TALK TO STRATEGIC INTELLIGENCE SCHOOL ON ECONOMIC INTELLIGENCE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP71T00730R000100010054-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 20
• Document Creation Date: December 9, 2016
• Document Release Date: April 8, 1999
• Sequence Number: 54
• Publication Date: February 17, 1955
• Content Type: REPORT

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17 February 1955
TALK TO STRATEGIC INTELLIGENCE SCHOOL
ON ECONOMIC INTELLIGENCE
In the next hour I intend to discuss 3 major aspects of this
subject:
First: The ,purpose of economic intelligence,
Second: Its production and coordination, and
Finally: and very briefly a few words about our sources of
economic intelligence information.
On the first of these three topics we can begin by noting that
it is the function of economic intelligence to explain production,
distribution and consumption for all sectors of the economy. To
do this requires not only an analysis of individual sectors of the
economy; such as the electronics industry, transportation, tele-
communications, agriculture, and the munitions industry. It also
demands a more aggregative type of analysis to give an integrated
and inter-related, picture of developments involving more than one
sector.
Now our question is: What is economic intelligence used for?
For the answer to this we might take a look at our chart. Here you
can see a somewhat artificial division of objectives. In the first
category we include studies which serve as a basis for broad policy
decisions and in the second group we have a different kind of report
which is used to support decision implementation. Obviously there is
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an overlap between these two categories. But let's quickly run down
the list in order to see more precisely what is involved.
Capability for Military Action:
Many of our major policy decisions depend on estimates of the
economic capabilities for war, both of our Allies and of the Soviet
Bloc. In preparing studies for the Bloc capabilities for war, for
example, we may have studies covering the whole picture of the Bloc's
economic capabilities or we may have a very narrow study; such as one
covering the Bloc's transportation capabilities for a selected campaign.
It's been interesting to watch the change in methods of
circulating Soviet capabilities over the past 5 to 6 years. In the
early days very crude calculations were made comparing the Soviet
Bloc output of key industrial products with those in the West.
Later Soviet availability of the key items was balanced with civilian
and military requirements. Today much more sophisticated techniques
are used to include the so-called "input-output" analysis which takes
into account the inter-relationship among selected industries. The
economic intelligence community has decided that in the absence of
bomb damage there is no limitation in the economy severe enough to
prevent the Soviets from going to war, and current studies are con-
centrating on hypothetical war-time capabilities.
Studies of this kind relating to economic capabilities for
military action are in considerable demand by such groups as the
National Security Council; the Joint Chiefs of Staff, the NATO
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Standing Group, the Weapons Evaluation Systems Group, and others.
Capability for Cold War Measures:
Economic intelligence studies of the capabilities of the Soviet
Union to undertake cold war measures would include certain fairly
recent studies of the capabilities of the Soviet Union to use trade
and technical assistance as a device to gain political leverage
in some of the underdeveloped areas of the world; such as India and
Indonesia. There: seems to be more and more evidence of Soviet efforts
in this direction.
To Maintain Economic Stability and Progress:
We are obviously very much concerned not only about the economic
stability in the Soviet Bloc but about the economic stability and
progress of the non-Bloc nations. A tremendous amount of effort
in the post-war period has gone into studies of the economic situation
in these countries. Some of you may know of the work done in ECA,
FOA, MSA, and the Departments of State and Defense along these lines
as a basis for major decision on foreign aid and technical assistance.
In this connection there was a situation in Iran, some years ago,
which required some study as to the urgency of Iran's requirements
for foreign assistance. You may remember this was occasioned by the
withdrawal of the British-Anglo Oil Company from Iran. Both before
this event and immediately thereafter, a great cry was heard from
many quarters that Iran would very soon be bankrupt and the economy
would collapse paving the way for Soviet domination. This reason-
ing was based on the calculated impact resulting from the loss of
the tremendous oil revenues to the Iranian government. The timing
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and shape of many Western decisions rested in part on conclusions
as to the urgency of Iran's economic situation. Certain economic
intelligence studies at that time concluded that while there would
be a strain on the economy, Iran could take measures that would
prevent the development of an internal economic crisis. This
conclusion proved correct, but at the time it was far from unanimous.
In this case the intelligence analysis was correct because it had
been based on facts that revealed not only the problems that the
Iranian government would face, but also the adjustments within
the economy which it might reasonably be expected to make. In
short, these adjustments were made and there was no economic collapse.
Vulnerability to Military Action:
One of the best examples of this category of vulnerability
study is the whole series of target studies analyzing the vulnerability
of the various sectors of the economy to air attack. As most of
you know these studies cover many detailed aspects of production,
distribution, and consumption for numerous sectors of the Soviet
economy. I'm sure that I don't need to labor this example for
you gentlemen.
