17. Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon 1


  • Decision on U.S. Economic Policy for Vietnam


This memorandum:

  • —reviews briefly the current economic situation in South Vietnam and the long term problems facing the GVN economy;
  • —presents for your decision two alternative U.S. economic policies and associated funding options for FY 71.

Current Situation and Long-Term Vietnamization Problems

Current Situation—The cost of living in Vietnam has risen 23% over the last six months and 53% over the last year.

GVN foreign exchange reserves have fallen to the lowest level since 1966, forcing the GVN to cut back sales of foreign exchange to importers. Because imports are an important source of goods to the GVN economy (roughly one-fourth), high demand for limited imports has caused consumers and importers to hoard imported goods. Demand for domestically produced goods has also risen due to the shift of purchasing [Page 33] power to these goods as well as a general loss of confidence in the piaster.

These speculative pressures are now serious. Continued price increases reward those who have lost confidence in the piaster and have caused unrest among low income groups, such as the veterans and civil servants.

Long-Term Vietnamization Problems—Besides coping with the current situation the GVN must:

  • —fund the additional budgetary costs of a 10% increase in Vietnamese forces,
  • —provide incentives for economic growth and exports and increase domestic tax revenues in order to enable Vietnam to achieve increased self-sufficiency,
  • —increase official civilian and military wages to restore some of the 50% to 100% loss in real purchasing power since 1966 caused by inflation.

To dampen speculative pressures in the short term while encouraging growth and self-sufficiency in the long term is the agreed goal for the Vietnamese economy. The key issue is how to do it.

Two Options

Essentially there are two views:

  • —(1) DOD has strongly urged that the GVN adopt a flexible exchange rate system whereby the piaster price of dollars would vary from day-to-day depending on the demand for imports and the dollar reserves of the GVN.2 This would be tantamount to a 75% to 100% devaluation (from 250 piasters per dollar currently to 450 or 500 per dollar) to be followed by gradual adjustments of the new rate.

    According to the DOD proposal, this Administration would ask Congress for a $100 million AID supplemental to provide the GVN with an incentive to institute a flexible rate, a move the GVN currently opposes. This $100 million would be used to support the new rate so as to preclude sharp day-to-day fluctuations. For example if there were a sudden demand for dollars by speculators, a portion of the $100 [Page 34] [million] fund would be released to satisfy this demand, thus preventing a sharp drop in the exchange rate, cooling off the speculation, and stabilizing the foreign exchange markets.

  • —(2) The Mission in Saigon with the support of State, Treasury, AID and OMB is urging the adoption of a series of complex measures that would permit the GVN to reduce inflationary pressures by a highly selective rather than across-the-board devaluation:
  • —The GVN would continue to import essential commodities at the current 250 per dollar exchange rate, but would institute a higher adjustable exchange rate on non-essential imports (thus discouraging them), on exports (thus encouraging them), and on the purchase of dollars by Vietnamese who want to build up bank accounts or investments abroad (thus discouraging this leakage of dollars).
  • —This option could require up to a $50 million increase in U.S. assistance to be used for additional imports. It could be funded with either: (a) an AID supplemental or (b) from the current DOD budget.

Pro and Con Arguments

  • Option 1—The principal arguments for Option 1 (DOD’s choice) are:

    • —After the initial major devaluation, the piaster-dollar exchange rate would be adjusted to meet speculative pressures. Thus future major devaluations, with the attendant political problems, would be precluded by small day-to-day exchange rate adjustments.
    • —The GVN could open up import licensing at the higher exchange rate without fear of expending all of its foreign exchange, because at the higher rate dollars (and imports) would be much more expensive. Presently the dollars are so cheap that the government would quickly lose all its scarce reserves if it opened up import licensing. However, the present system provides windfall profits to those favored few who do get licenses, because they can sell the goods they import cheaply at much higher prices. Thus a major argument for the DOD proposal is that it would sharply curtail the profits the favored importers can now earn because they can buy dollars at an artificially low price.

    These are strong arguments. Nonetheless the DOD proposal has serious disadvantages:

    • —An across-the-board devaluation to a flexible rate now would raise the prices of all imports including essential foodstuffs and fertilizer as well as Hondas, two to threehold. Moreover, nobody is sure the rate would not go higher. The effect of such price increase on large classes of people—peasants, urban private sector workers, and public employees—would be to cause a sharp loss in their real incomes. In some cases families would be pushed to near-subsistence income levels.
    • —The GVN may simply refuse to institute a single flexible rate on all transactions. President Thieu is opposed to a full-fledged devaluation.
    • —It is debatable whether Congress would approve the $100 million AID supplemental for FY 71 and doubtful that such assistance could be approved soon enough to permit it to be used to help solve the GVN’s short term economic problems.

