Foreign Relations of the United States, 1958–1960, Vietnam, Volume I

180. Telegram From the Ambassador in Vietnam (Durbrow) to the Department of State¹

Washington, July 18, 1960—8 p.m.

156. Reference: Saigon 81.² Sec State Presidency Thuan asked me call July 16. Thuan said Diem would shortly give me preliminary outline “realistic” three-year economic development plan now being drawn up. He admitted plan submitted earlier this year was unrealistic. According Thuan new plan will have realizable yearly goals, will permit US to program aid to Vietnam on realistic basis and will meet recommendations Mansfield Subcommittee.³ Details of plan to be worked out by September 30. I told Thuan I was glad to hear this and would study plan most carefully.

In connection with plan Thuan referred to recently increased taxes on beverages, flour and canned milk and said definite plans well-advanced with GVN to impose or raise various other internal taxes. He told me very confidentially plans include tax on rubber exports and improved collection rice milling tax. Said that with new taxes GVN will have taken large stride to shift revenue base from import to internal taxes.

After outlining above Thuan urged we not invoke commensurate value clause or insist upon higher exchange rate on ground this would throw economic plan out of kilter because of resultant price spiral. I gave Thuan arguments for increase in exchange rate and that application commensurate value will not necessarily impede plan but might help it by creating further piaster availabilities. Agreed however study matter if we received more details from GVN about plan.

In connection my arguments favoring devaluation Thuan again claimed Laos devaluation a failure primarily because we insisted on full convertibility. I asked whether IMF had suggested full convertibility for GVN. He said no and I stated we also did not believe this essential for GVN. Thuan seemed relieved learn this.

Full details my conversation with Thuan being pouched.

Comments: I believe this new development requires some modification in recommendation made in penultimate paragraph our 81. We should at least delay further pressure on GVN re commensurate value and exchange rate for few weeks until Diem has had opportunity outline to us development plan and further details on tax plans. Since GVN seems now to be bestirring itself on economic front, maintenance good relations makes it desirable that we not act precipitously but instead hear what Diem has to say and show willingness study GVN viewpoint.

Since I heard from Gant of Ford Foundation last week that Vu Van Thai has been asked by GVN to draw up three-year development plan, we have independent evidence that GVN is planning to work in this field and that Thuan’s statements may involve more than mere delaying tactics. We are aware that relationship between economic plan and exchange or counterpart deposit rate question is not too close, but trust nevertheless that rate rise would increase costs of imported producers goods and GVN will claim that this would hamper implementation of development plan. We are also aware that development plan will necessitate additional piastre availabilities for financing which change in exchange or counterpart deposit rate would help meet, but it is possible that recent and planned GVN actions in tax field may go at least part way toward meeting this need though would probably not in themselves be adequate.

Already our threat to invoke commensurate value clause as well as other démarches to GVN in recent months have apparently produced following results:

1. Taxes increased in early July on beer, soft drinks and imports of canned milk and wheat flour which will bring in preliminary estimated revenue rise of about 200 million piasters annually. How much this due to June 27 démarche⁴ or to earlier efforts induce GVN increase piaster availabilities not clear. Tentative indications also received that GVN planning accede to our proposal that shift in financing petroleum imports from CIP to GVN foreign exchange be used to increase revenue yield. According tentative information GVN planning finance imports gasoline at 85 rate and diesel oil at new 60 rate. If this plan implemented should also result in increased revenue yield of several hundred million piasters. New taxes mentioned by Thuan should also further raise revenues, but until we see details we have some question as to why GVN should impose tax on rubber at same time it subsidizes rubber exports and also as to whether improved collection rice milling tax will not further reduce price peasants receive for paddy.

2. Preparation three-year development plan also obviously results from our June 27 commensurate value démarche.

3. Evidence growing that Diem now genuinely concerned about corruption. He reportedly discussed subject at recent Vietnamese Mission Chief’s conference, has asked that we bring specific cases to Thuan’s attention, and has recently acted to try terminate scandal in national lottery resulting from sale of 10 piastre tickets for 13 piastres… . indicates crackdown on one of Nguyen Van Vuu’s associates for withholding share of business profits from Can Lao party, and information I received July 13 indicates crackdown extended to Vuu himself.

4. Some evidence also available that Diem trying enhance popular support of his regime. Stated in “double seven” talk July 7⁵ that he planned series intimate talks with people. First of these evidently took place at inauguration Agroville in Kien Hoa province July 15 where he understood to have made 45-minute extemporaneous, sincere speech to people stressing social justice and emphasizing distinct advantages of resettlement in Agrovilles for them and their children. On same occasion he apparently made real effort to be politician by leaving escort and walking over to chat with large group peasants despite obvious security hazard in this much disturbed province. Also bought items in new shops in Agroville and distributed them immediately to people in crowd and paid snack bar proprietor to serve beer to men and other drinks to women in crowd.

5. Diem has also taken action to improve effectiveness of armed forces. He instituted centralized command over all security forces in 5th military region south of Mekong, improved anti-guerrilla training of ARVN and has promised bring total level armed forces within 150,000 force level and integrate commandos into ARVN. While he has not established centralized intelligence service as we would like him to do, recent ARVN successes against guerrillas make it apparent that some improvement in intelligence collection and distribution has taken place.

