Part III of XI Parts) PARTICIPANTS U.S. The Secretary Mr. Bertus H. Wabeke, EUR Austria H.E. Lujo Toncic-Sorinj, Foreign Minister of Austria H.E. Dr. Heinrich Haymerle, Director, Political Affairs, Austrian Foreign Office H.E. Dr. Kurt Waldheim, Austrian Permanent Representative to the United Nations 1. Minister Toncic referred to feelers that have been put out--often in an awkward manner--by the Albanians in Vienna over the past two or three years and which would appear to indicate a desire on their part to move nearer to the West. Noting that the Albanians appear not to dare take the plunge and seem to be afraid of being repulsed by the West, Toncic asked the Secretary if he expected any change, be it ever so slight, in the Albanian attitude, and wished to know if Austria should respond. 2. The Secretary stated that the U.S. has little information on the subject except for impressions gained by Albania's neighbors. The Secretary speculated, however, that the Albanians may be becoming restless under the monopoly of the Communist Chinese. The Secretary indicated that while it would be a great mistake for the U.S. to try to probe the intentions of the Albanians, it would be constructive and helpful for the Austrians to do so and, he concluded, "You might meet with a response."   17. Memorandum From the Secretary of the 303 Committee (Jessup) to President Johnson/1/ Washington, September 25, 1967, 4:05 p.m. /1/Source: Johnson Library, National Security File, Memos to the President, Walt Rostow, Vol. 43. Secret; Eyes Only. SUBJECT The Future of Radio Free Europe and Radio Liberty, A Summary The future of Radio Free Europe has been under consideration for several years. McGeorge Bundy convened a special study group in 1966 which consisted of Professor Zbigniew Brzezinski, Dr. William Griffith of MIT, Richard Salant of CBS, and the current Ambassador to Switzerland, John S. Hayes. This paper, among other tasks, reviewed the work of Radio Free Europe and Radio Liberty and found that the value of these assets had not diminished and would continue to have a role in an era beyond the cold war. This opinion was unanimous. The matter became more critical after the Katzenbach Committee was forced to reach some decisions regarding covert support to various U.S. voluntary educational, philanthropic and cultural endeavours. This committee and Secretary Rusk recommended that the 303 Committee examine this problem because of its unique complexities. Since that time, Messrs. Rostow, Nitze, Kohler, and Helms, as well as Marks and Schultze, have given considerable time to looking at this problem from all angles. Some nine possible solutions were examined; these included the status quo, conversion from non-profit to profit-making corporations, reincorporation abroad, relocation abroad, support by a public private mechanism, support from a public private mechanism specifically designed to foster private international broadcasting and other communications, overt funding by USIA (or another agency of the Executive Branch), transfer to VOA/USIA, and termination. All were eliminated in 303 discussions except for the three possibilities: a. continued financing by CIA; b. financing through a public private mechanism to be established by Congress; c. transfer to USIA. It was these three approaches that were tackled on a priority basis by William Trueheart of State and an inter-agency group. The conclusion reached in this solid study was that there were really but two realistic choices: either continuation as now constituted or termination. Some basic conclusions from this report are quoted: "A special Radio Study Group (RSG), with representatives from State (Chairman), White House, Bureau of the Budget, Defense, USIA, and CIA, was directed to conduct this further study and make recommendations. "The RSG has concluded that RFE operations should be continued on substantially the present scale. RFE broadcasts make and can continue to make a significant contribution to U.S. objectives in Eastern Europe in promoting and encouraging internal pressures for reform and political liberalization (de-Stalinization) and for the attenuation of Soviet influence and control. Further, we believe that the broadcasts are not incompatible with a policy of bridge-building; indeed, meaningful improvement in East-West relations is probably dependent in the long run on the kind of internal changes which RFE seeks to foster. The unique element of RFE broadcasts--detailed reporting and comment on internal developments--could not be duplicated by VOA without substantial changes in VOA operating principles and the risk of unacceptable diplomatic consequences. Nor do we believe that VOA could realistically be expected, partly but not wholly for budgetary reasons, to maintain the massive news-gathering and research operations on which effective programming of the RFE sort depends. "The case for continuing RL is less clear because it is impossible to obtain relatively reliable data, such as we have for RFE, on the size and make-up of the RL audience. We do know that the massive Soviet jamming operation makes listening difficult at best. As against this, the RL target is incomparably more important than that of RFE, audience access to foreign information other than by radio is very much less, and developments in the Soviet Union could make retention of RL's capability of substantial importance. The Soviet jamming effort (at least 160 jamming centers) itself attests to the effectiveness, at least potentially, of the broadcasts and argues against according the windfall which termination would represent. On balance, we believe