175. Annex to the Draft Report Prepared for the Executive Committee of the National Security Council1


Introduction: The recommended US actions are designed to indicate to the Diem Government our displeasure at its political actions and to create significant uncertainty in that government and in key Vietnamese groups as to the future intentions of the US. At the same time, the actions are designed to have at most slight impact on the military or counterinsurgency effort against the Viet Cong, at least in the short term. The analysis of each action from this standpoint is as follows:


AID Commodity Import Program. Present planning envisages a range of $80-95 million of AID commodity imports, funded under the FY 1964 Supporting Assistance portion of the foreign aid appropriation and applicable to the CY 1964 budgetary and commodity needs of the GVN. An allotment of $28 million for the first quarter of FY 1964 has already been made, and $13 million of this committed and expended, with the balance of $5 million allotted but frozen in Saigon. A second quarter allotment of $20-25 million would now normally be due. The recommendation would continue to freeze the present $5 million and would withhold the second quarter allotment.

The material effect of this action must be considered from two standpoints:

Commodity imports are handled through commercial channels and the proceeds in piastres then become available to the GVN, 15% at the time of licensing, approximately 80% three months later at the time of shipment, and the balance through tax receipts upon arrival. The shortfall in piastre flow from receipts at the time of licensing is sufficiently small to be within the normal swing of the account, and would have no serious effect on piastre availability for the GVN budget, the deficiency being met by small borrowings from the Central Bank. However, the effect on piastre availability would become substantial in 3-4 months, in amounts that could be met over an additional short period by larger scale borrowings but that would be cumulatively serious in producing a budget pinch in the early months of 1964, and might cause the GVN to cut expenses even sooner. It should be noted that the GVN budget for 1964 is already tight even on the [Page 361]assumption that $95 million of AID commodity imports would be available, and it is now uncertain whether the foreign aid final appropriation would permit the $95 million level.
The effect on the flow of commodities into Vietnam would not be serious in the short term, inasmuch as $70-80 million of previous US-funded commodity imports as well as substantial private imports are in the pipeline. A valley would, however, begin to appear about March 1964.

Psychologically, a major problem might arise as the mere decision to suspend becomes more fully known in Saigon official and business circles. The freezing of the $5 million is already known, and the timing pattern of allotment decisions is also familiar. Hence, it must be expected that this too would become rapidly known. The resulting uncertainty might cause a substantial wave of speculation or hoarding. Moreover, retaliatory or compensatory action by the GVN might accelerate the process. Our tentative judgment is that inflation would start to become a substantial danger in 2-4 months, but the situation would require the closest possible scrutiny. We should be prepared to live with a modest degree of inflation, but anything major would be cause for concern. It should be noted, however, that the inflationary effect would probably be felt principally in the affected commodities and not, for example, in the basic price of rice for the people, which is under tight GVN control. Inflation would hit Saigon initially, and would be slow to reach the countryside. Its greatest early impact on the military effort would be through raising the already tight GVN budget to levels even more unlikely to be attained by any measure the GVN could be induced or pressured to take. Since 1/2 the GVN budget goes to the military effort, shortfalls might be reflected in some measure of force reductions and probably in reductions in the GVN's contribution to such key elements as the strategic hamlet program.

This action is not readily reversible. Since commodity imports move through commercial channels, they could not be later speeded up to avoid the impending valley. Nonetheless, a firm later decision to resume either at present full planning rates or at a more austere rate designed to keep some pressure on the GVN would tend to reduce the adverse effects.

Within 2-4 months, and perhaps sooner, a decision would have to be made whether to continue suspension and incur substantial effects on the military effort, or to resume either at the full level or at an intermediate austere level.


PL 480 items. Although the PL 480 mechanics are the same as for AID commodity imports, it should be noted that the specific items are in some cases more sensitive from the standpoint of popular blame to the U.S. in the countryside. Moreover, from the U.S. budgetary standpoint, PL 480 funds are more readily available than AID funds [Page 362]and for this reason have been built up to the maximum consistent with the GVN capacity to absorb; withholding PL 480 items must be weighed carefully if the economic effect is such as to require additional input in AID funds at a later time.

The only presently pending PL 480 item is $2.9 million of condensed milk. Much of this goes to the countryside, and its cut-off would be felt widely and might be blamed directly on the U.S. For this reason we do not recommend suspension of this item, nor, for lack of an appropriate mechanism, do we believe it should be shifted to direct grant channels under Title II. Instead, we believe it can make a modest contribution to the desired picture of uncertainty of being placed on a month-by-month basis rather than being negotiated on the normal basis of an agreement covering several months.

