Following from Heeney, Begins: Reference my immediately preceding teletype.† North Atlantic Defence Financial and Economic Committee.

Following is text of memorandum referred to in paragraph 3 of my immediately preceding teletype. The telegrams referred to in the first line of the memorandum are, of course, your messages of December 6 and December 22 respectively.

Text Begins:

1. Your telegrams Nos. 2360† and 2479¹ indicate that in the view of the United States' representative on the PWS, early attention should be given to an examination of the fiscal capacity of the NAT countries. This examination is evidently expected, first, to reveal the comparative performance of the member countries in bearing the current cost of defence, and second, to establish some measure of their relative capacity to share the financial burdens of mutual defence in future consistent with the maintenance of internal financial stability and support of continued economic recovery.

2. In our judgment this approach is an academic and impracticable way of dealing with the basic issue. The attempt to apply a general formula can be very unfair and misleading. No general formula can take fully into account all of the different national circumstances and varying government responsibilities and interests which must be considered when decisions are to be reached as to the amount or proportions which can or ought to be spent on defence. Furthermore, it would appear to us that the formula method approaches the problem the wrong way around. Instead of discussing first what are the hypothetical ways of sharing a presumably large, but as yet unspecified, defence burden, it would seem to be more fruitful to consider first what is suggested as a minimum programme and then, second, to examine this programme in relation to the resources which the member governments might find it practicable to make available.

3. Finally, the decisions regarding total government expenditures and the tax burdens to be imposed are inevitably political decisions which each government must make for itself. It is impractical to think that such fundamental matters of government responsibility can be determined by an abstract formula. Obviously governments will have in mind their obligations under the common defence programme when making their decisions. In reaching their decisions, however, they will have to be concerned both with the needs of the programme and their capacity to participate.

4. In the preceding paragraphs we have discussed the circumstances which would govern the general position of the individual governments. For your guidance the following general provisions apply in our own case.

5. Canada's ability to participate in the financial sense physical limits are not under discussion here is limited by two basic factors: (a) the budgetary position; (b) the Balance of payments limit.

6. The Budgetary Position. Whatever the Canadian Government does as a contribution to the common defence, it must be properly related to the overall budget plan. The contribution must be such as to fit within the total expenditures which the Government feels the country ought to undertake. Moreover, effective participation in the mutual defence scheme requires that Canada should pay appropriate regard to the need to maintain a strongly functioning economy. Significant resource development, which in this country usually entails large expenditures, is one of the Budget items which can be expected to occupy an important place in the overall plan for Canadian participation. Obviously the allocation of Canada's fiscal resources between defence and non defence expenditures at best a difficult distinction to make is a decision which can only be made by the Government.

7. The Balance of Payments Limit. Owing to the breakdown of multilateral trade Canada has been affected by the world wide dollar shortage, and since the end of the war we have had in consequence a serious balance of payments problem. The solution of the balance of payments problem is itself a major task for the Canadian Government. Since this problem is a long way from an adequate solution, the Government could not accept new responsibilities which would aggravate these balance of payments difficulties. Therefore the steps taken must not add to the pressure on our foreign exchange reserves. Any contribution we may make must then take place either through additional exports, or involve appropriate foreign exchange arrangements with the United States.

8. Having in mind the general considerations stated in paragraphs 6 and 7, the Government is studying the possibility of participating along one or more of the following lines:

(1) the provision of training facilities for a limited number of officers and technical personnel of the other NAT countries;

(2) provision of raw materials, insofar as this is an addition to rather than a part of our normal exports;

(3) provision of items of military equipment available from Canadian production or stocks surplus to North American requirements;
provided that in (2) and (3) immediately above such action does not involve a significant drain upon our foreign exchange reserves, or, if a drain is involved, that appropriate arrangements are made to take care of the foreign exchange problem thereby created.

9. Additional background material prepared by the Department of National Defence is being sent in a supplementary message which provides some illustrative matter for your personal information.²

¹Voir DREC, volume 15, document 412./See DCER, Volume 15, Document 412.

²Ce message a été rédigé par le ministère des Finances et approuvé par le premier ministre, le minister des Finances et le ministre de la Défense nationale.
This message was drafted in the Department of Finance and approved by the Prime Minister, the Minister of Finance and the Minister of National Defence.