been further intensified by the withdrawal of Soviet aid and technical assistance, leaving many industrial development projects incomplete, and by the sharp cutback in Chinese Communist imports from the Soviet bloc.

Communist China's economic difficulties and the strain of the recent campaign against India should tend to limit her ability to engage in large-scale aggression against other of her neighbors, particularly where such aggression might involve a direct confrontation with U.S. military forces. A large-scale overt attack elsewhere in southeast Asia, or against Taiwan or South Korea, is not very likely under present circumstances. However, an intensification of lesser efforts to cause trouble for the free world should be anticipated, particularly in terms of psychological warfare and political intrigue. And we have no reason to doubt that Communist China will continue to fuel the guerrilla war in South Vietnam, at least at the present scale, or support the position of the Communist elements in Laos.

To sum up, the Soviet Union will most likely pursue a strategy in which their military forces are designed to permit the Soviet Union

to

(a) Confront us with continuing political pressure, subversion, and various forms of unconventional warfare under the umbrella of their growing nuclear power;

(b) Capitalize on their conventional military power by the threat of bringing it to bear in situations where they have local conventional superiority; and

(c) Deter the West from military action.

Communist China will most likely follow an independent policy designed to expand its own influence in the Communist camp and among the unaligned nations, resorting to armed aggression to satisfy its ambitions only where this can be done without a direct confrontation of U.S. military forces.

The size and character of the military effort of both countries will be tempered by the pressures of other demands on their available resources. This factor should be kept in mind as we discuss the adequacy of our own military program.

D. IMPACT OF THE DEFENSE PROGRAM ON THE ECONOMY

A program as large as defense, commanding 10 percent of our totanational output, is bound to have an important impact on the econl omy, internationally, nationally, and locally. And, indeed, at the local level this impact is usually intensified by the uneven geographic distribution of defense-related industry and our own military activities, by the disproportionately large claims made by the defense program on some occupational categories and on certain sectors of industry, and by the rapidly changing composition of the defense program as technological innovations create the need for new weapons and facilities and obsolete the old.

1. DEFENSE CONTRACTING

We are aware that the award of new defense contracts and the establishment of new defense facilities in a particular area can make the difference between prosperity and depression. The law requires the Defense Department to give certain limited preferences to chronically

depressed and surplus labor market areas and to assure an equitable participation by small business firms. But the law explicitly forbidsthe payment of a price differential on contracts *** for the purpose of relieving economic dislocations.

And this is as it should be. The Defense Department's policy now, as in the past, is to procure what we need when we need it at the lowest cost to the Government, quality and delivery schedules considered. We will, however, make every effort to assist small business and firms in surplus labor market areas to participate in defense work by keeping them informed of opportunities for defense contracts, by encouraging our prime contractors to increase subcontracting to small business and by helping them to understand defense procurement policies and cedures, and finally by using fully the set aside provisions of the law. We will also continue our efforts together with other departments. and agencies of the Government to alleviate economic hardships caused by unavoidable shifts in defense procurement and the closing of defense installations.

2. BALANCE OF PAYMENTS

pro

A problem which has been giving us increasing concern during the last few years has been the unfavorable balance in our international payments. During the 1958-60 period, total U.S. expenditures abroad (i.e., imports, oversea defense expenditures, foreign investments, etc.) exceeded total U.S. earnings (i.e., exports, income from our foreign investments, sale of services, etc.) by an average of $3.7 billion per year. Although the size of the deficit was reducted last year, it was still on the order of $2 billion.

Such a continuing deficit would concern us in any event since it is usually the symptom of a fundamental economic imbalance. But there is a second reason for our concern. For a long time, particularly since the end of World War II, the dollar has been a world currency, held by many free world countries as backing for their own money. Their willingness to hold dollar balances is directly related to the convertibility of the dollar into gold upon demand. To the extent that our payments deficit results in a continued outflow of gold from our reserves, the position of the dollar as a fully convertible world currency is imperiled.

