DEVELOPMENT OF ECONOMIC INTELLIGENCE: OFFICE OF RESEARCH AND REPORTS VOLUME II 1960-1967

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• Document Number (FOIA) /ESDN (CREST): 05972160
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• Document Creation Date: September 12, 2023
• Document Release Date: June 30, 2023
• Case Number: F-2018-01193
• Publication Date: October 1, 1974

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DEVELOPMENT OF ECONOMIC INTELLIGENCE:
OFFICE OF RESEARCH AND REPORTS
VOLUME 11
1960 - 1967
by
(b)(3)
(b)(6)
OER 2
October 1974
Copy 2 of 2
PERMANENT HISTORICAL DOCUMENT
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
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WARNING NOTICE
SENSITIVE INTELLIGENCE SOURCES
AND METHODS INVOLVED
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DEVELOPMENT OF ECONOMIC INTELLIGENCE:
OFFICE OF RESEARCH AND REPORTS
VOLUME II.
1960 - 1967
by
_Approved for Release: 2023/06/14 C05972160..,
Copies:
#1 � CIA�HS
#2 � DDI
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Contents
I. State of Economic Intelligence in
the Early Sixties
A. Introduction
B. Work on the USSR in the Early Sixties.
I. Support to Congress
2. The Military-Economic Problem. � � � 6
3. Other Work on the Soviet Union � � � 9
C. Sino-Soviet Rift 12
D. The Support Function 17
18
2. Economic Defense ..... . � . � 21
E. Assumption of Additional NIS
Responsibility 23
II. 1962 - The Year of New Directions. � � � . � 26
A. Reorganization of 1962 27
1. Background 27
2. The New Organization 40
B. Economic Intelligence on Cuba 43
1. Introduction 43
2. The Cuba Branch 45
3. The Missile Crisis 47
Page
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III.
C. Sino-1.Indian Border War
Faltering Economies Behind the
Curtain
Page
56
60
A. General
61
B. The USSR
64
1. The Burden of Military Programs. �
�
64
2. Work on Soviet Agriculture
a. The Diagnosis of Communist
70
Agricultural Weakness
71
b. First Wheat Sale to the USSR .
75
C. Communist China
82
D. Application to Policy
88
IV.
Publicizing Communist Economic
Difficulties
89
A. The CIA Press Conference . . � 0 0 � �
�
90
102
(b)(1)
(b)(3)
C. Soviet Gold
105
D. Later Reporting on the Soviet Economy.
111
V.
Economic Research on a Global Scale
116
A. Policy Support Drive
117
B. Conflict with Priority National
Intelligence Objectives (PNIO's) � � �
124
C. McCone's Letter to Rusk
127
D. McCone's Letter to McNamara
133
E. Reorganization of 1965
137
F. Increase in Policy Support Activity. .
140
�
Page,
1. Bridge Building 141
2. Southeast Asian Development 145
3. Dual Crisis in India 150
4. Black Africa 153
VI, Vietnam 158
A. Buildup of Research Resources
on Vietnam 159
1. Economic Interdiction Against
North Vietnam 163
2. Targeting Iritellicience on
North Vietnam 165
3. Transportation and Logistics
Studies 167
4. The Viet Cong Economy 170
5. Economic Viability of South
Vietnam 175
B. Vietnam: Bomb Damage Assessment . 178
�
C. Summary of ORR's Vietnam Effort up
to July 1967 187
VII. ORR in Support of National Policy 191
A. Change in Leadership .... . � � � � 192
B. Policy Support: 1966 and 1967 195
1. Support to the Bureau of Far
Eastern Affairs, State 197
2. Support to the Bureau of European
Affairs, State 206
3. SIG and IRG Support
208
C. Organizational Developments in
Response to Vietnam War 210
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D. Demise of the Unclassified Dis-
semination Series 212
E. The Six Day War 226
F. Epilogue 228
Figures
No. 1. Organization Chart, April 1962
following page 41
No. 2. "Pst! Want to See Some Hot
Statistics?" - following page 90
No. 3. Reorganization of the Economic
Research Area, ORR, 7 May 1965 -
following page 138
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STATE OF ECONOMIC INTELLIGENCE IN THE EARLY SIXTIES
"It is a thought provoking question whether
human beings can be taught to accept the life of
the ant in return for an officially determined
supply of goods and services." �
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A. Introduction
The Office of Research and Reports (ORR) entered
the decade of the 1960's with an assured -- but
still somewhat circumscribed -- role in the pro-
duction of national economic intelligence. It had
made a determined and exhaustive analysis of the
economy of the USSR, its primary target. Because
its judgments about that economy were based on
sound and meticulous research, its continuing
analysis provided the clues that enabled the Office
to foresee some of the difficulties that lay ahead
for the Soviets. Thus; as will be seen in Chapters
III and IV, the faltering of the Soviet economy in
the 'early 1960's was noted by ORR's analysts well
in advance of other Western observers -- and of
� Soviet admissions.
The Office's approach to the economies of other
Communist countries differed only in degree from
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that on the Soviet Union. As has been noted in
Volume I, however, it was not so prescient
with respect to the Chinese economy. Its analysts
did see through some of the statistical distortions
�of the "great leap forward" campaign but failed to
discount them sufficiently. To have foreseen also
the Sino-Soviet rupture and the impact of continued
bad weather on agriculture in the early 1960's and
to have made full allowance for the ideological
intransigence of China's leaders would have been a
prodigious tour de force of intelligence wisdom,
and ORR, along with the rest of the community,
failed to pull it off.
ORR's entry into economic intelligence on the
Free .World, which was to be the principal substan-
tive development of the. early 1960's, had barely
begun at the turn of the decade.
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B. Work on the USSR in the Early 1960's
1. Support to Congress
Having made its presence known as an authori-
tative voice on the Soviet economy through the
public appearances of DCI Allen Dulles and others,
the Agency was increasingly called upon for eco-
nomic intelligence judgments in this period. De-
mands from ORR's traditional customers continued,
of course, while the Congress, in particular, dem-
onstrated an increased interest. A problem posed
by Senator Javits during Dulles's appearance before
the Subcommittee on Foreign Economic Policy of the
Joint Economic Committee in December 1959 resulted
in an unclassified paper (produced jointly by ORR
with the Departments of State and Defense) which
undertook a comparison 9f the United States and
Soviet economies in terms of the costs and benefits
to each of its bloc and pact system.* The report
after pointing out the conceptual difficulties of
such a comparison -- concluded that each side de-
rived a net benefit from its alliance system, but
that the Western powers gained more from their
* This document was publicly printed and released
as being the product of the Agency with the cooper-
ation of the two departments.
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system than the Bloc countries did from theirs.
The conclusion warned, however, that the Soviet
gains resulted in a total Bloc power position that
presented the Free World with a serious chal-
lenge. 1/*
The Joint Economic Committee again addressed
itself to the Soviet economic threat in 1962. On
this occasion, ORR's participation was substantial,
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2. The Military-Economic Problem
Estimation of Soviet military expenditures had
been an ORR effort since the mid-1950's. Initially
the primary interest had been in the overall magni-
tude of these expenditures. Two general approaches
had been developed for this purpose: the disaggre-
gation approach and the building-block approach.
The disaggregation approach was based on the
hypothesis that officially released Soviet aggre-
gative data -- the budget, national income, indices
of the gross value of output, and so on -- were
substantially reliable. Thus, if the veil of
secrecy clouding precise definitions and the req-
uisite detailed data could be penetrated, the re-
leased figures could be disaggregated, and their
deeper meaning would unfold. Although this effort
had been carried on with less than complete success,
it had yielded a gross appreciation of the magnitude
and trend in the resources (expressed in monetary
terms) which the Soviets had available to devote to
defense, nuclear weapons, and space activities.
This approach could produce only gross approxima-
tions, however, and it provided little insight into
�
the bases for probable Soviet choices between
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competing weapon systems. Accordingly, the build-
ing block approach gradually became the basis for
estimating Soviet military expenditures. The re-
sults of this latter approach, of course, were
compared with the magnitudes that were evolved
from the disaggreation approach and were melded
into the various aggregative analyses of the Soviet
economy.
The essence of the building-block approach was
to identify the cost of various military units and
their assigned equipment and weapons (e.g., bomber
regiments, fighter regiments, strategic rocket
forces, operational strength task divisions, and
the like). These breakdowns not only were designed
to reflect the structure of Soviet forces as the
Soviets organized them,, but also were sufficiently
detailed to permit manipulation for international
comparisons. The estimates of force structure
(order of battle) and military manpower and the
estimates of their appropriate equipment and
weapon systems were identified in terms of or
distributed to major mission categories. Unit
costs were devised, based on the best available
estimates of what the units would have cost in
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dollars and then adjusted by appropriate ruble-
dollar ratios.* Finally, the unit costs were
applied to the estimated quantities and the results
summarized in a variety of ways: by mission (stra-
tegic attack, air defense, and so on), and by indus-
trial origin (machinery, electronics, and so on).
Information deficiencies still plagued the
results of this approach. Differing degrees of
confidence were attached to the various component
parts, depending on the quality of the estimates of
quantities and prices involved. Relatively high
confidence was attached to the estimates of expend-
itures for manpower; on the other hand, for those
for research, development, testing, and evaluation,
the confidence limits were very wide, not only be-
cause of the inherent problems of scant and mis-
leading intelligence data, but also because of the
inherent difficulty of defining and measuring such
expenditures in any country. 2/ However, the
application of these approaches by the Office and
the consequent development of data that could be
* There was no single ratio for converting Soviet
military costs from rubles to dollars, but rather
a wide range of ratios for various categories; e.g.,
a ruble would buy the equivalent of $3.35 worth
of military manpower, but less than half that in
military electronic equipment.
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processed by computer made possible an estimation
of expenditures on a detailed military mission
basis. In the early 1960's, this constituted a
significant intelligence contribution in the mil-
itary economics sphere. Secretary of Defense
McNamara was understandably eager to have the new
Defense Intelligence Agency (DIA) collaborate
with CIA in its analysis in order to reach the
firmest judgments possible on Soviet military
strength as a measure of the threat that his
Department's planning would have to counter. The
CIA-DIA Joint Analysis Group (JAG) set up in 1972
to make long-range projections was a result by
this desire. ORR's "costing" analysis was a major
input to the work of JAG. 3/
3. Other Work on the Soviet Union
Under the impact of expanded military-economic
research, ORR's effort on the Soviet Union in the
early 1960's continued to focus on overall aggre-
gative assessments with some diminution of the
detailed analysis of non-military industrial sec-
tors. The ERA in 1961 and 1962 zeroed in partic-
ularly on the apparent soft spots in the economy --
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agriculture and manpower -- and undertook a detailed
study of plans for the introduction of new tech-
nology and automation in Soviet industry. Soviet
20-year advance planning, as revealed at the 22nd
Party Congress in October 1961, was also scrutinized
in detail. The 20-year program contained glowing
promises of the Utopia to come for the Soviet con-
sumer, but ORR's analysis made it clear that con-
sumption would continue to be subordinated to the
requirements of national power and that
The general drift of the future pattern
of Soviet life is ... to restrict still
further individual freedom of choice and
personal or family goals and activi-
ties. 4/
One of the significant constraints on Soviet
economic progress in the 1960's was considered to
.be the manpower problem caused primarily by the
tremendous population losses of World War II and
the low birthrates of the war years. ORR's most
significant report on the implications of this
problem was produced in 1960 and issued in the un-
classified dissemination series. 5/ Not only was
it the subject of a Cabinet briefing by the DDI,
but it was reprinted (with Agency
attribution) as an appendix to the published version
of the Senate Foreign Relations Committee Hearings,
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Events Incident to the Summit Conference. 6/ It
was also the subject of an article by Harry Schwartz
in the New York Times, 7/ and this publicity caused
a considerable "run" on the Office's supply of the
publication. Requests were received not only from
(b)(1)
(b)(3)
Although the report was primarily concerned with
describing the changes in the population and labor
force of the USSR expected to take place between
1960 and 1970, the Schwartz article, an presumably
the public interest, were more concerned with its
forecast of Soviet gross national product (GNP).
Not withstanding its failure to pinpoint the eco-
nomic slowdowns of the mid-1960's, its predictions
for 1970 were commendably close to the mark (see
Table 1). Its forecast of Soviet 1970 GNP was $240
billion (in 1958 dollars). Put in 1969 dollars (to
compare with the 1971 Statistical Handbook), this
was equivalent to $538 billion, only $30 billion
above OER's estimate for 1970 made in the 1971!
Handbook -- a forecasting error. of less thah.6
percent. The population forecast for 1970 was 247
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S.EfeRfT
Table 1
Selected Soviet Economic Data for 1970
GNP (in 1969 US $)
Population
Labor force
As Forecast
in 1960 8/
538 billion
247 million
123 million
As Reported
in 1971 9/
508 billion
243 million
124 million
million against a recorded population of 243
million -- 1.6 percent over, while its estimate of
the 1970 labor force was 123 million, compared
with the 1971 Handbook's estimates for 1970 of 124
million -- only 0.8 percent off the mark.
C. Sino-Soviet Rift
The same factors that made
see the economic problems that
China in this period pr9vented
of the depth and durability of
it difficult to fore-
befell Communist
early realization
the Sino-Soviet
rift. It was clear from 1958 on that the Soviet
leadership was not happy with the Maoist deviations
from the Soviet model, as expressed in China's
"great leap forward" and commune movements. It
was particularly unhappy with implications that
the Chinese, had discovered shortcuts on the road
to Communism that other Bloc countries, including
the USSR, would do well to emulate. By 1960,
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however, the Chinese were backtracking somewhat,
and it appeared to Western observers, virtually
without exception, that the Chinese dependence on
continued Soviet ai.d and support would prevent their
going so far as to jeopardize the maintenance of
these particular aid programs. In economics partic-
ularly, the Soviet commitment to provide China with
some 291 major projects was regarded as the basis
of China's industrialization program and a continu-
ing necessity if China was to maintain its high
rate of industrial growth.
On the Soviet side the Chinese payments for
this aid in the form of industrial raw materials
and agricultural products, although adding only a
minor fraction to total availabilities of such
1
items in the USSR, filled some critical heeds and
enabled the Soviets to conserve foreign exchange
and divert labor and other resources to industry.