that RL operations should also be continued on substantially the present scale. "Both RFE and RL represent important U.S. assets, in terms of rare talent, specialized organization and base facilities, which it has taken over 15 years and some $350 million to develop. Once dispersed, they could be recreated only with immense difficulty, if at all. We believe that this in itself is a powerful argument for continuing the operations for the time being. "On the other hand, RFE and RL should not be regarded as permanent enterprises. The situation in the target countries may over time so develop as to make the broadcasts superfluous. "If the radios are to be continued, we see no satisfactory alternative to continued CIA financing. Our judgment and that of those we have consulted--including some who have earlier advocated other solutions--is that normal Congressional appropriation procedures would almost certainly result in a fairly rapid phase-out of the operations, whether the radios were being funded through a public-private mechanism or as a line item in the USIA budget. In the process, appropriations for VOA might suffer as well. Even if this were not so, the extensive and annual public debate, in which it would be necessary inter alia to explain and defend the mission of RFE/RL as distinct from VOA, would directly jeopardize the position of the radios in certain host countries and could lead to serious diplomatic complications with the target countries. The public appropriation procedure, in short, would firmly fix the image of the radios as official instruments of the U.S. Government and, in our view, this image would not be significantly blurred by the device of the public-private mechanism, at least in foreign eyes. "It will not be feasible to deny government support of the radios, and we propose that such support (without identifying CIA explicitly as the source) be officially acknowledged. There would be certain advantages, e.g., in handling Communist protests over the broadcasts, if open acknowledgement could be avoided. We believe, however, that to take a 'no comment' stance in response to queries about government support would very likely undermine the credibility of the Katzenbach Report as a whole. On the other hand, official acknowledgement can be accompanied by an unambiguous assurance that RFE/RL are the only activities covered by the statement of policy in the Katzenbach Report which will continue to be subsidized in substantially the same way after December 31, 1967. There is the subsidiary advantage that future government support being acknowledged, i.e., not covert, an exception to the Katzenbach policy is not involved. Mr. Helms, however, is on record as follows: 'To contend that, since government support is being openly acknowledged, no exception to the Katzenbach policy is involved, would in my opinion be construed as an evasion of the issue. It would invite questions as to source and specific amounts. The failure to answer would provoke editorial criticism and a continuing attempt to get at the whole truth . . . I believe our best course is to face the situation directly by making an exception under the terms of the Katzenbach report, and by admitting that it has in fact been made.' Needless to say, the solution recommended in the report (if successful) would make life happier for the State Department and Mr. Katzenbach. "We believe that there is no reason to expect that the press will seek to exploit the acknowledgement in a major way. Government support for these operations is not 'news'. Moreover, neither operation has come in for serious press criticism in the past, except for charges of deception in connection with the mass-media solicitation of individual contributions by RFE. (We concur in previous recommendations that such solicitation be discontinued but we also agree that fund-raising within the business community should be continued, in part to substantiate the private nature of the organization.) "Protests from target countries will be somewhat more difficult to handle, once government support is acknowledged. However, it is believed that the United States can continue to take the position in diplomatic exchanges that RFE and RL are private operations, pointing out that many private organizations receive government financial support without thereby becoming instruments of the government. Host countries should be able to use the same line in response to target country protests or press criticism. Nevertheless, if government support is acknowledged, there will be added importance in insuring that any needlessly provocative themes are avoided. "Acknowledgement of U.S. Government support is not expected to make any substantial difference in RFE and RL credibility with their audiences. Most listeners have probably assumed such support all along and if anything acceptance of the radios may have been enhanced thereby. "Continued CIA financing is of course dependent on approval by the Senate and House 'watch-dog' committees. They have not been consulted and we have no basis for estimating their likely reaction. "Should continued CIA financing be ruled out, then we believe the operations should be terminated. The problems associated with normal appropriation procedures, taken with our estimate of the practical life expectancy of the operations, convince us that the game would not be worth the candle. "In the event of termination of either radio, every effort should be made to retain technical facilities, frequencies and personnel for the VOA. As the report of the technical subgroup indicates, certain of the technical installations and