In 1960, potential claims held by foreign countries against U.S. gold in the form of short-term dollar balances rose above the $18 billion. mark, and for the first time exceeded our total gold supply. As of last September, the net deficit between our gold stocks and potential foreign dollar claims had risen to $4.9 billion. While this does not indicate any immediate danger to the position of the dollar, continuation of a sizable deficit for several more years could greatly damage international confidence in our currency.

National security expenditures overseas represents a significant percentage of recent deficits in our balance of payments. In recent years, net U.S. defense expenditures entering the balance of payments have averaged $2.6 billion per year. Through economies in our own expenditures, and by arranging with our allies for their purchase of additional American equipment and services, we reduced that figure to about $2 billion for 1962, and it is our objective to bring it below the billion-dollar mark by 1966.

During the past year and a half, several measures aimed at reducing defense oversea expenditures and increasing receipts have been instituted. The most significant of these in dollar value has been the agreement with the Federal Republic of Germany to offset U.S. dollar outlays by increasing its military procurement in the United States and its use of American supply lines, depots, and maintenance and support facilities. A partial offset agreement has been negotiated with Italy and others are being sought.

Let me touch briefly upon a few of the other actions we have undertaken to reduce oversea defense expenditures.

1. A voluntary savings program for reduction of individual expenditures has now been in effect for nearly 2 years. Military and civilian personnel and their dependents have been urged to reduce their personal expenditures overseas and to channel their family spending and savings to U.S. sources. The success of this voluntary program is indicated by a 9-percent increase in the number of oversea military personnel purchasing savings bonds through payroll deductions and a 31-percent decrease in parcel post shipments from APO's— evidence of a reduction in purchases of foreign-made products for shipment home.

2. Procurement of goods abroad for use by our military forces overseas, is being replaced by procurement in the United States when it is estimated that the cost of U.S. supplies and services (including transportation and handling costs) will not exceed the cost of foreign supplies and services by more than 50 percent. In calendar year 1961, using a 25-percent differential, approximately $71.4 million of procurement contracts which otherwise would have been placed abroad were placed in the United States, and for calendar year 1962 we expect to raise this total to upward of $100 million.

3. Pursuant to the Foreign Assistance Act of 1961, we have issued instructions which limit the use of military assistance funds for offshore procurement to only certain very restricted purposes. During fiscal year 1962, MAP/OŠP expenditures were reduced by about $30 million below the previous year's level.

4. In addition to these measures, we have undertaken a comprehensive review of the requirements for each of our foreign military bases and installations, and we have placed underway more than 60 specific projects and actions for reducing the unfavorable impact of defense transactions entering the international balance of payments. During my budget review last fall, moreover, each proposed program was judged not only from a budgetary point of view, but also inlight of its foreign exchange implications.

E. ARMS CONTROL AND DISARMAMENT

Although the balance of my statement will be concerned with the specific measures we are proposing to increase our military strength and enhance our security, we should not lose sight of the fact that the central objective of our national policy is, in President Kennedy's words, "a peaceful world community of free and independent states, free to choose their own future and their own system as long as it does not threaten the freedom of others."

As the events of last October have so forcefully demonstrated, the expanding arsenals of nuclear weapons on both sides of the Iron Curtain have created an extremely dangerous situation not only for

their possessors but also for the entire world. As the arms race continues and the weapons multiply and become more swift and deadly, the possibility of a global catastrophe, either by miscalculation or design, becomes ever more real.

More armaments, whether offensive or defensive, cannot solve this dilemma. We are approaching an era when it will become increasingly improbable that either side could destroy a sufficiently large portion of the other's strategic nuclear force, either by surprise or otherwise, to preclude a devastating retaliatory blow. This may result in mutual deterrence but it is still a grim prospect. It underscores the need for a renewed effort to find some way, if not to eliminate these deadly weapons completely, then at least to slow down or halt their further accumulation, and to create institutional arrangements which would reduce the need for either side to resort to their immediate use in moments of acute international tension. The United States and the Soviet Union, as the two great nuclear powers, are the nations most directly endangered by these weapons and therefore have a great mutual interest in seeing to it that they are never used. But until we can find a safe and sure road to disarmament, we must continue to build our own defenses.