These considerations led the ERA, and other intel-
ligence observers, to continue into the 1960's to
predict the durability of the Sino-Soviet alliance
with,both partners realizing "the common need,
mutual advantages, and the possibilities for fruit-
ful years ahead." 10/ A serious rift in the
alli-
�ance was seen as a possibility only when China
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possessed sufficient economic independence from the
USSR "to alter the character and totality of forces
which unite the Alliance today." This contingency
was estimated to be at least a decade away. 11/
These judgments were repeated, although with
less assurance, in the fall of 1960 after the first
significant reductions in the number of Soviet tech-
nicians in China had been noted. To the extent that
the withdrawal of Soviet technicians in mid-1960
was greater than justified by the completion of aid
projects, it was viewed as reflecting a Soviet
"decision to admonish rather than a resolution to .
punish, for the USSR, no less than China, is keenly
aware of the grave political and economic conse-
quences of an excessive reduction or severance of
Soviet technical aid to, China." 12/*
The first really somber note in ERA's assess-
ments of China's economy appears to have been in a
* The depth of the Sino-Soviet rift in 1960 was no
more realized by other elements of the Agency than
hvOW A CIA Task Force, chaired by
L_jof ONE, was set up on 21 September 1960 to
examine the problem. After an exhaustive weighing
of the evidence, this task force concluded in Decem-
ber:
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Current Support Brief issued in early March 1961. 14/
It noted two severe setbacks to the Chinese economy
in 1960: a second consecutive year of poor harvests
. and the USSR's recall of its industrial technicians
in China. On the strength of these developments
and other evidence, the ERA reduced its estimate of
the increase of GNP in 1960 from 13 percent to 8
percent. It noted that projection of economic
growth rates over the next five years had "suddenly
become more difficult because three basic assumptions
have been cast into doubt." These were (1) continued
Soviet aid; (2) increasing agricultural production
at an average annual rate of at least 3 percent; and
(3) leadership that "would be vigorous and responsive
to the problems raised by the increasing complexity
of the economy. 15/ Th9se judgments were reflected
also in the special estimate prepared in the spring
of 1961 to consider the seriousness of the Chinese
economic situation. 16/
After the rift with the Soviet Union was
finally accepted as bonafide and given appropriate
consideration in the long-range assessment of the
Chinese economy, major intelligence interest
shifted to the food situation. Following a record
harvest in 1958, a prolonged period of unfavorable
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weather had set in, and the management errors
associated with the "great leap forward" program
,'aggravated China's agricultural problems. The
trend of increasing agricultural production which
had been sustained since the Communist takeover in
1949 was halted and then reversed. From 1959 to
1961, agricultural production fell far short of
normal requirements, while the population increased
by some 60 million persons. The excesses and
pressures of the "great leap forward" program led
to falsification of statistical reporting at local
levels so that the regime itself appears to have
been unaware of the seriousness of the situation
until late in 1960. It become necessary to curtail
the exports of foodstuffs, and in 1961 China began
to import large quantities of grain, mostly from
Canada and Australia. Some starvation was reported,
but the devastating famines that had plagued China
in the past were not repeated, probably because
the regimentation of society made more efficient
distribution possible. Nevertheless, widespread
malnutrition was leading to a high incidence of
deficiency diseases, apathy, and fatigue and to an
increase in the death rate.
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This situation was of considerable interest
to US policymakers in both the legislative and
executive branches. This interest peaked in the
spring of 1962 when the flow of refugees to Hong 1
Kong reached unprecedented heights. In April 1962
an unclassified report on the food situation 17/
was furnished to Congressman A. Paul Kitchin,
Chairman of the Committee on Export Control of the
House of Representatives. At the suggestion of the
DDI,
ORR started in March to issue
monthly reports on the food situation for the use
of the executive departments. Regular recipients
of this series included a number of key Kennedy
Administration leaders, such as McGeorge Bundy, Walt
W. Rostow, General Maxwell Taylor, and W. Averell
Harriman, The series reverted to an ad hoc basis
after the October 1962 issuance, as significant
information reports became more sporadic and as the
situation temporarily eased with the harvest cycle.
D. The Support Function
As will be brought out in subsequent chapters,
one of the major forces impelling the ERA to work
on the Free World was the broadening of its policy
support role. It should not be inferred, however,
that the Area's support function was insignificant
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prior to this development. It had in fact become
well established with respect to the Communist
countries in the 1950's. Volume I has described
some of these support activities and the contri-
butions to other offices in the DDI area: OCI,
ONE, and OBI.* Some note should also be taken here
of other ERA support activities of the late 1950's
and early 60's both inside the Agency and for other
government consumers.
(b)(1)
(b)(3)
* ORR's relationship with OSI, the other major
substantive component of the DDI,(until 5 Aug 1963),
was less supportive than complementary. With re-
spect to Sino-Soviet development in fields that
involved both offices -- nuclear energy, missile
and space activity, automation, etc. -- the arrange-
ments was that OSI would exercise responsibility
for reporting on research and development in these
fields, while ORR would take responsibility when
the activities moved to the production stage.
Obviously there is a gray area of potential fric-
tion here, but in retrospect the not infrequent
conflicts of jurisdiction and of substantive under-
standing have not prevented a healthy and essen-
tially fruitful relationship. .
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2. Economic Defense
Although ORR's role in economic defense is beyond
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defense are beyond the scope of this history, it
should be noted here that in addition to those
within ORR charged with responsibility for economic
defense, many of the components of the economic re-
search divisions gave considerable time and effort
to this activity.
(b)(1).
(b)(3)
Other "traditional" support activities of the
1950's have been alluded to in previous chapters.
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Within the .intelligence community the committee
structure of the Intelligence Advisory Committee
(IAC), later'(after 15 September 1958) 'the United
States Intelligence Board (USIB), received regular
support from the ERA. Naturally the Economic
Intelligence Committee (EIC) was the committee most
involved, but the Joint Atomic Energy Intelligence
Committee (JAEIC) and the Guided Missile and Astro-
nautics Intelligence Committee (GMAIC) also re-
ceived significant and continuing support. Al.;-
though most of ERA's findings on Bloc economic
activities in the Free World were put out in EIC
publications, there were regular contributions on
this subject to the Council on Foreign Economic
Policy (CFEP)
(b)(1)
(b)(3)
E. Assumption of Additional NIS Responsibility
In 1961 the Department of State withdrew from
the National Intelligence Survey (NIS) program
23
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.-rm*Iir'"4�1�Fr pproved for Release: 2023/06/14 C05972160, ,,..47777.1rxr-Arrnr-siritwe
.,.. :..1. � � ..- . ;....f.ii. ,t ,. ��,. .- ,- ,..-. ,,,i -?., ,./ , :,,ri, WI -51,7,fi,. "" .7.4.4aV, :5, :Or.. ":` yil.ZilL,1:31:�5:: C-Vr;;A,,"...".._41..�.....13-
PrA4:
1 ...
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SEQET
1
because of the decision by Roger Hilsman, appointed
by President Kennedy as Director of INR, to focus
hie reduced staff and facilities on policy-oriented
activities. State's responsibilities in the pro-
gram had included the production and maintenance of
the NIS economic sections on all non-Bloc nations.
Most of the burden now fell upon the Agency and was
assigned to a new Research Division in the Office
.of Basic Intelligence. ORR initially assumed
sponsibility for only two sections -- Section
.(Manpower) and Section 46 (Public Welfare) on
countries of the Sino-Soviet Bloc. This was,
ever, only the first step in ORR's assumption
re-
44
how-
of
increased NIS responsibility. Barely a year later,
the new DDI,
Division and
and OCI. As
abolished OBI's Research
assigned its responsibilities to ORR
described in Chapter V, this was an
affirmation of ORR's broadened responsibility for
economic research on the Free World.
This brief review of the Economic Research
Area's support role as it entered the 1960's
attests to the increasing demand within the gov-
ernment for economic intelligence on the Sino-
Soviet Bloc. But there was a parallel and as yet
.unsatisfied demand for other kinds of economic
24
� WAREll
�
(b)(3)
(b)(6)
for Release: 2023/06/14 CO5972160;
4 ainagiPW"
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intelligence -- a demand that could be satisfied
only by a reordering of priorities and a reorgani-
zation of ORR's resources, which came to fruition
in 1962.
25
f
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421�MeTZLILA,470.11,...114Corla.,....1.2
-41,8;44.4.-fr ts�x, ,;41:14:11;*qttW' "cleigvzSVIstr.4.
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Chapter II
1962 � THE YEAR OF NEW DIRECTIONS
... intelligence on the Cold War is shnply
Inadequate.
:::171,471e. FT, T-Prir,irr.iwoirortnrulz-Fr,
yr,�!Approved for Release: 2023/06/14 C05972160:!�
(b)(3)
(b)(6)
The year 1962 was in many respects climactic
in the history of economic intelligence. For ORR
it was marked by unprecedented demands for policy
support, by the proliferation of new duties, and
by the most significant reorganization in the
Office's history to that point. It was also, of
course, the year of eyeball-to-eyeball confronta-
tion with the Soviet Union over the installation
of offensive missiles in Cuba and of the Sino-
Indian border war, and ORR was heavily involved
with these dramatic events.
A. Reorganization of 1962
1. Background
Developments in the international situation,
in the operational philosophy of the executive
branch of the Government, and in the intelligence
community itself combined in 1962 to evoke a major
reorganization of ORR. As pointed out in Volume
One, Chapter II, the formal division structure
established under
proved both durable
and flexible in its responsiveness to the changing
27
(b)(3)
(b)(6)
SE
pproved for Release: 2023/06/14 C05972160
demands for economic intelligence during the 1950's.
The organizational changes that took place at the
divisional level in that period were administrative
rather than substantive in nature -- that is, the
elimination of the Strategic Division was an admin-
istrative necessity in the course of establishing
an all-source research organization, 'while the
initial restructuring of the Analysis Division was
for the purpose of separating operational support
from intelligence production. Later responses to
new substantive demands were handled by changes at
the branch level and by the device of the "Task
Force." By 1961, however, it was becoming apparent
that the existing structure, which had been devel-
oped to facilitate an orderly approach to under-
standing the Soviet economy by roughly reflecting
the Soviet ministerial organization, was no longer
appropriate to the responsibilities of the Economic
Research Area.
Three major developments had taken place to
produce a change in the Area's approach to its tasks:
(a) The Communist economic offensive
had grown since its initiation after the
death of Stalin in 1953 to a major weapon
of Soviet foreign policy.
(b) Communist military power and its
economic base had become of increasing con-
cern to US policymakers.
28
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- Lts
514:'
4-
��rir../
� � � � � 4-, � � Vt. � A � ��
� �!. .��4 � 3: !,?- :seri �.0.7..?:7fr3��. ,i.-1!"..,V.F'� 3
pproved for Release: 2023/06/14 C05972160a......-?"---
�
(c) Intelligence on the Bloc economies
had shifted from an emphasis on data accu-
mulation to "problem-oriented" analysis.
The response to the first two developments had
been such ad hoc arrangements as the gradual ex-
pansion of Trade Branch's Soviet Penetration Sec-
tion and an increasing levy on other branches for
assistance in meeting its responsibilities. In
response to the military-economic concern, the
guided missile effort -- initially carried out by
a small staff in the Industrial Division -- had
expanded to a DD/I task force, primarily staffed
by ORR personnel with a few detailed from OSI.
Meanwhile, many other units in the ERA were working
on diverse aspects of the Soviet military establish-
ment. With respect to the overall reporting on the
Bloc economies, the es4mate contributions dealing
with them were becoming increasingly analytical. To
support these most important products of the Area,
however, much of the research effort still concerned
itself with detailed descriptions of production
activity and the accumulation and presentation of
data on the individual sectors of the target econ-
omies. In preparing plans for the reorganization
of the ERA, its chief, and his
deputy, hoped that the shakeup
29
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. � �-�:=A -
.41', � -
� "if,:
, Approved for Release: 2023/06/14 C05972160t
� ,,skg1,4". '''''''
would not only provide a reallocation of personnel
responsive to the new priorities in research, but
also make it easier to discourage the "Annual Sur-
vey of the Bulgarian Button-hook Industry" type
of report that seemed to be the inevitable result
of the existing commodity and industry-oriented
branch structure. 19/
In addition to the three major substantive
developments, there was an increase in both quan-
tity and variety in the demands being laid on the
Office as a result of the advent of the Kennedy
Administration in 1961. The effect of ORR's having
gone, in a sense, "public" in the debate over Soviet
economic growth
March'1961, for
the President's
to ORR's chief,
in the Agency's
Soviet economies. 20/ In June 1961,
was still making itself felt. In
example, Chairman Walter Heller of
Council,of Economic Advisors wrote
expressing an interest
comparative studies of the US and
President
Kennedy took note of the Soviet challenge in a
press conference. He welcomed the competition and
noted that if the United States increased its
growth rate by one percent -- that is, from 3h to
41/2 percent -- the Soviet Union would not catch up
with the United States in this century. 21/
(b)(3)
(b)(6)
(b)(1)
(b)(3)
30
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� 7e�-�;-1.: � � ��" `
� � �
a,LAAI-,. Approved for Release: 2023/06/14 C05972160!'.�-:�::1�.�.:�,..-�'::,,,�
� tr:2
The new White House team included such people
as Walt W. Rostow from CENIS, who were familiar
with ORR's work and were now in a position to call
upon the Office for special tasks. They were in-
creasingly concerned with the impact of Soviet
economic developments on the world at large and
were not to be put off by disclaimers of responsi-
bility based upon a precise regard for formal
allocations of such responsibility within the
intelligence community.
On 18 January 1962, President Kennedy, alarmed
at the increasingly menacing posture of the Soviets
and the Chinese in support of "wars of national
liberation," directed the establishment of a Special
Group (Counter-Insurgency) to mobilize the govern-
ment's resources in preventing and resisting sub-
versive insurgency and related forms of indirect
aggression in friendly countries. 22/ ORR had
already created a Cuba Branch (9 January 1962) be-
cause of the perceived need for economic intelli-
gence
(b)(1)
(b)(3)
(b)(1)
(b)(3)
31
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,
4"14.
444
�0 --�r4;
- LL s� � -"- -
Approved for
Release: 2023/06/14 C05972160
.
_SECRET-
/
It seemed clear that similar types
of support would be called for with regard to other
threatened areas. At the very least, a heightened
interest in intelligence on Bloc economic and mili-
tary aid to such areas was anticipated, with a
particular emphasis on the impact of such aid.
On 3 March 1962, Robert W. Komer
serving on the White House staff,
wrote to the DDI suggesting the need for analyses
in depth of how Soviet aid programs in such major
recipient countries as the United Arab Republic,
Indonesia, and Afghanistan were paying off. 23/
Such analyses were not to be found in the Commu-
nity's regular reports of Sino-Soviet Bloc economic
activities in the Free World, particularly its eco-
nomic penetration activities, as embodied in the
biweekly and semiannual issuances of the EIC on this
subject. These reports had been issued since early
1956 with responsibility divided on the basis of
an informal agreement between the AD/RR and the
Director of INR in the State Department. The agree-
ment recognized CIA as having primary responsibility
for intelligence on the capabilities, actions, and
intentions of the Bloc countries in these activities
and State as having primary responsibility for
32
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(b)(1)
(b)(3)
(b)(3)
(b)(6)
intelligence on the impact of these activities on
the recipient Free World countries. 24/ Adminis-
tratively this division of responsibilities had
been working satisfactorily, but substantively it
was clear that State had done little in carrying
out its side of the bargain. The EIC issuances
were, by State's decision, not addressing them-
selves adequately to the impact of these Bloc pro-
grams. Meanwhile, the State Department's contri-
butions to National Intelligence Estimates on Free
World countries were also remiss in this respect.
ONE had, in fact, for some time been unhappy with
State's contributions on Free World economies and
was turning more and more to ORB for assistance in
this field. Other agencies were also concerned.
In June 1961
(b)(1)
(b)(3)
referred to the Department 0:0)
0:0)
of State's progressive dismantling of its effort
in this field, and wrote:
State just is not doing its part in
Free World underdeveloped countries.
(b)(1)
(b)(3)
33
SE
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� � ) � � .).;;J�IWA,;:;;FAY:.-1:. p�.
� r � .
