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

2621. It has come to my attention that Dept has recommended reduction in defense support to Viet-Nam for FY 60 of 10 to 15 million dollars below 1959 level. For reasons outlined below I and other members of Country Team believe firmly that such drastic reduction at this time would adversely affect GVN morale and prospects of building up VN economy to make it more self-sufficient.

Perhaps this suggestion was based on misunderstanding of conversation I had with Under Sec Dillon in Baguio re VN military budget.2 As Dept aware, we have advised GVN we do not anticipate contributing more than $130 million in counterpart to military budget FY 60, which would be reduction almost $15 million from contribution FY 59. We have also urged GVN in drawing up CY 60 military budget to make every effort reduce total to $165 million, reduction of about $10 million below CY 59. Reason for desire of cut this nature is to permit adequate supply counterpart for economic projects, brings slow but steady pressure on GVN to increase its own tax revenues, draw up adequate but tight military budget, and bring home to GVN need to allocate resources in realistic non-inflationary manner. These objectives could not be accomplished if defense support FY 60 cut by $10 to $15 million below 1959 level of $177 million.

It is considered opinion of Country Team that reduction to $162 of [or?] $167 million would put us well below danger point. There is continuing requirement here for commercial import program to sustain civilian economy, provide foreign exchange for local private investment, and create piastres to cover military budget without inflation, while giving GVN reasonable time to establish necessary [Page 208] administrative measures to increase tax revenues and permit economy to develop to point where gap in foreign payments will be greatly reduced. Because of continuing internal and external security needs, GVN has not yet been able adequately to develop resources to point where our aid can be substantially reduced without jeopardizing U.S. interests.

All our aid calculations presuppose reasonable assurance that certain urgent projects, such as electric power, railroad equipment, buses, and sugar and cement factories could be financed by DLF. Success of our operations in this country will depend on program which includes reasonable segment of DLF finance as well as ICA aid, and unless DLF is prepared to make tentative country allocation in substitution for cuts in defense support (rather than operating project by project), we doubt that this new instrument will be effective in furthering our political ends here. On other hand, while DLF–financed projects essential to raise productivity, and eventually exports and revenues, DLF loans cannot be substituted in next several years for ICA grants because of GVN’s limited repayment capacity even in piastres. GVN must continue receive considerable ICA grant aid for some time if we are to accomplish our political aim here and eventually put GVN into position where it can cover larger part of import and budget needs.

While acutely conscious of need to husband US tax dollars, Country Team believes we court grave risks if we cut program too brutally. Investment hitherto made by US in Viet-Nam has to date been fully justified. We therefore counsel most careful consideration before decision is made to cut aid too deeply. Cutting commercial aid (and therefore counterpart fund) too deeply would not only risk commodity shortages and inflationary pressures, but might result in reduction of security forces required to meet what now appears to be systematic well planned commie terrorist and sabotage activities aimed primarily at prevailing economic and agricultural progress (Embtel 2525 to Dept3). Cut in project aid and other programs of development would go far to retard economic recovery and growth, discourage GVN by depriving it of present hope of eventual viability, and probably cause South Viet-Nam to fall behind the North in present competition.

  1. Source: Department of State, Central Files, 751G.5–MSP/6–1259. Secret. Sent with instructions to pass to ICA and the Department of Defense.
  2. Apparent reference to a discussion at the Chiefs of Mission Conference, April 13–17, 1959, at which both Durbrow and Dillon were participants. No record of the DillonDurbrow conversation has been found.
  3. See footnote 4, Document 72.