851G.131/3–853: Telegram

The Ambassador at Saigon (Heath) to the Department of State

secret

1747. Repeated Paris 243, information Hanoi unnumbered. Re-Deptel 1719, February 20.1 Joint Embassy STEM message. Embassy and STEM highly commend MacDiarmid report2 and concur with his conclusions for necessity of eventual devolution from economic standpoint. Also welcome submission of devaluation problem to NAC.

Department should realize, however, that under present circumstances the three AS firmly believe, and with reason, that there will be no immediate advantage to them in devaluating now and they will strongly resist and resent any pressure to this end. In such an attitude, they will have the at least tacit support of the French authorities here, first because forcing devaluation on the AS would worsen the not too happy relations of France with them, and secondly because the [Page 399] politically powerful French business community, the French bureaucracy, and military are opposed to devaluation because it would reduce the high profits and salaries they now enjoy. As an almost invariable rule, governments cannot be persuaded to devaluate until they are obligated to. For them to devalue now would mean that they would not be able to get their imports at the present artificially cheap rate from France and devaluation would be followed by price rises with consequent discontent among the urban populations at least, because there would be inevitably some increases in living costs. Bartlett, chief STEM, believes price rise potentiality possibly underestimated MacDiarmid report.

Advantage would be to French Government and French economy as a whole, and to us in that we would be getting great results from our program of military, financial, and economic aid for a lesser expenditure of francs and dollars: I believe MacDiarmid report makes a sound case for thesis that it would be of eventual economic and political benefit to AS themselves if they would take step of devaluation now, instead of awaiting the return of peace and more normal conditions when they will have to devaluate.

What we can do, and should do now, in interests of France and US, is to begin to condition public and official opinion in the AS, and in France, towards advantage of an early devaluation of piaster. It is almost certain that we will be asked to increase our arms aid program in 1954 and will be faced with a request for financial assistance to pay for enlargement of Vietnamese army, which must be increased if we are going to have an early victory over communism in this area. It is dangerous to let war drag on. If it is true that France is already making her maximum contribution here, then we will be called on to foot the additional bill and we will expect to get value received for any additional contribution we make, which we cannot get at present rate of piaster. It is to be noted in this connection that Vietnamese army, originally expected to be a small one, was formed on basis of voluntary enlistment and with pay schedules equal to those of French expeditionary forces. These pay schedules are far in excess of those of other Asiatic armies and beyond capability of AS to finance themselves over any long period without outside help. On other hand, as a practical measure, it is extremely difficult in time of war to cut pay scales to which troops are now accustomed. It might have very disastrous effects on morale and fighting spirit of national armies. Devaluation, however, would cut cost of these pay scales to France and US, which are footing major portion of bill.

It must be repeated, however, that we are in no position, nor is France, to make a direct demand now on AS to consent to devaluation. We can only gradually but determinedly, and particularly if US is to [Page 400] finance piaster cost of Vietnamese army, condition AS Governments to an early devaluation. That process will take several months at least. In addition, we believe French should be persuaded present opportune time encourage AS adopt reasonable exchange tax on financial transfers in order increase own military financing. We can expect powerful French interests object strongly.

STEM and Embassy again urge importance send consultant soonest complement MacDiarmid report by comparable study tax situation.

Heath
  1. Telegram 1719 to Saigon, concerning the question of devaluation of the piaster is not printed. (851G.13/2–1953)
  2. See footnote 2, p. 395.