.NIIIWige;i&APP=i'4CaSe':20i3;(0'e/14:60597216014gligp
Equally important, we have recently had to
"bail out" ONE by contributing or rewriting
the economic part of NIE's on Taiwan, Yugo-
slavia, Japan, and Brazil and on other
developed and underdeveloped Free World
countries. It has been fortunate that so
far, thanks to ORR's unofficial aid, no
serious economic error has been allowed
� to remain in an NIE. 25/
What ORR regarded as an economic error in judg-
ment did subsequently appear in an ONE paper --
fortunately not an NIE. In December 1961 the ORR
review of an ONE memorandum for the Director of
ONE on the subject of Finland concluded that eco-
nomic considerations bearing on Soviet-Finnish
relations had been inadequately covered. In so
advising the AD/NE,
pointed out that ORR was
ready to be of assistance with background informa-
tion on those countries where the Bloc was active
either through its trade and aid program or through
other economic means of penetration. In this case
it was the ORR view that ONE had neglected a basic
economic fact � -- that Finnish postwar development
of shipbuilding and metalworking industries to
meet Soviet reparations demands had left Finland
with a continuing dependence on Soviet markets. 26/
reference to the State Department's
dismantling was well founded.
34
SE
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Approved for Release: 2023/06/14 C05972160
Another factor leading ORR toward a decision
to assume a greater role in economic research on
the Free World
35
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pproyed for Release: 2023/06/14 C0597216071,:-�10m,,,,
-.(L�� ".���r�-:1
Atzroved for Release: 2023/06/14 C05972160,,,
� (b)(1)
(b)(3)
On the military-economic side, there were also
compelling reasons for an organizational adjustment
to the growing demands for policy support. By the
end of 1961 the Economic Research Area of ORR had be-
come the principal producer within the intelligence
community of intelligence on the production, deploy-
ment, logistics, and training factors affecting the
operational capabilities of the Soviet guided
missile program. The DDI's Guided Missile Task
Force, set up in March 1960 under the leadership of
drew heavily on ORR's capabi-
(b)(3)
(b)(6)
lities for its personnel and productive facilities.*
Intelligence personnel working on Bloc conventional
ground, air, and naval
facilities had been cut from
a peak of more tha
analysts in three separate
(b)(3)
(b)(6)
branches in the mid-1950's to a consolidated Air-
craft, Shipbuilding, and
Armaments
Branch in the
Industrial Division with
analysts, largely
(b)(3)
(b)(6)
7
analysts
were detailed from the ERA to
FY 1962.
(b)(1)
the task force for
(b)(3)
36
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Approved for Release: 2023/06/14 C05972160
SF4,eit-rr
to accommodate this drain on assets. The Soviet
missile and space effort also required attention
from the ERA units and specialists
Although not so demanding in terms of manpower,
a related and highly significant research effort
was also going forward. This was the costing of
Soviet military and space programs, including sup-
port activities broken down by major mission
area -- that is, air defense, strategic attack,
ground and naval missions -- together with command
and support and residual categories. ORR's pi-
oneering efforts with this research had established
the Office's reputation with ONE and other consumers,
and there was every reason to believe that demands
for contributions would grow.*
* See I, B, 2, above.
rVrt. '17)4"7-"TC717 � 1r17,t ,OF t
>4.,Approved for Release: 2023/06/14 C05972160.4?-1',''
41.
Approved for Release: 2023/06/14 C05972160
�Y-
Accordingly
who had taken the lead in
developing the Office's resources in military-
economics since 1954, prepared a staff study
pointing to the need for increasing the Agency's
capabilities for producing military-economic re-
search.
38
SE
� .7N t _Jer-7
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4::,A..44.1.274-1,:"SrZikAiIVANas*WWAte.aiaritZta;a:42414:
Approved for Release: 2023/06/14 C05972160
S
(b)(1)
(b)(3)
The recent establishment of DIA initially
caused some concern about possible charges that
ORR was attempting to set up a competing organiza-
tion before the new agency had been given an
opportunity to prove itself. 31/ ORR had, however,
developed the capability for, and was being pressed
for intelligence judgments on, a wide range of
military-economic matters, some of which were
beyond DIA's apparent area of concern: the pro-
duction and deployment of missile, aircraft, and
naval systems; the costs and economic impact of
military and space programs; and the assessment of
economic factors affecting Bloc military policy.
The research planned by ORR on these subjects for
FY 1963 amounted to more than a quarter of the
total research effort, and there was every reason
to believe that the burden would continue at an
even higher level, in spite of the recent creation
of DIA. In fact, the existence of the new DIA could
well increase the responsibilities of ORR in
military/economics. The preliminary planning for
what was to become the CIA-DIA Joint Analysis Group
.(JAG) was also going on in the winter of 1962.
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_ Approved for Release: 2023/06/14 605672160' -
S.Brelt-fr
Although the plan called for a small
group,
of whom on the CIA side would be
an economist, it was obvious that the mission --
to develop and keep current a series of projections
of Sino-Soviet Bloc force patterns up to ten years
in the future -- would require a major economic
research and analytical effort calling for a sub-
stantial input from ORR.*
2. The New Organization
The ERA Division and Staff Chiefs, after a
series of staff studies and meetings with the Chief
and Deputy Chief, ERA, throughout the fall and
winter of 1961-62, finally designed an organiza-
tional structure which appeared to be responsive
to the new situations. Effected in May 1962, the
new organization called, for five divisions and 29
branches in place of the former four divisions and
20 branches and for an increase in the average
grade of the Office from
but did not change the Office position ceiling
or the estimate of funds needed for the
(b)(1)
(b)(3)
(b)(1)
(b)(3)
* The proportion of ERA research time devoted to
military-economics did in fact increase to 37 per-
cent in the research program for FY 1964. Its
growing importance led to the establishment in 1964
of an area-level organization, the Military Research
Area (ARA), and its ultimate evolution into the
Office of Strategic Research (OSR) in 1967.
40
(b)(1)
(b)(3)
(b)(1)
(b)(3)
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coming fiscal year. (The new organizational break-
down of the ERA is shown in Figure 1.)
The Analysis Division under the leadership of
remained unchanged. The former
Materials Division was renamed Resources Division
and was increased from five to six branches by
the separation of the Fuels and Power Branch into
an Electric Power Branch and a Fuels Branch.
(b)(3)
remained as Division Chief. The 0:0(6)
Industrial Division was abolished, with its three
military branches going to a new Military-Economic
Division. Its two civilian industry branches were
consolidated into a Manufacturing Branch. This
new branch, together with the Electronic Equipment
Branch, was combined with three branches from the
abolished Services Division -- Communications, Con-
(b)(3)
(b)(6)
struction, and Transportation -- into a Manufac-
turing and Services Division.
Deputy Chief of Industrial Division, became Chief
of the new Division. The remaining function of
the Services Division, international trade, was
deployed within the new International Division as
discussed below.
The International Division, under the former
Services Division Chief, was the
41
� .(b)(3)
(b)(6)
(b)(3)
(b)(6)
SE
__Approved for Release: 2023/06/14 C05972160
 �,1
OFFICE OF RESEARCH AND REPORTS
ECONOMIC RESEARCH AREA
pproved for Release: 2023/06/14 C05972160.
ANALYSIS DIVISION
European Satellites
Branch
� Far East Branch
Manpower and
� Management Branch
�-� USSR Branch
April 1962
OFFICE OF CHIEF
ECONOMIC RESEARCH
CURRENT SUPPORT
STAFF
PLANNING AND
REVIEW ATAFF
INTERNATIONAL
DIVISION
� Asia Branch
East-West Comnierce
Branch
Trade and Finance
Branch
International Shipping 2
Branch
MANUFACTURING AND
SERVICES DIVISION
� Communications Branch
� Construction Branch
Electronic Equipment
Branch
� Manufacturing Branch
� Latin America Branch � Transportation Branch
Near East-Africa
� Branch
. Policies and
^ Organizations Branch
MILITARY-ECONOMIC
DIVISION
Plans and Support
� Staff
Aircraft Systems Branch
Guided Missile
Deployment Branch
Guided Missile
Production Branch
Military Expenditures
Branch
Military Programming
Branch
� Naval Systems Branch
II
��
RESOURCES DIVISION
� Chemicals Branch
� Electric Power Branch
� Ferrous Metals Branch
Food and Agriculture
Branch
� Fuels Branch
Non-Ferrous Metals
and Minerals Branch
%.1
-775.
'! �� � . � � 42- `j' �``.�fle..1.:A"
for Release: 2023/06/14 C05972160`'
major organizational response to the increased
effort on the international economic activities of
the Sino-Soviet Bloc. Three regional branches were
created -- Latin America (a redesignation of the
recently established Cuba Branch), Asia, and Near
East-Africa -- for the production of intelligence
on the impact of the Bloc economic offensive against
the countries of their respective areas. The
Policies and Organizations Branch was created with
responsibility for the institutional arrangements
and programs of the Bloc countries in carrying out
this offensive. The East-West Commerce Branch was
concerned with the Bloc's economic relations with
the countries of the industrial West, and thus 'in-
cluded the now much-reduced economic defense sup-
port activities of the Office. Intra-Bloc economic
relations were the responsibility of the new Trade
and Finance Branch; and international transporta-
tion activities, formerly a function of the Trans-
portation Branch, were assigned to the new Inter-
national Shipping Branch.
Description of the new Military-Economic
Division's breakdown of branches and responsi-
bilities is properly the historical concern of the
Office of Strategic Research, its lineal descendant.
42
.1?cE�1
��Approved for Release: 2023/06/14 C05972160�,
Headed by
the former. Chief of the Indus-
trial Division, it remained a part of the Economic
Research Area from its creation in May 1962 until
the establishment of the Military Research Area in
March 1964. The existence of a separate division
for military-economic research made it easier to
delineate the strictly economic research function
and to relieve the economic divisions and branches
of a considerable burden of research responsibility,
not only for coverage of production activities in
the military hardware field but also for such mat-
ters as military programming, weapons system de-
ployment, and civil defense activity. The impact
of military programs on the Bloc economies remained
a concern of the economic research components, as
did the matter of Bloc military aid to countries of
the Free World. In addition, as is described in
Chapter VI below, the varied military-economic
intelligence problems arising out of the Vietnam
War fell largely to the economic research components
in 1964 and in subsequent years.
B. Economic Intelligence on Cuba
1. Introduction
Although the overthrow .of the Batista Govern-
ment in Cuba occurred on 1 January 1959 and the
43
S T
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',;vaJ.f'Ll4'.:A.:,...iataitZifill-igSIVik412.421-ft1 -
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political tilt of the Castro regime revealed itself
with Mikoyan's visit to Havana in February 1960
and Soviet economic and military aid agreements
soon after, the extension to the Western Hemisphere
of ORR's mission of economic intelligence production
on Communist countries was not immediate. The only
significant intelligence research on Cuba under-
taken by ERA during 1959 and 1960 was in connection
with the economic penetration coverage and in re-
sponse to an unusual request for operational support
from the DDP. The latter involved a detailed and
elaborate study of Cuba's telecommunications
facilities. 32/ This crash project occupied the
attention of Services Division's Communications
Branch for several weeks in the fall of 1960 and
also depended heavily on the facilities of the
Cartography Division of the Geographic Research
Area, which set aside much of its other work for
the month of October in order to concentrate its
resources on the project. The Publication Staff
also found it necessary to take all its typists
off regular work for most of the month in order
to complete this massive study. None of the
analysts concerned with this assignment were
witting as to its purpose, but it is obvious, in
�
44
r�!, Approved for Release: 2023/06/14 C05-9721 .E.07777"67:171,4Trticr:
.0;
. -6 �
4
:444.
"
Approved for Release 2023/06/14 C05972160
VOlt
-
ci
_sEeR-E
retrospect, that it was for use in the planned
operations in Cuba which came to a premature end
at the Bay of Pigs. In thanking the DDI for the
quality and thoroughness of the project, the DDP,
2. The Cuba Branch
It was not until late in 1961 that it was de-
cided that the ERA should take on formal responsi-
bility for economic research on Cuba. On Friday,
29 December 1961, the DDI,
instructions from the new DCII John
render full intelligence support to
following
A. McCone, to
the DDP in
developing clandestine operations against Castro,
directed ORR to set up a Cuba Branch. On the
following Wednesday, after the New Year holiday,
it was in business, wit professionals, �none
of whom had any particular background in Cuban or
Latin American affairs, but who had functional
specialties which, it was believed, would be perti-
nent to the Cuban economy.
45
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(b)(3)
(b)(6)
(b)(1)
(b)(3)
(b)(6)
(b)(1)
(b)(3)
(b)(1)
(b)(3) �
(b)(6)
�
Aflit.f9 �:;;Z; rs ;,t,a;FaITEC447.6�gVi.figgift,Wit.i..14...,..,...szigfr..4uLal."- -41+
Approved for Release: 2023/06/14 C05972160
(b)(1)
(b)(3)
(b)(6)
On 7 February, it
published its first support project for the DDP,
Other
reports on the sugar and nickel industries followed.
These reports were designed in part to identify for
DDP exploitable vulnerabilities in the Cuban economy
and were supplemented by specific intelligence sup-
port to clandestine operational planning against
Cuban targets.
In July 1962, the Cuba Branch prepared an NIE
contribution, which characterized the state of the
Cuban.economy as "in the throes of progressive
decline." 34/ An expanded version of this
46
(b)(1)
(b)(3)
(b)(1)
(b)(3)
_4Approved for Release: 2023/06/14 C059721607
�
Approved for Release: 2023/06/14 C05972160
contribution was also published as an Intelligence
Memorandum, which presented the first comprehensive
picture of the performance of the Cuban economy
since Castro took power in January 1959. 35/ This
proved a very popular publication, receiving wide
distribution
3. The Missile Crisis
The Cuba Branch (renamed Latin America Branch
in the reorganization of May 1962) was joined by a
number of other elements of the ERA in providing
intelligence collection and reporting support in
connection with the Cuban Missile Crisis of October
(b)(1)
(b)(3)
1962. These elements included
tional Shipping Branch
the new Interna-
(b)(1)
(b)(3)
The Cur-
rent
Support Staff
the
loan
of
from
other components,
provided
(b)(1)
(b)(3)
around
crisis.
-the-clock
One of
coverage during the height of the
the key members of this staff,
was attached to the ONE Working
(b)(3)
(b)(6)
(b)(1)
(b)(3)
47
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Group on Cuba, and he became the channel for the
ERA's substantial contributions to the many esti-
mates, memoranda, and other documents provided
for the DCI and the ad hoc Executive Committee of
the NSC, which had been established by President
Kennedy to deal with the crisis. All branches of
the new Military-Economic Division, especially the
Guided Missile Deployment Branch, were heavily
involved. After the crisis was over,
described the contribution of ERA'S missile deploy-
ment specialists as follows:
(b)(1)
(b)(3)
The expertise of specialists in electronics,
military costing, construction, telecommunications,*
transportation, chemicals, and petroleum was also
48
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ovGREr
called upon, not only during the buildup and at
the height of the confrontation but also during
the dismantling of the missile sites and the long
aftermath period of surveillance which followed.
The contribution of ORR's shipping monitors
has been well described
Soviet shipping and the operation of the
US quarantine were the reporting responsi-
bility of an ORR task force which moved
into the OCI situation room and worked in
close cooperation with the Pentagon to main-
tain continuing surveillance of Soviet
shipping not only on the approach to ruha.
but
ThIS task force dealt with
photography,
alongside inspection by US Naval Units,
low-level photography and inspection by
US military aircraft supporting the
quarantine, and whatever other eyeball
information might help determine the cargo
of the suspect ships...
It was one of the analysts on this
task force who first alerted the commu-
nity to the fact that the Soviet ships
heading for Cuba had turned around after
the President's speech of 22 October.
In the spring of 1962 an expensive auto-
mated system to account for Soviet ship
movements had been set up in Washington.