frequencies would be valuable to VOA in improving its service and in providing a backstop in the event of loss of facilities elsewhere. Important savings might also be made in future construction costs. These benefits would, of course, be contingent on satisfactory arrangements with the host countries for VOA use of the facilities. The price of such arrangements in Portugal would probably be unacceptably high: a change in our African policy, especially modification of our views on self-determination for Portuguese territories. In the case of Spain, prospects would be less bleak, but we could expect the Spanish to demand a substantial monetary quid pro quo. At this juncture, this might take the form of increased demands in the 1968 base negotiations. We believe also that the German Government, for the reasons mentioned earlier, would be reluctant to agree to additional USIA facilities on German soil. As regards personnel, any major use of RFE/RL personnel would probably be contingent on a VOA decision to expand its programs to the target areas as well as to change its broadcast policies so as to permit somewhat more freedom in dealing with internal developments. This raises much broader problems affecting the world-wide operations of VOA which are beyond the scope of this study. "We have considered whether it would be possible to obtain a quid pro quo for the termination of RFE and RL. While the target countries would undoubtedly regard cessation of the broadcasts as a concession, we see no way of using them as direct bargaining counters in present circumstances. On the other hand, the kind of broad negotiations directed at détente, in which the question of terminating the broadcasts might indirectly play an important role, are not in the offing. "Finally, we recommend that the question of the future of RFE and RL be reviewed periodically, perhaps annually. Such reviews should take into account, as the present study has done, (a) the continuing need for the radios, (b) the outlook for retention of base facilities, and (c) the feasibility of transferring technical facilities and staff to VOA and/or of obtaining compensating concessions from the Communist countries in the event of termination." The Bureau of the Budget dissented from this report on the grounds that the following considerations were not adequately assessed: a. The alternative of an enriched VOA should be more adequately developed . . . b. The recommendations of the committee should be assessed in the light of (1) implicit disclosure of CIA funding; (2) attendant political repercussions at home and abroad; and (3) probable congressional reactions to funding acknowledged activities in the CIA budget. c. The case for continuing Radio Liberty under acknowledged U.S. Government financing is even less convincing than the RFE case and should be decided separately. The Department answered this dissent, saying that even if the concept of an enriched VOA was not "developed", it was thoroughly considered and the program review groups for the following areas had reported as follows: "The Polish Program Review Group reported as follows: 'Within the present charter of VOA it could not duplicate the type of reporting on internal policy affairs broadcast by RFE.' "The Czechoslovak PRG reported: 'We do not see how the official U.S. Government radio station can ever take over some of the specific objectives of RFE--unless we were at war with the country being broadcast to . . . The U.S. objective, like RFE's, is awakening and creating political consciousness among the citizens of Czechoslovakia. As it stands now, it does not appear that VOA could effectively absorb RFE.' "The Hungarian PRG reported: 'Department of State and USIA guidances, as well as the USIA mission document and the VOA charter would have to be specifically amended and changed to permit VOA direct approach to Hungarian internal affairs . . . We do not believe that such an overall policy change is either advisable or desirable.' "The Rumanian PRG reported: 'The key difference--and the principal RFE function which VOA cannot and should not undertake--is RFE's open criticism of the domestic situation in Romania and suggestions for improvement.' "The Radio Liberty PRG reported: 'Theoretically, it would not be impossible for VOA to duplicate most of the objectives and themes of RL, using the same facilities and personnel . . . The U.S. would be giving up a current asset--and one with considerable potential value for years to come--without receiving a quid pro quo from the Soviet government.' "The second way in which the Study Group addressed the possibility of an 'enriched country-oriented VOA' was through inquiries to our missions in target countries. In a relevant comment from Embassy Moscow, Ambassador Thompson concluded that status quo should be maintained for the time being and that 'public disclosure (of U.S. Government support) would be unfortunate but believe risk must be taken.' "The third approach to the 'enriched VOA' alternative was technical . . . The subgroup report brings out that 'the entire shortwave system of the VOA is being used at maximum capacity for broadcasting to the European area at the present time during reasonable listening hours.' Hence additional broadcasting during such hours would require additional transmitters. "A fourth consideration is that enrichment of VOA programs would also require VOA to absorb at least some substantial part of the RFE/RL news-gathering, research, and program personnel and facilities. Embassy Bonn believes that 'if the RFE/RL executive and professional staffs became U.S. Government employees, the FRG