67. Telegram From the Embassy in Vietnam to the Department of State 1

1863. Task Force VN 25. Reference: Deptels 1494, 1496.2 In course of discussions with Thuan on June 8, following points arose relevant GVN thinking concerning financing present and future increase force level. Meeting had been arranged in advance at Thuan’s request to clarify certain matters before Thuan’s trip to Washington. It was understood that we were not negotiating, but simply seeking clarification. Thuan was supported by Secretary Economy Thanh, economist Buu Hoan from National Bank (who will accompany Thuan to Washington), and Thinh, Deputy Budget Director. Gardiner and Howe of USOM accompanied me.

Thuan opened subject of aid level to GVN for FY 62. In requesting $30 million additional aid in memorandum to Vice President Johnson,3 Thuan said GVN intended to seek a total of $169 million for FY 62 on basis 170,000 force level. They calculate this on basis 1961 aid level at $110 million new money, $15 million pipeline draw down, and $14 million PL-480,4 plus $30 million additional needed for force level of 170,000. $169 million, with customs duties added thereto, was judged to be adequate to finance armed forces of 170,000 (and presumably leave a balance for economic projects, although GVN representatives did not say so). Import list submitted to USOM by Ministry Economy, June 3, representing $149 million, was disowned as not responsive to military requirement.
$169 million aid requirement calculated by GVN on basis 30 percent flexible waiver “Buy American” restriction, and freedom from 50 percent shipping restriction. (On latter point, believe we made convincing argument that GVN funds could be devoted to buying cheaper freight, leaving greater amount in US aid funds for purchase commodities.)
Thuan agreed that level of GVN foreign exchange reserves should not rise above approximate present level of $210 million, but also insisted that present foreign exchange reserves should not be depleted to finance additional forces.
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We made it clear that final resolution of aid level for 1962 and subsequent years could not be accomplished until SFG advice available and funds voted for FY 1962. We very much hoped, however, that during this summer we and GVN could agree on a sound long-term financial plan. Meanwhile, I hoped nothing would be allowed to interfere with build-up of forces to 20,000 agreed increase as fast as possible. This was regarded as necessary by both GVN and US. Was it true, I asked, that the build-up of the 20,000 was being delayed for financial reasons?

Thuan said, yes, inductions are now being deferred since GVN does not have funds to take on additional obligations. I emphasized that we were not trading, but exploring possibilities within framework of our mutual desire to raise 20,000 troops as quickly as possible. Thuan then threw out proposal that GVN should finance as much of 20,000 increment as could be raised for FY 61, but said this would have to be done at cost of stand-still on certain economic-military-social projects now under way (mentioning roads, canals, and land development). I told him that US considers many of these projects as necessary in the fight against the Viet Cong, and that I do not wish at this time to be in position of recommending priorities between necessary projects. This proposal of Thuan’s was later withdrawn, after GVN budget man had pointed out that transfer of funds from other budget appropriations to military is not possible during current year (for reasons, we assume, appropriation law).

I persisted in exploring ways to continue inductions for the 20,000 and to finding method to pay for them without further loss of time. We calculated the sum involved to be about VN $350 million for the remainder calendar year 1961. Having withdrawn his original suggestion, Thuan then said that there were only two ways to meet this problem: (1) By borrowing from National Bank; (2) By cash grant from US. The first course GVN rejected as inflationary, and likely to cause criticism from IMF authorities due soon for annual consultations. The second alternative, I said, appeared impractical from our side, for reasons of lack of funds and on principle (i.e., cash grant in relation to over-all balance of payments position). As a personal suggestion, in order to solve the problem of 1961 payments without further loss of time and without prejudice to SFG and subsequent negotiations, I threw out the following: (1) That the cost for 1961 for the additional 20,000 be calculated as precisely as possible; (2) That Thuan then might suggest in Washington that the cost be divided between GVN’s own funds and remaining counterpart and other US-controlled availabilities. (An agreed table of [Page 171] counterpart, Section 4025 and PL-480, utilization, was available, showing a remaining balance of $5.1 million equivalents (178.5 million piasters) unprogrammed after providing $159 million equivalents for 1961 military budget and $15.9 for economic projects.)

Thuan thought this idea had possibilities. I made clear that I could make no commitments. (Comments: I urge that this matter be cleared up promptly, either in Washington or on instructions here, in order that agreed force increase be not further delayed and to clear decks for study and negotiation on future program, perhaps involving much larger forces. To do so, in my judgment, would preserve and build confidence, keep up momentum, and enable us to work much more effectively in future negotiations.)

In responding to point that we consider it necessary to maintain economic projects which were part and parcel of counter-insurgency effort, Thuan said that GVN was taking steps to improve tax collections and back up certain tax rates. Tax revenues estimated by GVN to rise by VN $600 million in 1961 over 1960. Forecasts of exports and budget details requested by USOM in April were still not available. We urged that they be ready soon for SFG study; exports for 1961 were estimated by GVN at $70 million compared to $85 in 1960. We also requested breakdown proposed US aid-financed import list of $169 for fiscal 1962.

These discussions, I think, were useful in bringing clarification and perhaps in drawing positions together. Both Diem and Thuan mentioned their usefulness to me today (June 9). I repeat that we have not made any financial commitments here, and will not do so pending further instructions.

  1. Source: Department of State, Central Files, 751K.5-MSP/6-961. Secret. Repeated to CINCPAC for PolAd.
  2. Dated June 3 and 6, respectively. The former requested information on the Vietnamese military budget, while the latter asked for cost estimates for FY 61 and 62 military assistance program requirements. (Ibid., 751K.5-MSP/6-261)
  3. See footnote 4, Document 54.
  4. Formally entitled the Agricultural Trade Development and Assistance Act enacted July 10,1954, P.L. 480 provided for the donation of U.S. agricultural surpluses to friendly governments; for text, see 68 Stat. 454.
  5. For text of Section 402 of the Mutual Defense Assistance Control Act of 1951 (the Battle Act), enacted October 26, 1951, see 65 Stat. 644.