Foreign Relations of the United States, 1958–1960, South and Southeast Asia, Volume XV

540. Telegram From the Embassy in Thailand to the Department of State¹

Bangkok, January 9, 1960—8 a.m.

1835. Reference: Deptel 1615; Embtel 1535.² I have not previously attempted make extensive justification for policy which would authorize DLF loans to Thailand covering local currency as well as foreign costs for major public projects because I felt considerations in favor this policy so overwhelming as be self-evident. However, in view delay receiving coordinated State, ICA, DLF policy in response our requests guidance this matter, believe useful for me outline considerations which I believe pertinent this regard. Issues at stake this decision are of major import, perhaps as important as any issue in US-Thai relations since my arrival here.

The following comments are concurred in by country team.

1. Believe important Department and DLF recognize that dollar loans to Thailand for local currency uses not equivalent such loans to countries with weak or inflated currencies. To treat as equivalent would be to penalize Thailand for its responsible fiscal and monetary management.

2. Financial stability is a major US objective in developing countries. Strength of Thailand’s position has been secured by group well trained sound economists Bank of Thailand and Minister Finance over frequent and vigorous opposition. Governor Bank of Thailand and concurrently Director of Budget today advised National Economic Development Council increase baht expenditures projected new budget (1959 budget 7.2 billion) would not be met by deficit financing through Bank of Thailand. Believe those defending internal financial stability should be supported by US. However, with roads and irrigation projects needed to increase nation’s productivity and non-availability sufficient funds from defense support, I believe Thailand’s case for DLF loans for local currency costs these projects should be welcomed with favorable US consideration.

3 With respect Thai foreign exchange reserve position believe prudent handling of reserves by Bank of Thailand should be applauded by US rather than used as basis for denial financing sound local currency projects. Believe that pressure in Thai Government for economic development projects, i.e., roads and irrigation, such that without favorable US consideration DLF loans prudent financial policies will by force [perforce?] give way to deficit financing or cause first break in reserve position which would likely be beginning of series of runs on reserve holdings.

4. In Thai private sector most applications to DLF for industrial loans likely be under $100,000 and in practically all cases under $500,000. Based my understanding DLF loan criteria, such small loans not likely be considered by DLF. Therefore, except for indirect DLF loans to Thai private sector, such as through intermediate of Thai Industrial Finance Corporation (IFC), DLF activity in Thailand’s private sector likely be quite small for many years in future.

5. Use of IFC for channeling smaller industrial loans highly desirable when IFC fully functioning one to two years hence. But DLF not likely play important role since IFC Chairman Prince Vivat has understanding for use IBRD as initial source financial resources when needed.

6. In public sector Thailand seeking DLF loans for roads and irrigation projects. In any country such projects largely involve local currency costs. This even more pertinent in Thailand which self-sufficient in cement. If DLF fails to make public sector loans on basis they involve local currency costs, this would appear leave DLF with very minor, if any, role in Thailand.

7. Economic implications of probable future combination reduced grant aid to Thailand plus failure of DLF to play role here would be to retard Thailand’s economic growth substantially and to negate much of what accomplished here recent years.

8. Political implications of small or no DLF assistance to Thailand even more serious. It would subject to doubt US statements that DLF willing finance road and irrigation projects Thailand (see Dillon statements to Thanat Khoman at Wellington SEATO meetings and in Washington in September 1959).³ Thais already sensitive re what they feel is preferred treatment given uncommitted nations in US aid program. This feeling would be magnified if US in effect cut off Thai public sector from DLF financing. (See Embtel 1834)⁴

9. Thai financial contribution to joint defense already large. Requesting Thais to finance all local currency costs large public works would certainly make Thais skeptical about wisdom their military contribution.

Have explained economic implications DLF loan policy to Edwin Kirby, Deputy Managing Direct DLF, and Department may wish obtain his views.

I wish again stress that this question not simple one soft versus hard loans (especially since baht quite hard any case) but one which pervades entire gamut US-Thai relations and which must be judged this context.

With US assistance and Thai efforts sound base for their economy (in contrast most surrounding countries) now established and from this point on added projects can have maximum effect. Such would demonstrate to SEA and other countries value of free economy and cooperation with US. Would regret seeing this opportunity lost.

Johnson

1. Source: Department of State, Central Files, 792.5–MSP/1–960. Confidential.
2. In telegram 1535 from Bangkok, December 10, Johnson reported on the increasing impatience of high Thai officials with the lack of information they were receiving about the prospects for DLF loans on three irrigation projects and on the Bangkok-Nakorn Pathom Highway. (Ibid., 792.5–MSP/12–1059) The Department’s response in telegram 1615 to Bangkok, December 30, stated that part of the delay in reaching a decision stemmed from the fact that the Thai presentations on these projects were not considered formal applications. The DLF was also still considering its policy on financing local currency costs in such projects. (Ibid., 792.5–MSP/12–1059)
3. A memorandum of conversation between Dillon and Thanat Khoman on April 8, 1959, in Wellington during the SEATO Council Meeting is ibid., Conference Files: Lot 64 D 560, CF 1253. The two met again in Washington on September 29 on the occasion of Thanat’s visit to the United States for the meeting of the U.N. General Assembly; the memorandum of conversation is ibid., Central Files, 792.5–MSP/9–2959.
4. See footnote 2, infra.