182. Telegram From the Embassy in Laos to the Department of State1

2075. Department pass CINCPAC for POLAD. Deptel 1436.2

I am fully aware of difficulties Department now has in justifying adequate appropriations for Laos, and agree with OCB view (paragraph 2 reference telegram)3 that resolution exchange rate problem is imperative, but I consider merger of conservative parties and formation anti-Communist government now clearly must enjoy an even higher priority. I therefore have already started informing selected Lao leaders that July funds may not be forthcoming unless they have given tangible proof that continued US aid will produce different results from heretofore. I shall explain that this requires concrete results in areas of (1) merging conservative parties, (2) formation anti-Communist government excluding NLHZ, and (3) monetary reform.
Furthermore from conversations with Lao and French advisors which will be summarized in a following cable,4 we in Embassy have become convinced that if negotiations in Washington are to be quickly concluded exploratory talks should be undertaken here first to seek to obtain definition current Lao position which we understand confidentially has altered considerably since February and then to try to bring it close enough to US viewpoint to provide more hope for prompt agreement in Washington.
I would like to suggest therefore that I be authorized to start preliminary technical discussions with RLG right away in Vientiane to help define areas of agreement and disagreement and possibly narrow [Page 455] differences between two sides.5 Negotiations could then be concluded in Washington with representatives new Lao Government. I do not believe it is necessary for me to dwell on undesirability of having present government sign an agreement to which Souphanouvong objects and once he is excluded from new government he can claim that he preferred to leave government rather than yield to American pressure.

I agree with Department that in any official negotiations preliminary or otherwise it is undesirable to give RLG impression US has dropped proposals discussed last fall and therefore feel that we should begin officially where we left off when Leuam departed Washington last February. As stated in interim agreement (Embassy despatch 143)6RLG has agreed to resume negotiations in June. Department’s attention invited, however, to fact that interim agreement is not restricted to apply only FY 1958 funds as suggested by paragraph 1 reference telegram.

The suggestions Embassy and USOM made in Embtels 19407 and 19738 were not put forward primarily as suggestions for an alternation of our US position in the negotiations or to be the basis of an official American suggestion. It was primarily a recommendation that an idea of this nature or some alternative idea serving the same purpose be planted by the USOM banking advisor with his Lao and French colleagues clearly as his own personal speculation as to a possible Lao position to be put forward by them as a starting position in negotiations that would, as the Lao want, maintain on paper present official exchange rate while at same time offering US in practice considerably more for every dollar it sells Lao National Bank. The primary purpose to be served was therefore to take advantage of the opportunity presented by USOM banking advisor’s informal relations with Lao National Bank officials to bring Lao opening position at least a little closer in effect to ours and thus make an early conclusion of agreement more likely. However, a secondary purpose was to suggest exploration of [Page 456] possible alternative avenues for providing monetary stabilization of a type which might result in broader and somewhat more permanent economic reform than that provided by the establishment of the immediate necessary minimum of a more realistic exchange rate and convertibility. At this point I agree fully with Department that this necessary minimum is the most we can hope to negotiate before the new fiscal year.

  1. Source: Department of State, Central Files, 851J.13/6–458. Secret; Niact.
  2. This joint State–ICA telegram stated that since the formulation of a new Lao Government would delay negotiations for monetary reform past the already agreed upon June deadline, the United States was unprepared to fund Lao armed forces beyond June 30 and Lao leaders should be informed accordingly. (ibid., 851J.13/5–358; included in the microfiche supplement)
  3. In this paragraph, the Department noted that the OCB “viewed the resolution of the exchange rate problem imperative.” At the OCB meeting, ICA Director James Smith stated that as long as the United States continued aid payments, the Lao “would stall” on monetary reform. Parsons said that the Lao Government was “not necessarily acting in bad faith” and the elections had delayed the negotiations. (Notes by Richards, May 28; Department of State, OCB Files: Lot 62 D 430, Preliminary Notes III)
  4. Apparent reference to telegram 2081 from Vientiane, June 5. (Department of State, Central Files, 751J.00/6–558; included in the microfiche supplement)
  5. In telegram 1446 to Vientiane, June 6, the Department responded that time was insufficient for preliminary discussions and resumption of aid payments depended on monetary reform. (Department of State, Central Files, 851J.13/6–458; included in the microfiche supplement)
  6. Dated April 2. (Department of State, Central Files, 851J.13/4–258; included in the microfiche supplement)
  7. The reference is in error and should be to telegram 1955 from Vientiane, May 16, in which the Embassy and USOM suggested raising a compromise dual exchange rate solution with the Lao Government in which 35 kip to the dollar would be the government-to-government rate and 70 or 80 kip to the dollar would be the commercial rate. (Department of State, Central Files, 851J.13/5–1658)
  8. In telegram 1973, May 20, the Embassy and USOM suggested that the best way for Laos to establish a commercial rate for the kip was in the form of an exchange tax equal to the difference between the 35 to 1 official rate and a commercial rate of 70 or 80 kip to the dollar. Such a tax would lessen the political repercussions of devaluation. (ibid., 851J.00/5–2058)