Vulnerability to cold War Measures:
One of the major U.S. programs designed to exploit Soviet
vulnerabilities to western cold war measures in the international
economic defense effort (economic warfare) which has been heavily
supported by economic intelligence. This intelligence has taken
the form of commodity studies covering the Soviet Bloc to assist
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in a determination of items to be controlled and broader studies
to assist in evaluating the focus and effectiveness of the program.
In this connection I might point out that an analysis of this,
or any vulnerability, requires an understanding of the dynamic inter-
relationship between a nation's capabilities and its vulnerabilities.
By this I mean that an effort to exploit a vulnerability by one
nation will, given time, always be adjusted to by the opposing
nation within the limits of its capability and in accordance with
its schedule of priorities. Let's take a couple of concrete
examples.
Before World War II the Allied Powers were aware of a long list
of deficiencies which existed in the German economy. This list
included some of the following vital materials:
Petroleum and Iron Ore 2/3 of pre-war consumption
imported
Manganese No deposits of any
consequence
Ferro-alloys Deposits almost totally
(Tungsten, nickel, lacking
cobalt)
Copper
Less than 10 percent of
requirements produced
domestically
Bauxite No deposits
(For aluminum)
Rubber No production of natural
rubber
And we could go on listing deficiencies in lead, tin, zinc, mica,
sulphur, and many, many others.
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These facts unfortunately led many people astray, including
specialists in economic warfare. Statisticians could prove that
Germany was hopelessly lacking in almost all of the raw materials
necessary to carry on a real wax. Moreover, many experts concluded
that if Germany started another war, a blockade exploiting these
deficiencies would bring about military collapse or revolution in
a very short time. As a result many felt that Hitler was merely
bluffing and the illusion of a "phony" war lasted, as you know,
until the spring of 1940.
But what actually happened? Let's list some of the actions
Germany took to offset the effects of economic warfare:
1. The government took firm control of the country's
economy thereby permitting an allocation of scarce materials
to priority military objectives.
2. Tremendous preparations were made to stockpile
scarce materials.
3. Low grade mineral deposits, which normally would
be unprofitable to work, were mined intensively.
4. Agricultural lands were cultivated more intensively
and poor lands were put into cultivation for the first time.
5. Synthetics were developed and substitute products
were used to replace certain essential imports, including
certain alloy metals and rubber.
6. Plans were made to obtain supplies of vital materials
from neighboring countries by conquest or purchase, including
petroleum from Rumania, iron ore from France, nickel from
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Finland, and so forth.
The allied nations were, of course, aware that some of these things
were going on but the ability of Germany to make adjustments over-
coming the critical deficiencies of her economy were grossly under-
estimated.',-, All of this is not to argue against economic warfare -
rather it is to emphasize that an analysis of the impact of such
measures must be realistic. False anticipations of the enemy's
weakness merely deceives our own planners.
Very recently there was another opportunity for intelligence to
highlight this inter-relationship of vulnerability and the capability
for adjustment. During the Korean War, you may remember, there was
a great deal of discussion about the impact of the Western export
control program on the economy of Red China. One of the principal
unknowns in this was the extent to which Red China could obtain its
vital requirements from the USSR and other Bloc nations. It was
first thought by some that (a) the USSR was not in a position to
spare the volume of support required by Red China, and (b) that even
if it were able to do so the Trans-Sib and the connecting rail lines
r
Manchuria would not be able to carry that volume. Intelligence
anticipated, and later reported, that the Soviet Bloc would have the
capability to supply the items in the quantity required and that the
Trans-Sib and the connecting lines in Manchuria not only had the
capability to deliver these goods but had an even larger capability
if it were required. There was no self-delusion on these points.
It was clear that Red China could adjust and did adjust to the loss
of imports from the West.
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Vulnerability to domestic Pressures:
Just a brief word on this. In setting a policy to exploit a
country's vulnerabilities, the policy-makers should understand the
pressures already existing within the economy in question. In
connection with the U.S. economic defense policy for example, there
have recently been studies of the agricultural situation in the Soviet
Union. We know that this is one of the weakest sectors of the Soviet
economy and that the prospects of any early and dramatic improvements
are very remote. We also know that this same agricultural problem
was given considerable prominence in the recent political shake-up
in Moscow. In fact, Malenkov's resignation address took special
pains to emphasize his failures in agriculture. It is obviously
important that we have a thorough knowledge of the situation not
only as it relates to the U.S. economic defense policy but to other
programs, including psychological warfare.
Course of Action - Military:
Up to now we have talked solely of economic intelligence as it
applies to an analysis of the capabilities and vulnerabilities of
foreign nations. Let me say just a word about the way economic
intelligence is used in estimating probable courses of action.