would certainly view the status of the organizations as having basically changed.' "More basic than any of the foregoing is the question whether VOA world-wide broadcasting policies, evolved over the years, should be changed--quite apart from the practicality of doing so. The Study Group thought this question went well beyond its mandate. "Apart from the question of the 'enriched, country-oriented VOA', the BOB dissent boils down to a questioning of the majority view on the public reaction to acknowledging U.S. Government support and Congressional reaction to continued CIA funding. The former is a matter of judgment; the latter can only be assessed by consultation with the Congress--which the Study Group assumed would be the first order of business if the basic recommendation is approved." However, Budget Director Schultze has expressed serious doubts, both orally at the 303 Committee meeting on 20 September 1967 and later on paper, about the proposal to acknowledge government support and continue CIA financing of both RFE and RL, with or without a public exception to the policy developed by the Katzenbach Committee. He believes the principal disadvantages of this course of action are: --The CIA funding will be obvious; it is the only source of covert funding for this type of activity. --Continued CIA funding of an acknowledged activity will create serious problems in Congress: --Congress has already eliminated all funding for RFE and RL after December 31, 1967, except termination costs. --Russell and Mahon are strongly opposed to CIA funding of activities that are not wholly covert. (On these grounds, Congress cut out CIA funding of the Vietnam Revolutionary Development Worker program.) --We should be very careful not to start the practice of having CIA finance activities simply because Congress won't provide funds otherwise. --Public acknowledgement of continued covert U.S. Government financing will cast doubt on the credibility of the whole Katzenbach policy. --Though there has been considerable speculation about CIA funding, the acknowledgement of support would be given a big play in the press and will provide ammunition to attack the Administration. There are two alternatives to the proposed course of action which would avoid the dangers cited above and keep open our options on Radio Free Europe. The options are: 1. Terminate Radio Liberty and, before December 31, pre-fund RFE for an 18-21 month period. Mr. Schultze believes the case for RL is weak and termination would simplify the problem. Pre-funding RFE would require the approval of Russell and Mahon, but they are more likely to agree to this one-shot action than to continued CIA funding. No exception to the Katzenbach policy would be required. We would have time to develop a plan either to provide alternative means of overt support or to fold the valuable RFE activities into USIA in connection with the 1970 budget. 2. Terminate RL and seek an open appropriation to USIA to support RFE. The main disadvantages of this lie in the risk of congressional turndown, the inevitable congressional comparisons between VOA and RFE and the effect of open support on the target countries and the countries where the transmitters are located. The 303 Committee, in discussing these opinions on 20 September 1967, recommended that Secretaries Rusk's and McNamara's views be sought and the matter brought to your attention. As I see it, this is basically a political decision with some far-ranging repercussions regardless of the way the issue is decided. We have built up a $350,000,000 asset; it has been and is a useful instrument; by terminating, we will indeed lose something. By continuing as is, with CIA funding, certain credibility risks exist. As we see it, the risks of termination are as follows: a. We would be surrendering without any quid pro quo a proven instrument for affecting the rate of change in Soviet and Eastern European societies. b. We would, in other words, be making a unilateral concession to the other side. c. There could be a Western European reaction in which they could construe the termination of RFE/RL as an acceptance of Communist domination of Eastern Europe after 17 years of opposition. d. Within the United States, certain blocs within both Democratic and Republican parties would consider the termination as outright appeasement. Certain ethnic minority groups of Eastern European origin with powerful regional strength in Pittsburgh, Chicago and Detroit, etc., and a political voice through such Congressmen as Pucinski and Zablocki could be both vociferous and intemperate. e. There is more than a possibility that Richard Nixon or another Republican candidate, in casting about for issues, could go flat-out against bridge-building. The liquidation of RFE/RL could provide some gunpowder for such an attack. f. Last but not least, a decision to liquidate might well be taken quite personally by such individuals as Michael Haider of Standard Oil, Crawford Greenewalt, Frank Stanton, Roy Larsen, and Roger Blough. These men have had long association with this effort and, we have reason to believe, feel strongly about it. Continuation as recommended with continued CIA financing entails the following hazards: a. If the State Department scenario is followed in which the United States Government admits covert funding, it is definitely open to the charge: How can you call this an open subsidy if you won't reveal how much and from where? Both the press and Congress may find this unpalatable. b. If it is claimed by the government that, yes, this is an exception to the Katzenbach ruling, the press could lean heavily on this