114. Editorial Note
As the U.S. military effort in Vietnam expanded, the South Vietnamese Government (GVN) incurred substantial foreign exchange holdings. With growing criticism of the benefit reaped by the GVN at U.S. expense, the long-standing issue of foreign exchange moved slowly toward resolution during 1967. The U.S. Government’s position was to commit the GVN to the agreement of November 4, 1966, which limited the GVN’s foreign exchange reserves to $250 million, but the GVN did not want such a drastic draw-down of its then rising reserves. It also objected to the transfer of commodities from the Commercial Import Program (CIP) to a direct import program, a measure designed to force down GVN balances but under which South Vietnam would lose the subsidies provided through the CIP. South Vietnam only wanted to be bound to a consideration of prepayment of its loans from the United States as the sole reduction mechanism. For the evolution of this issue, see U.S. House of Representatives, Armed Services Committee, United States-Vietnam Relations, 1945–1967, Study Prepared by the Department of Defense, Book 7, pages 27–29, 33, 36–38, 44–47.[Page 267]
Extensive negotiations were carried out between Ambassadors Henry Cabot Lodge (and his successor, Ellsworth Bunker), Robert Komer (later attached to the Military Assistance Command, Vietnam), and Deputy Director of AID Rutherford Poats for the United States, and Prime Minister Nguyen Cao Ky and Bank of Vietnam Governor Nguyen Huu Hanh for the GVN. On March 19, 1967, Lodge and Ky signed an interim agreement on foreign exchange rate unification. See The Pentagon Papers, Senator Gravel Edition, Volume II, pages 395–396. On March 28 the State Department’s classified periodical Current Economic Developments reported on the agreement:
“Vietnamese exchange reserves have risen over $200 million in the past year and a half—to a level of nearly $350 million at the end of February. To deal with this, arrangements have been made for: A) Prepayment in piasters of $40 million of outstanding US loans to the GVN. B) Establishment by the GVN of a $50 million development fund deposited in the US, tied to US procurement, and usable for economic development projects approved jointly by the USG and the GVN. C) Sale of 300,000 tons (worth approximately $50 million) of PL–480 rice for piasters, which the US can use for local expenses instead of these piaster proceeds going mostly for GVN troop pay as is the normal arrangement. This rice generates piasters from GVN importers at the rate of 118 per US dollar. This will reduce DOD purchases of piasters (at the less advantageous official rate of 80 piasters per dollar) by about $75 million, so this arrangement is highly advantageous to the US balance of payments.” (Current Economic Developments, Issue No. 776, March 28, 1967, page 6; National Archives and Records Administration, RG 59, E/CBA/REP Files: Lot 72 A 6248, Current Economic Developments)
On August 29 notes were exchanged to establish a P.L. 480 agreement for the sale of a minimum of 500,000 tons of rice by the United States on a 100 percent uses basis of piaster proceeds (a situation that gave an advantageous rate of exchange to the U.S. Government) with 100,000 tons delivered in 1967 and 400,000 tons by mid-1968. However, the uses provision would reduce to 20 percent when the GVN applied to piaster purchases of the U.S. Government and American firms the exchange rate of 118 piasters per dollar (the previous rate had been 80 piasters per dollar). In order to maintain the past level of foreign exchange, the package included an additional $240 million in financing for agreed-upon and future economic development programs, $227 million of U.S. financing of CIP commodities, and funds for other non-P.L. 480 commodities. Also, the United States would establish a capital development fund for South Vietnam that would be held to finance GVN imports under the November 4, 1966, agreement. In turn, the GVN would hold to the reserves ceiling while making a 100 billion piaster contribution to the Free World forces and prepaying one of its major loans to the United States. On October 31 the Board of Directors of the National Bank enacted the rate regulation, but in November [Page 268]added a commission payment to reduce the exchange rate to 117.6 piasters per dollar. Documentation on these negotiations is ibid., Central Files 1967–69, E 1 VIET S, FN 10 VIET S, and AID (US) 15 VIET S.