66. Memorandum of a Conversation Between the Assistant Secretary of State for Far Eastern Affairs (Robertson) and the Director of the United States Operations Mission in Saigon (Gardiner), Department of State, Washington, April 22, 19591
SUBJECT
- Situation in Viet-Nam
During a call by Mr. Gardiner prior to his return to Saigon, Mr. Robertson requested his views concerning developments in Viet-Nam. Mr. Gardiner said that trouble with the dissidents has increased in South Viet-Nam during the past few months. In the economic field, however, gradual progress is being made. Rice production rose during the last crop year but is harder to sell because of present large supplies in the world market. Rubber production is being further developed but returns from this will not be evident for some years because of the length of time required for growth of rubber trees. Substantial progress is being made on the road program which has already shown favorable results for the economy. Industrial projects are inching ahead with more being done in this realm under the non-project sector of the aid program than is generally realized. Mr. Gardiner noted, however, that progress in industrial development is giving rise to a fairly serious problem. As Viet-Nam comes to depend less on imports, a squeeze is placed on the budget because of its dependence on counterpart. Since counterpart is now accumulating at a rate just about sufficient to maintain our contribution to the military budget and further draw-down on the counterpart pipeline for economic projects cannot continue much longer, a problem of the adequacy of local currency resources is posed.
In response to Mr. Robertson’s question as to how this problem can be met, Mr. Gardiner said that increased revenues from taxes and simplification of the exchange rate (which could lead to elimination of export subsidies now approaching a billion piastres) could help in solving it. He said that his view as well as that of the Government of Viet-Nam was that as non-project aid is reduced, it is desirable to increase project aid in order to enable Viet-Nam to progress faster toward self-support.
Mr. Robertson expressed concern as to whether the necessary military expenditures could be met in light of the problem posed by Mr. Gardiner. If this should mean consideration of a reduction in force levels, Mr. Robertson said that it must be borne in mind that [Page 186] the GVN forces are confronted by a much larger Viet Minh army. Mr. Gardiner said that our new program for up-grading the Civil Guard by furnishing it transportation and communications equipment might help in this connection. He also commented that it might be possible to find economies in the military budget without reducing combat effectiveness. Mr. Robertson said that the current fashion in some circles is to take the position that economic aid is more important than military aid. That would be true if there were no Communist threat, but Viet-Nam faces strong battle-ready Communist forces. If the military posture of Viet-Nam were weakened, we would then be faced in case of Communist attack with the alternatives of either letting Viet-Nam be taken over by the Communists or counter-attacking with thermonuclear weapons. Since we do not want to be faced with these two alternatives, it is important that conventional forces be maintained. Thus while economic development is effective for combating subversion, it is no defense against actual aggression. Prosperity does not, therefore, mean security.
Mr. Gardiner mentioned the problem of the exchange rate applicable to the servicing of DLF loans which has come up in connection with the first proposed loan to Viet-Nam. He noted that the exchange rate language proposed by the DLF in the draft agreement would require the limited access free market rate of 72 piastres per dollar which is used primarily for the repatriation of the profits of French firms. Both the GVN and USOM are opposed to this rate for repayment of DLF loans. The USOM considers a rate of about 50 piastres per dollar as the appropriate one for this purpose since exports are made at an effective rate of 47 and most imports come in at an average rate of 53. He said that a memorandum to Mr. Dillon on this question would soon reach Mr. Robertson.
Mr. Robertson inquired about the GVN attitude toward changing the exchange rate. Mr. Gardiner said that he thinks that most GVN officials are in favor of a change in the rate structure but that President Diem has not yet been convinced. Mr. Robertson suggested citing the fact that we devalued our currency in 1934. He also cited our problem with Congress in cases of unrealistic rates. He said that since aid is likely to be reduced in any case because of Congressional appropriations cuts, Viet-Nam should in its own interests take every necessary step to make the most effective use of the aid given.
Mr. Gardiner said that contacts with Vietnamese officials were on a close and frank basis. Mr. Robertson expressed pleasure at hearing this.
- Source: Department of State, Central Files, 751G.00/4–2259. Confidential. Drafted by Mendenhall.↩