71. Telegram From the Department of State to the Embassy in Vietnam1

1534. Task Force VN 11. Joint State/ICA. Refs (A) Embtel 1874, (B) Embtel 1863.2

In conversations at highest level Thuan has repeated statement reported Ref B that induction 20,000 being deferred because GVN “simply does not have the liquid assets necessary to pay the local costs of continuing this increase to 170,000”. In view urgency avoid delays in mobilization plans, problem received high level review Washington with following conclusions:

Issue concerns how total CY 1961 GVN budget costs can be financed by joint US/GVN actions. Military budget represents critical aspect but should not be resolved except in total context.
Additional US dollar aid not justified on economic grounds in light GVN reserve position.
Analysis info Ref A indicates there is now available for commitment from combined US/GVN sources total of 6,066 million piasters (5,366 million US and 700 million GVN) against estimated total military budget requirement including additional 20,000 men of 6,579 million piasters. This represents approximately 94% of total required or on monthly basis about eleven months of CY 1961 requirements for commitment. US commitment alone to date represents 80% of total or about ten months requirement. Do not therefore see any financial reason for GVN suspend mobilization plans at this time.
Recognize, however, that by suspending mobilization on grounds lack of assured budgetary financing, GVN has created politico/military rather than economic issue and is attempting place onus for slow-down on US. In order resolve this political issue, you authorized negotiate agreement with GVN to resume mobilization within one of following positions, set out in order preference from US point of view:
US willing now commit to 1961 MBS additional 178.5 million piasters ($5.1 million equivalent) available from US controlled sources (Ref B) provided GVN (a) proceeds without delay with mobilization effort and undertakes major effort meet balance 1961 military budget requirements from own resources. SFG arriving [Page 178] Saigon shortly assist GVN in developing ways and means meeting budgetary requirements. (FYI) We unable confirm availability 178.5 million but assume USC’M analysis takes account of restriction against commitment US-owned local currency prior to deposit (End FYI).
If above insufficient inducement, one of following additional concessions could be offered: MBS of $153.3 equivalent assumes FY 1961 non-project aid level of $110 million of which $97.4 million allotted to date, leaving balance $12.6 million. Since GVN requirement is not for foreign exchange, but for local currency, piasters needed to pay for 20,000 man increase could be raised by charging Vietnamese importers same rate (i.e. 73.5 to 1) for balance of FY 61 non-project assistance as GVN charges importers for most of its own exchange. Customs and other taxes would be additive as with GVN financed imports. This rate would raise at least additional 485 million piasters which when added to commitment of 178.5 million piasters current availability per 1 above more than sufficient cover remaining gap 1961 military budget.
Final alternative would be to increase FY 1961 dollar aid level by $4.55 million with agreement these dollars would generate piasters at 73.5:1 rate as per (2) above and thus generate 334.5 million piasters which, together with 178.5 million under (1) above would cover remaining requirements CY 1961 military budget.

In discussions with GVN on resolution current problem you should also point out that (a) inflationary pressures resulting from drawdown of existing local currency pipeline or from increase GVN foreign exchange reserves much the same as those resulting from budget deficit and (b) that additional dollars provided by US would go either reserves or finance non-essential goods. After careful US examination resulting in considerations outlined above GVN would appear unduly concerned that if it pays local currency costs 20,000 man increase, serious inflationary pressure would result.

  1. Source: Department of State, Central Files, 751K.5-MSP/6-1461. Secret; Niact. Drafted by Cottrell, Fowler, and Furst (ICA); cleared with McConaughy and ICA; and signed for the Secretary by Cottrell. Repeated to CINCPAC for PolAd.
  2. Telegram 1874, June 14, reviewed various aspects of the Vietnamese military budget. (Ibid., 751K.5-MSP/6-1461) Telegram 1863 is Document 67.