The next items requiring decision will be wheat flour ($6 million) and raw cotton ($12 million) both of which would start to run short unless supplementary agreements were negotiated about 1 November. We reserve a recommendation on these.

The remaining items comprise $5 million in the total PL 480 planning figure of $33 million for FY 1964. These too require no immediate decision.

Actions in the PL 480 field are similar to actions affecting AID commodity imports in their reversibility. Impending commodity slacks cannot be taken up by accelerated action.


AID Project Loans. The Saigon waterworks and electric power projects are now partially funded and under construction, and the remaining balances are up for final approval. Arrangements are so nearly final that it would be necessary to inform the contractors in both cases, and we believe this should be done frankly at once.

Suspension of these projects would have no direct effect whatever on the military effort. However, it could add to the psychological factors bearing on the likelihood of inflation, and would eventually affect employment in the Saigon area.

The GVN might well react to our suspension either by applying its own resources to the projects (raising a cumulative foreign exchange problem) or by turning to third countries such as France. The latter would be an interesting test of the recently displayed French attitude of willingness to assist, but the amounts are not so great that we should be unduly concerned from this standpoint if the French would come through.


Support for Colonel Tung's Saigon Forces.

The stated rationale for this action is that we will not support forces not being used for combat purposes. The material effect of this gesture would not be great, since the equipment already in the hands of these units is generally adequate and the U.S. contribution to their pay is small and could be made up from the GVN budget. However, [Page 363]the gesture would have importance not merely as part of the picture of uncertainty, but perhaps even more strongly in dissociating the U.S. from support of these forces. If-as we believe likely-Diem refused to accept our conditions, or proposed some transparent device, we should then (unlike the other actions) make an outright public announcement. The U.S. press reaction would undoubtedly be most favorable, and within Soviet Vietnam both high military leaders and disaffected elements in Saigon would also be favorable.

The cut-off action against Colonel Tung would be designed to be permanent and not reversible, unless our conditions were met and maintained.

The recommended transfer [less than 1 line not declassified] to MACV of border surveillance and mountain scout forces is desirable in its own right. Funding through FY 1964 will continue to be supplied [less than 1 line not declassified] under the same procedures now used for CIDG forces.

Furthermore, MACV [less than 1 line not declassified] should urgently consider whether it is wise and feasible to transfer to MACV wholly or in part certain [less than 1 line not declassified] activities: combat intelligence teams and operations into south Laos and North Vietnam.

Such recommended or possible transfers [less than 1 line not declassified] responsibility would result in the loss of some [less than 1 line not declassified] liaison connections in high military circles. Hopefully, this slack could be taken up by U.S. military advisors.

Over-all Impact. As stated in the McNamara-Taylor Report, it should be emphasized that, so long as the U.S. continued its principal assistance activities that contribute directly to the military effort, the level of pressure on Diem generated by the recommended actions would probably not be high. We do believe, however, that they would collectively add up to a picture of significant uncertainty, and that this would extend to Diem both directly and through representations by military leaders and economic officials who would be aware of the potential consequences. We must recognize that pressures such as these do not appear likely to get rid of Nhu, and likewise that they might conceivably lead Diem and Nhu to some upsetting action.
Need for a Working Group. Both GVN reaction and the impact of these actions on the military effort (notably through the inflation possibility) require very close review. Hence our recommendation for a working group in Washington, with Ambassador Lodge reporting reactions carefully.
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It is only prudent to recognize that the course of action outlined above can be substantially affected by developments beyond our control. Among these might be one or more of the following:

Unanticipated coup d'etat (e.g. by junior officers), or death of Diem.
Other unanticipated internal developments (similar to the Hue incident on May 8) which could take place in the volatile atmosphere that characterizes the Vietnamese political scene. This could include a marked step-up in the pace and nature of the Viet Cong effort.
International developments affecting the war or the GVN's position, e.g. active Chinese Communist or Cambodian support to the Viet Cong; a UN initiative toward the condemnation of the GVN or neutralization of the area; or active and direct intervention by North Vietnamese forces in Central Viet-Nam.
A posture by the GVN vis-a-vis the United States characterized by outright and stubborn hostility to “foreign interference,” accompanied by efforts to rally popular xenophobia.
A bid by Hanoi or the National Front for a rapprochement on terms attractive to Diem and Nhu (a contingency we believe conceivable, but unlikely).
A situation in which the Ngos carry out the forms of change, but maintain the fundamental character and image of their regime.

  1. Source: Kennedy Library, Hilsman Papers, Country Series-Vietnam. Top Secret. There is no drafting information on the source text, but an earlier draft of this annex, October 3, had William Bundy as the drafter. (Ibid.) This annex was attached without modification to the October 5 draft of the report (see footnote 3, Document 174) but was not sent as part of Document 181.