by the State Department out of the proceeds of foreign aid operations (mainly PL480 sales of agricultural commodities in exchange for local currencies), so that only $4,735 million actually represent the flow of U.S. dollars through foreign exchange markets. These expenditures were partially offset by $1,452 million in net funds received for U.S. arms exports negotiated through the Department of Defense, mainly with Germany as part of its agreement to offset U.S. expenditures for troops stationed there. Only those arms sales officially arranged through the Defense Department are included in this category, as arms sales not so channeled are considered autonomous and are, therefore, included among commercial exports.

The net payments outflow due to the Government's military operations, after declining from $2.6 billion in 1960 to $1.7 billion in 1965, rose rapidly for the following three years, increasing by almost 90%, mainly because of rising Vietnam expenditures. There was an almost continuous rise in military expenditures on balance of payments account to countries in Asia and Africa other than Japan, Australia, New Zealand, and South Africa. By far the larger part of military expenditures to this group of countries is accounted for by Southeast Asia. These expenditures increased from less than $500 million in 1963 to over $2 billion in 1969.

The source of the increase was the change in total expenditures, as the offsets. which are related mainly to European troop costs rather than those in Southeast Asia, have remained relatively stable since 1962. The slight decline in net payments outflow in 1969, however, was accounted for by a 50% increase in the offset, and despite a nearly 7% increase in expenditures.

These figures purport to show only the direct net impact of U.S. military operations on international payments. The ultimate balance of payments effects of these military operations is, of course, much greater than shown. Because U.S. imports are attributed to the purchaser-of-record, rather than to the ultimate user, merchandise imported by military contractors for manufacture into products for sale to the Department of Defense are classified as being of a commercial rather than of military nature. Other factors also work to under-report the deficit on military account and correspondingly to overcharge other components of U.S. Government transactions. Total post exchange sales are credited against military spending abroad, even though not all sales are to military personnel. Under current accounting practices, some overlapping occurs between military related exenditures in the category of foreign aid. In addition to the treatment of military loans as foreign aid, substantially expenditures of a quasimilitary or peace keeping nature are recorded as non-military grants and loans, especially those related to the war in Southeast Asia.

Finally, the balance of payments effects of the Vietnam conflict are understated to the extent that the rise in military expenditures was responsible for the inflationary excess demand in the economy, which has lead to the dramatic upsurge in imports of goods and services. Between 1965 and 1969 imports, not including military expenditures, increased by over 70%-a rise in those four years equivalent to that in the preceding nine years, that is, from 1956 to 1965. And to the extent that the excess demand was reflected not in rising imports but in increases in domestic costs and prices, the balance of payments effects are likely to persist for many years. It takes several years for increases in domestic costs relative to foreign costs to show up fully in the damaged international competitive position. We are just beginning to feel, that is, the balance of payments effects of the loss in competitive advantage from the recent bout of inflation.

The longer the excessive balance of payments deficits persist, the longer will they provide the excuse to maintain controls over foreign investment, lending, and trade. The longer these controls are maintained, the more entrenched do they become in distorted markets, and the more difficult it will be to relax them. The war in Southeast Asia cannot take the blame for the whole of our inflationary and balance of payments problems, but it is obvious that it must share a larger part of the blame.

1 Not available.

Source: U.S. Department of Commerce, Summary of Current Business.

DIFFERENCE BETWEEN UNITED STATES AND RUSSIAN CURRENCY

Senator SYMINGTON. With respect to observations of the distinguished Senator from Alabama about relationship of the currency, the Soviets don't have their currency laced in in any manner to the value of gold.

Mr. LUNDBORG. That is correct. It is not a reserve currency, it is not a trading currency at all as the dollar is. Basically the whole problem of balance of payments is the fact that the dollar is the international reserve currency and that the ruble is not that kind of currency at all.

Senator SYMINGTON. I remember one time President Eisenhower gave me a line I used in a speech, namely, in a totalitarian state the coin of the realm is the order of the dictator. That would seem clear as to the difference.

EFFECT OF U.S. MILITARY VENTURES ON NATIONAL DEBT

I have been thinking a long time about this problem of inflation. I was in business before coming into this business; I am not a banker although I have served on various bank boards and have looked at plenty of balance sheets. As I remember it, our national debt is about $60 billion more than the debt of all the other countries in the world put together. The interest on that great debt in itself is a crushing burden to the American taxpayer.

We often justify this gigantic debt to our people by saying, “After all, we owe it to ourselves.

You mentioned the fact we have put a hundred billion dollars into this escalation of the Vietnam war. Wouldn't it be rather difficult, as an economist, to justify how we could owe that hundred billion dollars to ourselves? And if you add what we have put in Europe, where we have now had hundreds of thousands of troops for over a quarter of a century, to what we have put into the Far East, you come up with a figure that is considerably more than the current national debt.

I would illustrate part of the problem this way. When the Secretary of the Treasury, an able commercial banker, came up before the Joint Economic Committee, I asked if he felt it was essential to the economy of the United States to continue the surtax. This was in an open hearing. He said "Yes." I told him we figured the surtax, 5 percent from the 1st of January to the 1st of July, would bring in about $2 billion. He thought that about right, a billion seven from individuals and $300 million from the corporations. I said, "We figure in my office that is about a hundred dollars a second we are lifting from the taxpayer," and he said that was probably right if I said so; he didn't know. So I presented that, based on the $80 million a day we had been spending in Vietnam, we were taking over $900 a second from the taxpayers for our Vietnam cost alone; therefore, how could this surtax be of such great importance one way or the other to the economic position of the United States. Secretary Kennedy just shrugged his shoulders. He had no answer.