  • Option 2—The principal advantages of Option 2 (the Mission’s proposal) are:

    • —A sharp drop in income for peasants, urban, and government workers is not expected because the exchange rate for essential imports would not be changed.
    • —This option is consistent with the GVN’s current plans and with President Thieu’s determination not to execute a full devaluation.
    • —This option can be funded without going to Congress for a supplemental because there are enough funds available within the DOD budget to fund the $10 million to $50 million required. Thus it can be implemented in time to solve the immediate problem. In the meantime we can consider a better long term arrangement.

    The disadvantages of Option 2 are:

    • —It does not provide for periodic exchange rate adjustments in the future. Thus the GVN will be faced with the necessity to execute a major devaluation after the 1971 Presidential elections.
    • —If the exchange rate adjustment made by the GVN on non-essential imports is not great enough, there may not be enough foreign exchange to open up import licensing. This would require the continued rationing of import licenses, and those fortunate to get a license would receive windfall profits as they do today. Thus an evil of the present setup would continue.

My Recommendation

Option 2 is favored by State, OMB, the Mission, Treasury, AID and is consistent with the current GVN plan that is emerging from consultations with the IMF.

The consequences of the DOD proposal could be serious for the GVN and Vietnamization. In any case the GVN will probably reject it. DOD’s concern that we face up to the longer term implications of not executing a full-scale devaluation now is well taken. But this concern is probably best dealt with within the framework of Option 2, which calls for a partial devaluation now (on non-essentials), but no drastic and unpredictable reforms.

Therefore I recommend you approve Option 2 with the stipulations that:

  • —The resulting $750 million South Vietnamese import level should be viewed as the ceiling for U.S.-provided foreign exchange for FY 71 [Page 36] and beyond. The level of foreign exchange provided by the U.S. should decline thereafter as domestic production rises.
  • —It is U.S. policy that the GVN should maintain and adjust exchange rates on non-essential imports in a manner consistent with the level of foreign exchange provided so as to minimize and preclude windfall profits.3


If Option 2 is acceptable, additional funding of up to $50 million above that currently planned for FY 71 may be required, although current estimates indicate that only an additional $10 million is needed.

This could be provided by:

  • —asking Congress to approve a special AID supplemental,
  • —adjusting DOD’s currently authorized outlay ceiling. (OMB would increase DOD’s $71.8 billion ceiling by the needed amount and still not exceed the Defense authorization you have requested from the Congress.)

There are strong arguments against seeking a supplemental:

  • —it might not be approved, particularly considering the attitude of the Senate Foreign Relations Committee,
  • —even if approval were possible it would follow a long debate that could result in the funds not being available soon enough to alleviate the near term speculative crisis,
  • —debate on a supplemental could hold up approval of the Foreign Assistance and Foreign Military Sales Acts now before Congress,
  • —securing Congressional approval for the Korean and Cambodian supplementals should be the principal goals of our FY 71 Congressional strategy and the Administration may risk the attainment of these goals if it seeks a $100 million AID supplemental for Vietnam.

The principal argument for an AID supplemental is DOD’s opposition to providing additional support for Vietnam from the Defense budget.

However, OMB has proposed that the pressure on DOD be alleviated by raising OMB’s $71.8 billion ceiling, thus permitting DOD to fund the increase.

This seems to be the most sensible approach and is more likely to be acceptable to Secretary Laird than anything else short of the AID supplemental.

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Therefore, I recommend you approve an upward adjustment in DOD’s ceiling to fund Option 2. OMB concurs.4

Approve (adjust DOD budget)

Disapprove (ask for AID supplemental)


If you approve I will sign the NSDM at Tab A5 which establishes:

  • —a $750 million U.S. foreign exchange assistance level for South Vietnam;
  • —that U.S. policy will be to obtain an effective exchange rate on GVN imports to permit open import licensing at the $750 million level, i.e. the rate on non-essentials should be adjusted so as to permit open licensing on all imports within the $750 million level, thereby eliminating windfall profits and precluding sharp increases in the prices of essential imports;
  • —these these policies will be funded by adding to OMB’s current ceiling for DOD expenditures the amount required to bring U.S. expenditures in Vietnam to the $750 million level in FY 71.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–218, NSDMs, NSDM 80. Secret. Sent for action. According to an attached routing slip, Lynn sent the memorandum to Kissinger on August 7.
  2. The memorandum from Laird to Nixon, July 18, describing this course of action is in the Washington National Records Center, OSD Files: FRC 330–74–142. On August 11, Laird sent Kissinger a follow-up memorandum that reiterated: “The effort of the South Vietnamese through monetary, fiscal, and other economic reforms to maximize utilization of their own economic resources, as well as those we provide, is not moving forward. Such problems in fact jeopardize the Vietnamization effort. I urge, therefore, that the President address as a matter of first priority the questions now before him concerning U.S. economic policy for Vietnam.” (National Archives, Nixon Presidential Materials, NSC Files, Box 148, Vietnam Subject Files, Vietnam, 1 August 1970)
  3. Nixon initialed his approval of option 2, which was Kissinger’s recommendation.
  4. The President initialed his approval to “adjust DOD budget.”
  5. Attached; printed as Document 23.