The crisis obviously was the test for this
system, for the Soviet reaction to the US
decision to blockade Cuba was crucial to
� 49
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the next US course of action. As Wash-
ington waited anxiously for the evidence
of the Soviet reaction, the computer
spewed forth reams of data on Soviet ship
operations and positions, but nothing on
the direction of movement. It was an ex-
perienced lady analyst on the task force,
working with the same data on the dog-
eared 5x8 cards she had been using for
years, who first noted that the key Soviet
ships now were headed east and north, not
west and south.
50
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(b)(1)
(b)(3)
Indeed, ORR's reporting on shipping to Cuba was
a key input to intelligence throughout the whole
period of the crisis, beginning in July 1962 and
extending well into 1963. And, as pointed out by
it provided the clue that the Soviets
"blinked first in the showdown."
The retreat or withdrawal period, of course,
also required painstaking detailed (b)(1)
ODA
analysis and reporting of all activities in Cuba.
ERA's reporting resulted in a steady flow of sup-
port projects, including daily reports on shipping,
eval-
uations of proposed economic countermeasures against
Cuba, and the like. Even those elements of ERA
that focused on Soviet domestic
increased
the search for clues of Soviet intentions
activities sharply
during
in
the period. This day-to-day analysis, reported to
(b)(3)
(b)(6)
(b)(1)
(b)(3)
(b)(1)
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the highest levels of government, revealed a com-
plete lack of mobilization activity. 38/ This
unheralded contribution to intelligence during a
period of great tension must have provided a back-
ground of reassurance for the policy decisions
that were evoked.
The matter of economic denial measures against
Cuba caused the office considerable concern in the
post-crisis period. The Clandestine Services were
pressing for means to attack Cuba at economically
vulnerable points and seeking ORR's guidance on an
economic warfare program. For example, the possi-
bility of crippling the Cuban economy by denying
it "bright stock"* commended itself to the economic
warriors in spite of ORR's insistence that the
proposed denial would prove ineffective. Such an
embargo was attempted without success. After a
grudging admission that "bright is not as econom-
ically important to Cuba as we originally believed,"
DOP's Special Affairs Staff -- nothing daunted --
requested a comprehensive study of Cuba's import
and export vulnerabilities to help in the planning
and undertaking of further economic denial opera-
tions. 39/ The resulting study, although responsive
* A blending agent used in .the production of
lubricants.
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as to specific strengths and weaknesses, warned
that there was little likelihood of causing an
economic collapse in Cuba and pointed out the
difficulties of achieving effective economic inter-
diction. 40/ Once again the "bottleneck fallacy"
was exposed as it had been with respect to the
Soviet Union in the 1950's* and would be with
respect to Vietnam and Rhodesia in the later 1960's
and 1970s.**
These post-crisis activities contributed to a
sustained crisis atmosphere in the Office (and
undoubtedly elsewhere in the community as well)
which lasted well into 1963.
was constrained
to point out to the DDI in May 1963 the effect that
this pressure was having on the Office's ability
to carry out its other responsibilities. Among
other activities which were being slighted were:
* See Volume I, pp. 54-55.
** See chapters on Vietnam in this volume (Chapter
VI) and Volume III and discussions of Rhodesian
embargo in this volume (Chapter. V).
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(b)(1)
(b)(3)
It is not recorded whether this
plea had any effect, but it is evident, as noted
elsewhere, that requests for policy support not
only on Cuba but on a worldwide basis were
steadily increasing, and the ability of the Office
to maintain an orderly program of planned research
would continue to be sorely tested.
As the missile crisis subsided, a paper that
had a certain propaganda impact was written in re-
sponse to a request from Walt W. Rostow, then head
of State's Policy Planning Staff, for an estimate
of the cost of the Sino-Soviet Bloc* of economic
� support to Cuba. The response, which approached
the problem by detailing the Bloc's net export
surplus vis-a-vis Cuba, the subsidy involved in
Bloc payment of a premium price for Cuban sugar,
and certain other tangible and intangible items
concluded that Cuba would require a subsidy of
$350 to $450 million in 1963. ia/
* This term was still in use at the time, although
the Sib-Soviet rift was becoming increasingly
evident.
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(b)(1)
(b)(3)
' The postmortem on the Cuban missile crisis by
the DDI area included two basic studies issued
early in 1964. The DDI Research Staff paper en-
titled The Soviet Missile Base Venture in Cuba ex-
amined the soviet buildup within the broad context
of Soviet foreign policy, while ORR's study con-
centrated on the hard facts of the buildup against
a background of Soviet military and economic rela-
tions with Cuba prior to 1962 and set forth the
evidence on the buildup, and the details of the
Soviet military forces in Cuba and of their subse-
quent withdrawal. 44/
C. Sino-Indian Border War
Overshadowed by the,Cuban crisis, but nonethe-
less considered a grave threat to the Free World,
was the Chinese invasion of India in October and
November 1962. Tensions had been developing for
some time as China accumulated troops and supplies
in Tibet and established pressure points on the
Indian frontier in Ladakh (Kashmir) and along the
MacMahon line in the North East Frontier Agency.
Frequent border clashes throughout the year culmi-
nated in a large-scale Chinese attack on the Indian
. 56
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g. 10P,414.1�44-AEWalbloadff..3:1 -
!.1.
defense positions on 20 October. The inability of
the Indian forces to stem the advance brought the
Chinese to the edge of the Assam plain by mid-
November, but soon thereafter China declared a
unilateral cease-fire and gradually withdrew its
forces behind its own (i.e., Tibetan) borders by the
end of the year. While most of the community's
eyes were still on Cuba, the Construction, Communi-
cations, and Transportation Branches became heavily
involved with supportive studies for the US policy-
makers with respect to the border war.
The Transportation Branch's report
examined in detail the logistical and operational
problems involved for Cpina in the conflict and
provided estimates of the size of forces that could
be employed against India. 45/ It was produced on
a crash basis and was the only guide available to
US policymakers for several weeks. The Far East
Branch of Analysis Division prepared a crash project
on the economic capability of China to sustain a
military operation against India, 46/ while the
new Asia Branch of International Division was busy
with a similar project on India's economic
(b)(1)
(b)(3)
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capabilities and the state of her defense indus-
try. 47/ The former report concluded that the Chi-
nee economy would have little difficulty in sup-
porting military operations on the scale then
existing. It also considered the economic impact
of acceleration in the level of military activity
and concluded that a significant step-up would be
possible if China were willing to accept consider-
able diversion of POL and related supplies and to
undertake a major roadbuilding effort. With respect
to the Indian economic capabilities, the second re-
port noted that because Indian economic plans had
been based on the assumption of no major hostile
threat to the country, domestic defense expenditures
had been maintained at a minimum level. the sudden
Chinese aggression required a revision of this
assumption and a consequent reallocation of re-
sources toward defense and defense supporting
industries. The ORR study concluded, however, that
because of the existence of widespread underemploy-
ment of labor and capital resources in India, such
a reallocation was well within Indian capabilities
and need not be injurious to economic growth.
However, India's desire to get military production
�
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,,--. 0
rolling quickly created a need for foreign assist-
ance under liberalized credit terms in view of
the foreign exchange shortage.
.4
59
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Chapter III
FALTERING ECONOMIES BEHIND THE CURTAIN
"A police state finds it cannot command the grain
to grow."
John F. Kennedy
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A. General
With the demands for economic research on the
Free World and on the military-economic activities
of the Communist World burgeoning, some of the
traditional research of the Economic Research Area
had to be curtailed.
(b)(1)
(b)(3)
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(b)(1)
(b)(3)
Military-economic intelligence on the Soviet
Union was, of course, in great demand. The drain
on the resources available for strictly economic
research was felt not only in terms of the manpower
buildup of the Military-Economic Division but also
in an increasing number of projects
undertaken by the functional
branches in the other divisions in support of the
military-economic activity,
in large part the after-
math of the Cuban missile crisis, which was bringing
.requests for intelligence with great frequency and
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demands for considerable detail
Research on the Communist world after mid-1962
continued to produce significant findings
In fact, with the developing
emphasis on policy support, these findings appear,
to a greater extent than in the 1950's, to have
had a direct bearing on a number of significant
US Government actions. The Communist economies
were coming into hard times in this period, and
ORR's pinpointing of their weaknesses provided
material contributions to the decision-making
process as new US policies were developed to ex-
ploit these weaknesses.
B. The USSR
1. The Burden of Military Programs
Analysis of the Soviet economy in 1963-64 was
focused particularly on the Soviet decisions re-
garding resource allocation. It was becoming
obvious that under the euphoria of impressive
accomplishments in the 1950's and the hope of
"catching up" with the United States and with the
.burden of increasingly complex military and space
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� space programs, the USSR was suffering from an
overcommitment of resources. The biggest commit-
ment and the one that was clearly holding back the
advance of the overall economy was the allocation
of resources to the
military burden and
therefore, of major
military. Analysis of this
its effect on the economy was,
concern to the intelligence
community and to the policymakers.
In February 1963, Secretary of Defense McNamara
wrote to DCI McCone questioning recent estimates
of Soviet ground force strength. He suggested a
thorough review of the problem by CIA and DIA and
emphasized that it was essential that "all esti-
mates of Soviet force levels be required to meet
reasonable tests of economic feasibility." 48/
In spite of the Secretary's expression of con-
cern, DIA did not prove responsive to CIA's
efforts to mount a joint attack on this problem.
The new Agency, in existence for only about two
years, was, in ORR's view, still floundering with
growing pains.
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(b)(1)
(b)(3)
(b)(6) �
ORR's work on Soviet military expenditures
served as inputs not only to the military capa-
bilities estimates and similar finished intelli-
gence in this field but also to the broader
assessments of the Soviet economy. Thus Secretary
McNamara's expressed wish that estimates of Soviet
force levels be required to meet reasonable tests
of economic feasibility was being met, in the
sense that the Soviet allocation of resources to
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S T
military and space activities was a major subject
of concern �to ORR's "aggregative" analysts. In
fact the judgments that were being made with re-
spect to the Soviet economy in this period stressed
that the acceleration of military and space spending
was the most important cause of the Soviet's eco-
nomic difficulties. Hence NIE 11-5-63, Soviet
Economic Problems, based primarily on ORR's draft,
stated:
The growing military burden, together
with rising space expenditures, has in
recent years increasingly held back the
advance of the Soviet economy. This
effect is particularly noticeable in the
industries producing machinery and equip-
ment, where weapons and other military
hardware compete directly for resources
with industrial, agricultural, and trans-
portation equipment and consumer durables.
The production of machinery and equipment
for nonmilitary users, which increased by
an estimated 14 percent or more annually
in the years 1955-1958, grew at a rate of
only nine percent or less in the ensuing
years. Production for the military, on
the other hand, which declined slightly
in the earlier period, rose by an esti-
mated average of 13 percent per year after
1958. Moreover, it seems that orders for
military and space programs have enjoyed
priority in the competition for special-
ized, highgrade resources, such as design
engineers, highly trained technicians,
and high-quality materials and components.
We estimate that military and space
programs consumed in 1962 over 35 percent
of the Soviet production of durable goods,
as compared with about 25 percent in the
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US ... . .Investment in machinery and
equipment increased by 16 percent annually
from 1955 to 1958 but only an average of
about 9 percent per year subsequently.
This factor, along with difficulties in
the planning and completion of new con-
struction, explains the drastic slowdown
in the growth of investment, which rose
by only 4 percent in 1961 and 4 or 5 per-
cent in 1962 after increases of 14 per-
cent or more in the years 1956-1959.
Under the impact of these problems,
the post-Stalin improvement in Soviet
living standards has begun to slow down
perceptibly. The leveling off in agri-
culture, where net output in 1962 was
about equal to that of 1958 but had to
support 14 million additional people, is
the major cause of this slowdown. In
addition, however, the continued low pri-
ority of light industry in the competi-
tion for modern equipment and skilled
labor has kept this a backward sector
producing shoddy goods which frequently
go unsold despite the continuing rise in
money incomes. The annual volume of new
housing has remained roughly stationary
over the last three years.
While per capita consumption is still
rising, the declining pace of improvement
and the attendant growth of inflationary
pressures have not been without repercus-
sions. Certain price and tax measures
introduced in 1962 created strong popular
resentment and raised fears that consumer
interests would be further circumscribed
in the future. This was particularly evi-
dent in the provincial cities which have
traditionally lagged far behind Moscow,
Leningrad, and Kiev in quality of consumer
goods and the amenities of life; in sev-
eral locations the decision of June 1962
to raise meat and butter prices was fol-
lowed by demonstrations and even riots on
the broadest scale in many years. 51/
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,sEcarr
2. Work on Soviet Agriculture
If the *analysis of resource allocation was
inevitably a key factor in the understanding of
Soviet economic problems, nowhere was this more
evident than in the field of agriculture. Since
it had long been recognized that a principal key
to, if not the Achilles heel of, the Soviet econ-
omy was agriculture, ERA's agricultural research
was accorded great emphasis in the annual planning
and in the staffing of the organization.
Other persons in
the branch also had substantial credentials for
their assigned tasks. In one important respect, a
number of the agricultural specialists had a sig-
nificant advantage over most of their colleagues:
(b)(3)
(b)(6)
(b)(1)
(b)(3)
A7ZW4W211.14ZRVI.
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a. The Diagnosis of Communist Agricul-
tural Weakness
Soviet agricultural difficulties in the early
1960's were not a surprise to ORR. Even when
noting the bumper crop of 1958 (13 percent above
the previous year), the Office contribution to
This uncertainty was attributed by
ORR to the USSR's resource allocation practices
(b)(1)
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(b)(1)
(b)(3)
(b)(6)
(b)(1)
(b)(3)
rather than to any assumption that Communism and
agricultural progress are incompatible. This
latter bit of conventional wisdom had to be ad-
dressed when Soviet agricultural difficulties in
1962 and 1963 and China's severe agricultural
problems for an even longer period led a number
of observers -- some of them highly qualified
agricultural specialists -- to postulate that col-
lectivization as practiced by these countries was
incompatible with agricultural success and that
they would be unable to solve their agricultural
difficulties so long as they remained saddled with
a system that stifled production incentives. In
ORR's view a good deal of this type of thinking
rested upon a faulty analysis of the role assigned
to agriculture in Communist countries. The Office
stressed that it was primarily a matter of resource
allocation. The usual practice under Communism
is to gain control over the country's resources
and channel the maximum of these resources into
the development of heavy industry. The reason
for this is, of course, that heavy industry is
considered the basis of economic and military
power. Consumption and, hence, agriculture are
�
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regarded as residual claimants on resources be-
cause human welfare is fundamentally not regarded
as the end reason for economic activity. In terms
of mobilizing resources, it was noted, Communist
societies do very well compared with Western socie-
ties. This was clearly shown in the very high
degree of investment as a proportion, of GNP which
they were able to achieve even in the case of
relatively underdeveloped economies. Communist
societies could obviously channel their resources
into the manufacture of commercial fertilizers,
agricultural machinery, and insecticides; into
investments in transportation and storage facili-
ties on farms; and into the divergence of the best
scientific brains in the country to work on such
problems as improvements in feed strains, live-
stock breeding methods, etc. Instead, however,
Communist societies channeled the maximum (and
the best) resources into heavy industry and the
military establishment. To say that the Communists
neglected agriculture was a very different thing
from saying that there was something mysterious
C.