6. In response our démarche GVN also attempting improve relations with Cambodia. It is apparently trying bring exchange of notes on islands to end. It has also apparently offered to cooperate with RKG in locating alleged Free Khmer groups in Viet-Nam and Free Khmer radio. Report just received … also indicates that GVN has removed Son Ngoc Thanh’s Free Khmer headquarters from west of Banmethout to Gia Dinh province near Saigon … . This removal from frontier area seems to be step forward.

Invocation commensurate value clause is one of best clubs we have to induce GVN take action along lines we desire and along with our other démarches has already produced gratifying results on most points on which we have been pressing GVN for several months. We should therefore not be too hasty in making final use of this club and thus lose its wide potential for future use. We therefore believe it inadvisable set date now for invocation commensurate value. We may hold weapon over GVN’s head to try induce adoption realistic development and taxation plans. If GVN fails come through with realistic plans in reasonable time, we can then set date for invocation commensurate clause in effort force GVN to consult IMF on exchange rate as suggested our 81.⁷

Durbrow

1. Source: Department of State, Central Files, 751K.5–MSP/7–1960. Secret; Limit Distribution. Repeated for information to CINCPAC PolAd, Phnom Penh, Vientiane, and Bangkok.
2. In telegram 81, July 9, Durbrow reported conversations he had with Vice President Tho on July 6 and Ambassador Luyen, Diem’s younger brother, on July 8. Durbrow’s intention in these talks was to explain the proposed U.S. aid program for Vietnam in light of reports reaching the Embassy that the Government of Vietnam considered the proposed cuts arbitrary and punitive. Durbrow stressed the need for Vietnam to devalue its currency, reiterated the principle that aid to Vietnam was tied to Vietnam’s balance of payments gap—which was shrinking—and encouraged Tho and Luyen to do all they could to see that Vietnam collected more taxes. From these conversations and others, Durbrow concluded in this telegram that Diem would resist pressure for devaluation because of his preoccupation with internal security and with the growing opposition to him among Vietnamese intellectuals. In fact, Durbrow was convinced that Diem would view pressure for devaluation and U.S. aid cuts as unfriendly moves by the United States. (Ibid., 751K.5–MSP/7–960)
3. See Document 107.
4. During June the Department of State and other interested agencies in Washington discussed with the Embassy in Saigon the possibility of an official démarche to the Republic of Vietnam for establishment of a realistic and unitary exchange rate for its currency. (Telegram 3391 from Saigon, June 7, and telegram 2265 to Saigon, June 17; both Department of State, Central Files, 851K.131/6–760) In telegram 3519 from Saigon, June 22, the Embassy suggested the following alternative:

   “As compromise approach which would tend to force GVN to enter into serious rate discussion with IMF we would inform GVN that we shall be obliged to insist GVN deposit into counterpart commensurate value for all US aid within near future. Without specifying a date, we would say that this has become necessary because of congressional attitude and note that executive branch must reply to Congress on Mansfield report by September 30, 1960. We would also tell GVN that once commensurate value clause invoked, under VN rate structure, all counterpart and 402 deposits must be at present limited access free market rate with appropriate safeguards in case change in this rate. We would construe this deposit rate as commensurate value, and not require customs duties be deposited in addition. However, if GVN and IMF agree in meantime on new official rate, we will consider accepting that rate plus customs for deposit to counterpart fund. In making such approach we would also state that we would be compelled to suspend commercial aid until GVN agrees deposit at increased rate. At same time we would inform GVN that additional piasters obtained from larger counterpart deposits could be used to finance: (a) Economic development, (b) additional needs for security, and (c) certain other expenditures now financed GVN budget, but which are appropriate for aid financing, (b) and (c), of course would reduce anticipated deficits in 1960 and 1961.” (Ibid., 851K.131/6–2260)

   The Department of State accepted this suggestion in telegram 2320 to Saigon, June 23, with the following modifications:

   • “(a) In your presentation emphasize importance which US attaches to current IMF visit and expectation GVN will seize occasion undertake meaningful consultations and take prompt and effective steps toward basic exchange reform.
   • “(b) Rather than specify limited access free market rate with waiver customs, say deposits must be at ‘rate substantially higher than current level, which would be considered by US as acceptable and commensurate with value in dollars.’
   • “(c) Believe threat to cut off commercial aid should be eliminated as this implicit in demand for commensurate value. Believe Embassy would concur that overt threats of sanctions should be avoided at this difficult time.
   • “(d) Singling out additional security needs from other GVN budget expenditures might imply US willingness relax restraints on spending for security forces which now result from limited availability counterpart. Thus, you could say additional piasters could be used finance economic development and certain other expenditures in GVN budget which appropriate for US financing (FYI This would not exclude security if proven necessary. End FYI).” (Ibid., 851K.131/6–2260)

   According to telegram 3570 from Saigon, June 27, Durbrow made the approach based on telegram 3519 from Saigon as modified by 2320 to Saigon to Thuan on June 27. (Ibid., 851K.131/6–2760)

5. See footnote 2, supra.
7. In telegram 137 to Saigon, July 27, drafted in SEA and marked “From Parsons”, the Assistant Secretary replied in part: “Recent favorable developments so well summarized your 156 are especially encouraging. They show that even though our démarches not easy to make and frequently seemed unenthusiastically received, your determined efforts during past year and forthright discussions with Diem and other GVN officials are showing results.” (Department of State, Central Files, 751K.5–MSP/7–1960)