The Presidential Slush Fund.

The inside story of how the fund established to help stabilize the dollar, supplemented by enemy assets during World War II, financed the first U.S. coven operations after the Cold War.

Over the centuries, as every graduate student of history knows, presidents and potentates have had their slush funds to carry out discreet activities of statecraft that they would prefer not to explain in public. In the United States, the practice started with George Washington himself, and for his purposes he seemed to manage quite well with disbursements in the hundreds of dollars.

By the middle of the twentieth century, with the United States emerging as a global power and heading into a cold war with international communism, the covert doings of ages past were growing into an art form of intelligence -- and a major arm of foreign policy. On June 18, 1948, the National Security Council of the Truman administration secretly approved its Directive 10/2, a clandestine program for infiltration, sabotage, and subversion of the newly imposed communist regimes of Eastern Europe.

Since both the new Central Intelligence Agency, established barely a year before, and the Joint Chiefs of Staff were skittish about entering into the uncharted waters of covert action on such a scale, Truman's NSC created a new government agency to do the job that the top policymakers felt had to be done if the world was to be saved from communism.

The new creation was called the Office of Policy Coordination (OPC), an opaque label for the command headquarters running operations for which, the NSC mandated, the United States government could "plausibly disclaim any responsibility." (This was the origin of the doctrine, later infamous as its cynicism became all too evident, of "plausible deniability.") Recruitment of agents to parachute behind the Iron Curtain, their training, and logistical support became the secret mission assigned to a creative and energetic New York lawyer and World War II intelligence veteran named Frank G. Wisner.

Wisner's obvious first task, before any of the skullduggery could be mounted, was to scrounge up the cash to pay for it all. For this, the NSC blithely had made no provision. And it had to be cash on trust; the purposes for which it would be disbursed could not be openly described. "The heart and soul of covert operations" Wisner learned from his savvy legal counsel, Lawrence Houston, is "provision of unvouchered funds, and the inviolability of such funds from outside inspection." Thus was the notion of a slush fund expressed in bureaucratic parlance.

Traditionally, appropriations for secret operations are buried on innocuous lines of other agencies' budgets as submitted to Congress. The semblance of legal accountability is preserved, without wide disclosure of exactly how these funds are to be used. In 1948, with Truman and his NSC pressing him for immediate action, Wisner could not wait for a congressional appropriation procedure, however circumspect. The State and Defense departments, for all their endorsement of Wisner's mission, were not about to part with any of their own appropriated funds for some nefarious new venture.

Wisner cobbled together what his officers called "tenuous understandings" with key members of Congress, the General Accounting Office, and other government departments to locate obscure accounts that his agency could draw upon without having to answer for it in public.

He found his first tempting target in an extraordinary and (at the time) little-noted account accumulating out of sight in the Department of the Treasury known as the Exchange Stabilization Fund (ESF). Established in 1934, this ESF had provided the then extravagant fund of $2 billion in working capital before World War II, for short-term currency trading to stabilize the value of the dollar in world trade. Then, in 1941, War Powers legislation designated this convenient accounting device as the holding pool for captured enemy assets and other monies being smuggled out of Europe.

After the war, the bulk of the ESF was transferred to the new International Monetary Fund as America's capital contribution. But a relatively small portion, $200 million, was retained in the Treasury. As Congress was much later told, this would serve to help in the "reconstruction and rehabilitation of war-torn countries." Exactly how it would so help was not specified, nor indeed, under the founding mandate, did it have to be.

One special feature about the ESF was particularly enticing to Wisner and his financial officers, and their counterparts in Truman's White House, as they scoped out possibilities for seed money to get the OPC's clandestine operations up and running. From its origin, the ESF had been endowed with a provision which made financial sense at the time, but was also well suited to the funding of secret operations, never contemplated when the measure was enacted.

Currency trading and hedging tactics required "a high degree of flexibility and discretion," Congress noted in setting up the fund. "Operations for the account of the ESF are likely to be highly sensitive, requiring a substantial degree of confidentiality." Thus, Congress placed the fund "under the exclusive control of the Secretary of the Treasury, with the approval of the President, whose decisions shall be final and not be subject to review by any other official."

For Wisner and his OPC, this extravagant freedom from scrutiny, enshrined in law, was nothing short of ideal.

A reported $10 million was quickly signed over to the OPC; no outside accounting was required or made. Lest this old device ever be challenged, Wisner sought the specific concurrence of the NSC after his first year of operations that financial measures could "jolt" the communist bloc, with repercussions "bound to be felt in the political, military and cultural spheres." Use of the ESF was thus brought within the OPC purview.

Since Congress had already stated that ESF disbursals were not proper subjects for scrutiny, neither the Senate nor the House of Representatives bothered to hold any hearings in the formative years of the Cold War on the confidential accounts of the Exchange Stabilization Fund.

Congressional scrutiny of intelligence was both circumspect and casual during the early Cold War years; no voices were raised, in or out of Congress, to have it otherwise.

From 1946 until 1952, only one person on Capitol Hill knew the amount and hidden locations of the American intelligence budget. This was George Harvey, non-partisan chief clerk of the House Appropriations Committee. Harvey would share general knowledge with the successive committee chairmen, but not with other members. In the era, this seems to have been the way senators and congressmen wanted it; they preferred not to inquire into the details of secret operations. By 1951, however, Harvey had to alert his CIA liaison officer that the CIA budget (which included that of the OPC) had "reached a magnitude which makes camouflage difficult." Sooner or later, he warned, "this situation might lead to extremely embarrassing questions from other members."

But for the early Cold War years, the officials in on the secrets need not have worried. Speaking as a member of what passed in those innocent days as the congressional oversight committee for intelligence, the moderate Republican Senator Leverett Saltonstall of Massachusetts, said: "It is not a question of reluctance on the part of CIA officials to speak to us. Instead, it is a question of our reluctance, if you will, to seek information and knowledge on subjects which I personally, as a member of Congress and as a citizen, would rather not have."

Seed money from the ESF was quickly replaced by a more substantial cornucopia. The so-called counterpart funds accumulating for American purposes in European currencies, five percent of the value of the aid provided under the Marshall Plan, filled out the soaring unappropriated budgets of the OPC. But it was the slush fund established to help stabilize the dollar in world trade, then supplemented by enemy assets during World War II, that started the United States off on the first covert operations of the Cold War.

Peter Grose, a long time foreign and diplomatic correspondent for The New York Times, then Executive Editor of Foreign Affairs, is now a fellow at the John F. Kennedy School of Government at Harvard University. This article is adapted from Operation Rollback: America's Secret War Behind the Iron Curtain, by Peter Grose. Copyright c 2000 by Peter Grose. Reprinted by permission of Houghton Mifflin Company. All rights reserved.