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,sgeftsor
about agriculture which made it incompatible with
Communism.*
(b)(1)
(b)(3)
The Office's estimates of overall grain pro-
duction for the period 1950-57 were in close
* ORR, of course, recognized the fact that, given
the opportunity, peasants under Communism will de-
vote more effort to production on private plots,
either for their own use or in the limited free
�markets made available to them, than to production
� for the controlled outlets of the state.
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SEPT
agreement with official Soviet statistics. From
1958 on, however, ORR's agricultural specialists
noted considerable exaggeration in the Soviet sta-
tistics, resulting not only from technical changes
in statistical reporting and recording but also
from distortion and falsification within the ad-
minstrative hierarchy. The falsification of sta-
tistics at the lower levels undoubtedly stemmed
from pressure from above to fulfill the unrealistic
pledges made by Khrushchev. 54/ Thus, even the
top levels were probably misled, and the full ex-
tent of the grain crisis of 1963 was not appre-
ciated by the leadership itself.
b. First Wheat Sale to the USSR
In 1963 the Office's expertise in the field of
Soviet agriculture paid off in a significant con-
tribution to policy support. Early in January the
White House had been apprised of Soviet agricultural
difficulties as revealed by ORR's research. Food
shortages (particularly of potatoes) had been
observed throughout the northern European part of
the Soviet Union, and winterkill was taking a toll
of the recently sown grain crop. These difficul-
ties, added to the generally unsatisfactory perform-
ance of agriculture in 1962, revealed the pervasive
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and cumulative nature of the problem that Soviet
leaders faced. 55/ Noting that unrest and some
civilian rioting had occurred in 1962, doubtless
caused by consumer dissatisfaction over food sup-
plies and prices, the Office predicted further
civil disorders unless such measures as drawing
down state reserves and curtailing exports were
taken. More detailed analyses of the Soviet agri-
cultural bind in 1963 followed. The Office's pub-
lished version of its NIE contribution on the�
Soviet economy referred to agriculture as "the
most intractable problem for Soviet economic
policy" 56/ and, while acknowledging the unfavor-
able weather of the past three years, attributed
the difficulties primarily to "the unwillingness
of the Soviet leadership to commit a higher level
of resources to agriculture on a continuing basis."
By midsummer 1963 it was increasingly apparent
that prospects for the coming harvest were poor.
Agriculture Secretary Freeman and the Department
of Agriculture experts who accompanied him on a
visit to the USSR in July had observed drought
and "spotty" crop conditions, although the Soviets
had been hopeful at that time that large-scale
imports would not be necessary. At the same time,
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however, the USSR was shopping for wheat in Canada
and Australia, and the Soviet Grain Commission in
Canada had informally dealt with a number of US
grain dealers, asking them to "feel out" the US
Government to see whether a request to purchase
US wheat would be honored. In anticipation of a
prospective request, Theodore Sorensen, Special
Counsel to President Kennedy, convened a White
House meeting on 24 September 1963. The attending
experts, including ORR's were re- 0:0)
0:0)
quested to consider the implications of such a
sale. ORR was well primed to furnish support on
the subject -- a recent ORR report had reviewed
the world wheat situation. Although increasing
world wheat surpluses were expected, with strong
competition by the exporting countries for exist-
ing markets, the Communist Bloc would be a net
importer. The Chinese had been making large pur-
chases for several years, and Soviet production was
burdened by commitments to the European Satel-
lites. 57/ A comprehensive report on the stagna-
tion in Soviet agriculture 58/ and another on
Soviet wheat purchases in Canada 59/ had been
disseminated during September, providing background
for the upcoming policy decision. The latter
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report indicated that the Canadians had been un-
able to commit as much wheat as the Soviets were
seeking and that the Soviets would need more to
meet their own export commitments to the European
Satellites and Cuba. Guidance on the policy im-
plications of an unprecedented sale of US wheat
to the Soviet Union came from various sources.
The Departments of State, Agriculture, and Com-
merce had, of course, prime responsibility for
considering the foreign and domestic political
aspects of the deal, but ORR handled the economic
issues. In essence, the ORR response covered the
following points:
(1) The 1963 grain harvest in the Soviet Union
was significantly smaller -- perhaps one-fifth
below that of 1962 - and with similar poor har-
vests in the Satellites, the Soviets needed some
9 to 10 million tons of wheat to cover their
domestic needs and export commitments. With about
8 million tons under purchase agreement from Canada
and Australia, 1 to 2 million tons were still
needed. Replenishment of drawn-down stockpiles
might raise this figure.
(2) It was doubtful that US sales of wheat
.would be used to the benefit of Cuba or Communist
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China, and restrictions against reexports, which
would doubtless be honored, could be specified
in' the sales contract.
(3) With large surplus stocks held by the
United States it would be impossible for the USSR
to manipulate the world wheat market.
(4) Although the existing Soviet,grain shortage
was a reflection of cumulative effects of several
years of poor crops and was probably an extreme
case, significant Soviet purchases could be ex-
pected in future years of poor harvest.
(5) Commenting on the political aspects of the
deal, ORR weighed the argument that a refusal to
help the USSR out of its economic difficulties
could contribute to a weakening of overall Soviet
strength and prestige against the longer range
prospect that the USSR's hard currency, and gold
reserves would be used for the purchase and since
these were in short supply, Soviet ability to pur-
chase strategic items would be lessened. A rejec-
tion would bolster the arguments of those within
the Soviet Union who were opposed to any detente
with the United States, while an acceptance would
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SERT
improve changes of further meaningful cooperation
with the Soviets.*
' At the ensuing meeting with Messrs. Sorensen
and Bundy, Under Secretary George Ball, and Gove-
nor Harriman, these conclusions were presented,
along with the pro-sale findings of other depart-
ments within the group. The matter was accordingly
passed with favorable recommendations to the
President for final decision. 60/ On 9 October
1963, President Kennedy announced at his press
conference that he had authorized the sale to
Russia of more than $250 million worth of US
wheat and wheat flour (amounting to approximately
4 million metric tons). 61/
In his history of the Kennedy administration,
Sorensen describes the factors that led to the
decision to sell wheat to the USSR in terms that
appear to be a direct reflection of ORR's judg-
ments on the subject:
In their rush to develop heavy in-
dustry, space and armaments, the Soviets
had short-changed investment in agricul-
ture. The collective farms were riddled
with inefficiency -- "for a closed society
is not open to ideas of progress," as the
* This was a period of "detente" since the nuclear
test ban treaty had been signed only a few weeks
before and was ratified by the Senate during the
same week that the wheat deal was under considera-
tion.
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President had said, "and a police state
finds it cannot command the grain to
grow." The original soil moisture and
productivity in the "New Lands" opened by
Khrushchev in Siberia and Kazakhstan had
been used up, and a severe drought had
held per capita food production to its
lowest point in history. Large imports
of grain from the West were required; and
sizable purchases had already been con-
cluded with Canada and Australia. Soviet
exports were insufficient to pay for
these imports along with necessary indus-
trial supplies; and the Soviet gold re-
serve was being drawn down faster than
their mines could replace it. 62/
The decision to sell grain to the USSR had
significant policy implications for this country.
As a tactic in the cold war, it brought into
public view the deterioration in domestic food
supplies and the resulting popular discontent in
the Soviet Union. The necessity of buying grain
caused not only a psychological shock to Soviet
vanity but also a drain on Soviet reserves of gold
and foreign exchange. It may well have fanned the
embers of discontent in the European Satellites.
With Chinese agriculture also in trouble, the con-
trast between the agricultural economies of the
Communist World and the Free World was marked.
When President Johnson took office following the
assassination of President Kennedy later in 1963,
the US policy of giving publicity to Communist
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economic weaknesses became even more explicit, and
the CIA's only press conference, early in 1964,
was a direct consequence of this policy.*
C. Communist China
That the Communist Chinese economy was in
serious trouble was well established by the end
of 1962. The collapse of the "great leap forward"
campaign, the rift with the Soviet Union, and sev-
eral consecutive years of poor harvests had all
contributed to the difficulties. China had been
forced to make substantial grain imports -- on the
order of 5 million tons annually in 1961 and 1962.
Chinese announcements of policies of retrenchment
and consolidation and a change of priorities to
concentrate resources in agriculture and light
industry at the expense, of heavy industry also
attested to the fact that the Chinese economy was
in very serious difficulties. 63/
Early in 1963, however, the DDI,
noted that "the official word in town seems to
be the Chicoms are better off economically this
year than last." 64/ He accordingly requested ORB
to prepare an "unequivocal statement" on China's
economy. ORR's response was that indeed there were
.* See Chapter IV..
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"bits and pieces of information" indicating a
slight improvement in overall economic activity,
but that "the depressed agricultural scene colors
the entire economic outlook." .�1/ It concluded
that "Faced with overriding problems of over-
population, backwardness in agriculture, and a
low level of industrial technology, China's pros-
pects for achieving status as a major world power
in this decade have vanished."
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In ORR's view, there were few data that could
be put in an input-output table with any confi-
dence. The folly of expending any substantial
effort on this type of exercise without reliable
data had been well demonstrated with respect to
the USSR in the 1950's.*
* See Volume I, pp. 155-162.
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ERA's use in agricultural analysis of aerial
photography taken by Chinese Nationalist pilots
started in 1962. This provided a verification of
moisture conditions affecting crop production as
well as a check on land reclamation and irriga-
tion programs. 67/
A number of meetings were held with the State
Department's China specialists during 1963 to ex-
plore further the mysteries of the Chinese economy.
ORR's reporting on the subject, although based on
thin evidence as to detail, continued to fore-
� cast poor economic performance, and it appears
� that State did not maintain its disagreement.
ERA's contribution to the annual NIE on China in
the fall of that year noted that the economy was
still operating considerably below the peak level
of 1959-60 and that the rate of economic growth
through 1967 would be well below that of the mid-
1950's. 68/
� The estimate it-(3)(1)
self, although stressing the lack of information (b)(3)
and noting that even broad judgments were subject
to error, concluded that because of cumulative
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difficulties in the economy, China could not be-
come a modern industrial state for many years. �2/
(b)(1)
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D. Application to Policy
With economic difficulties pervading all parts
of the Communist world and with firm evidence that
Moscow's domination of the "Bloc" was no longer
to be taken for granted, certain US policy oppor-
tunities suggested themselves. The sale of wheat
to the Soviet Union was one of these. More dra-
matic, perhaps, was the campaign to publicize
Soviet economic problems, undertaken at Presi-
dential direction and kicked off in January 1964
with CIA's first press conference - the subject.
of the following chapter.
f�
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Chapter IV
PUBLICIZING COMMUNIST ECONOMIC DIFFICULTIES
"Pat! Want to see some Hot Statistics?"
�Herblock. 1964 .
r:44.,."7141' .777.7,...1.1.14:';"441,��� F.:
'Approved for Release: 2023/06/14 C05972160A- " �
A. The CIA Press Conference
On 9 January 1964 the CIA held its first and,
as far as the writer can ascertain (1972), only
press conference. It dealt with the Soviet economy,
and therefore the circumstances that caused it to
take place, its content, and its impact are impor-
tant parts of the history of economic intelligence
in the Agency. Unfortunately, its impact was not
entirely what had been hoped for. The press seemed
less interested in the message than in the medium --
why was the Agency publicizing itself? Did it have
some conflict with the State Department over eco-
nomic intelligence or over policy toward the Soviet
Union? Herblock of the Washington Post apparently
thought so. He drew a cartoon, showing CIA as a
sinister cloaked figure on the steps of the State
Department attempting to peddle Soviet economic
data to a State Department employee (see Figure 2).
The fact was that the press conference was only
one of a number of steps worked out in concert with
90
JECET4,.
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Figure 2
"Psi! Want To See Some Hot Statistics?"
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the State Department for giving worldwide publicity
to the weaknesses in the Soviet economy. In Decem-
ber 1963, two weeks after President Kennedy's
assassination, the DCI, John A. McCone, had given
a briefing to President Johnson and the National
Security Council based on ORR's latest assessment
of the Soviet economy. The main points in this
assessment, which indicated a marked reversal since
the last exposure of Agency views on the subject,
were as follows:
(1) Growth of Soviet GNP in 1963 would
be about lh percent.
(2) Growth in 1962 had also slowed, so
the average of the two years was only 21/2
percent, markedly lower than the previous
rates of 5 and 6 percent.
(3) Agriculture accounted for a large
part of the slowdown in both 1962 and 1963,
but not all of it. Industrial growth had
also slowed noticeably since 1958.
(4) In trying to raise meat production,
Khrushchev had prodigally used up his sur-
plus grain production of the preceding
years, 1958-1961, and had much smaller
grain reserves than CIA had previously esti-
mated.
(5) The slowdown in industry was in
large part the result of competition of
defense for scarce investment and R&D
resources.
(6) Gold production and stocks were
significantly lower than current public
estimates.
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(7) The Soviet campaign to obtain long-
term credits from Western Europe for the
purchase of advanced Western equipment was
'a natural consequence of its dwindling gold
stocks. 71/
The President suggested that these facts be
made public, and accordingly McCone, after dis-
cussing the matter with W. Averell Harriman and
G. Griffith Johnson, respectively Under Secretary
of State for Political Affairs and Assistant Secre-
tary of State for Economic Affairs, ordered that:
the information which:we had developed
on the Soviet economy in general, Soviet
agriculture, the trends of Soviet foreign
aid commitments, the lag between commit-
ments and drawdowns, the facts about the
Soviet gold and foreign currency reserves
and the imbalance between the sale of gold
and their production of gold, all should
be brought to the attention of the people
throughout the world -- my purposes (are)
twofold: One, factual knowledge of the
Soviets' precarious economic situation
would have a considerable influence on
the "undecided" leaders of many countries
throughout the world ... if these men
understood the facts, they would realize
the precariousness to themselves of de-
pending heavily on the Soviets as an
alternate to the United States as a
source of help and aid. Secondly, the
Western European countries and Japan should
understand the situation and should realize
that extending long-term credits to the
Soviets was precarious. 72/
At about the same time, Harriman had requested
that "your analysts on Communist economic matters
.[ORR]" prepare a 25-30 page summary of current
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economic weaknesses in the Soviet Bloc and Commu-
nist Asia to be used ,"in a variety of ways -- dip-
lomatic, informational, for backgrounding the press,
etc. -- to expose the weaknesses of communism and
to strengthen the position of the free world." 73/
The joint CIA-State program that evolved before
the end of 1963 included such immediate action as:
briefings of key press figures
speech by Richard Helms at the Annual Trustees
Dinner of the American Committee for Liberation;
a Special National Intelligence Estimate to provide
a nationally accepted statement of the primary
factors in the assessment of the Soviet economic
situation; and provision of some
RR reports to
the Covert Action Staff of DDP for use -- after
sanitization -- in a comprehensive program of dis-
semination of news releases on a worldwide basis
by the Inter-Agency Psychological-Political Working
Groups (which included USIA and State). Meanwhile,
the preparation of the material requested by Harri-
man proceeded. The resulting unclassified report
(47 single-spaced pages) entitled Current Economic�
Weaknesses in the Soviet Bloc and Communist Asia
was forwarded early in January 1964.
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The essence of the story on Soviet economic re-
versals was starting to appear in the US press.
The Washington Star of 29 December 1963, naming CIA
as the source of the information, carried an article
which pinpointed the weakness of Soviet gold hold-
ings and the need for long-term credits. 74/ The
New York Herald Tribune carried a similar article
on 5 January 1964. 75/ A NW York Times� front-page
article by Edwin L. Dale, Jr., on 8 January 1964,
with typical Times thoroughness, was much more ex-
plicit as to the facts and figures of the Soviet
economic decline, but more significantly in the
light of what followed, this article gave particular
emphasis to CIA as the source of the informa-
tion.'