Intentions are really derived from bits of evidence about the probable
courses of actions of foreign nations; and to be meaningful this
evidence must be evaluated against the background and in the con-
text of intelligence on economic capabilities and vulnerabilities.
Moreover this evidence must be considered in the light of pertinent
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political and military intelligence. Economic evidence of inten-
tions by itself means very little unless it is considered in relation
to the total pattern of the particular situation. Evidence, for
example, of the strengthening of bridges and the stockpiling of POL
in certain forward areas would not appear by itself to be very
menacing unless it appeared in the context of a threatening situation.
Similarly, in evaluating other military developments such as
probable Soviet efforts in the guided missiles field, we must, in
considering limited evidence, take account of Soviet capabilities
to manufacture the guidance systems, the special fuels, etc.
As a good example of how future courses of action can be pre-
dicted by a knowledge of the basic economic situation, we might
look at Germany shortly after World War I. Many of the basic economic
forces which aided the rise of Hitler and helped to shape his aggressive
military policy were recognized by the then little known economist
John Maynard Keynes. This present situation prompted Keynes to
write his book "The Economic Consequences of Peace" predicting
many of the broad German policies that would, of necessity, emerge
from this basic economic situation.
Reports as Support for Decision Implementation For Military Plans
and Operations
Turning then to the second category of objectives, we can again
take the example of target analysis in connection with support of
military plans and operations. Economic intelligence must render
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close support in any bombing operation, not only to evaluate the
physical damage from bombing but the repercussions of such damage
to the economy. If a particular electric power installation is
knocked out, for example, how does this affect aluminum production
and which industries will feel the aluminum shortage. This is the
same general kind of support rendered by economic intelligence
during the last war.
Skipping to II C in our chart, --"Support for Cold War Measures"--
the economic intelligence community presently renders almost day-to-
day support for the U.S. economic defense enforcement program. The
Economic Defense Division in CIA is continually on the alert for
clandestine trade in contravention of Western trade controls and
reports on violations are transmitted almost daily to the U.S.
Diversion Control Net. This is just one example of "cold war" support.
Up to this point we have dealt largely with economic intelligence
as it relates to the Soviet Bloc probably because this geographic
area takes the most intensive efforts of the intelligence community.
However, a large portion of the intelligence community continually
provides support for some of the more conventional economic
programs that have been of tremendous importance to U.S. security
interests. This includes, for example, the operational support
for the U.S. foreign and technical assistance programs, all of which
require detailed knowledge of the economies of the foreign countries
concerned.
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I think you can see from this brief run-down that in many
major decisions and operations, economic intelligence plays a
very vital role and I hope this gives at least a rough idea
of just where economic intelligence fits into the whole intelligence
picture.
Production and Coordination of Economic Intelligence:
Now that we have covered the uses to which economic intelligence
is put, we can look at the system here in Washington for the produc-
tion of this intelligence. Within the last six months the economic
intelligence community has agreed to a directive outlining primary
responsibilities for the production of all foreign economic intelli-
gence. This directive, issued by the Director of Central Intelli-
gence, outlines the following general areas of primary responsibility:
Military economic intelligence The military departments
on all foreign countries of the Department of
including such subjects as Defense.
shipping, logistics, and
target analysis.
Economic intelligence -- other The Department of State.
than military economic -- on
the non-Bloc areas.
Economic intelligence -- other CIA.
than military economic --
on the Soviet Bloc areas.
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While we have this agreement among the intelligence agencies,
we all know that economic research on foreign areas is not confined
to the intelligence community -- Commerce, FOA, Treasury, and many
other agencies of the government are also deeply involved in this
subject.
Recognizing this, the IAC in 1951 took steps to make some
sense out of all these duplicate and overlapping efforts by establish-
ing the Economic Intelligence Committee. The organization chart gives
you a rough idea of the broad committee structure. The full members
are drawn from the IAC agencies and it is these representatives
who have the principal responsibility for making the committee work
effectively. Roughly 20 non-IAC agencies are brought in when sub-
jects are considered in which they have an interest or responsibility.
The secretariat is an instrument of the whole committee and assists
the main committee in providing guidance and direction to the sub-
committees and working groups. The subcommittees themselves are
made up of the top professional personnel in their respective fields,
and it is their responsibility to oversee the continuing research
program in these fields. The working groups, on the other hand,
coordinate special. priority studies on an ad hoc basis.
It would be naive to conclude that the EIC has solved all of
our coordination problems, but it has gone a long way toward making
sense out of the diverse efforts of a lot of individual agencies.
We might quickly review the major responsibilities of this committee
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under three separate headings.
