114. Memorandum From the Deputy Director of the Vietnam Working Group (Heavner) to the Assistant Secretary of State for Far Eastern Affairs (Hilsman)1

SUBJECT

  • Related Problems of Counterinsurgency Funding and Commercial Import Program

1. CI Funding

We are pressing the GVN to pick up the piaster costs of the CI program and other AID projects which until now have been financed by our $10 million piaster purchase of last year and by counterpart funds. It is our best estimate that the GVN can undertake the amount of deficit spending required without incurring dangerous inflationary pressures. In the past the GVN has resisted deficit financing, clinging to very conservative fiscal policies.

GVN resistance to deficit spending for the CI programs has not up until now however been couched in fiscal terms. Their objection to our proposed joint counterinsurgency fund was political. Diem and Nhu apparently feel that to share control of a fund predominantly made up of “their” monies would be an unacceptable infringement on Vietnamese sovereignty and their control of the levers of power.

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We have taken a very firm line on this issue. We have insisted that economic and social CI projects undertaken in support of the strategic hamlet program are essential to winning the war. We have further insisted that the GVN is obligated to finance them after our piaster purchase funds are exhausted. These funds will run out about the end of September.

The outcome of these negotiations will not be known for quite a while. The GVN has agreed to finance all of these projects up to the total amount of 2.3 billion piasters which we requested. However, these projects will be subject to GVN control and in most cases will have to be negotiated, project by project, with the USOM. A slowdown and curtailment of the whole AID effort is therefore likely.

We will have to evaluate the effect of this possible slowdown and curtailment on the overall program and on the total war effort as the program continues under the new ground rules. We will need to keep up a steady pressure on the GVN to maintain the necessary momentum. And if after we have given this arrangement a fair trial, it appears that the GVN effort is inadequate, we may be compelled to make some very hard decisions.

2. The Commercial Import Program (CIP)

As we approach the end of the fiscal year, Saigon states that orderly licensing and procurement under the Commercial Import Program will be seriously disrupted if more money is not made available. Saigon estimates that they need additional new obligational authority (NOA) of $15 million for FY 63.

The amount of aid extended under the Commercial Import Program has varied from year to year. The import targets have in the past been set, for psychological reasons, higher than we really expected the Vietnamese importers to realize. This was done both to ensure an orderly flow of commodities and to reassure the GVN that the largest possible amount of counterpart funds would be available for essential war programs. This year’s import demand, however, apparently exceeds our estimates.

A. Economic Considerations

The economic justification for an increase in new obligational authority for the CIP is questionable. It would probably be possible for the GVN to maintain the present level of imports by drawing down its own foreign exchange reserves, which are quite substantial. It may also be—although this is not at all clear—that inventories in Viet-Nam are now so large that a curtailment of commercial import licensing would not seriously affect the situation. Imports could perhaps be halted, and the resulting cut in counterpart piaster resources made up by deficit spending, without any disastrous economic results.

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It is also possible that an increase in CIP funds would result in a rise in GVN foreign exchange reserves or in an increase in luxury imports. It appears, moreover, that the GVN may be deliberately pumping up present import demand. The GVN has pursued an easy credit policy, and last month business borrowing reached an all-time high. Much of this borrowed money is apparently being used to purchase CIP goods.

Finally, general U.S. policy toward CIP’s worldwide is that they must be based on balance of payments considerations rather than serving as budgetary support. We should recognize that this requested increase leans toward the budgetary support approach.

B. Political Considerations

The political justification for an increase is as strong as the economic justification is weak. In the vital area of piaster resources for the war effort, it is clear that GVN willingness and ability to finance the CI programs depends to a large degree on counterpart piasters generated by the commercial import program. For us to disrupt licensing under the commercial import program at this time would make it doubly difficult, if not impossible, for us to persuade the GVN to carry out those CI economic and social projects which we deem so essential in winning the war.

The war is entering a critical stage. Economic programs have been launched which support the military effort and which we believe are essential to any permanent restoration of security. To keep up this momentum we must have GVN confidence and cooperation, and we must retain maximum influence in the direction of the war effort.

The funds involved are not large by comparison with our total effort, but failure to provide them might well reopen the whole “crisis of confidence” problem so recently skirted.

3. Recommendations

I am told that the only source which we could tap to make up the commercial import shortfall is the President’s contingency fund. I recognize the difficulties of tapping this fund, but given the importance of the Viet-Nam situation, I recommend the following:

A.
We should continue to press the GVN to pick up the piaster costs of CI projects, undertaking whatever degree of deficit spending is required to accomplish this.
B.
To support this effort we should take every step to avoid disrupting commercial import licensing.
C.
We should request that funds be made available from the President’s contingency fund to cover the necessary imports.
D.
Attached for your approval is a Memorandum to Assistant Administrator Janow 2 recommending on political grounds that we maintain orderly CIP licensing by using contingency funds if necessary.3

“I agree with Roger Hilsman that the application of strict economic criteria is not feasible at this fume. Our Government should make every reasonable effort to sustain the current momentum of the GVN’s military drive.” (Washington National Records Center, RG 330, OASD/ISA Vietnam Task Force Files: FRC 75-163, Chron FilesVietnam-1963)

  1. Source: Department of State, Vietnam Working Group Files: Lot 67 D 54, AID-7, CIR Secret. Drafted by Heavner and Montgomery and sent to Hilsman through Robert W. Barnett.
  2. Not printed. The draft memorandum from Hilsman to Janow is not initialed and may have been revised before being sent. No copy of the final version has been found, but a May 15 letter from William Bundy to Janow indicates that Hilsman did send a memorandum to Janow on May 9 dealing with the Vietnam Commercial Import Program. The thrust of Hilsman’s memorandum to Janow apparently accorded with the conclusions outlined in Heavner’s memorandum in light of Bundy’s supporting remarks in his letter to Janow:
  3. Further documentation on a proposed increase in the Commercial Import Program for fiscal year 1963 is in Department of State, Central Files, AID (US) S VIET