The agency was mentioned twelve times in this
article and was identified more explicitly than
ever before as having
virtually exclusive responsibility in
the United States Government for evaluating
the Soviet economy. Several hundred econ-
omists and other analysts work full time
on the question. They primarily use pub-
lished sources, which are now numerous, but
the information is supplemented by some data
obtained clandestinely. 77/
The press reaction to Dale's story was immediate.
article cited above describes what en-
sued:
94
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-71
-2
Li
. . . somehow it caused a furore. Front
page, The New York Times, with attribution!
The Washington press corps raised an immedi-
ate clamor for equal briefing.
In response to this demand the Agency
scheduled its first press conference for
the following day, at CIA headquarters.
Twenty reporters attended. The conference
was conducted by the Deputy Director for
Intelligence, Ray Cline. A press release,
entitled "Soviet Economic Problems Multiply,"
was passed out. But by this time Soviet
economic problems were no longer news.
The first question asked by a reporter was,
"Why? Why this public apparition, this
naked materialization of CIA?"
The DDI replied, "Well, we thought we had a
good story, so. . . "
Twenty eager faces radiated frank and
open disbelief.
The press conference made headlines
all around the world. However, the mes-
sage of Soviet economic slowdown was sub-
ordinated to speculation about CIA's mo-
tives in seeking the publicity. The most
frequently cited motives were (1) a sup-
posed CIA-State Department conflict over
European long-term credits for the USSR --
CIA opposing, the State Department approv-
ing; and (2) an alleged attempt to rebuild
CIA's public reputation after the Bay of
Pigs episode. 78/
The overall purpose of CIA and State in carrying
out the President's suggestion had been served, but
the publicity to the Agency was distressing to
McCone. Orders were issued that thenceforth news
media contacts were to be on an individual and
hon-sttributable basis and that the Agency was to
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wAurr
make no releases of any of its estimates, analyses,
or reports, whether classified or not. 79/ The
Director's orders were, of course, observed. When
ORR next had occasion to release its assessment of
Soviet economic conditions
This was in October
1965. The Department's release, which estimated
the growth of Soviet GNP for 1965 at 3 percent,
was given page 16 attention by the New York Times
and caused no excitement at All. 80/
Probably the principal reason why the press
reaction to these events was unanticipated was the
failure to realize that the press and the public
have short memories. In only a few of the articles
was it mentioned that CIA views on the Soviet econ-
omy had been made public on a number of occasions
in the 1950's� principally through the speeches and
Congressional testimony of Allen Dulles. In some
respects this may have been just as well because
the thrust of the earlier releases had been to warn
of the strength of the Soviet economy insofar as
its ability to support a major military establish-
ment was concerned. Thus an unfriendly newsman by
selective quotations from the earlier statements,
Could have made a case that the Agency was now
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4�2144,-4,4�
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sEQ
�VeAttreadttailligitlidnalia
reversing itself. Actually the earlier statements
never contended that the Soviet economic momentum
would be maintained, nor did the present statements
imply that the Soviet economy was no longer able
to sustain its military establishment. In fact,
the increase in Soviet military spending and the
diversion of scarce critical resources in men and
materiel to the military establishment were spec-
ifically cited as the reasons for the slowdown in
industrial output.
In spite of the unanticipated reaction to the
press conference, the campaign to spread the mes-
sage of Soviet economic difficulties went forward.
Briefings were given also to Congressional
groups
Other newsmen..
97
and
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';;'11?-"RFr7ns'; 711a
The Office was also kept busy assuring McCone
that "we really are right," because much of the
press comment played up disagreement with the CIA
position among academic and other experts, and
from such voices of authority as the London Econ-
omist. This journal took the position that the
Agency's presentation was politically inspired --
as indeed it was -- and went on to note that the
"novel figuring put out by Washington's Soviet
strategists in their deflating exercise is itself
as open to question as the politicalizing behind
it ... the validity, and also the consistency, of
some of the figures can be seriously chal-
lenged." 81/ The Soviet propaganda machine was also
turned on in an attempt to prove the CIA figures
faulty.
During the course of 1964, most of the dissi-
dent voices were stilled. The academic world
gradually came around, as reputable economists
analyzed the Soviet data and became convinced that
CIA methods and procedures were respectable. This
process received a boost with the publication by
the Joint Economic Committee of calculations by
Stanley Cohn
with the
(b)(3)
(b)(6)
Research Analysis Corporation.
Cohn's calculations
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�
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were explained in sufficient detail to convince
other scholars, and his results were reasonably
close to CIA's. 82/ In addition, Harry Schwartz of
the New York Times acknowledged the validity of
CIA's figures in his analysis of official Soviet
releases in an article of 23 July 1964. The Soviet
releases themselves, together with some rather
bumbling letters to US newspapers by Soviet writers,
gave the discerning reader indications that the
CIA analysis might be correct, an impression that
was generally verified when the release of the
Soviet statistical handbook for 1963 belatedly took
place in 1965.
The press conference episode -- aside from the
stir it created -- was significant in the context
of the Office's policy Support activities of late
1963 and 1964. This was largely because ORR had
brought to light an international payments crisis
in the Soviet Union. The materials provided for
public dissemination were supplemented by classified
reports, which were of direct use for policy support.
These included:
99
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The findings of these reports and subsequent analy-
ses were, in summary, that the Soviets were suf-
fering a payments crisis in late 1963, as the cul-
mination of a series of annual hard currency def-
icits incurred from 1959 on. The crisis itself was
precipitated by the disastrous Soviet harvest in
1963, which forced the USSR to draw down its gold
reserve to a new low in order to pay for imports of
Western wheat, totaling $800 million in 1963-64.
The chronic Soviet deficit, which was caused by the
USSR's failure to generate enough exports to pay
for its rapidly growing imports of Western equip-
ment, was financed by sales of gold and by drawing
on the medium-term credits available in the West.
ERA estimates indicated, however, that the Soviet
gold reserve had been reduced to around $2.2 bil-
lion by the end of 1962, and to $1.5 billion at the
end of 1964 after payment for the grain imports.
Furthermore, drawings against medium-term credits
were being largely offset by the growing volume of
repayments. The conclusion was that the USSR faced
important internal adjustments and a decline in its
ability to import Western capital equipment, which
would be eased significantly if Western countries
came to its rescue with substantial long-term credits.
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ERA was estimating at the time that Khrushchev's
expanded chemical fertilizer program alone would
require about $1.5 billion worth of chemical equip-
ment from the West. 83/
(b)(1)
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102
,
H
J
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, .
This was a period not only of economic slowdown in
these countries but also of striving for greater
economic freedom. Romania in particular had shown
marked signs of restlessness with the supranational
planning programs and policies of CEMA in 1963. 86/
Perhaps fortuitously, Romania was the only Eastern
European nation to have .a good year in 1963. What-
ever the reason, the next several years saw all the
so-called Satellite nations seek a more independent
course. Although Satellite activity in this re-
spect was in evidence prior to the Agency's press
conference,* it is reasonable to surmise that the
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(b)(1)
(b)(3)
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.1tET
surfacing of Soviet economic difficulties by the
Agency gave these nations some ammunition in their
pursuit of economic nationalism.
Throughout 1964, ORR's specialists on Eastern
Europe watched carefully for and reported on the
growing evidence that the supposedly monolithic
empire of Soviet Eastern Europe was, economically
at least, crumbling. (By the end of 1964, the
term "European Satellites" had been largely re-
placed by "the Communist countries of Eastern
Europe" in US government usage.) Frequent scraps
of evidence formed the basis for a number of short
articles in OCI publications, while more detailed
analyses appeared in ORR's reporting. The interest
104
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(b)(1)
(b)(3)
SE T
of a number of these countries in developing trade
with the United States was also noted, particularly
in response to the President's policy of "building
bridges to Eastern Europe."*
C. Soviet Gold
As noted earlier in this chapter, there was a
substantial body of opinion that was initially
skeptical about the Agency's exposure of the weak-
nesses in the Soviet economy. Much of the skepti-
cism concerned the estimate that Soviet gold re-
serves had fallen to US $2 billion and that gold
production was only about $150 million annually.
The Soviet gold position, a carefully guarded
state secret, was revealed by ORR after meticulous
research and imaginative use of diverse source
material a classic case of the "jigsaw puzzle"
approach to intelligence so beloved by Agency
briefing officers.
ORR's attack on the gold problem involved esti-
mates of annual production, consumption, and sales
* President Johnson, in a speech honoring General
George C. Marshall at VMI on 23 May 1964, had noted
that "the nations of Eastern Europe are beginning
to reassert their own ability.., we will continue
to build bridges across the gulf which has divided
us from Eastern Europe. They will be bridges of
increased trade, of ideas, of visitors, and of
humanitarian aid." '88/
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over a 40-year period, starting with what was con-
sidered a reasonably accurate and reliable figure
for former Czarist gold reserves in Communist
hands at the end of 1920. Among the inputs in the
calculations were Soviet-released production fig-
ures for a few of the early years, apparently valid
estimates for collections from the Soviet popula-
tion, acquisitions from Spanish Loyalist sources
shipped to the USSR during the Spanish Civil War,
appropri-
ation of the Baltic States' gold holdings when
these countries were absorbed into the Soviet
Union as well as analysis of Soviet reports on
percentage increases in production made by the
American Legation in Riga (Latvia) for the 1934-39
period, scraps of information from survivors of
the NKVD's forced-labor mining efforts under
"Dal'stroy" (the Construction Trust of the Far
North), the memoirs of an American mining engi-
neer who had worked with Glavzoloto" (the Main
Administration of the Gold Industry) in the mid-
1930's, �and other bits and pieces of evidence,
In the
words of the Office's. principal researcher on this
problem,
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(b)(1)
(b)(3)
(b)(3)
(b)(6)
t
The experience gained in reaching this
assessment does not point to the develop-
ment of any standard technique or method-
ology. The important thing seemed to be
a thorough exploitation of all sources
and pursuit of every however unpromising
lead. Though only about five percent of
the leads proved fruitful, those that paid
off did so handsomely. Sources ran the
gamut from the observations of a Yakut
panning for gold in one of several thou-
sand streams in Siberia to reports from
the highest levels in Moscow. 89/
On the basis of its elaborate reconstruction
of the evidence, the Office reached the conclusion
that during the years of Khrushchev's ascendency,
the USSR had steadily drawn upon its gold reserves
over and above current production in order to pay
for imports of machinery from the West. When it
became necessary to import substantial tonnages of
grain as well, gold reserves dropped to a low of
$1.8 billion at the end of 1963.
It was not easy to convince observers of the
Soviet economy outside the intelligence community
of the validity of ORR's estimates. For the
Treasury Department's skeptics, a special briefing
was given following arrangements for a special in-
telligence clearance. The Bureau of Mines of the
Department of Interior, although it did not pub-
lish estimates of the Soviet gold reserves, did
estimate Soviet gold production using primarily
107
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unclassified sources, and its figures were substan-
tially higher than ORR's. The Bureau of Mines
estimates led outside observers to calculations of
Soviet gold reserves much higher than those put
forward by the Office. Such calculations were
widely used to cast doubt not only on CIA's esti-
mate of gold reserve but also on its "denigration"
of Soviet economic progress in early 1964 and sub-
sequently. When, however, the Bureau of Mines re-
vised its series on Soviet gold production in the
�1964 Minerals Yearbook, published in 1965, follow-
ing a briefing by �RR's experts, the doubts were
pretty well eliminated. The British journal Statist
noted:
The necessity to resume gold sales on
such a scale to pay for its bread is a
severe blow to the Soviet Union. The size
of its gold reserves, as well as of its
annual production of the metal, is one of
the best kept Russian state secrets. Un-
til January, 1964, Western sources had
placed the value of Soviet gold production
at $300 to $700 million annually. Soviet
gold reserves were held to be worth between
$4,000 million and $10,000 million. Then
the US Central Intelligence Agency startled
the world by putting the annual Soviet gold
production at only $150 million to $175
million, and consequently reducing the esti-
mate of Soviet gold reserves to $3,000 mil-
lion in 1956 and to $2,000 million at the
end of 1963.
At the time, many experts received the
CIA figures with a good deal of skepticism.
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These figures were also directly contra-
dicted by another US Government organiza-
tion engaged in estimating Soviet gold
production -- the US Department of the
Interior Bureau of Mines... The US Bureau
of Mines, having so impressively demon-
strated its independence of the CIA two
years ago, has now published its "Minerals
Yearbook, 1964" which drastically revises
downwards its estimates of Soviet gold
production and reserves over the last ten
years. The Bureau offdrs as its reason
for doing so "substantial new information
on gold-mining activity in the Soviet
Union, which has become available to the
Bureau of Mines since earlier Minerals
Yearbooks were published." Since the re-
vised estimates agree with those of the
CIA it is not difficult to guess who has
made the new information available. And
it must have been impressive enough to
make the Bureau's experts publicly eat a
large slice of humble pie.
One therefore cannot but accept the
1964 CIA data as essentially correct, or
at worst, as the best piece of informed
guesswork we have.
There have been a number of indica-
tions over the past few months that the
Soviet Government is worried about the
state of its gold reserves. The Central
Committee of the Communist Party pub-
lished an unprecedented appeal to the
gold miners to exceed their production
goals and to reduce costs. The prices
in roubles paid Soviet citizens who
turned in the gold they held was in-
creased by 40 percent. The penalties
meted out to illegal gold dealers had be-
come truly draconian even by Soviet stand-
ards. In an attempt to get more hard cur-
rency and thus save gold, well-stocked
stores and bars were opened in Moscow
primarily for foreigners, in spite of the
psychologically disadvantageous effect
this was bound to have on a luxury-starved
population.
109
� All this tends to confirm that the gold
situation in Russia is indeed serious. The
crop of 196.5-was not as bad in 1963. It
was, however, �bad enough to make the Gov-
ernment transport probably as much as one
third of its gold to its rivals' coffers
simply in exchange for the nation's daily
bread. Nothing could advertise more strongly
the acuteness of the country's agricultural
crisis. Speaking at the March (1965) ses-
sion of the Central Committee one provincial
party official said: "If 1963 had been
followed by another such disastrous year,
I do not know how we should have survived."
What we now know about Soviet gold re-
serves shows that he was not exaggerating. 90/
The Economist also came around to the Agency's
view, but after reviewing the evidence and noting
in addition that Russian behavior in international
markets gave credence to the low reserves estimate,
this publication's Foreign Report supplement was
ungracious enough to observe:
Naturally, it cannot be ruled out that CIA
and the Bureau of Mines are in cahoots; but
the Bureau of Mines is a responsible pro-
fessional body which is not on the face of
it likely to have lent itself lightly to
the CIA's department of disinformation.
Russian trading behavior had, of course, been
an additional element of evidence in ORR's analysis.
Again to quote,
detailed analysis:
...in the realm of deeds Soviet behavior
has been much more appropriate to a nation
with limited and dwindling gold reserves.
The USSR has frequently forgone attractive
trade offers when its efforts to obtain
long-term credits failed, has lost desired
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� deals by insisting on barter arrangements,
and has been searching among its products
for additional foreign exchange earners.
. And finally, during certain negotiations
on an international gold reserve to which
each nation should contribute ten percent
of national reserves, Soviet representa-
tives offered, not the $1 billion appro-
priate to these public claims, but $250
million, around ten percent of our fore-
going estimate of their reserves. 91/
D. Later Reporting WI the Soviet Economy
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The decision not to repeat the press conference
did not preclude the occasional use of press con-
tacts to publicize points of interest about the
Soviet economy.