1. Coordination of major studies of national security
importance.
2. Review and rationalization of the total economic
research effort and identification of priority intelligence
gaps.
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3. Review and improvement of the collection and pro-
cessing of intelligence.
The British Prime Minister, Mr. Churchill, and former President
Truman had a lot to do with initiating one whole series of EIC studies.
In early 1952 in a meeting on-board the Yacht "Williamsburg", they
were discussing matters relating to China trade and shipping policy
when they found certain major differences in their intelligence
briefings. The EIC was called into action and after contributions
by State, Army, Navy, Air, and CIA a completely coordinated study
was produced and approved by the U.S. intelligence community. It
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As you may know, the
subject of transportation is one on which every agency in the
intelligence community seems to have some "expertise", and it is
understandable that the consumers could get almost any answer
they wanted, depending on the agency they contacted. The EIC
tackled this problem and within the last few months completed a
coordinated study. However, this study was honestly judged to be
inadequate by the same professional experts who had produced it.
This, in itself, is a startling development. It was even more
encouraging when three of the agencies on the Economic Intelligence
Committee, Army, Air Force, and CIA, agreed to combine forces
in one CIA office to make a concerted effort to lick this problem.
So much for coordinated studies.
The EIC, in line with its second function of taking inventory
of the whole research effort, has made a survey covering most of
the professional personnel engaged in economic research in Washington -
where they are and what they do. It has also listed practically
all economic research on the Soviet Bloc underway in Washington or
under government contract. I don't need to tell you the affect this
has had in reducing duplication and in insuring a better intelligence
product. The subcommittees have gone even further and have identified
critical deficiencies in such fields as electronics, chemicals, and
military end-items, and have gone so far as to allocate research
responsibilities among the EIC agencies with assurances that these
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studies would be given priority treatment.
The third function of the EIC, I am sure, relates even more
closely to your principal interest. This is the responsibility
to improve guidance to the collection effort. On this problem,
several things have been done by the Requirements Subcommittee.
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Finally, the EIC is developing, on
an experimental basis, statements of priority collection deficiencies
which are of major interest to all IAC agencies. Precisely how
these are going to be converted into priority collection require-
ments for the various sources of information
is not yet clear.
You will probably ',hear more about this in the future.
Up to this point we have been talking about the Economic
Intelligence Committee as the principal coordinating mechanism for
economic intelligence in Washington. You should understand, how-
ever, that there are other groups engaged in other types of more
specialized coordination. Let me mention a few of these. The first
is the NIS program. I know that you have heard about this earlier
in the course. Let me simply say that this program is confined
to basic encyclopedic background intelligence. It is not meant
to be current and it is not meant to be focussed on specific
problems. It does, however, provide an excellent system for
coordinating all types of basic intelligence, including economic
intelligence on all areas of the world. The second specialized
type of economic coordinating committee is the Economic Defense
Intelligence Committee. This group was set up to provide support
to the US economic defense program -- the program which some of us
might call the economic warfare program. This interagency committee
not only provides intelligence support for the preparation of control
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lists and other aspects of the economic defense program, but also
assists in the preparation of specialized collection requirements
to the field. These are the people who are interested in knowing,
for example, all of the details about illegal shipments in contra-
vention of trade controls. The third specialized group is the
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I have finished up this presentation on the subject of coordination
for a purpose. We have found in the Economic Intelligence Committee
here in Washington that by paying less attention to bureaucratic
prerogatives and by giving more emphasis to a combined attack on
common problems, we are all much more effective in getting the job
done. This is particularly true in the collection of information.
There is no collector in the field, regardless of his parent agency,
who does not have an interest in collecting some kind of economic
intelligence. I would like to urge that you work with these people
in the field as part of the team.
Sources of Economic Intelligence Information:
In conclusion I might run down briefly the sources of economic
intelligence information which represent significant contributions
to the research analysts.
Foreign Language Publications
Interrogations: a. Defectors
b. Returned Scientists
c. Returned P?W's
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Contacts at Missions Abroad
Photo Intelligence
Covert Sources
PBISFRadio Monitoring
Contacts in the US
Analogs of Soviet Economic Activity
Official Records and Archives
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Tire Production: (1943)
telligence Estimates - 1,250,000
25X1 B4d Intelligence Reports - 176,000
c rman Production - 186, 000 fwi 7NO.
Difference of 6%
Tank Production: (1942)
Other '[ntelligence Estimates - 1,550 a month
25X1 B4d- Intelligence Reports - 327 a month
Actual German Production - 342 a month
Difference of 5%
Truck Production:
Other Intelligence Estimates - 2,000 a year
25X1 B4d Intelligence Reports -97,000 a year
Actual German Production -80,000 a year
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