Foreign Relations of the United States, 1961–1963, Volume I, Vietnam, 1961

124. Telegram From the Embassy in Vietnam to the Department of State¹

Saigon, August 25, 1961, 7 p.m.

277. Task Force VN. Gardiner, Mendenhall and I had almost 3 hour session with SecState Presidency Thuan and SecState National Economy Thanh Aug 24 with following results:

1. Thuan made clear GVN had taken decision to raise piaster yield to average of 74 piasters per dollar and said this decision could be cabled to Washington. At same time under questioning, he disengaged GVN decision on piaster yield from level US aid. Piaster yield will consist of 35 as counter-value at official exchange rate, 25 representing new “economic development and defense tax”, and average 14 from other taxes. We believe this represents real progress as this is decision which has been sought by US for several years.

Thuan frankly stated this is devaluation in everything but name, but stressed importance of avoiding labeling it as devaluation publicly and officially. When I asked why GVN adopting complex system of taxes and subsidies rather than direct simple approach Thuan replied with smile that it was because of complexity. He explained that psychologically masses will not understand that rate has been changed, and political and social results will therefore be limited. On other hand if GVN were to announce change in official rate everyone would know what is taking place and results would be much more severe.

Two GVN subcommittees have been appointed to work out the necessary and indispensable measures to accompany piaster yield change: First to review and make adjustments in customs tariff and second to recommend further fiscal reform measures. These committees directed to report within 45 days and therefore new rate cannot be placed in effect before that time. Net reduction will result in “other taxes” on imports to achieve new average yield of 14 piasters per dollar (in contrast present yield these taxes of 17 or 18 piasters per dollar on sliding scale from low tax on essentials to higher tax on less essential goods). Subcommittees also working on problem of recapturing windfall profits resulting from new piaster yield approach and measures to increase yield from other than import taxes.

All addressees will recognize indispensability of maintaining secrecy about new piaster yield approach until officially announced by GVN.

2. Thuan presented piaster yield decision in context projected budget for calendar year 1962 showing expenditures 23.4 billion piasters and receipts 20.5 billion piasters. Budgetary breakdown as follows (in billions piasters): Expenditures consist of regular civil budget 8.6, security (including civil guard and self defense corps and gradual increase in armed forces during 1962 from 170,000 to 200,000) 10.6, continuation USOM economic projects 0.8, extra budgetary accounts (export subsidies and compensation account expenditures) 2.0, one-half of 18-month emergency economic and social program proposed in Staley Report 0.9, and one-half of 18-month long range economic development program proposed in Staley Report 0.5. Receipts consist of counterpart of US-financed commercial aid at official 35 rate 5.9, internal fiscal receipts 4.5, and import taxes (new economic development and defense taxes of 25 piasters per dollar and other taxes of 14 piasters per dollar) 10.1. In calculating above receipts GVN projects import program of 259 million dollars consisting of commercial aid 169, PL 480 12.7, and GVN’s own foreign exchange 73.8. Under questioning, however, Thuan stated clearly that GVN decision to go to 74-1 yield was not conditional upon US aid figure used in projected budget. He said aid figure used is simply one chosen by GVN because it has to use some basis for calculating US aid in making its budgetary projections. Thuan also stressed that average piaster yield is maximum GVN can do, thus indicating that if actual US aid is less than amount projected in budget GVN will have to cut back on program. Thuan said that internal receipts item in budget represents increase of 1 billion piasters over 1961, thus showing GVN’s intention to implement SFG report recommendation on tax reform as well as exchange reform recommendation. When questioned re gap of 2.9 billion piasters in budget he said GVN would try meet as much as it could by other two SFG report recommendations: Victory bonds (perhaps up to one billion) and National Bank advances, which has lowest priority of any of methods to be used for financing budget.

Budget being analyzed and our detailed comments will follow.²

3. I congratulated Thuan on adoption joint report³ breakthrough concept, as reflected in 1962 budget. I explained we could make no decision at this time re US aid level because Congress has not yet completed action on aid legislation. I also said that my approach toward aid level problem was to let joint experts report criteria be sole guide, since I saw no possible way of choosing realistic import figure at this time. I indicated I was not sure whether Washington would agree with this approach, and in any case we would shortly have to come up with a temporary figure which, as I envisaged, would be subject to revision after several months in light of experience. I also pointed out that in addition to commercial aid DLF offered possibilities for financing import of capital goods, and could under certain circumstances be used to generate piasters for current government use. Got no reaction to this.

Thanh was reluctant agree to my proposed approach of fixing only temporary aid level figure because he foresaw various practical difficulties such as delays in goods arrivals pending agreement on final figure, speculation and price increases. I believe however he eventually acceded to approach we proposed, particularly because of emphasis we place on flexibility given to field in President Kennedy’s letter to President Diem.⁴ Thanh stated however that for practical purposes review of temporary aid level would have to come well prior to expiration of 6-month period.

Thanh told us that GVN calculates new piaster yield approach will cause only 4 percent increase in cost of living of lower classes. He underlined however importance prompt arrival of adequate quantity of imports to avoid greater effect on cost of living and adverse political repercussions.

Thanh asked specifically about addition petroleum products to list eligible commodities for US financing. Gardiner replied he saw no problem in this.

4. Thuan raised problem of extent to which piaster proceeds of aid should go into counterpart account under new piaster yield approach. He expressed awareness of congressional problems on this score, but asked that we also take a sympathetic look at GVN’s public relations problems and vulnerability to Communist attack if apparent US hold on Vietnamese economy becomes too evident from budget. He proposed that out of new piaster yield of 74 per dollar 60 go into counterpart fund (which would be real improvement over present deposit rate of 43), but that 25 be released automatically for military budget and emergency development expenditures just as 7 out of current 43 is released automatically for military budget. We replied that we understood GVN concern; that this is primarily congressional and legal problem and we would see what we could do to accommodate GVN as much as possible. Shall submit recommendations on this point.

5. Thuan requested that 30 percent of total US commercial aid be exempted from buy American provisions. We also promised we would see what could be done on this score. I said that perhaps we could ask Washington to delegate authority to US in Saigon to go up to 30 percent but on basis case by case decision.

6. Will submit shortly our further ideas on how best to move in light this major step on part GVN. I took occasion to reiterate US assurance that “increased piaster realization per dollar’s worth of imports will not be used as reason for reducing the American share of our joint efforts.” (Deptel 140)⁵

Nolting

1. Source: Department of State, Central Files, 751K.5-MSP/~2561. Secret; Priority. Repeated to CINCPAC for PolAd, Bangkok, Phnom Penh, London, Vientiane, and Paris.
2. Apparently a reference to Document 126.
3. See Document 93.
4. Document 114.
5. Document 113.