By September 1965, ORR's economic analysts
were ready to forecast the USSR's economic per-
formance for that year. With a recurrence of
agricultural difficulties, Soviet GNP was estimated
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to be increasing at about 3 percent compared with
7�Dercent rate in 1964.
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Chapter V
ECONOMIC RESEARCH ON A GLOBAL SCALE
Pat: Have you ever been In Patagonia?
Mike: No.
Pat: Good, then I can speak freely.
Old story told by
116
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A. Policy Support Drive
Not long after the reorganization of 1962, it
became apparent that the area branches of the new
International Division would not be able to limit
their research to those countries that were the
targets of Communist economic penetration activity.
Among others, John A. McCone, the new DCI, was
requesting support on a variety of countries and
subjects outside of ORR's traditional concerns.
A DCI action memorandum of 30 October 1962, for
example, requested a memorandum on the current
situation and economic "trends in Western Eurpoe.
The resulting paper, prepared in five days by the
East-West Commerce Branch, can rightly be regarded
as a tour de force, since the branch was not
,formally organized or staffed for such a task.* 95/
* The assigned mission of this branch was limited,
as indicated by its name to the analysis of Bloc
economic relations with the countries of the Indus-
trial West. This included the still important
export control and other economic defense support
activity..
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we. 1.-tr+f Aa
The major source of the new responsibilities
stemmed, however, from the directives with respect
,to policy support that were issued in the fall of
1962. At the direction of the DDCI, the DDI had
set up a Senior Intelligence Officer Team for
Policy Support
The DDI's Special Assistant for Policy
Support,
channel to bring
tive offices the
used the group as a
to the attention
principal policy
White House and other consumers.
of the substan-
concerns of the
In spite of the
several touchy issues between East and West of
that period -- Cuba, Berlin, etc. -- a surprising
number of these policy concerns dealt solely with
Free World matters. Accordingly, a number of
118
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S5,It
requests for economic intelligence support in areas
quite new to ORR were forthcoming. The new Inter-
national Division's area branches, set up for
the limited purpose of analyzing the impact of
Bloc economic programs on a selected group of
underdeveloped countries, found themselves over-
whelmed by requests for a much wider range of
material on countries in various stages of econ-
omic development and with differing economic
the new
branches found the task of responding to these
new and unusual requests, often with tight dead-
lines, formidable indeed.
nevertheless, demands filled the pipeline. The
probability of egregious error was great. Fortu-
nately it was avoided. If some of the economic
intelligence papers on the Free World produced
during these early years seemed superficial, they
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in terms of the demands made, they filled
a definite need.*
(b)(1)
. (b)(3)
Early in
ORR set up a
the Area and
1963, responding to the new demands
policy support group, consisting of
Division Chiefs and the Chief of
Current Support
Staff, and chaired by
(b)(3)
DAD/RR. The group's first meeting was
(b)(6)
the
held
on 16 January
1963 to receive a briefing
from
on the scope of his assignment:
(b)(3)
(b)(6)
liaison with McGeorge Bundy's White House Staff
and other policy groups on matters of current
policy interest.
A number of other meetings
were held with
during the year and served
(b)(3)
(b)(6)
to keep the Office alert to White House preoccupa-
tions and the shifts therein. It was increasingly
apparent that, while interest in the Soviet Union
and Communist China was undiminished, there was
a growing need to put more and more emphasis on
(b)(1)
(b)(3).
(b)(6)
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ox
the problems of the Free World. The pressure
to-add more countries to those that the ERA was
to "cover" could not be resisted.
It was the consensus
of the group that nowhere in the Government was
adequate research being done on these countries,
and
said ORR should consider assigning
analytical resources to this area. Also surfaced
at these meetings were other Free World problems
that could hardly be related even in an indirect
way to ORR's charter responsibility for research
on the Communist Bloc.
Mean-
while' the demands for day-to-day coverage of
Bloc shipping and military aid questions continued.
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As a result of these pressures,
the DDI, directed that approximately
of the professional strength of the ERA be shifted
122
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41.
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t7c.
Concomitant with these organizational charges,
the :annual research program drawn up on the spring
of 1963 for FY,1964
from programs of
showed significant differences
previous years. Planned research
on the Free World
(b)(1)
of the total
(b)(3)
and included for the first time
a number
of self-initiated projects dealing with
economic
problems of Free World countries. Such
titles as
(b)(1)
(b)(3)
appeared for the first time,
while the planning for contributions to NIE's
included analyses of the domestic economic situa-
tions of a wide range of Free World countries. In
the military area, the analytical effort was ex-
panded to include such problems as
Studies
of the impact of weapons programs of the Free
World countries on their domestic economies were
scheduled by the regional branches of Interna-
tional Division. 100/
123
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B. � Conflic*t with Priority National: ;Inte'lliqence
� Objectives :(PNIO's)�
At the same time that requests for ORR policy
support on the Free World were burgeoning, the
usual pressures for cutting the alleged fat out
of Agency activities because of budgetary problems
were constantly felt. Not unexpectedly, the best
way to justify an activity was to relate it to a
high-category Priority National Intelligence
Objective (PNIO). There was little difficulty
in doing this with the research activities of the
Military-Economic Division.
124
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ST
Thus the PNIO's were relatively useless to
the ERA, either as a guide to activity or as an
authorization for priority treatment by the fiscal
authorities. During the period when economic
intelligence was growing in importance to the
policymakers and in the range of its concerns,
both geographically and substantively, the pri-
ority formally accorded to it in the overall
scale of intelligence community activities was
diminishing -- with unfortunate effects on its
resources. At the same time, the dilemma that
had predicted early in the 1950s
was becoming particularly acute. Service to the
"clamorous customer" was taking its toll in the
area of basic research. The problem was
succinctly stated
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The management problems created by these bu-
reaucratic considerations presumably were not
unique to ORR.
ORR's leaders
Nevertheless, they demanded of
126
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0.
adaptability and initiative to a degree unfelt in
the 1950's. As recounted in the subsequent pages
of this volume and in Volume III, the challenges
have been met largely by a variety of tactics
relative to the Office's consumers and competitors
within the community. The first of these tactics
was the acquisition of formal authority to do what
was being informally demanded of the Office.
C. McCone's Letter to Rusk
With the expansion of ORR's economic intelli-
gence activity to Free World countries, it was
not long before concern was expressed that author-
ity for this activity was not clearly established
either in Agency Regulations or in DCI Directives.
This concern was first officially voiced by
the Comptroller, in mid-1963. He sug-
gested that it might be desirable to propose
changes in these documents in order to clarify
the Agency's authority to allocate resources to
the military-economic and Free World economic
functions. 103/ did not feel, however, that
the time was ripe for a formal step of this kind.
Although the demands for production of Free World
economic and military-economic intelligence were
largely caused by the failure of the Departments
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of State and Defense to fulfill their responsi-
bilities under existing DCID's, the Office had
not developed, in the year since its reorganiza-
tion, professional resources adequate to the task
of assuming primary community responsibility for
these activities. For the time being, at least,
it was considered preferable to justify the
Office's contributions in these fields as "depart-
mental" -- i.e., as support for the DCI, the DDI,
and the Office of National Estimates. 104/
reiuctance to push too far too fast
into State's areas of responsibility was shared
in this period by
In 1964 the Inspector General's Survey of the
Office noted
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These considerations not withstanding, the
.pressures for more emphasis on Free World economic
intelligence mounted and the need to formalize the
authority for doing it became sharper.- The final
impetus which moved the Office to seek formaliza-
tion of its role in the production of Free World
economic intelligence came from the Bureau of the
Budget, and specifically from the former DDI and
former chief of ORR, had
left the post of DDI in April 1962 to become Chief
of the Bureau's International Division. His role
in the drawing up of DCID 3/1 in 1954 has been
described in Volume I.* Although the written
* See Volume I, pp. 67-73.
129
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record does not make clear his specific views on
the Free World matter in 1964,
it was at
mended a reduction
recalls that
behest that the Bureau recom-
being
allocated to Free World research for FY 1966. 108/
This would have cut deep into the Office resources
and its ability to respond to the demands for sup-
port from the DCI, ONE, and the NIS Program, as
well as from a growing number of consumers outside
the Agency.*
Again, however, it was not believed to be
necessary or desirable to revise DCID No. 3/1,
which allocated primary responsibility for the
production of all economic intelligence on foreign
countries outside the Sino-Soviet Bloc to the De-
partment of State. Preferring to rely on the
existing language of the directive, drafted
a letter for McCone's signature, to be sent to
the Secretary of State, setting forth the reasons
why, as DCI, he considered it appropriate for ORR
to produce economic intelligence on the Free World.
After several drafts and with the (apparently)
130
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5-Ffelthr
reluctant) acquiescence of State's Bureau of
Intelligence and Research (INR), the letter was
sent on 11 Marc 1965. The letter stated that
DCID No. 3/1 "provides that each department or
agency ... shall maintain adequate research facil-
ities to accomplish its departmental intelligence
production mission, and ...'may make such studies
as it believes necessary to supplement intelligence
produced by other departments and agencies." The
DCI noted that he had
found it necessary to develop within
CIA a limited capability for all-source
economic analyses on non-Communist coun-
tries..... The Clandestine Services re-
quire detailed economic analyses based �on
highly sensitive sources to support certain
of their activities in non-Communist areas.
The Agency's responsibility to produce,
at the national level, timely all-source
economic intelligence on current develop-
ments in non-Communist areas precludes,
as a practical matter, our relying wholly
on the other intelligence components of
the community.
It also stated that he "must maintain within-the
Agency the capability of obtaining immediate all-
source economic intelligence bearing on critical�
national policy questions...." Furthermore, the
letter reminded .the Secretary that CIA had taken
over the Departmept's NIS responsibilities at
the request of INR's Chief, Roger Hilsman, and
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td
jEf
accordingly the NIS Committee had allocated to ORR/
CIA the responsibility for producing the Section
6 of the NIS General Surveys for the Free World
countries. He closed by noting that he considered
"DCID No. 3/1 properly interpretable as permissive
of these intelligence production activities." (See
Appendix B).
To all intents and purposes that ended the
matter. It is noteworthy that the Department of
State (INR), which had fought stubbornly in the
1950's to keep ultimate responsibility for overall
assessments of the Bloc economies* was surprisingly
resigned to ORR's entry in the 1960's into its
assigned field of primary responsibility. There
was obviously some reluctance on INR's part and
some informal effort to delay the dispatch of
McCone's letter. After this failed, and the letter
had formally been sent
The fact was, of course
that policy
officers of the Department itself had frequently
* See Vol I, pp. 67-73.
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been seeking support from ORR on these countries.
The Office was providing not only commentary on
Policy Planning Council papers on Free World
countries,
are to be found
� in the S-Project log for 1964 with the State De-
partment policy bureaus cited as requesters. The
latter project was, as indicated above, prepared
for Secretary Rusk himself.
D. McCone's Letter to McNamara
As a result, the ORR effort in the field
of military economics expanded to fill the gap.
The Military-Economics Division, which had been set
up to concentrate the Office's resources in this
field, was expanded into the Military Research
Area (MRA) in March 1964. There were, however, two
major categories of military-economic intelligence
activity that remained the concern of the Ecohomic
(b)(1)
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Research Area. These were the whole spectrum of
problems arising from the Indochina conflict (the
subject of the following chapter) and the contin-
,-
uing problem of analyzing the strategic impact of
major military and space programs on the economies
of the Communist countries, chiefly the USSR. The
latter problem came to a head in the fall of 1964.
Thus at virtually the same time that the organiza-
tional and jurisdictional aspects of economic
intelligence production on the Free World were a
major ORR management concern, the military-economic
coverage matter was also being determined.
The problem of assigning more resources to
strategic impact analysis was aired at a meeting
the head of CIA/DIA JAG
of ORR
in October 1964.
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Because additional slots would be necessary, this
meeting was followed by appropriate staff studies
and other procedures which resulted in the estab-
lishment within Analysis Division, ERA, of a
Strategic Impact Task Force
This group, which was
to be raised to a Branch when appropriate author-
ity was given,* was to undertake comprehensive
studies of Soviet long-run growth prospects as
affected by the impact of alternative military
programs. Its duties would include specific
sectoral analyses of key industries such as elec-
This occurred in the spring of 1965.
135
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El
El
ci
tronics and analysis of the requirements for
scarce categories of trained manpower. It would
draw on the MRA's estimates of space and defense
expenditures and on the BRA'S USSR Branch for its
current aggregative estimates of Soviet GNP and
components by end use and sector of origin. Thus
it was to move the Office's aggregative projections
to a new level of analysis involving consideration
of alternative military and related programs for
time periods considerably in the future and adapt-
able to the "cost-effectiveness" analysis being
used in the forward planning for US defense pro-
grams by the Department of Defense. 111/
The ORR proposal was discussed with a number
of Defense officials
(b)(1)
(b)(3)
(b)(6)
It was agreed that the matter
should be formalized by a letter from the DCf to
136
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."z
�����is.
the Secretary of Defense. 113/ This was accord-
ingly dispatched early in 1965 (see Appendix C).
It emphasized the confusion and expense that
would result from reliance on external contracts
for this type of research and the desirability of
central direction, monitoring, and evaluation of
this activity by the intelligence community. It
also requested the Secretary's endorsement of
CIA's intention to negotiate with the Bureau of
the Budget for an expansion of its capabilities in
the field. The concurrence by Defense was duly
accorded �in a responsive letter from Deputy Secre-
tary of Defense Cyrus Vance on 5 February 1965.
(See Appendix D).
E. Reorganization of 1965
The events described above, culminating in the
DCI's letters to the Secretaries of State and De-
fense, succeeded in establishing within the intel-
ligence comMunity the concept that CIA -- that is,
ORR -- had a legitimate role to play in two major
areas of national intelligence concern, although
the prime responsibility for these areas remained
in the hands of the Departments. Meanwhile, re-
organization plans were afoot to strengthen ORR's
ability to function in these areas.
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pxamor
the continuing need to shift emphasis from research
on industries and commodities in Communist coun-
tries to aggregative economic research on Free
World countries and on international economic
activities of Communist countries, the existing
structure of ERA no longer provided the most ap-
propriate mix of numbers and grades to meet the
needs of its customers. Implementation of
proposals to reorganize the area, made in the fall
of 1964, was now able to go forward. Within the
Economic Research Area, the following changes were
made (see Figure 3):
(1) The existing International Division (D/I)
was abolished with its elements disposed'as fol-
lows:
(a) The Area Brnches were realigned
and formed into a new Free World Division
(D/FW).
(b) The remaining p/I branches, (Trade
and Finance, Policies and Organizations,
and International Shipping) merged with
the service industry branches of Manufac-
turing and Services Division (Transporta-
tion, Construction, and Communications)
into a new International Trade and Services
Division (D/IS).
(2) The remaining branches of Manufac-
turing and Services Division (Manufacturing
and Electronic Equipment) were merged with
the Resources Division to form a new Resources
and Industries Division (D/R).