and the only truthful answer is that no other solution has been found. c. Any large-scale press play--something very difficult to forecast--may directly affect the present satisfactory attitudes of the Portuguese, Spanish and Germans, who control as host governments the leasing and transmitting site facilities. An open disclosure by itself could adversely affect the attitudes of these governments. We have desisted from initial feelers among members of Congress because we felt this issue was sufficiently subtle so that you would prefer to design the strategy and name the strategists yourself. Secretaries Rusk and McNamara have been briefed on this problem by Mr. Kohler and Mr. Nitze and are presumed ready to discuss the matter with you. A decision is needed sooner rather than later because of the size of the enterprises, the interested parties, the money involved, and the deadline of December 31, 1967. Peter Jessup   18. Memorandum From Director of Central Intelligence Helms to President Johnson/1/ Washington, November 14, 1967. /1/Source: Johnson Library, National Security File, Memos to the President, Walt Rostow, Vol. 51. Secret. 1. You will recall that at lunch on 17 October/2/ we discussed the future of Radio Free Europe and Radio Liberty. At that time, you expressed a willingness for me to consult those leaders of Congress having to do with appropriations in an effort to establish whether or not they would be willing to continue appropriating money for these radios on the understanding that this would not constitute a request by you for this money or a charge against your congressional program. /2/No further record of this conversation has been found. 2. As a result, I visited individually with five members of Congress: Representatives Mahon of Texas, Bow of Ohio, Lipscomb of California, and Senators Russell of Georgia and Milton Young of North Dakota. All five of these individuals expressed a willingness to support the radios financially in the round amount of $30,000,000 per annum for at least the next fiscal year and possibly longer. 3. At my visit with each of these five individuals, I explained in detail the problem we have had in finding alternative means of financing these radios. I made it clear that a public relations problem still exists in terms of how the Administration explains the continuance of the present financial arrangements. On the other hand, if there is no firm assurance of congressional support for the radios, there is no need to waste time on devising the right tactical approach to the press. I carefully underlined that I was there on my own since you wanted it clearly understood that you did not want to make a personal appeal for the money involved nor did you feel that you should be asked to plead for these radios as against other projects which you felt to be more essential. It was my distinct impression that each individual understood the terms of the discussion quite clearly. 4. Congressman Mahon reacted to my presentation by saying that he had felt it had been a mistake to include the radios in the Katzenbach report and that he had always preferred to have them continue to operate as they had in the past. He recognized the public relations problems but stated that it did not concern him unduly even if there were some criticism. (At this point, he made a disparaging reference to the influence of The New York Times and told me "I never read Reston.") He then remarked that he thought the radios should be continued and that he was prepared to help provide the necessary funds. He pointed out, however, that Mr. Bow would have to agree and asked me to see both Mr. Bow and Mr. Lipscomb, the two Republican members of his CIA Appropriations Subcommittee. 5. Representative Bow told me that he thought the radios were doing a good job and that they should be continued. He promised to help provide the money. In the course of our conversation, he pointed out that he was on the Appropriations Subcommittee which deals with USIA and that in his opinion it would make no sense to try to meld Radio Free Europe and/or Radio Liberty into the Voice of America organization. He indicated that he clearly understood the difference in the program content of the Voice of America on the one hand and the two "private" radios on the other. He concluded by opining that this was no time in history to reduce our efforts to bring about change behind the Iron Curtain. 6. Representative Lipscomb said that he was in favor of the radios and did not want to see them terminated. He volunteered to do what he could to have the money appropriated and asked a few questions about the amounts involved and how they were allocated. He accepted the fact that some admission of government support might have to be made. He stated that this would present "a tricky problem" in dealing with the press but did not anticipate widespread newspaper criticism. 7. Senator Russell expressed his support of the radios and said that he thought they ought to be continued at least for a time. He repeated what he has said before that he never could understand what all the ruckus had been about. He pointed out that criticism over these subsidies had died out quickly after the initial flurry last winter. He indicated his willingness to help secure the money involved and asked me to go see Senator Young and put the matter to him. He authorized me to tell Senator Young that he favored continuing the radios. 