Foreign Relations of the United States, 1961–1963, Volume II, Vietnam, 1962

223. Memorandum From Michael V. Forrestal of the National Security Council Staff to the President¹

Washington, June 20, 1962.

SUBJECT

• South Vietnam: Dollar Aid to, and Waiver of “Buy American” Restrictions for South Vietnam (New York Times article, June 20, 1962)

Background

For the past month Ambassador Nolting, General Harkins, and the rest of the country team in South Vietnam have been pressing very hard for a rapid increase in the amount of local currency (piasters) available for counterinsurgency activities in South Vietnam. Diemʼs people have complained that, owing to a 4.8 billion piaster estimated budget deficit this year (U.S. estimate: 3 to 4 billion), decline in tax revenues, and the failure of the Vietnamese economy to absorb sufficient high cost American imports, there is a shortage of local currency. They also point out that their gold reserves have slipped from $200 million plus to $164 million.

Due to this situation the Diem regime asked for a $25-million cash grant and an across-the-board waiver of all “Buy American” restrictions.

The Defense Department and Secretary McNamara have argued strongly that local funds for counterinsurgency must be provided quickly, directly to the field and preferably under U.S. control. Secretary McNamara feels that this is of the highest importance, since it affects particularly those military programs which are vital at this time, i.e. aid to the Montagnards who defect from the Viet Cong and the strategic village and related programs.

The Aid Agency on purely economic grounds questioned the advisability of providing cash grants to Diem at this time, pointing out that the better way to generate local currency was to have the Diem Government borrow from the central bank, i.e. print money.

The State Department, while sympathetic to the Aid Agency position, came to the conclusion that the military urgency was so great and the political resistance of the Diem Government to deficit financing was so strong, that the following compromise on a one-shot basis offered the best solution:

1. An offer to Diem of a cash grant of $10 million in return for which Diem will deposit piasters at a rate of approximately 73 to the dollar in an account which will be available to the United States for counterinsurgency purposes in Vietnam. (This, I gather, would be a direct charge on our balance of payments.)

2. The waiver of the “Buy American” restrictions with respect to $8 million of funds already obligated but not yet used to finance the importation of items useful in the counterinsurgency campaign (i.e. fertilizers, barbed wire, etc.) which would generate an equivalent amount of local currency, also to be used by the U.S.

3. The waiver of “Buy American” restrictions on $12 million of industrial imports to bolster the general economy of South Vietnam. This is new money and together with the funds referred to in (2) above would also constitute a charge against our balance of payments to the extent that imports were made from countries other than the United States. The maximum potential gold drain is thus on the order of $30 million.

Action Taken So Far

There has been an exchange of cables with Nolting which has resulted in Noltingʼs having been given authority generally to negotiate within the above three actions. Negotiations are not to start, however, until the State Department has sent further details on certain technical points. I have asked that these negotiations be held up pending your review.

Comment

This problem boils down essentially to a political decision. I am told that the Diem regime is adamant in their refusal to finance the local currency requirements of counterinsurgency operation by increasing their budgetary deficit. This appears to be the only other quick way of generating the piasters without the United States simply purchasing them for dollars. If we refuse a cash grant and refuse to waive the “Buy American” restrictions, I am told that Diem would not finance the counterinsurgency programs. This is blackmail, and I am personally convinced that our objective should be to force Diem to increase his economyʼs contribution to the war effort by increased taxes and deficit financing if that is necessary. Not only are cash grants from us a charge on our balance of payments, but, perhaps even more importantly, they may encourage socially undesirable activities in war time, such as the importation of some luxuries and possibly the flight of capital. Despite feeling this way, I did approve the sending of a telegram to Nolting authorizing him to begin negotiations on the above described program.² I was mainly moved by the need at this time for speed as expressed by the military. It seemed that this was perhaps not the best time to force the political issue. Since no steps have been taken, the decision can be modified or reversed; and even if you approve the currency proposal, you can and, I hope would direct the Departments and the country team to raise the whole issue of deficit financing with Diem in the strongest possible terms, so that the question of cash grants and waivers will not come up again. This should be done simultaneously with the current negotiations.

Specifically, I would recommend that you first discuss the general political and financial problems of South Vietnam with Secretary McNamara in order to ascertain how strongly he feels about the necessity of swallowing this bitter pill now. If you are convinced of the military and immediate political necessity to go ahead, then you might approve the program described above with an injunction to the Departments concerned and to the field to tell Diem that we are simply not prepared to continue our support of their war unless he does his share. The United States has been forced into deficit financing and a drain on its gold reserves in order to meet its commitments throughout the free world. The least we can expect is for those Governments whom we help to take their fair share of the burden.

One last point on the balance of payments and the waiver of “Buy American” restrictions. I have asked why it is not possible for the American commodities whose importation to South Vietnam we finance to be sold locally at lower prices, thus avoiding having to buy them from other countries. I have not got a satisfactory explanation of why this isn’t possible, and would hope you would approve my telling State that this should be done unless Nolting can give a convincing explanation why not. This would save up to $12 million of the $30 million charge against the balance of payments. It would also be an additional cost to the U.S. internal budget.

1. Source: Kennedy Library, National Security Files, Vietnam Country Series. Secret.
2. Presumably a reference to Document 212.