I would now like to turn to the specifics of the program proposed for the coming fiscal year and planned through fiscal year 1968.

II. STRATEGIC RETALIATORY FORCES

The Strategic Retaliatory Forces are designed to carry out the longrange strategic mission and to carry the main burden of battle in general nuclear war. They include the long-range bombers, the airto-ground and decoy missiles and refueling tankers; the land-based and submarine-based strategic missiles; and the systems for their command and control. They do not include certain other U.S. nuclear forces capable of reaching tragets deep inside the Communist bloc; namely, the deployed tactical air units and carrier-based attack aircraft. Although the targeting of these forces is coordinated with that of the Strategic Retaliatory Forces, they are not taken into account in computing the requirements for the latter. The reason for this is that they are primarily intended for other purposes. Thus, with respect to the strategic mission, they represent an additional or bonus capability.

A. THE REQUIREMENT

The major mission of the Strategic Retaliatory Forces is to deter war by their capability to destroy the enemy's warmaking potential, including not only his nuclear strike forces and military installations, but also his urban society, if necessary. Last year I described to this committee the steps involved in determining the numbers and types of weapon delivery systems required to carry out this mission under various sets of conditions. Briefly, they take into account the character of the target systems; the numbers and yields of weapons required to destroy that system; the kinds of forces best suited to deliver these weapons, i.e., their payloads, penetration abilities, CEP's, reliability and vulnerability and cost/effectiveness, as well as the size and character of the enemy's strategic offensive forces.

Obviously, each of these factors involves various degrees of uncertainty for which allowances must be made in our analyses. One

of the major uncertainties is, of course, the size and character of our opponent's strategic forces and defensive systems-now, and more importantly, in the future. Because of the long leadtimes involved in making these weapon systems operational, we must plan for our forces well in advance of the time when we will need them and, indeed, we now project our programs at least 5 years ahead of the current budget year. For the same reason we must also project our estimates of the enemy's forces at least 5 years into the future, and for some purposes, even beyond. These longer range projections of enemy capabilities are, of course, highly conjectural, particularly since they deal with a period beyond the production and deployment leadtimes of enemy weapon systems. Therefore, we are, in effect, attempting to anticipate production and deployment decisions which our opponents, themselves, may not yet have made. This fact should be borne in mind as we discuss the intelligence estimates and our own programs based on them.

B. PRESENT U.S. STRATEGIC RETALIATORY CAPABILITIES

Last year I told this committee

there is no question but that, today, our Strategic Retaliatory Forces are fully capable of destroying the Soviet target system, even after absorbing an initial surprise attack.

This statement is still true.

We have a total of about 650 manned bombers on 15-minute ground alert and over 200 operational ATLAS, TITAN, AND MINUTEMAN missiles on launchers and about 144 POLARIS missiles in submarines.

And this force is rapidly expanding as additional MINUTEMANS and POLARIS enter our operational inventory.

Allowing for losses from an initial enemy attack and attrition en route to target, we calculate that our forces today could still destroy the Soviet Union without any help from the deployed tactical air units or carrier task forces or THOR or JUPITER IRBM's.

C. FUTURE STRATEGIC RETALIATORY FORCES

In my statement a year ago, I pointed out that—

as the Soviet Union hardens and disperses its ICBM force and acquires a significant number of missile launching submarines (as we must assume that they will do in the period under discussion), our problem will be further complicated.

There is increasing evidence that this is the course the Soviet Union is following.

Thus, it is even more important today than it was last year that we concentrate our efforts on the kind of strategic offensive forces which will be able to ride out an all-out attack by nuclear-armed ICBM's or submarine-launched missiles in sufficient strength to strike back decisively.

We can't depend on our warning. We didn't depend upon other actions to prevent a strike of the Soviet missiles against our weapons systems, and it is absolutely essential, therefore, that they be designed to survive such a strike.

And that is our primary objective.

A very large increase in the number of fully hard Soviet ICBM's and nuclear-powered ballistic missile-launching submarines would