8. When I met with Senator Young, I told him that Senator Russell had asked me to see him, but I did not attempt to influence his decision by telling him in advance what Senator Russell's position was. He did not even inquire. He simply stated that he thought the radios should continue to operate and that he would do what he could to help as far as appropriations are concerned. He expressed the opinion that the state of the world being what it was, no useful efforts to deal with Communism or Communist ideology should be reduced. He voiced concern that possibly not enough was being done in this area. 9. I have reported the above to Secretary Rusk. We will again raise with you shortly how we should proceed on this problem of handling Radio Free Europe and Radio Liberty. Dick   19. Memorandum From Nathaniel Davis of the National Security Council Staff to the President's Special Assistant (Rostow)/1/ Washington, January 19, 1968. /1/Source: Johnson Library, National Security File, Country File, East Europe. Confidential. SUBJECT East European Economic Reform At the staff meeting on Wednesday, we talked about the relationship between political stability in Czechoslovakia, Poland and East Germany and the success or failure of reform efforts. You pointed out the crucial role of management incentive and I remarked that the most notable recent step was the Hungarian reform which took effect at the start of this year. Yugoslavia, of course, remains out in front. Perhaps you would like a bit more information: Rank order, from a market economy at one end to Stalinist planning at the other, might now be the following: Yugoslavia, Hungary, Czechoslovakia, Bulgaria, Poland, East Germany, the Soviet Union, Romania, and finally Albania. In Yugoslavia they are moving toward free convertibility and share capital. By a system of investment through contract, firms can even use their profits to buy into other firms. Some Yugoslav academicians even advocate factory managers having shares, and there is talk of a stock exchange. The present period of transition has been painful. The government's policies have been classically deflationary and economic growth has radically fallen off. There are estimates that urban unemployment is as much as 15 percent. The Hungarians have an inherent advantage, in not having set up an intermediate network of trusts, cartels or production associations between the ministries and the individual firms (as is the case in most of the other countries in Eastern Europe). In their latest move they have done away with planning for each enterprise. The manager's salary and bonus do depend on his ability to find customers and satisfy them. If he does not show a profit at all, he pays back a quarter of his base salary. The Hungarians plan a phased transition from a three-tier pricing system to the virtual abolition of price controls. They plan increased reliance for investment on retained profits (from about 25 percent in 1968 to a larger percentage in each coming year). Another quarter of investment is to be financed with bank credits at 7 to 8 percent. Increasing number of firms will have the right to engage directly in the import and export trade, with foreign currency controlled by duties and surcharges rather than governmental allocation. Apparently at least part of the Hungarians' motive is to qualify for the GATT. In Czechoslovakia, economic reform has been hindered by the almost Stalinist conservatism of Novotny and his friends. Tight foreign exchange, continuing scarcities, constant Party interference and the continued incumbency of managers from the earlier era have all served to slow reform. There is no doubt that this was an important element in the recent leadership crisis. Partly because of the genuine socialist tradition in Czechoslovakia, salaries paid managers are much lower as compared with workers' salaries than in other countries (e.g. East Germany). The manager can increase his earnings by about one-third if he maximizes profits, sales and exports. Poland is still benefiting from 1956 (including, of course, the de-collectivization of agriculture). There is quite a bit of private trade, and more of the new breed of men than in Czechoslovakia. Quite apart from Oscar Lange, the Poles have some of the best economists of Eastern Europe. East Germany's economy benefited for years from the open border with the West. Even now private firms, averaging about 25 employees, produce about 5 percent of gross output. Mixed private/public enterprises produce another 10 percent. For a few general observations, plans for economic liberalization tend to run afoul of Party control, scarcities, foreign exchange limitations, etc. As for the Party, I am sure not a few big wigs and old aparatchiki have wondered what the Party does if it doesn't run the economy. Only in Yugoslavia is the manager not hired or fired by the Party/Government. So far, only in Yugoslavia is it the factory manager who has the dinars really free to buy another blast furnace. However, Hungary will be moving in that direction if her most recent reform is really carried out. One last word. You are probably familiar with the story told by the Czech economist, Sik, which goes as follows: Prague was having worse and worse trouble with traffic congestion and remembered that the British seem to handle things better in London. So they sent a delegation. The delegation reported that the British did seem to handle things better, and the most remarkable difference was that they drove on the left. So the Czech Government decided to shift sides; but, being cautious, they felt they should not take too radical a move--so they decreed that taxicabs drive on the left. ND [Continue with the next documents] Volume XVII Index | Foreign Relations Online | Historian's Office Department of State | Secretary of State