Isn't this pertinent to the position you are presenting this morning? Mr. LUNDBORG. If it does not completely, it is completely consistent with it. I am sure what Dave Kennedy undoubtedly had in mind was

that as small as the surtax was it was part of the difference between a balanced and unbalanced budget. In terms of inflation, strictly speaking, the unbalance is a very powerful part of the inflationary force, that is what, part of what, he had in mind. The rest of your statement is certainly valid.

Senator SYMINGTON. I was not criticizing his testimony. The more he can get, the better for the Nation's balance sheet.

Mr. LUNDBORG. Right.

U.S. FOREIGN MILITARY EXPENDITURES AS BASIC CAUSE OF INFLATION

Senator SYMINGTON. Speaking of balance sheets in the days when I was in business, on the left side you have cash and what is owed you, plus land, buildings, machinery, and equipment, if you have a generous board of directors they often let you put in a little for good will. On the right side you express what you owe people, plus the value of your stock, debentures, and so forth; correct?

Mr. LUNDBORG. That is correct.

Senator SYMINGTON. But in a government you don't have any assets; you just have the debt. You just have the debt. But that debt represents assets such as the Defense Department, our Interstate Highway System, all our dams, Federal buildings, Federal departments, and so forth. It is justified, as I mentioned, by people saying, "We taxpayers owe it to ourselves."

Isn't the basic reason for this crippling inflation the vast amount of money, which now runs well over a hundred million dollars a day, for these various military investments and adventures abroad? We can't say we owe that cost to ourselves. Isn't that the basic cause for this continuing inflation, as you see it?

Mr. LUNDBORG. Yes, basically the whole debt you referred to has been built up largely from the financing of wars, present and past

ones.

LIMITING DEFENSE EXPENDITURES TO VITAL SECURITY INTERESTS

Senator SYMINGTON. For some reason, and I must say I think the recent marked change in this attitude on the part of the Congress is a healthy recent development. Up until recently the cost of anything that had to do with defense just went right through the Congress. People in many other departments knew they would have a better chance of getting the appropriation they wanted if they could say it contributed to national defense.

Yesterday I was in a hearing where the new cost of the ABM was given, $12 billion. Regardless of whether this system is right or wrong, it takes a lot of business to create the profits and income to in turn create the tax source necessary to get that $12 billion. As a banker you would agree to that. At one time the Air Force came up with a plane. They wanted 150 airplanes. The total cost of those 150 was estimated as high as $10 billion. This morning I was in a hearing that had to do primarily with the cost of modern aircraft carriers. The cost of one without planes, or oil or the required escort vessels is now over $600 million for one ship. So we do have a serious problem of how to distribute our increasingly limited resources, do we not, in these various high Government costs?

Mr. LUNDBORG. That is correct.

Senator SYMINGTON. And if it is essential to buy such equipment for protection against the obvious real enemy, then the sooner we get out of military expenses not vital to our security the better, if we are going to preserve the economy. Would you agree?

Mr. LUNDBORG. There is no question about that.

Senator SYMINGTON. Now I would run through, if I may, some of the points in your testimony, which to me is impressive testimony.

EFFECT OF RESEARCH AND DEVELOPMENT EXPENDITURES ON ECONOMIC

GROWTH

We have run into a somewhat peculiar application of research and development in budgets of the past, where, at least to some extent, the supplier to the contractor is the decider as to where and how the money should be utilized.

Therefore, when in your statement you say, "Other authorities have shown that rising expenditures for research and development may be actually reducing the rate of economic growth in the United States," especially because of the emphasis or fallout incident to a lot of this research and development, could we have some more detail on that? Mr. LUNDBORG. We would be glad to supply that.

Senator SYMINGTON. Thank you, sir.

(The information follows.)

INDUSTRIAL RESEARCH AND DEVELOPMENT: ITS CONTRIBUTION TO SOCIAL AND ECONOMIC PROGRESS IN THE SEVENTIES BY ROBERT J. OSTER, ECONOMIST, Bank of AMERICA, N.T. & S.A.

America is transcending from a quantitative to a qualitative economic objective. In the "Socially Sensitive Seventies", improving the "quality of life" will be paramount and increasing the quantity of goods and services will be secondary. In this emerging environment, the social benefits of industrial-military research will be sharply reduced unless they are explicitly sought after, rather than left to the chance of nonexistent or increasingly difficult to obtain research spillover. Can industrial research and development,' with its heavy emphasis on defense. advanced weapons systems and space exploration, meet our basic social and economic needs in the Seventies? Not unless it is redirected to meet head-on the challenges placed before us by a generally labor scarce, inflation prone economy and by a fundamental shift in our national economic objective to one of improving the "quality of life". It is not clear that rising expenditures for research and development are conducive to economic growth or that scientific and technological advances in space and military R and D can be readily transferred to the benefit of the private economy. Indeed, a growing body of empirical evidence, together with the results of the research presented here, suggests that the opposite may be true. In any event, the common sense dictum that a straight line is the shortest distance between two points implies that research and development directed specifically to meeting our growing social and economic problems will be more beneficial than will reliance on the risky "spillover" from military and space oriented R and D.

AMERICA IN TRANSITION

The major social transition of the century may well be underway. It is a transition to a new, higher "quality of life" objective. Because public interest is aroused and the economic climate is right, this shift from a national objective

1 By industrial research and development, I mean federal and company financed research and development conducted in the private industrial sector. Industrial research and development is 70-75% of total R & D, the remainder being accounted for by the federal government, colleges and universities and other nonprofit institutions. See [5].