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(b)(3)
(b)(3)
(b)(6)
7777717777777717777
2.1.1
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FIGURE 3
Reorganization of the Economic Research Area, ORR
7 May 1965
Analysis Division
USSR Branch
Far East Branch
Eastern Europe Branch
Manpower & Management Branch (abolished)
Strategic Impact Staff
International Division
Asia Branch
Latin America Branch
Near East/Africa Branch
East-West Commerce Branch
Trade & Finance Branch
Policies and Organizations Branch
International Shipping Branch
Manufacturing & Services Division
Transportation Branch
Construction Branch
Communications Branch
Manufacturing Branch
Electronic Equipment Branch
Resources Division
Agriculture Branch
Chemicals Branch
Electric Power Branch
Fuels & Power Branch
Minerals & Metals Branch
Analysis Division
USSR Branch
Far East Branch
Eastern Europe Branch
Strategic Impact Branch
International Division
Asia Branch
Latin America Branch
Near East Branch
Africa Branch
Western Europe Branch
Trade & Services Division
Trade & Finance Branch
Policies & Organization Branch
International Shipping Branch
Transportation Branch
Construction Branch
Communications Branch
� Resources & Industries Divisior
Manufacturing Branch
Electronic Equipment Branch
Agriculture Branch
Chemicals Branch
Fuels & Power Branch
Minerals & Metals Branch
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(3) The Strategic Impact Task Force was elevated
to a Branch. in Analysis Division, while the, Manage-
ment and Manpower Branch was abolished with its
functions dispersed among the other Analysi6 Divi-
sion Branches.
This reorganization was approved by the several
echelons of command on 7 May 1965 with one excep-
tion. This was the demand by the Office of Budget,
Program Analysis and Manpower, that the name "Free
World Division" be changed. The objection appeared
to be that Cuba was among the responsibilities of
this Division and that therefore it could not be
truly considered "Free World." Accordingly it
was again named "International Division,"* and the
word "InternatiOnal" was dropped from the name of
D/IS, which became Trade and Services Division
(D/T).
The number of analypts assigned to the Free
World branches was increased by this reorganization
and those assigned to the functional branches cor-
respondingly reduced. While the functional
branches continued to assist with technical know-
ledge, when needed, the Free World branches were
thereafter better able to carry out research on
* In a later reorganization (1 November 1967) this
nicety was ignored, and the division finally acquir-
ed the name "Free World Division."
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ET
the individual industrial and resources sectors of
their assigned economies. This was a reflection
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of
judgment that
The reorganization also enabled the ERA to
better cope with the increasing burden of policy
support and particularly of Free World support.
In retrospect, it failed in.one major respect. It
did not allow for the rapidly growing demands of
the Vietnam War, although as shown in the following
chapter the ERA was already deeply involved in re-
search and analysis on .a number of aspects of that
affair. The persistence of the Vietnam problem
1
was not yet fully accepted, and it required another
two years before a major reorganization took
cognizance of the fact.
F. Increase in Policy Support Activity
Early in 1965,
joined McGeorge
Bundy's staff at the White House. He was succeeded
as the DDI's Policy Support Assistant by
a former ORR Division Chief,: who had been
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serving on the Board of National Estimates. The
combination of a White House staffer with know-
ledge of and respect for ORR's economic intelli-
gence product and a former ORR senior economist
in the principal policy support seat in the Direc-
torate of Intelligence could have only one result:
an intensification of ORR's support role for the
White House.
No area of the globe was considered "off limits"
for ORR's economic intelligence efforts from that
time forward, but the first major request from
the White House, after
assignment there,
was in familiar territory. This was an invitation
to assist in the activation of President Johnson's
"bridge building" program.
i
1. Bridge Building
In his second State of the Union Message, de-
livered on 4 January 1965, President Johnson had
reiterated his intentions, originally expressed
in May 1964, to "build bridges of trade" to East-
ern Europe.
In Eastern Europe restless nations
are beginning to assert their identity.
Your government ... is exploring ways
to increase p6aceful trade with these
countries and the Soviet Union ... 115/
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The message was followed on 18 February by the
appointment of a Special Presidential Committee
on US Trade Relations with Eastern European Coun-
tries and the Soviet Union, under the Chairmanship
of J. Irwin Miller, an Indiana businessman.
The Agency, together with the Departments of
State, Commerce, Defense, Agriculture, and Interior,
was called upon to assist the Committee with
briefings and other materials. It was found that
a number of ORR publications issued during the
previous year were directly pertinent to the Com-
mittee's concerns, and the following reports were
accordingly made available to its members.
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Finally, two briefings were presented to the
Committee by
on the subjects of The Stra-
tegic Importance of Western Trade to the Soviet
Bloc and l'he� Prospects and Implications for Soviet
Bloc Trade with the Industrial West. These brief-
ings pointed out that Western trade was relatively
insignificant in total Soviet and East European
economic actiyity and that the role of the United
States in East-West trade was neg1igible.1 The
USSR and Eastern Europe regarded the West as an
important source of advanced technology for
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accelerating their economic growth and had blamed
restrictive Western trade policies for the failure
of East-West trade to expand as rapidly as they
had hoped. The major obstacle to the expansion of
this trade, however, was not Western restriction,
but chronic failure of the USSR and Eastern Europe
to develop export products capable of gaining
significant markets in the West. While the Western
share of both Soviet and East European trade was
expected to remain about the, same, regardless of
Western trade policy, the removal of US restric-
tions might raise significantly the US share in
total East-West trade.
The Committee's report to the President, dated
29 April 1965, reflected these intelligence assess-
ments, both on the importance of East:-West trade to
the participants and on the likely future course
of this trade. The Committee recommended a selec-
tive expansion of US-Communist trade in non-stra-
tegic items, and urged that greater use by made
of trade concessions as an instrument of US policy.
This report was accepted by the President as the
basis for a proposed modification of US trade policy
toward Eastern Europe and the USSR.
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2. Southeast Asian Development
'Another major Presidential pronouncement in
the spring of 1965 involved the "Free World" side
of ORR's economic research team. This was the
President's proposal, in a speech at Johns Hopkins
University on 7 April 1965, for a massive coopera-
tive development program for all of Southeast Asia,
including North Vietnam, to be financed by the
United States and all other industrial countries,
including the Soviet Union. He announced that the
United States would, Congress willing, pledge a
billion dollars in support of such a program. Al-
though the offer was promptly rejected by North
Vietnam and by the Soviet Union, the US Government
moved forward with plans to carry it out. On the
day of President Johnson's speech,
sent an
urgent request to ORR for ideas on economic develop-
ment of the Southeast Asian region. A major prob-
lem was how to read the President's intentions,
since the usual Johnson "style" was evident in the
way this proposal was sprung on the Washington
bureaucracy. As
described the problem:
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ORR's response made a number of suggestions
and appraised the prospects of such existing
schemes as the Asian Highway and the Mekong River
Basin Project. Viewing the $1 billion proposal
against the background of $10 billion in aid al-
ready extended to the region since the end of.
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that had prevented past and existing aid programs
from having much of an impact. The response also
suggested a more positive attitude on the part of the
US Government toward the Asian Development Bank, a
project that was just getting started at the time
and was not receiving much encouragement from Wash-
ington. 117/
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With its global responsibilities now implicitly
recognized throughout the community, a necessary
shift took place in the tempo of the ERA's activ-
ities. The Current Support Staff had, of course,
for many years operated under "crash" conditions.
However, that staff did not get involved in the
new Free World responsibilities exciat as a trans-
mission mechanism to OCI and its publications. The
new burden of quick response to policy requests
thus fell in large measure on the Free World re-
search branches. During the remainder of 1965 a
wide range of crisis situations occurred that called
for response from ORR.* Although some of the activ-
ity was in the familiar form of NIE contributions,
it was by no means restricted to this vehicle.
Among the situations that required support projects
on a crash basis were: Indonesia's withdrawal from
the United Nations (January 1965), Singapore's
withdrawal from Malaysia (August 1965), India's
two border wars with Pakistan (April and August
1965), the abortive Communist coup attempt in
Indonesia (September 1965), the Indian food crisis
.* The Geographic Research Area had left ORR in
June 1965,. leaying ORR with only economic and
military-economic responsibilities.
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(fall and winter 1965-66), and Rhodesia's with-
drawal from its ties with the United Kingdom (fall
of 1965).* Less sudden but persistently grave
I
issues were also receiving attention: The UK's
7
balance-of-payments problem, international petro-
leum problems, smoldering unrest in the Congo and
in Portugese Africa, and the nuclear development
plans of France and India. Finally, of course,
there were the ever-present problem of Cuba, mil-
itary and economic programs of the Communist coun-
tries in the "Third World," the internal economies
of traditional target countries, and the burgeoning
problem of Vietnam.
Even "intelligence" on the US economy was not
omitted from the ERA's activities. Not only were
US data required and some attount of analysis ne-
cessary for the not infrequent comparative studies
required by policymakers concerned with the growth
race; but also the DCI would have questions of the
"What would happen if ...?" variety, with respect to
the US economy. Thus in December 1965, in response
to one of these DCI queries, the ERA prophetically
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warned that, without action to control prices, an
increase of $10 billion to $11 billion in defense
outlays as a result of the Vietn'am involvement would
create great inflationary pressures. The existing
US inflationary "creep" of 1.5 to 2 percent a year
could under these circumstances increase to 4 to
5 percent. 120/
3. Dual Crisis in India
Illustrative of the variety of support activities
�that occurred in response to crisis situations are
the several papers called for from ORR during the
fall of 1965 with respect to India. Not only did
the longstanding dispute with Pakistan over Kashmir
break out into open hostilities in August 1965 but
also India found itself facing a major food crisis
almost simultaneously. Among the support projects
prepared in ORR in response to these dual problems
were:
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* So far as the writer can ascer Ain. thp nrepara-
tion of these support project
is an ORR record for a single analyst. The yeoman:
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It is discouraging to note that in spite of
ORR's continued reporting throughout the fall of
1965, the Indian food crisis seemed to have caught
many US officials unaware. In a memorandum for the
record on the 16 December 1965 "Rostow Lunch"
meeting that considered the problem, a DDP officer
who was present
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S-1729 (noted above) addressed to these very
issues,, was already in process, was published on
the day of the meeting, and was quickly made avail-
able to the Departments of State, Agriculture, and
Defense.
4. Black Africa
In Black Africa, as in other areas of the less-
developed world, the Office's initial interest was
in those countries that had received economic or
military aid from Communist countries. Thus Ghana,
Guinea, Mali, and Tanzania were the foci of Office
reporting on Africa in the early 1960s. Internal
economic problems in the forty-odd new nations of.
the region soon outweighed this narrow concentra-
tion, however, and in the reorganization of 1965
the Near East-Africa Branch was replaced by separate
branches for each area, and African research was
thus elevated to Branch status. By the second
half of the decade, the Branch's research product
was in considerable demand by policymakers,
particularly in the State Department.*
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The proliferation of newly independent coun-
tries arising in Black Africa in the 1960s put a
considerable burden on this small branch. Each
country was usually favored with a brief ORR/OER
memorandum outlining its prospects for economic
viability; demands for an NIS General Survey Eco-
nomic section soon followed, and since the weak
economic position of these countries made many of
them clients for US aid, the region acquired a
policy significance far beyond its intrinsic eco-
nomic importance. Although the region and the
individual countries had perhaps rather low pri-
ority in terms of their economic importance, their
economic problems were myriad. The efforts of the
office to analyze them illustrate in an extreme
form the difficulties 4cing economic intelligence
practitioners responsible for those countries vari-
ously described as "undeveloped," "underdeveloped,"
"less developed," and even "developing" -- that
is, useful and meaningful statistics are prac-
tically non-existent. Since economists are ex-
pected to quantify and measure and since policy
decisions are supposed to be based on "hard facts,"
the various papers issued about these countries --
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whether NIS chapters, NIE contributions, other
support papers, or internally initiated projects �
'were replete with economic data and statistics
which suggested a spurious exactitude no matter
what caveats accompanied them. Some of the
absurdities created by the application of.statis-
tical measurements, designed for modern economies,
to countries just emerging from the bush were well
described by
in "African Numbers
Game," a Studies in Intelligence article, appearing
in Fall 1964. Demands of the office's .consumers
for such measurements did not noticeably diminish,
however, and the Office has attempted to satisfy
the need with as much common sense as is possible
under the circumstances.
The Office's most persistent African problem in
the 1960's was undoubtedly �that caused by Rhodesia's
unilateral declaration of independence (UDI) in
November 1965. This action, although it had only
moderate significance as measured on any quanti-
tative scale of US economic interests, created
many knotty subsidiary problems. Among them were
the black versus white conflict in Southern Africa,
the United Kingdom's, and ultimately the United
Nation's effort to bring economic pressure to bear
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on a former colony, the economic dependence of a
black state (Zambia) on the neighboring outlaw
white regime in Rhodesia, the US strategic and
financial interest in the copper and chrome pro-
duction of Zambia and Rhodesia, and the opportunity
for Communist influence by the Tanzania-Zambia
railroad project being planned with assistance
from the Communist Chinese.* Since September 1965
when the crisis surfaced, continuing through March
1970, when Rhodesia cut its last ties with the
Crown and became a republic, and down to the time
of writing, ORR/OER has continually been called
upon for assessments of this many-faceted problem.
Of particular interest has been the concern over
the effectiveness of the economic sanctions pro-
gram against Rhodesia., In this respect, the
Office has maintained consistently that such a
program would be unlikely to achieve its objec-
tive -- sufficient disruption of the Rhodesian
economy to force a return to British rule.
* The agreement for this railroad project was
concluded by the parties on 5 September 1967,
after Western aid for the project had been denied
on the grounds that it could not be justified
economically.
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The ineffectiveness of economic sanctions
against Rhodesia was, as indicated, the major
theme of ORR/OER reporting in this situation. The
voluntary sanctions in effect following UDI in
November 1965 were replaced by a United Nations
mandatory program on 16 December 1966. The ORR
estimate at that time was that these were not
likely to be much more effective than before,
because of Rhodesian determination to evade the
sanctions and their ability'to do so with the
ready cooperation -- official and private -- of
South Africa and Portugal (in Angola and Mozam-
bique), who controlled the trade and transport
routes from Rhodesia. Zambia, dependent on Rhodesia
, I
for its trade routes, was suffering much more from
the sanctions than Rhodesia, and this was, of
course, one reason for its frantic search for other
route's and its acceptance of the Chinese offer of
assistance in construction of a railroad through
Tanzania. These judgments continued to characterize
the Office's assessment of the problem throughout
the course of this history.
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Chapter VI
VIETNAM
"Writing history especially where it blends into
� =rent events, and especially where that current
event is Vietnam, is a treacherous exercise."
Leslie H. Gelb
(Chairman of the "Pentagon
Papers" Task Force)
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1.4-444
A. Buildup of Research Resources on Vietnam
Until 1963, the ERA commitment to economic
intelligence production on countries of the Indo-
china penisula was small.* The economy of North
Vietnam had been the subject of several studies
by the Far East Branch of the Analysis Division
as part of its normal mission to follow the Com-
munist countries in the area. 122/ Support
projects that had more immdeiate relevance to US
efforts to counter North Vietnam's activities
against South Vietnam were also produced.
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The next major project wag study of
selected targets in North Vietnam, prepared in
June 1962 for Walt W. Rostow, then Chairman of the
Policy Planning Council of the Department of State.
The position of the requester and the tone of the
transmittal memo implied that this was designed
for long-range contingency planning rather than
immediate operational use. 124/
Prior to 1964, the Asia Branch of the Inter-
national Division had produced only occasional
support projects on Laos, Cambodia, and Thailand
as contributions to NIE's or in response to
specific requests. South Vietnam, which of course
had no economic relations with the Communist world,
was receiving only superficial attention.* The
Transportation and Construction Branches of the
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